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 June 30, 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 August 9, 2007, there were 87,213,382 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			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			35
PART II
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 6. Exhibits			38
Compensation of Non-Employee Directors
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)

		June 30,				December 31,
		2007				2006
Current Assets:
Cash and cash equivalents		$	9,147			$	9,579
Receivables, net of allowances of $1,566 and $726 as of June 30, 2007 and December 31, 2006, respectively			165,619				149,692
Insurance receivables			81,126				61,001
Derivative asset			21,781				54,488
Prepaid seismic			27,561				20,835
Prepaid expenses and other			13,604				12,846
Total current assets			318,838				308,441
Property and Equipment:
Proved oil and gas properties, full-cost method			2,620,098				2,345,041
Unproved properties, not subject to amortization			90,099				40,246
Total oil and gas properties			2,710,197				2,385,287
Other property and equipment			14,429				13,512
Accumulated depreciation, depletion and amortization			(570,591	)			(386,737	)
Total property and equipment, net			2,154,035				2,012,062
Restricted cash			—				31,830
Goodwill			288,504				288,504
Derivative asset			2,440				17,153
Other Assets, net of amortization			28,796				22,163
TOTAL ASSETS		$	2,792,613			$	2,680,153
Current Liabilities:
Accounts payable		$	1,658			$	1,822
Accrued liabilities			111,618				74,880
Accrued capital costs			173,148				99,028
Deferred income tax			4,199				26,857
Derivative liability			2,207				—
Abandonment liability			31,459				29,660
Accrued interest			9,487				7,480
Total current liabilities			333,776				239,727
Long-Term Liabilities:
Abandonment liability			175,087				188,310
Derivative liability			5,666				—
Deferred income tax			299,744				262,888
Long-term debt, bank credit facility			—				354,000
Long-term debt, senior unsecured notes			600,000				300,000
Other long-term liabilities			34,406				32,637
Total long-term liabilities			1,114,903				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 June 30, 2007 and December 31, 2006			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 87,140,509 shares issued and outstanding at June 30, 2007; 180,000,000 shares authorized, 86,375,840 shares issued and outstanding at December 31, 2006			9				9
Additional paid-in-capital			1,047,966				1,043,923
Accumulated other comprehensive income			9,232				43,097
Accumulated retained earnings			286,727				215,562
Total stockholders’ equity			1,343,934				1,302,591
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,792,613			$	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								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues:
Oil		$	66,678			$	51,493			$	127,129			$	81,675
Natural gas			134,082				105,607				274,614				149,762
Natural gas liquids			11,413				9,631				20,562				14,865
Other revenues			908				936				2,341				1,623
Total revenues			213,081				167,667				424,646				247,925
Costs and Expenses:
Lease operating expense			40,297				22,627				75,053				34,119
Severance and ad valorem taxes			2,888				1,757				5,878				3,448
Transportation expense			1,403				1,548				3,305				2,277
General and administrative expense			11,376				6,964				21,517				17,473
Depreciation, depletion and amortization			93,899				76,982				192,633				109,806
Total costs and expenses			149,863				109,878				298,386				167,123
OPERATING INCOME			63,218				57,789				126,260				80,802
Other Income (Expense):
Interest income			231				136				522				249
Interest expense, net of amounts capitalized			(13,873	)			(8,663	)			(26,220	)			(14,668	)
Other			(373	)			—				5,058				—
Income before taxes			49,203				49,262				105,620				66,383
Provision for income taxes			(16,245	)			(18,557	)			(34,455	)			(24,549	)
NET INCOME		$	32,958			$	30,705			$	71,165			$	41,834
Earnings per share:
Net income per share—basic		$	0.38			$	0.36			$	0.83			$	0.62
Net income per share—diluted		$	0.38			$	0.36			$	0.83			$	0.62
Weighted average shares outstanding—basic			85,627,433				84,720,331				85,585,072				67,244,331
Weighted average shares outstanding—diluted			85,905,296				85,027,561				85,767,175				67,829,117

