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, 2009

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 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 a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 May 5, 2009, there were 89,966,286 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 March 31, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2009 and 2008			4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2009 and 2008			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			38
PART II
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 5. Other Information			41
Item 6. Exhibits			42
Items 1, 3 and 4 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)

		March 31,				December 31,
		2009				2008
ASSETS
Current Assets:
Cash and cash equivalents		$	7,339			$	3,251
Receivables, net of allowances of $7,182 and $3,868 as of March 31, 2009 and December 31, 2008, respectively			210,454				219,920
Insurance receivables			16,148				13,123
Derivative financial instruments			149,224				121,929
Intangible assets			1,805				2,353
Prepaid expenses and other			27,452				14,377
Total current assets			412,422				374,953
Property and Equipment:
Proved oil and gas properties, full-cost method			4,634,723				4,448,146
Unproved properties, not subject to amortization			192,738				201,121
Total oil and gas properties			4,827,461				4,649,267
Other property and equipment			53,612				53,115
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(2,557,169	)			(1,767,028	)
Other property and equipment			(6,163	)			(5,477	)
Total accumulated depreciation, depletion and amortization			(2,563,332	)			(1,772,505	)
Total property and equipment, net			2,317,741				2,929,877
Insurance Receivables			23,781				22,132
Other Assets, net of amortization			65,897				65,831
TOTAL ASSETS		$	2,819,841			$	3,392,793
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable		$	2,490			$	3,837
Accrued liabilities			91,689				107,815
Accrued capital costs			152,290				195,833
Deferred income tax			12,594				23,148
Abandonment liability			109,718				82,364
Accrued interest			21,284				12,567
Total current liabilities			390,065				425,564
Long-Term Liabilities:
Abandonment liability			327,548				325,880
Deferred income tax			108,876				319,766
Long-term debt			1,240,000				1,170,000
Other long-term liabilities			29,400				31,263
Total long-term liabilities			1,705,824				1,846,909
Commitments and Contingencies (see Note 8)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2009 and December 31, 2008			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 90,006,593 shares issued and outstanding at March 31, 2009; 180,000,000 shares authorized, 88,846,073 shares issued and outstanding at December 31, 2008			9				9
Additional paid-in capital			1,077,677				1,071,347
Accumulated other comprehensive income			99,601				78,181
Accumulated deficit			(453,335	)			(29,217	)
Total stockholders’ equity			723,952				1,120,320
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,819,841			$	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
		March 31,
		2009				2008
Revenues:
Natural gas		$	153,338			$	179,623
Oil			60,925				113,614
Natural gas liquids			6,469				20,981
Other revenues			22,604				1,679
Total revenues			243,336				315,897
Costs and Expenses:
Lease operating expense			53,399				45,647
Severance and ad valorem taxes			3,532				4,610
Transportation expense			4,584				3,019
General and administrative expense			17,411				11,111
Depreciation, depletion and amortization			94,805				119,318
Full cost ceiling test impairment			704,731				—
Other miscellaneous expense			8,009				537
Total costs and expenses			886,471				184,242
OPERATING (LOSS) INCOME			(643,135	)			131,655
Other Income (Expense):
Interest income			85				326
Interest expense, net of amounts capitalized			(14,402	)			(18,571	)
(Loss) Income Before Taxes			(657,452	)			113,410
Benefit (Provision) for Income Taxes			233,334				(41,194	)
Net (Loss) Income			(424,118	)			72,216
Less: Net income attributable to noncontrolling interest			—				90
NET (LOSS) INCOME ATTRIBUTABLE TO MARINER ENERGY, INC.		$	(424,118	)		$	72,126
Net (Loss) Income per share attributable to Mariner Energy, Inc.:
Basic		$	(4.77	)		$	0.83
Diluted		$	(4.77	)		$	0.82
Weighted average shares outstanding:
Basic			88,864,648				87,293,730
Diluted			88,864,648				88,012,901

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

MARINER ENERGY, INC.

