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, 2008

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

Commission file number 1-32747

MARINER ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware		86-0460233
(State or other jurisdiction of		(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, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

     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, 2008, there were 87,794,130 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 (unaudited)			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			31
PART II
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 6. Exhibits			33
Consent of Ryder Scott Company, L.P.
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

Item 1. Condensed Consolidated Financial Statements

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

		March 31,				December 31,
		2008				2007
Current Assets:
Cash and cash equivalents		$	3,872			$	18,589
Receivables, net of allowances of $2,378 and $2,449 as of March 31, 2008 and December 31, 2007, respectively			208,415				157,774
Insurance receivables			26,683				26,683
Derivative financial instruments			—				11,863
Intangible assets			9,319				17,209
Prepaid expenses and other			24,525				10,630
Deferred tax asset			51,015				6,232
Total current assets			323,829				248,980
Property and Equipment:
Proved oil and gas properties, full-cost method			3,516,241				3,118,273
Unproved properties, not subject to amortization			122,323				40,455
Total oil and gas properties			3,638,564				3,158,728
Other property and equipment			65,301				15,545
Accumulated depreciation, depletion and amortization			(868,388	)			(754,079	)
Total property and equipment, net			2,835,477				2,420,194
Restricted Cash			—				5,000
Goodwill			295,598				295,598
Insurance Receivables			56,924				56,924
Derivative Financial Instruments			—				691
Other Assets, net of amortization			65,442				56,248
TOTAL ASSETS		$	3,577,270			$	3,083,635
Current Liabilities:
Accounts payable		$	13,894			$	1,064
Accrued liabilities			105,531				96,936
Accrued capital costs			165,018				159,010
Abandonment liability			32,683				30,985
Accrued interest			20,840				7,726
Derivative financial instruments			132,546				19,468
Total current liabilities			470,512				315,189
Long-Term Liabilities:
Abandonment liability			232,703				191,021
Deferred income tax			378,953				343,948
Derivative financial instruments			44,066				25,343
Long-term debt, bank credit facility			430,000				179,000
Long-term debt, senior unsecured notes			600,000				600,000
Other long-term liabilities			45,104				38,115
Total long-term liabilities			1,730,826				1,377,427
Commitments and Contingencies (see Note 8)
Minority Interest			91				1
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2008 and December 31, 2007			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 87,810,265 shares issued and outstanding at March 31, 2008; 180,000,000 shares authorized, 87,229,312 shares issued and outstanding at December 31, 2007			9				9
Additional paid-in capital			1,057,039				1,054,089
Accumulated other comprehensive loss			(112,829	)			(22,576	)
Accumulated retained earnings			431,622				359,496
Total stockholders’ equity			1,375,841				1,391,018
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,577,270			$	3,083,635

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

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

		Three Months Ended
		March 31,
		2008				2007
Revenues:
Natural gas		$	179,623			$	140,532
Oil			113,614				60,451
Natural gas liquids			20,981				9,149
Other revenues			1,679				1,472
Total revenues			315,897				211,604
Costs and Expenses:
Lease operating expense			44,832				32,054
Severance and ad valorem taxes			4,610				2,990
Transportation expense			3,019				1,902
General and administrative expense			11,926				12,593
Depreciation, depletion and amortization			119,318				98,855
Other miscellaneous expense			537				168
Total costs and expenses			184,242				148,562
OPERATING INCOME			131,655				63,042
Other Income (Expense):
Interest income			326				291
Interest expense, net of amounts capitalized			(18,571	)			(12,347	)
Other income			—				5,431
Income Before Taxes and Minority Interest			113,410				56,417
Provision for Income Taxes			(41,194	)			(18,210	)
Minority Interest Expense			(90	)			—
NET INCOME		$	72,126			$	38,207
Earnings per share:
Net income per share—basic		$	0.83			$	0.45
Net income per share—diluted		$	0.82			$	0.45
Weighted average shares outstanding—basic			87,293,730				85,515,561
Weighted average shares outstanding—diluted			88,012,901				85,704,529