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

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

		Six Months
		Ended June 30,
		2007				2006
Operating Activities:
Net income		$	71,165			$	41,834
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			34,205				24,549
Depreciation, depletion and amortization			193,922				111,851
Ineffectiveness of derivative instruments			2,047				1,082
Stock compensation			3,414				7,891
Changes in operating assets and liabilities:
Receivables			(15,927	)			13,382
Insurance receivables			(20,125	)			(42,128	)
Prepaid expenses and other			(198	)			(1,134	)
Other assets			(1,974	)			(5,150	)
Accounts payable and other liabilities			17,365				(59,630	)
Net realized loss on derivative contracts acquired			—				3,548
Net cash provided by operating activities			283,894				96,095
Investing Activities:
Additions to properties and equipment			(258,311	)			(185,997	)
Property conveyances			2,017				2,012
Purchase price adjustment			—				(20,808	)
Restricted cash designated for investment			31,830				—
Net cash used in investing activities			(224,464	)			(204,793	)
Financing Activities:
Repayment of term note			—				(4,000	)
Credit facility (repayments) borrowings, net			(354,000	)			5,000
Debt and working capital acquired from Forest Energy Resources, Inc.			—				(176,200	)
Proceeds from note offering			300,000				300,000
Deferred offering costs			(6,491	)			(12,129	)
Net realized loss on derivative contracts acquired			—				(3,548	)
Proceeds from exercise of stock options			629				675
Net cash (used in) provided by financing activities			(59,862	)			109,798
(Decrease) Increase in Cash and Cash Equivalents			(432	)			1,100
Cash and Cash Equivalents at Beginning of Period			9,579				4,556
Cash and Cash Equivalents at End of Period		$	9,147			$	5,656

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 the Gulf of Mexico, both shelf and deepwater, and in West Texas. 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 June 30, 2007 and December 31, 2006 and for the three-month and six-month periods ended June 30, 2007 and 2006 include our accounts and the accounts of our wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

     Reclassifications — Commencing January 1, 2007, revenues associated with natural gas liquids are being reported separately. In addition, certain other 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.

     In July 2006, the Financial Accounting Standards Board (“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. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. On May 2, 2007, the FASB issued FASB Interpretation No. 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FIN 48-1), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.

     The Company adopted FIN 48 and applied the guidance of FIN 48-1 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 situation to change significantly within the next 12 months. In addition, as of the adoption date, 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 and, 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 reported in general and administrative expense.

     Recent Accounting Pronouncements —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.

     During February 2007, the 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 April 2007, FASB issued FASB Interpretation No. 39-1, “Amendment of FASB Interpretation No. 39” (FIN 39-1), which addresses certain modifications to FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts,” and whether a reporting entity that is party to a master netting arrangement can offset fair value amounts recognized for the right to reclaim or obligation to return cash collateral against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with Interpretation 39. FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early application permitted. We are evaluating the impact that FIN 39-1 will have on our financial statements.

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

     Assets acquired in the Forest Merger include 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 increase to goodwill 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 subject to a borrowing base. 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.

     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 (the “Dedicated Letter of Credit”); and add MERI as a co-borrower. The bank credit facility will mature on March 2, 2010, and the Dedicated 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 Dedicated 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 June 30, 2007, 136 wells had been drilled and completed. The Dedicated Letter of Credit balance as of June 30, 2007 was $17.1 million. A further reduction of $9.6 million occurred in August 2007, resulting in a remaining Dedicated Letter of Credit balance of $7.5 million.

     On April 23, 2007, the Company’s secured bank credit facility was further amended to increase from $350 million to $600 million the aggregate principal amount of certain unsecured bonds that the Company may issue with a non-default interest rate of 10% or less per annum and a scheduled maturity date after March 1, 2012. The amendment provided that upon a new bond issuance of up to $300 million before May 1, 2007, the borrowing base under the credit facility would remain at its then current level of $450 million, subject to redetermination or adjustment under the credit agreement. Accordingly, the borrowing base was reaffirmed at $450 million upon the April 30, 2007 issuance by the Company of its 8% Senior Notes due 2017 discussed below.