(Unaudited)

(In thousands)

For the three months ended March 31, 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 — restricted stock			1,213				—				—				—				—				—
Treasury stock bought and cancelled on same day			(52	)			—				(448	)			—				—				(448	)
Forfeiture of restricted stock							—				—				—				—				—
Share-based compensation			—				—				6,778				—				—				6,778
Stock options exercised							—				—				—				—				—
Comprehensive income (loss):
Net income (loss)			—				—				—				—				(424,118	)			(424,118	)
Change in fair value of derivative hedging instruments — net of income taxes of $(10,398)			—				—				—				(19,496	)			—				(19,496	)
Hedge settlements reclassified to income — net of income taxes of $22,885			—				—				—				40,916				—				40,916
Total comprehensive income (loss)			—				—				—				21,420				(424,118	)			(402,698	)
Balance at March 31, 2009			90,007			$	9			$	1,077,677			$	99,601			$	(453,335	)		$	723,952

														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			549				—				—				—				—				—				—				—
Treasury stock bought and cancelled on same day			(13	)			—				(366	)			—				—				(366	)			—				(366	)
Forfeiture of restricted stock			(7	)			—				—				—				—				—				—				—
Share-based compensation			—				—				2,625				—				—				2,625				—				2,625
Stock options exercised			52				—				691				—				—				691				—				691
Comprehensive income (loss):
Net income			—				—				—				—				72,126				72,126				90				72,216
Change in fair value of derivative hedging instruments — net of income taxes of $45,111			—				—				—				(81,089	)			—				(81,089	)			—				(81,089	)
Hedge settlements reclassified to income — net of income taxes of $5,067			—				—				—				(9,164	)			—				(9,164	)			—				(9,164	)
Total comprehensive income (loss)			—				—				—				(90,253	)			72,126				(18,127	)			90				(18,037	)
Balance at March 31, 2008			87,810			$	9			$	1,057,039			$	(112,829	)		$	431,622			$	1,375,841			$	91			$	1,375,935

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)

		Three Months
		Ended March 31,
		2009				2008
Operating Activities:
Net (loss) income		$	(424,118	)		$	72,216
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			(233,334	)			40,400
Depreciation, depletion and amortization			94,805				119,318
Ineffectiveness of derivative instruments			179				3,924
Full cost ceiling test impairment			704,731				—
Share-based compensation			6,778				2,625
Derivative financial instruments			(3,591	)			—
Allowance for doubtful accounts and other			(2,450	)			737
Changes in operating assets and liabilities:
Receivables			12,784				(50,020	)
Insurance receivables			(4,674	)			—
Cash from liquidation of hedges			10,024				—
Prepaid expenses and other			(13,457	)			(16,007	)
Accounts payable and accrued liabilities			(21,720	)			40,978
Net cash provided by operating activities			125,957				214,171
Investing Activities:
Acquisitions and additions to oil and gas properties			(190,880	)			(437,565	)
Additions to other property and equipment			(524	)			(47,648	)
Restricted cash designated for investment			—				5,000
Net cash used in investing activities			(191,404	)			(480,213	)
Financing Activities:
Credit facility borrowings			140,000				412,000
Credit facility repayments			(70,000	)			(161,000	)
Repurchase of stock			(448	)			(366	)
Debt redetermination costs			(17	)			—
Proceeds from exercise of stock options			—				691
Net cash provided by financing activities			69,535				251,325
Increase (Decrease) in Cash and Cash Equivalents			4,088				(14,717	)
Cash and Cash Equivalents at Beginning of Period			3,251				18,589
Cash and Cash Equivalents at End of Period		$	7,339			$	3,872
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)		$	6,836			$	3,757

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 March 31, 2009 and consolidated financial statements as of 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 producing well overhead were presented as “General and administrative expense” in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2008. These amounts are presented herein as “Lease operating expense” for comparability to 2008 presentation. 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.

     There were no significant changes to the Company’s uncertain tax positions during the three months ended March 31, 2009. For a detail of the Company’s uncertain tax positions, please refer to Note 10 “Income Taxes” to the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2008, as amended.

     Recent Accounting Pronouncements — In April 2009, the FASB issued three FASB Staff Positions (“FSPs”) to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. These three FSPs are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted the provisions of these FSPs for the period ending March 31, 2009. The adoption of these FSPs 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 SEC’s 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;
	•		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 accounting standards 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 SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), 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 Statement 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. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company adopted SFAS 160 beginning January 1, 2009. The adoption of this statement 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 Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes criteria to be considered when