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

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

		Three Months
		Ended March 31,
		2008				2007
Operating Activities:
Net income		$	72,126			$	38,207
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for doubtful receivables			(71	)			(667	)
Deferred income tax			40,400				17,960
Depreciation, depletion and amortization			119,318				98,855
Amortization of deferred financing costs			808				585
Ineffectiveness of derivative instruments			3,924				2,148
Share-based compensation			2,625				1,567
Minority interest			90				—
Changes in operating assets and liabilities:
Receivables			(50,020	)			(6,834	)
Insurance receivables			—				(7,058	)
Prepaid expenses and other			(16,007	)			(1,695	)
Accounts payable and accrued liabilities			40,978				10,561
Net cash provided by operating activities			214,171				153,629
Investing Activities:
Acquisitions and additions to oil and gas properties			(437,565	)			(148,784	)
Additions to other property and equipment			(47,648	)			(6	)
Property conveyances			—				18
Restricted cash designated for investment			5,000				31,830
Net cash used in investing activities			(480,213	)			(116,942	)
Financing Activities:
Credit facility borrowings (repayments), net			251,000				(40,000	)
Repurchase of stock			(366	)			—
Proceeds from exercise of stock options			691				45
Net cash provided by (used in) financing activities			251,325				(39,955	)
Decrease in Cash and Cash Equivalents			(14,717	)			(3,268	)
Cash and Cash Equivalents at Beginning of Period			18,589				9,579
Cash and Cash Equivalents at End of Period		$	3,872			$	6,311
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)		$	3,757			$	6,429
Income taxes		$	—			$	250

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

MARINER ENERGY, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

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

     Interim Financial Statements — The accompanying unaudited consolidated financial statements have been prepared 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, 2007.

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

     Principles of Consolidation — Our consolidated financial statements as of March 31, 2008 and December 31, 2007 include our accounts and the accounts of our subsidiaries. All inter-company balances and transactions have been eliminated.

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

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

     There were no significant changes to the Company’s uncertain tax positions in the first quarter of 2008. For a detail of the Company’s uncertain tax positions, please refer to Note 9, “Income Taxes” to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     Recent Accounting Pronouncements — In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to

enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS 161 also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”); and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk—related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information about derivative instruments. The Company is currently evaluating the provisions of this Statement.

     In December 2007, FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements, which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will have an impact on accounting for business combinations with the effect dependent upon acquisitions at that time.

     In December 2007, 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 non-controlling 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 non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated 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. The provisions of FIN 39-1 were consistent with the Company’s accounting practice. The adoption of FIN 39-1 did not impact the condensed consolidated financial statements of the Company.

     During February 2007, the FASB issued SFAS No 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 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 159 was effective for the Company as of January 1, 2008. SFAS 159 did not have an impact on the Company’s Condensed Consolidated Financial Statements as the Company elected not to measure at fair value additional financial assets and liabilities not already required to be measured at fair value.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather it eliminates inconsistencies in the guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB

Statement No. 157,” which delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP is effective for financial statements issued during fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Accordingly, our adoption of SFAS 157 was limited to financial assets and liabilities, which primarily affects the valuation of our derivative contracts. The adoption of SFAS 157 with respect to financial assets and liabilities did not have a material impact on our net asset values. See Note 11. We are still in the process of evaluating SFAS 157 with respect to its effect on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption in 2009. Nonfinancial assets and liabilities for which we have not applied the provisions of SFAS 157 include our asset retirement obligations and assets held for future sale.

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 approximately $243.0 million, subject to customary purchase price adjustments, including $8.0 million for reimbursement of drilling costs attributable to the High Island 166 #5 well. The acquisition was financed by borrowing under Mariner’s bank credit facility. As of March 31, 2008, additional purchase price adjustments resulted in a net credit to Mariner of approximately $15.0 million.

     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 acquisition was consummated on January 31, 2008. 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				2007
		(In thousands, except per share amounts)
Pro Forma:
Revenue		$	330,874			$	266,321
Net income available to common stockholders		$	75,628			$	47,980
Basic earnings per share		$	0.87			$	0.56
Diluted earnings per share		$	0.86			$	0.56

     West Texas Acquisitions. On December 31, 2007 and February 29, 2008, Mariner acquired additional working interests in certain of its existing properties in the Spraberry field in the Permian Basin. Mariner internally estimated net proved oil and gas reserves attributable to the December 2007 acquisition of approximately 94.9 Bcfe (75% oil and NGLs) and to the February 2008 acquisition of approximately 14.0 Bcfe (65% oil and NGLs). Mariner intends to operate substantially all of the assets. The purchase price, subject to customary purchase price adjustments, for the December 2007 acquisition was approximately $122.5 million, which Mariner financed under its bank credit facility, and for the February 2008 acquisition was approximately $21.7 million.

     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 for book purposes on this disposition.

3. Long-Term Debt

     Bank Credit Facility — On January 31, 2008, the Company further amended its secured bank credit facility to increase the facility’s maximum credit availability to $1 billion, including up to $50.0 million in letters of credit, subject to an increased borrowing base of $750.0 million. The amendment also extended the facility’s term to January 31, 2012; terminated an additional dedicated $40.0 million letter of credit facility in favor of Forest Oil Corporation (“Forest”) due to Mariner’s satisfaction of its obligations under a drill-to-earn program; and added as a permitted use of loan proceeds the funding of Mariner’s purchase of Mariner Gulf of Mexico LLC (f/k/a Hydro Gulf of Mexico, L.L.C.). The Company’s payment and performance of its obligations under the bank credit facility are secured by liens upon substantially all of the assets of the Company and its subsidiaries. Borrowings under our bank credit facility bear interest at either a LIBOR-based rate or a prime-based rate, at our option, plus a specified margin.