     At June 30, 2007, the Company had no advances outstanding under its bank credit facility and four outstanding letters of credit totaling $16.5 million (excluding the Dedicated Letter of Credit), of which $14.6 million is required for plugging and abandonment obligations at certain of its offshore fields. As of December 31, 2006, $354.0 million was outstanding under the bank credit facility, and the weighted average interest rate was 7.29%. 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.

     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 under the bank 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 June 30, 2007.

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

     Senior Notes — 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.

     On April 30, 2007, the Company sold and issued $300 million aggregate principal amount of its 8% Senior Notes due 2017 (the “8% Notes” and together with the 7¹/2% Notes, the “Notes” ). The 8% Notes were sold at par in an underwritten offering registered under the Securities Act of 1933. Net offering proceeds, after deducting underwriters’ discounts and estimated offering expenses, were approximately $292.4 million. The Company used the net offering proceeds to repay debt under its bank credit facility.

     The 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 each other and 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 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. Interest on the 8% Notes is payable on May 15 and November 15 of each year, beginning November 15, 2007. The 8% Notes mature on May 15, 2017. There is no sinking fund for the Notes.

     The Company may redeem the 7¹/2% Notes at any time before April 15, 2010 and the 8% Notes at any time before May 15, 2012, in each case 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 the dates indicated below, the Company may redeem the 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:

71/2% Notes		8% Notes
April 15, 2010 at 103.750%		May 15, 2012 at 104.000%
April 15, 2011 at 101.875%		May 15, 2013 at 102.667%
April 15, 2012 and thereafter at 100.000%		May 15, 2014 at 101.333%
		May 15, 2015 and thereafter at 100.000%

In addition, before 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. Before May 15, 2010, the Company may redeem up to 35% of the 8% Notes with the proceeds of equity offerings at a price equal to 108% of the principal amount of the 8% Notes redeemed plus accrued but unpaid interest.

     If the Company experiences a change of control (as defined in each of the indentures governing the Notes), subject to certain exceptions, the Company must give holders of the 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 each of the indentures governing the Notes. The indentures limit the ability of the Company and each of its restricted subsidiaries to, among other things:

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

     Costs associated with the 7¹/2% Notes offering were approximately $8.5 million, excluding discounts of $3.8 million. Costs associated with the 8% Notes offering included aggregate underwriting discounts of approximately $5.3 million and estimated offering expenses of $2.3 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. 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 $14.5 million and $4.8 million for the three-month periods ended June 30, 2007 and 2006, respectively. For the six-month periods ended June 30, 2007 and 2006, interest payments were $21.2 million and $8.4 million, 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 calculated using the unit-of-production method based on estimated proved oil and gas reserves.

     GAAP requires that a quarterly full-cost ceiling limitation calculation be performed whereby net capitalized costs related to proved and unproved properties, less related deferred income taxes, may not exceed a ceiling limitation. The ceiling limitation is 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, all net of related income tax effect. 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 oil and 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, less related deferred income taxes, were to exceed the ceiling limitation, the excess would be impaired and a permanent write-down taken. 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.

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			1.3
Liabilities Settled			(15.6	)
Accretion Expense			8.7
Revisions to previous estimates			(5.9	)
Abandonment Liability as of June 30, 2007 (2)		$	206.5

6. Stockholders’ Equity

     We recorded compensation expense related to restricted stock and stock options of $3.4 million and $7.9 million for the six-month periods ended June 30, 2007 and 2006, respectively, and $1.8 million and $1.5 million for the three-month periods ended June 30, 2007 and 2006, respectively.