measuring fair value and expands disclosures about fair value measurements. SFAS 157 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 of SFAS 157 for all recurring measures of financial assets and liabilities on January 1, 2008. In February 2008, the FASB issued Staff Position No. 157-2, "Effective Date of FASB Statement No. 157” (“FSP 157-2”), which granted a one-year deferral of the effective date of SFAS 157 as it applies to non-financial assets and liabilities that are recognized or disclosed at fair value on a nonrecurring basis (e.g. those measured at fair value in a business combination and asset retirement obligations). Beginning January 1, 2009, Mariner applied SFAS 157 to non-financial assets and liabilities. The adoption of SFAS 157 did not have a material impact on the Company’s financial position, cash flows or results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). This statement requires enhanced disclosures about the Company’s derivative and hedging activities. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted the disclosure requirements of SFAS 161 beginning January 1, 2009. See Note 7 “Derivative Financial Instruments and Hedging Activities” for additional disclosures. The adoption of this statement 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
		Ended March 31, 2008
		(In thousands, except per
		share amounts)
Pro Forma:
Revenue		$	330,874
Net income available to common stockholders		$	75,628
Basic earnings per share		$	0.87
Diluted earnings per share		$	0.86

     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, subject to customary purchase price adjustments.

     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, subject to customary purchase price adjustments, 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 March 31, 2009 and December 31, 2008 the Company’s long-term debt was as follows:

		March 31,				December 31,
		2009				2008
		(In thousands)
Bank credit facility		$	640,000			$	570,000
7 1/2% Senior Notes, due April 15, 2013			300,000				300,000
8% Senior Notes, due May 15, 2017			300,000				300,000
Total long-term debt		$	1,240,000			$	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, with the latest amendment made as of March 24, 2009. 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. Pursuant to the March 2009 amendment, the borrowing base was affirmed at $850.0 million. In addition, Mariner agreed to initiate the next scheduled borrowing base determination process by July 31, 2009 and requested that the amount of the next borrowing base be $800.0 million. The intended effects are to accelerate the next borrowing base redetermination to August 2009 and require 100% lender approval if the resulting borrowing base exceeds $800.0 million. The March 2009 amendment increased by 1.0% the interest rate on outstanding borrowings and increased to 0.5% per annum the commitment fee on unused capacity.

     As of March 31, 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 $850.0 million. As of March 31, 2009, there were $640.0 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 March 31, 2009, after accounting for the $4.7 million of letters of credit, the Company had $205.3 million available to borrow under the credit facility.

     During the quarter ended March 31, 2009, the commitment fee on unused capacity was 0.250% to 0.375% per year through March 23, 2009 and 0.5% 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. As of March 31, 2009, the interest rate was 3.57%.

     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 March 31, 2009.

     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, and guaranteed by its subsidiaries, other than Mariner Energy Resources, Inc. which is a co-borrower.

     Senior 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 8% Notes, the “Notes”). The Notes are senior unsecured obligations of the Company. 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 March 31, 2009.

     Capitalized Interest — For the three-month periods ended March 31, 2009 and 2008, capitalized interest totaled $2.2 million and $0.2 million, respectively.

4. 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 Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), 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 March 31, 2009 and 2008, capitalized G&A totaled $5.0 million and $4.6 million, respectively.

     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 and is 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 SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS 133”) 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.

     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 $3.63 per Mcf for gas and $49.65 per barrel for oil, adjusted for market differentials for the three-month period ended March 31, 2009. At March 31, 2008 the ceiling limit exceeded the net capitalized costs of the Company’s proved oil and gas properties and no impairment was recorded.

5. Accrual for Future Abandonment Liabilities

     In accordance with SFAS 143, 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 of SFAS 143, 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 (1)		$	408,244
Liabilities incurred			10,502
Liabilities settled			(10,516	)
Accretion expense			8,708
Revisions to previous estimates			20,328
Abandonment Liability as of March 31, 2009 (2)		$	437,266

6. Share-Based Compensation

     Mariner has a stockholder-approved Stock Incentive Plan, as amended and restated from time to time (the “Stock Incentive Plan”), pursuant to which the Board of Directors (or a committee thereof) can grant to Mariner’s directors and employees restricted shares of its common stock or options to purchase common stock on terms determined in the Board’s discretion. Restricted common stock and option grants are outstanding under the Stock Incentive Plan. Options to purchase Mariner 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 recorded total compensation expense related to restricted stock and stock options of $6.8 million and $2.6 million for the three-month periods ended March 31, 2009 and 2008, respectively. Under the Stock Incentive Plan, unrecognized compensation expense at March 31, 2009 for the unvested portion of restricted stock granted was $60.4 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 three months ended March 31, 2009:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at January 1, 2009			645,348			$	13.88			$	(3,956	)
Granted			—				—				—
Exercised			—				—				—
Forfeited			—				—				—
Outstanding and exercisable at March 31, 2009			645,348			$	13.88			$	(3,956	)