     As of March 31, 2008 and December 31, 2007, $430.0 million and $179.0 million, respectively, was outstanding under the bank credit facility and the interest rate was 4.62% and 7.25%, respectively. In addition, as of March 31, 2008, four letters of credit totaling $4.7 million were outstanding, of which $4.2 million was required for plugging and abandonment obligations at certain of the Company’s offshore fields.

     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 Company was in compliance with the financial covenants under the bank credit facility as of March 31, 2008.

     The Company must pay a commitment fee of 0.250% to 0.375% per year on the unused availability under the bank credit facility.

     Senior 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”). In 2007, the Company sold and issued $300.0 million aggregate principal amount of its 8% Senior Notes due 2017 (the “8% Notes” and together with the 7¹/₂% Notes, the “Notes”). The Notes are senior unsecured obligations of the Company. The 7¹/₂% Notes mature on April 15, 2013 with interest payable on April 15 and October 15 of each year. The 8% Notes mature on May 15, 2017 with interest payable on May 15 and November 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.

     Capitalized Interest — For both of the three-month periods ended March 31, 2008 and 2007, capitalized interest totaled $0.2 million.

4. Oil and Gas Properties

     Our 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 certain general and administrative expenses (“G&A”). For the three-month periods ended March 31, 2008 and 2007, capitalized G&A totaled $4.6 million and $2.2 million, respectively. 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 the amount equal to the present value discounted at 10% of estimated future net revenues from estimated 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 would be recorded in the Consolidated Statements of Operations.

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. Mariner had no write downs due to the ceiling test for the current quarter.

5. Accrual for Future Abandonment Liabilities

     SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS 143”) 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.

     To estimate the fair value of an asset retirement obligation, we employ a present value technique, which reflects certain assumptions, including our 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 December 31, 2007 (1)		$	222,006
Liabilities Incurred			129
Liabilities Settled			(8,117	)
Accretion Expense			5,008
Revisions to previous estimates			1,940
Liabilities from assets acquired			44,420
Abandonment Liability as of March 31, 2008 (2)		$	265,386

6. Stockholders’ Equity

     We recorded compensation expense related to restricted stock and stock options of $2.6 million and $1.6 million for the three-month periods ended March 31, 2008 and 2007, respectively. Under the Company's Stock Incentive Plan, as amended and restated from time to time (the "Stock Incentive Plan"), unrecognized compensation expense at March 31, 2008 for the unvested portion of restricted stock granted was $38.3 million and for unvested options was $0.4 million.

      The following table presents a summary of stock option activity under the Stock Incentive Plan and under rollover options granted to certain former Forest employees for the three months ended March 31, 2008:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at beginning of year			720,488			$	13.82			$	9,503
Granted			—				—				—
Exercised (2)			(52,130	)			13.26				(717	)
Forfeited			(18,000	)			14.00				(234	)
Outstanding at March 31, 2008			650,358				13.86				8,552

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of March 31, 2008 and 2007, respectively, and changes during the three-month periods is as follows:

		Restricted Shares under
		Stock Incentive Plan
		March 31,
		2008				2007
Total unvested shares at beginning of period: January 1			1,484,552				875,380
Shares granted			548,864				—
Shares vested			(40,844	)			(48,608	)
Shares forfeited			(6,708	)			(7,850	)
Total unvested shares at end of period: March 31			1,985,864				818,922
Available for future grant as options or restricted stock			3,561,978				4,880,706

7. Derivative Financial Instruments and Hedging Activities

     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 effects on our oil and gas revenues from our hedging activities were as follows:

		Three Months Ended March 31,
		2008				2007
		(In thousands)
Cash Gain (Loss) on Settlements		$	(10,307	)		$	23,622
Loss on Hedge Ineffectiveness (1)			(3,924	)			(2,148	)
Total		$	(14,231	)		$	21,474

     As of March 31, 2008, the Company had the following hedge contracts outstanding:

										March 31,
						Weighted Average				2008 Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Liability
										(In thousands)
Natural Gas (MMbtus)
April 1—December 31, 2008			28,257,260			$	8.43			$	(50,641	)
January 1—December 31, 2009			31,642,084			$	8.48				(39,571	)
Crude Oil (Bbls)
April 1—December 31, 2008			1,616,724			$	78.93				(32,727	)
January 1—December 31, 2009			2,172,210			$	76.15				(40,137	)
Total										$	(163,076	)

														March 31,
						Weighted Average				Weighted Average				2008 Fair Value
Costless Collars		Quantity				Floor				Cap				Liability
														(In thousands)
Natural Gas (MMbtus)
April 1—December 31, 2008			8,889,000			$	7.83			$	14.60			$	(1,339	)
Crude Oil (Bbls)
April 1—December 31, 2008			836,136			$	61.65			$	86.80				(12,197	)
Total														$	(13,536	)

As of May 5, 2008, the Company has not entered into any hedge transactions subsequent to March 31, 2008.