The following table presents a summary of stock option activity under the Company’s Stock Incentive Plan, as amended and restated from time to time (the “Stock Incentive Plan”), and under rollover options granted to certain former Forest employees for the six months ended June 30, 2007:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at beginning of year			802,322			$	13.77
Granted			—				—
Exercised (2)			(48,637	)		$	12.94
Forfeited			(11,752	)			—
Outstanding at June 30, 2007			741,933			$	13.80			$	7,751

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of June 30, 2007 and 2006, respectively, and changes during the six-month periods is as follows:

		Restricted Shares under
		Stock Incentive Plan
		June 30,
		2007				2006
Total unvested shares at beginning of period: January 1			875,380				—
Shares granted			799,694				762,483
Shares vested			(207,053	)			—
Shares forfeited			(24,266	)			(12,338	)
Total unvested shares at end of period: June 30			1,443,755				750,145
Available for future grant as options or restricted stock			4,146,100				4,949,855
A summary of the activity for unvested restricted stock awards under the Company’s Equity Participation Plan, as amended (which expired May 31, 2006), as of June 30, 2007 and 2006, respectively, and changes during the six-month periods is as follows:
		Restricted Shares under
		Equity Participation Plan
		June 30,
		2007				2006
Total unvested shares at beginning of period: January 1			—				2,267,270
Shares granted			—				—
Shares vested			—				(2,267,270	)
Shares forfeited			—				—
Total unvested shares at end of period: June 30			—				—
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 June 30, 2007 are as follows:

		(In millions)
2008		$	1.5
2009			1.3
2010			1.6
2011			1.5
2012 and thereafter			1.5

     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 oil and natural gas revenue. 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 our hedge contracts settled and reported in oil and natural gas revenue during the three months ended June 30, 2007 and 2006 was a $6.9 million gain and an $1.8 million loss, respectively. During the six months ended June 30, 2007 and 2006, the cash activity on our hedge contracts settled and reported in oil and natural gas revenue was a $30.5 million gain and an $11.8 million loss, respectively. A $3.9 million non-cash gain was also recorded for the three and six-month periods ended June 30, 2006 relating to the hedges acquired through the Forest Merger. Additionally, for the three months ended June 30, 2007 and 2006, an unrealized gain of $0.1 million and an unrealized loss of $1.0 million, respectively, was recognized in natural gas revenue related to the ineffective portion of open contracts that are not eligible for deferral under SFAS 133 due primarily to the basis differentials between the contract price and the indexed price at the point of sale. Losses related to ineffectiveness recognized during the six months ended June 30, 2007 and 2006, were $2.0 million and $1.0 million, respectively.

     As of June 30, 2007, the Company had the following hedge contracts outstanding:

										June 30,
						Weighted Average				2007 Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Gain/(Loss)
										(In millions)
Crude Oil (Bbls)
July 1—December 31, 2007			627,900			$	69.20			$	(1.3	)
January 1—December 31, 2008			992,350			$	69.34				(3.0	)
January 1—December 31, 2009			1,280,750			$	68.93				(4.4	)
Natural Gas (MMbtus)
July 1—December 31, 2007			10,661,236			$	8.75				15.7
January 1—December 31, 2008			10,833,979			$	8.87				4.9
January 1—December 31, 2009			8,052,820			$	8.30				(2.4	)
Total										$	9.5

														June 30,
						Weighted Average				Weighted Average				2007 Fair Value
Costless Collars		Quantity				Floor				Cap				Gain/(Loss)
														(In millions)
Crude Oil (Bbls)
July 1—December 31, 2007			889,824			$	59.43			$	83.52			$	(2.6	)
January 1—December 31, 2008			1,195,495			$	61.66			$	86.80				1.0
Natural Gas (MMbtus)
July 1—December 31, 2007			8,197,200			$	6.98			$	12.19				2.0
January 1—December 31, 2008			12,347,000			$	7.83			$	14.60				6.4
Total														$	6.8

     As of August 9, 2007, the Company has not entered into any hedge transactions subsequent to June 30, 2007.