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of March 31, 2009 and 2008, respectively, and changes during the three-month periods is as follows:

		Restricted Shares under
		Stock Incentive Plan
		March 31,
		2009				2008
Total unvested shares at beginning of period: January 1			2,697,926				1,484,552
Shares granted (1)			1,212,654				548,864
Shares vested			(170,724	)			(40,844	)
Shares forfeited			—				(6,708	)
Total unvested shares at end of period: March 31			3,739,856				1,985,864
Available for future grant as options or restricted stock			1,369,868				3,561,978

     The following table summarizes the status under the provisions of SFAS 123(R) of the Company’s restricted stock, including long-term performance based restricted stock, at March 31, 2009 and the changes during the quarter 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			$	76,127
Granted			1,212,654				10.94				13,266
Vested			(170,724	)			25.69				(4,386	)
Forfeited			—				—				—
Unvested at March 31, 2009			3,739,856				22.73			$	85,007				6.59

     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 $2.9 million for the three months ended March 31, 2009.

     Weighted average fair values and valuation assumptions used to value Program grants for the quarter ended March 31, 2009 are as follows:

		Quarter Ended
		March 31,
		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 March 31, 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.

7. 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 SFAS 133, 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.

     On January 29, 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. 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 not be reclassified into earnings until the physical transactions occur. Any changes in the value of these derivative contracts subsequent to January 29, 2009 will no longer be deferred in other comprehensive income, but rather will impact 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 March 31,
		2009				2008
		(In thousands)
Cash Gain (Loss) on Settlements (1)		$	57,457			$	(10,307	)
Gains on liquidated swaps (2)			6,523				—
Loss on Hedge Ineffectiveness (3)			(179	)			(3,924	)
Total		$	63,801			$	(14,231	)

     As of March 31, 2009, the Company had the following hedge contracts outstanding:

						Weighted Average				Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Asset
										(In thousands)
Natural Gas (MMbtus)
April 1—December 31, 2009			36,923,804			$	7.57			$	121,718
Crude Oil (Bbls)
April 1—December 31, 2009			769,485			$	76.56				16,494
Total										$	138,212

     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 March 31, 2009, the Company expects to realize within the next 12 months approximately $138.2 million in net gains resulting from hedging activities and $17.5 million resulting from liquidated fixed price swaps that are currently recorded in accumulated other comprehensive income. These hedging gains are expected to be realized as an increase of $34.0 million to oil revenues and an increase of $121.7 million to natural gas revenues.

     As of May 5, 2009, we have entered into the following hedge transactions subsequent to March 31, 2009:

						Weighted Average
Fixed Price Swaps		Quantity				Fixed Price
Natural Gas (MMbtus)
January 1—December 31, 2010			12,775,000			$	5.84
January 1—June 30, 2011			4,525,000			$	6.65
Crude Oil (Bbls)
January 1—December 31, 2010			1,277,500			$	62.28
January 1—June 30, 2011			452,500			$	65.65

Additional Disclosures about Derivative Instruments and Hedging Activities

     At March 31, 2009, the Company had derivative financial instruments under SFAS 133 recorded in its balance sheet as set forth below:

Fair Value of Derivative Contracts

Asset Derivatives

March 31, 2009

December 31, 2008

Balance sheet

Balance sheet

Location

Fair value

Location

Fair value

Derivatives designated as cash flow hedging contracts under SFAS 133

Fixed Price Swaps

Current Assets: Derivative Financial Instruments

$

138.2

Current Assets: Derivative Financial Instruments

$

121.9

Derivatives not designated as cash flow hedging contracts under SFAS 133

Fixed Price Swaps

Current Assets: Derivative Financial Instruments

11.0

Current Assets: Derivative Financial Instruments

—

Total derivatives

$

149.2

$

121.9

     For the three months ended March 31, 2009, the effect on income of derivative financial instruments under SFAS 133 was as follows:

		Amount of								Location of		Amount of gain/(loss)
		gain/(loss)								gain/(loss)		reclassified from										Amount of (loss)
Derivatives		recognized in OCI								reclassified from		Accumulated OCI into										recognized in income
designated as cash		on derivative								Accumulated OCI		income (effective								Location of (loss)		on derivative
flow hedging		(effective portion)								into income		portion)								recognized in income		(ineffective portion)
contracts under		First Quarter								(effective		First Quarter								on derivative		First Quarter
SFAS 133		2009				2008				portion)		2009				2008				(ineffective portion)		2009				2008
Fixed Price Swaps		$	138.2			$	(163.1	)		Revenues-Natural Gas		$	43,145			$	5,860			Revenues-Natural Gas		$	(179	)		$	(3,924	)
Fixed Price Collars			—				(13.5	)		Revenues-Crude Oil			14,312				(16,167	)
Total		$	138.2			$	(176.6	)		Total		$	57,457			$	(10,307	)

				Amount of gain/(loss) recognized
		Location of gain/(loss)		in income on derivative
Derivatives not designated as cash flow hedging contracts		recognized in income on		First Quarter				First Quarter
under SFAS 133		derivative		2009				2008
Fixed Price Swaps		Revenues-Crude Oil		$	6,523				—

8. 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 March 31, 2009 are as follows:

		(In thousands)
2010		$	2,532
2011			2,499
2012			2,414
2013			2,084
2014 and thereafter			9,877

     Other Commitments — In the ordinary course of business, the Company enters into long-term commitments to purchase seismic data. The minimum annual payments under these contracts are $0.7 million in 2010. At March 31, 2009, the Company also had a long-term commitment for contracted drilling services for $183.9 million of which $59.4 million is due in 2010 regardless of whether the Company uses the services.

Insurance Matters

Current Insurance Against Hurricanes

     Mariner is a member of OIL Insurance, Ltd. (“OIL”), an energy industry insurance cooperative, which provides the Company’s primary layer of physical damage and windstorm insurance coverage. Mariner’s coverage is subject to a $10.0 million per-occurrence deductible for its assets and a $250.0 million per-occurrence loss limit. However, if a single event causes losses to all OIL-insured assets in excess of $750.0 million, amounts covered for such losses will be reduced on a pro-rata basis among OIL members.

     In addition to Mariner’s primary coverage through OIL, it also maintains commercial “difference in conditions” insurance that would apply (with no additional deductible) once its limits with OIL are exhausted, as well as partial business interruption insurance covering certain of its significant producing fields as well as certain other fields situated in hurricane prone areas. Mariner’s business interruption coverage begins to provide benefits after a 60-day waiting period once the designated field is shut-in due to a covered event and is limited to 35% of the forecast cash flow from each designated property. Mariner’s commercial policy expires annually on June 1, and is subject to a general limit of $100.0 million per occurrence and in the case of named windstorms, a combined annual aggregate limit of $100.0 million covering both property damage and business interruption.

     As of March 31, 2009, approximately $36.0 million was accrued for an OIL premium contingency. As part of its OIL membership, the Company 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, OIL calculates a potential withdrawal premium annually based on past losses and Mariner accrues a liability for the potential premium. 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 anticipates that it will enter into such a security agreement, granting to OIL a security interest in a portion of Mariner’s Hurricane Ike claim proceeds payable by OIL. Mariner would have 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 $140.0 million net to Mariner’s interest. With respect to Hurricane Ike, Mariner’s OIL coverage has a $10.0 million per occurrence deductible and a $250.0 million per occurrence limit, subject to an industry-wide loss limit of $750.0 million per occurrence. OIL has advised the Company that industry-wide damages from Hurricane Ike are expected to substantially exceed OIL’s $750.0 million limit and that OIL expects to prorate the payout of all OIL members’ Hurricane Ike claims at approximately 68%, subject to further adjustment. Mariner expects that this shortfall in its primary coverage will be covered in full under its commercial excess coverage.

Although Mariner expects to begin receiving payment in respect of its Hurricane Ike claims in 2009, 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 $194.6 million in hurricane expenditures resulting from Hurricanes Katrina and Rita, of which $128.4 million were capitalized expenditures and $66.2 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 46% for Katrina and 64% 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 March 31, 2009, the Company had recovered $14.6 million from OIL and $48.5 million from its commercial carriers in respect of Hurricanes Katrina and Rita, and the insurance receivable balance for the Company’s claims for those hurricanes was approximately $25.5 million, of which $16.1 million is classified as Insurance Receivables in Current Assets in the Condensed Consolidated Balance Sheet. Due to the magnitude of the storms 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 Hurricanes Katrina and 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 million that is included as a use of the borrowing base. As of March 31, 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.