     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. During the first half of 2007, the Company entered into two commitments to purchase seismic data for an aggregate $22.0 million. The remaining minimum annual payments under the Company’s seismic contracts are $16.6 million in 2007 and $15.0 million in 2008. 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 reimbursement to the Company to be paid in quarterly installments through December 2007.

     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 1995 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 some of 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 June 30, 2007 was $22.6 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. Pending legal proceedings include:

• In April 2005, the Interior Board of Land Appeals denied Mariner’s administrative appeal of the MMS’ April 2001 order asserting royalties were due for production during calendar year 2000 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 August 2007, the United States Court of Appeals for the Fifth Circuit affirmed the dismissal on procedural grounds. The Company currently is evaluating its options in light of the Fifth Circuit’s ruling.

• In May 2006, the MMS issued an order asserting price thresholds were exceeded in calendar years 2000, 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 1995 Royalty Relief Act containing such commodity price threshold language, including interest, is approximately $3.6 million as of June 30, 2007, and a

reserve of that amount was recorded as of June 30, 2007. This potential liability relates to production from the lease commencing July 1, 2005, the effective date of Mariner’s acquisition of MERI.

     The enforceability of the price threshold provisions of leases granted pursuant to the 1995 Royalty Relief Act currently is being litigated in several administrative appeals filed by other companies in addition to Mariner, as well as in Kerr-McGee Oil & Gas Corp. v. Burton, C.A. No. 06-0439, pending in federal court for the Western District of Louisiana.

  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 June 30, 2007, we had incurred approximately $104.1 million in hurricane expenditures resulting from Hurricanes Katrina and Rita, of which $86.6 million were repairs and $17.5 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 $17.1 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 of Mexico 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 also should be covered under Forest’s insurance. At June 30, 2007 the insurance receivable balance was approximately $76.9 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 per storm. 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 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 June 30, 2007, we had incurred approximately $8.2 million of property damage related to Hurricane Ivan. As of June 30, 2007, approximately $2.4 million has been recovered through insurance, with the balance of $4.2 million, net of deductible, recorded as insurance receivable, as we believe it is probable that these costs will be reimbursed under our insurance policies.

     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 “MMS Proceedings” above.

     Letters of Credit — On March 2, 2006, Mariner obtained the reducing $40 million Dedicated Letter of Credit under its bank credit facility that is not included as a use of the borrowing base. The Dedicated Letter of Credit balance as of June 30, 2007 was $17.1 million. A further reduction of $9.6 million occurred in August 2007, resulting in a remaining Dedicated Letter of Credit balance of $7.5 million.

     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 June 30, 2007, four such letters of credit totaling $16.5 million were outstanding.

     Please refer to Note 3, “Long-Term Debt” for further discussion of these letters of credit.

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								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
		(In thousands, except per share data)
Numerator:
Net Income		$	32,958			$	30,705			$	71,165			$	41,834
Denominator:
Weighted average shares outstanding			85,627				84,720				85,585				67,244
Add dilutive securities			278				308				182				585
Total weighted average shares outstanding and dilutive securities			85,905				85,028				85,767				67,829
Earnings per share—basic:		$	0.38			$	0.36			$	0.83			$	0.62
Earnings per share—diluted:		$	0.38			$	0.36			$	0.83			$	0.62

Shares issuable upon exercise of options to purchase common stock that would have been anti-dilutive are excluded from the computation of diluted earnings per share. Approximately 547,000 and 578,000 shares issuable upon exercise of stock options were excluded from the computation for the three months and six months ended June 30, 2007, respectively. Approximately 770,000 and 760,000 shares issuable upon exercise of stock options were excluded from the computation for the three months and six months ended June 30, 2006, respectively.

     Please refer to Note 6 “Stockholders’ Equity” for option and share activity for the three and six months ended June 30, 2007 and 2006.