9. 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
		March 31,
		2009				2008
		(In thousands, except per share data)
Numerator:
Net (Loss) Income		$	(424,118	)		$	72,216
Denominator:
Weighted average shares outstanding			88,865				87,294
Add dilutive securities
Options			—				260
Restricted stock			—				459
Total weighted average shares outstanding and dilutive securities			88,865				88,013
Net (Loss) Income per share:
Basic:		$	(4.77	)		$	0.83
Diluted:		$	(4.77	)		$	0.82

     Shares issuable upon exercise of options to purchase common stock and unvested shares of restricted 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 quarter ended March 31, 2009, all of the Company’s shares issuable upon exercise of stock options and unvested shares of restricted stock (approximately 645,000 and 2,992,000, respectively) were excluded from the computation of diluted earnings per share because the effect was anti-dilutive. For the three months ended March 31, 2008, approximately 390,000 shares issuable upon exercise of stock options and 48,000 unvested shares of restricted stock were excluded from the computation of diluted earnings per share because the effect was anti-dilutive.

10. Comprehensive Income

     Comprehensive income includes net income 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 ended March 31, 2009 and 2008:

		Three Months Ended
		March 31,
		2009				2008
		(in thousands)
Net (Loss) Income		$	(424,118	)		$	72,216
Other comprehensive (loss) income:
Change in fair value of derivative hedging instruments, net of income taxes of $(10,398) and $(45,111)			(19,496	)			(81,089	)
Derivative contracts settled and reclassified, net of income taxes of $22,885 and $(5,067)			40,916				(9,164	)
Change in accumulated other comprehensive (loss) income			21,420				(90,253	)
Comprehensive loss			(402,698	)			(18,037	)
Comprehensive income attributable to noncontrolling interest			—				90
Comprehensive loss attributable to Mariner Energy, Inc.		$	(402,698	)		$	(18,127	)

11. 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 March 31, 2009 and December 31, 2008. These assets and liabilities are not included in the following tables.

     SFAS 157 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.

     SFAS 157 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 March 31, 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		$	149,224			$	—			$	149,224			$	—
Natural gas and crude oil fixed price swaps — Long Term			—				—				—				—
		$	149,224			$	—			$	149,224			$	—

     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 March 31, 2009.

Level 3 Fair Value Measurements

     The Company had no Level 3 financial instruments as of March 31, 2009.

12. Segment Information

     The FASB issued SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), which establishes 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.

13. Supplemental Guarantor Information

     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 March 31, 2009 and December 31, 2008, its Condensed Consolidating Statements of Operations for the three months ended March 31, 2009 and 2008, and its Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 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)
March 31, 2009
(In thousands except share data)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	7,339			$	—			$	—			$	7,339
Receivables, net of allowances			156,802				53,652				—				210,454
Insurance receivables			185				15,963				—				16,148
Derivative financial instruments			149,224				—				—				149,224
Intangible assets			1,737				68				—				1,805
Prepaid expenses and other			25,899				1,553				—				27,452
Total current assets			341,186				71,236				—				412,422
Property and Equipment:
Proved oil and gas properties, full-cost method			2,268,384				2,366,339				—				4,634,723
Unproved properties, not subject to amortization			178,971				13,767				—				192,738
Total oil and gas properties			2,447,355				2,380,106				—				4,827,461
Other property and equipment			33,847				19,765				—				53,612
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(1,305,219	)			(1,251,950	)			—				(2,557,169	)
Other property and equipment			(4,850	)			(1,313	)			—				(6,163	)
Total accumulated depreciation, depletion and amortization			(1,310,069	)			(1,253,263	)			—				(2,563,332	)
Total property and equipment, net			1,171,133				1,146,608				—				2,317,741
Investment in Subsidiaries			461,031				—				(461,031	)			—
Intercompany Receivables			128,825				(133,427	)			(262,252	)			—
Intercompany Note Receivable			176,200				—				(176,200	)			—
Insurance Receivables			124				23,657				—				23,781
Other Assets, net of amortization			65,275				622				—				65,897
TOTAL ASSETS		$	2,343,774			$	1,375,550			$	(899,483	)		$	2,819,841
Current Liabilities:
Accounts payable		$	2,490			$	—			$	—			$	2,490
Accrued liabilities			58,637				33,052				—				91,689
Accrued capital costs			97,231				55,059				—				152,290
Deferred income tax			12,594				—				—				12,594
Abandonment liability			20,870				88,848				—				109,718
Accrued interest			21,284				—				—				21,284
Total current liabilities			213,106				176,959				—				390,065
Long-Term Liabilities:
Abandonment liability			46,524				281,024				—				327,548
Deferred income tax			(42,040	)			150,916				—				108,876
Intercompany payable			133,427				128,825				(262,252	)			—
Long-term debt,			1,240,000				—				—				1,240,000
Other long-term liabilities			28,805				595				—				29,400
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			1,406,716				737,560				(438,452	)			1,705,824
Commitments and Contingencies (see Note 8)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2009			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 90,006,593 shares issued and outstanding at March 31, 2009			9				5				(5	)			9
Additional paid-in capital			1,077,677				886,142				(886,142	)			1,077,677
Partner capital			—				31,611				(31,611	)			—
Accumulated other comprehensive income			99,601				—				—				99,601
Accumulated deficit			(453,335	)			(456,727	)			456,727				(453,335	)
Total stockholders’ equity			723,952				461,031				(461,031	)			723,952
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,343,774			$	1,375,550			$	(899,483	)		$	2,819,841