9. 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 and six-month periods ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
		(in thousands)								(in thousands)
Net Income		$	32,958			$	30,705			$	71,165			$	41,834
Other comprehensive income (loss):
Derivative contracts settled and reclassified, net of income taxes of $2,445, $375, $9,979 and ($3,124)			4,523				696				18,464				(5,802	)
Change in unrealized mark to market (losses) gains arising during period, net of income taxes of ($2,235), $8,436, ($29,358) and $22,111			(4,134	)			16,930				(52,329	)			40,124
Change in accumulated other comprehensive income (loss)			389				17,626				(33,865	)			34,322
Comprehensive income		$	33,347			$	48,331			$	37,300			$	76,156

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 the 8% Notes. Please refer to Note 3, “Long-Term Debt” for futher discussion of 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 Mariner Energy Resources, Inc.

     The following information sets forth our Consolidating Balance Sheet as of June 30, 2007 and December 31, 2006, our Consolidating Statement of Operations for the three months and six months ended June 30, 2007 and 2006, and our Consolidating Statement of Cash Flows for the six months ended June 30, 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
June 30, 2007
(In thousands except share data)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	9,147			$	—			$	—			$	9,147
Receivables, net			73,660				91,959				—				165,619
Insurance receivables			3,970				77,156				—				81,126
Derivative asset			21,781				—				—				21,781
Prepaid seismic			27,561				—				—				27,561
Prepaid expenses and other			11,534				2,070				—				13,604
Total current assets			147,653				171,185				—				318,838
Property and Equipment:
Proved oil and gas properties, full-cost method			1,113,618				1,506,480				—				2,620,098
Unproved properties, not subject to amortization			89,633				466				—				90,099
Total oil and gas properties			1,203,251				1,506,946				—				2,710,197
Other property and equipment			14,379				50				—				14,429
Accumulated depreciation, depletion and amortization			(315,978	)			(254,613	)			—				(570,591	)
Total property and equipment, net			901,652				1,252,383				—				2,154,035
Investment in subsidiaries			915,704				—				(915,704	)			—
Intercompany receivable			99,709				—				(99,709	)			—
Intercompany note receivable			176,200				—				(176,200	)			—
Goodwill			—				288,504				—				288,504
Derivative asset			2,440				—				—				2,440
Other Assets, Net of Amortization			28,796				—				—				28,796
TOTAL ASSETS		$	2,272,154			$	1,712,072			$	(1,191,613	)		$	2,792,613
Current Liabilities:
Accounts payable		$	1,658			$	—			$	—			$	1,658
Accrued liabilities			105,129				6,489				—				111,618
Accrued capital costs			113,202				59,946				—				173,148
Deferred income tax			4,199				—				—				4,199
Derivative liability			2,207				—				—				2,207
Abandonment liability			8,597				22,862				—				31,459
Accrued interest			9,487				—				—				9,487
Total current liabilities			244,479				89,297				—				333,776
Long-Term Liabilities:
Abandonment liability			47,450				127,637				—				175,087
Derivative liability			5,666				—				—				5,666
Deferred income tax			58,766				240,978				—				299,744
Intercompany payable			—				99,709				(99,709	)			—
Long-term debt, bank credit facility			—				—				—				—
Long-term debt, senior unsecured notes			600,000				—				—				600,000
Other long-term liabilities			30,820				3,586				—				34,406
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			742,702				648,110				(275,909	)			1,114,903
Commitments and Contingencies (see Note 7)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at June 30, 2007			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 87,140,509 shares issued and outstanding at June 30, 2007			9				5				(5	)			9
Additional paid-in-capital			1,047,966				886,142				(886,142	)			1,047,966
Accumulated other comprehensive income			9,232				—				—				9,232
Accumulated retained earnings			227,766				88,518				(29,557	)			286,727
Total stockholders’ equity			1,284,973				974,665				(915,704	)			1,343,934
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,272,154			$	1,712,072			$	(1,191,613	)		$	2,792,613