MARINER ENERGY, INC.
CONSOLIDATING BALANCE SHEET (Unaudited)
December 31, 2008
(In thousands except share data)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	2,851			$	400			$	—			$	3,251
Receivables, net of allowances			157,362				62,558				—				219,920
Insurance receivables			5,886				7,237				—				13,123
Derivative financial instruments			121,929				—				—				121,929
Intangible assets			2,334				19				—				2,353
Prepaid expenses and other			12,923				1,454				—				14,377
Total current assets			303,285				71,668				—				374,953
Property and Equipment:
Proved oil and gas properties, full-cost method			2,181,238				2,266,908				—				4,448,146
Unproved properties, not subject to amortization			185,012				16,109				—				201,121
Total oil and gas properties			2,366,250				2,283,017				—				4,649,267
Other property and equipment			33,351				19,764				—				53,115
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(911,462	)			(855,566	)			—				(1,767,028	)
Other property and equipment			(4,425	)			(1,052	)			—				(5,477	)
Total accumulated depreciation, depletion and amortization			(915,887	)			(856,618	)			—				(1,772,505	)
Total property and equipment, net			1,483,714				1,446,163				—				2,929,877
Investment in Subsidiaries			704,971				—				(704,971	)			—
Intercompany Receivables			123,142				113,064				(236,206	)			—
Intercompany Note Receivable			176,200				—				(176,200	)			—
Insurance Receivables			3,924				18,208				—				22,132
Other Assets, net of amortization			64,726				1,105				—				65,831
TOTAL ASSETS		$	2,859,962			$	1,650,208			$	(1,117,377	)		$	3,392,793
Current Liabilities:
Accounts payable		$	3,837			$	—			$	—			$	3,837
Accrued liabilities			72,743				35,072				—				107,815
Accrued capital costs			144,710				51,123				—				195,833
Deferred income tax			23,148				—				—				23,148
Abandonment liability			1,554				80,810				—				82,364
Accrued interest			12,567				—				—				12,567
Total current liabilities			258,559				167,005				—				425,564
Long-Term Liabilities:
Abandonment liability			56,920				268,960				—				325,880
Deferred income tax			110,431				209,335				—				319,766
Intercompany payables			113,064				123,142				(236,206	)			—
Long-term debt			1,170,000				—				—				1,170,000
Other long-term liabilities			30,668				595				—				31,263
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			1,481,083				778,232				(412,406	)			1,846,909
Commitments and Contingencies (see Note 8)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2008			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 88,846,073 shares issued and outstanding at December 31, 2008			9				5				(5	)			9
Additional paid-in-capital			1,071,347				886,143				(886,143	)			1,071,347
Partner capital			—				30,646				(30,646	)			—
Accumulated other comprehensive income			78,181				—				—				78,181
Accumulated deficit			(29,217	)			(211,823	)			211,823				(29,217	)
Total stockholders’ equity			1,120,320				704,971				(704,971	)			1,120,320
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,859,962			$	1,650,208			$	(1,117,377	)		$	3,392,793