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:
Proved oil and gas properties, full-cost method			922,385				1,422,656				—				2,345,041
Unproved properties, not subject to amortization			39,885				361				—				40,246
Total oil and gas properties			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 June 30, 2007
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Oil		$	32,129			$	34,549			$	—			$	66,678
Natural gas			60,368				73,714				—				134,082
Natural gas liquids			7,284				4,129				—				11,413
Other revenues			908				—				—				908
Total revenues			100,689				112,392				—				213,081
Costs and Expenses:
Lease operating expense			8,815				31,482				—				40,297
Severance and ad valorem taxes			1,890				998				—				2,888
Transportation expense			789				614				—				1,403
General and administrative expense			10,849				527				—				11,376
Depreciation, depletion and amortization			45,392				48,507				—				93,899
Total costs and expenses			67,735				82,128				—				149,863
OPERATING INCOME			32,954				30,264				—				63,218
Earnings of Affiliates			17,183				—				(17,183	)			—
Other Income (Expense):
Interest income			3,872				1				(3,642	)			231
Interest expense, net of amounts capitalized			(13,818	)			(3,697	)			3,642				(13,873	)
Other			—				(373	)			—				(373	)
Income before taxes			40,191				26,195				(17,183	)			49,203
Provision for income taxes			(7,233	)			(9,012	)			—				(16,245	)
NET INCOME		$	32,958			$	17,183			$	(17,183	)		$	32,958

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2006
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Oil		$	29,874			$	21,619			$	—			$	51,493
Natural gas			38,705				66,902				—				105,607
Natural gas liquids			4,868				4,763				—				9,631
Other revenues			936				—				—				936
Total revenues			74,383				93,284				—				167,667
Costs and Expenses:
Lease operating expense			8,796				13,831				—				22,627
Severance and ad valorem taxes			1,757				—				—				1,757
Transportation expense			1,054				494				—				1,548
General and administrative expense			6,569				395				—				6,964
Depreciation, depletion and amortization			31,520				45,462				—				76,982
Total costs and expenses			49,696				60,182				—				109,878
OPERATING INCOME			24,687				33,102				—				57,789
Earnings of Affiliates			30,121				—				(30,121	)
Other Income (Expense):
Interest income			594				—				(458	)			136
Interest expense, net of amounts capitalized			(6,140	)			(2,981	)			458				(8,663	)
Income before taxes			49,262				30,121				(30,121	)			49,262
Provision for income taxes			(18,557	)			—				—				(18,557	)
NET INCOME		$	30,705			$	30,121			$	(30,121	)		$	30,705

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2007
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Oil		$	64,232			$	62,897			$	—			$	127,129
Natural gas			135,916				138,698				—				274,614
Natural gas liquids			12,083				8,479				—				20,562
Other revenues			2,241				100				—				2,341
Total revenues			214,472				210,174				—				424,646
Costs and Expenses:
Lease operating expense			23,335				51,718				—				75,053
Severance and ad valorem taxes			3,979				1,899				—				5,878
Transportation expense			1,815				1,490				—				3,305
General and administrative expense			20,317				1,200				—				21,517
Depreciation, depletion and amortization			85,490				107,143				—				192,633
Total costs and expenses			134,936				163,450				—				298,386
OPERATING INCOME			79,536				46,724				—				126,260
Earnings of Affiliates			29,557				—				(29,557	)			—
Other Income (Expense):
Interest income			7,769				1				(7,248	)			522
Interest expense, net of amounts capitalized			(26,032	)			(7,436	)			7,248				(26,220	)
Other			—				5,058				—				5,058
Income before taxes			90,830				44,347				(29,557	)			105,620
Provision for income taxes			(19,665	)			(14,790	)			—				(34,455	)
NET INCOME		$	71,165			$	29,557			$	(29,557	)		$	71,165