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, 2008 are as follows:

		(In thousands)
2009		$	2,217
2010			2,489
2011			2,499
2012			2,414
2013 and thereafter			11,961

     Other Commitments — In the ordinary course of business, the Company enters into long-term commitments to purchase seismic data. At March 31, 2008 and December 31, 2007, the Company’s seismic obligations totaled $8.4 million and $14.6 million, respectively.

     MMS Proceedings — Mariner and its subsidiary, Mariner Energy Resources, Inc. (“MERI”), own numerous properties in the Gulf of Mexico. Certain of such properties were leased from the MMS subject to The Outer Continental Shelf Deep Water Royalty Relief Act (“RRA”), signed into law on November 28, 1995. The RRA relieved lessees of the obligation to pay royalties on certain leases until a designated volume was produced. Four of these leases held by the Company and one held by MERI that are producing contain language that limits royalty relief if commodity prices exceed predetermined levels. Since 2000, commodity prices have exceeded some of the predetermined levels, except in 2002. The Company and MERI 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 pending proceedings on those leases that the MMS has issued orders to pay. The Company has recorded a liability for its estimated exposure on these leases, which at March 31, 2008 was $35.3 million, including interest. The potential liability of MERI under its lease relates to production from the lease commencing July 1, 2005, the effective date of Mariner’s acquisition of MERI.

     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 enforceability of the price threshold provisions of leases granted pursuant to the RRA currently is being litigated in several administrative appeals filed by other companies in addition to Mariner.

   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. Our coverage is subject to a $10.0 million per-occurrence deductible for our 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 our primary coverage through OIL, we also maintain commercial “difference in conditions” insurance that would apply (with no additional deductible) once our limits with OIL are exhausted, as well as partial business interruption insurance covering certain of our significant producing fields as well as certain other fields situated in hurricane prone areas. Our 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. Our commercial policy expires June 1, 2008, and is subject to a general limit of $75.0 million per occurrence and in the case of named windstorms a combined annual aggregate limit of $75.0 million covering both property damage and business interruption.

     Applicable insurance for our Hurricane Katrina and Rita claims with respect to the Gulf of Mexico assets previously acquired from Forest is provided by OIL. Our coverage for the former Forest properties is subject to a deductible of $5.0 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 therefore, our insurance recovery is 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, we believe the shortfall would be covered by applicable commercial excess insurance coverage. This excess coverage is not subject to an additional deductible and has a stated limit of $50.0 million per occurrence. The insurance coverage for Mariner’s legacy properties is subject to a $3.75 million deductible.

   Hurricanes Katrina and Rita (2005)

     In 2005, our 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, we had incurred approximately $141.8 million in hurricane expenditures resulting from Hurricanes Katrina and Rita, of which $110.9 million were repairs and $30.9 million were hurricane-related abandonment costs. We estimate that we will incur hurricane-related abandonment costs of approximately $42.0 million during 2008.

     At March 31, 2008, the insurance receivable balance for our Hurricane Katrina and Rita claims was approximately $79.4 million, of which $56.9 million is classified as a long-term asset. 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. We expect to maintain a potentially 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 natural 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 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 recommenced in the first quarter of 2007. Since 2004, we had incurred approximately $8.5 million of property damage related to Hurricane Ivan. To date, 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 an additional $40.0 million letter of credit under its bank credit facility in favor of Forest that was not included as a use of the borrowing base (the “Dedicated Letter of Credit”). The Dedicated Letter of Credit was issued to secure performance of Mariner’s obligation to drill and complete 150 wells under a drill-to-earn program. The Dedicated Letter of Credit reduced periodically by an amount equal to the product of $0.5 million times the number of wells exceeding 75 that were drilled and completed. As of January 2008, the Dedicated Letter of Credit had been reduced to zero and cancelled as all 150 wells had been drilled and completed as of December 31, 2007. The Dedicated Letter of Credit balance as of December 31, 2007 was $3.2 million.

     Mariner’s bank credit facility also has a letter of credit facility for up to $50.0 million that is included as a use of the borrowing base. As of March 31, 2008, four such letters of credit totaling $4.7 million were outstanding.

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

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 if security interests were exercised or converted into common stock.

		Three Months Ended
		March 31,
		2008				2007
		(In thousands, except per share
		data)
Numerator:
Net Income		$	72,126			$	38,207
Denominator:
Weighted average shares outstanding			87,294				85,516
Add dilutive securities			719				189
Total weighted average shares outstanding and dilutive securities		$	88,013			$	85,705
Earnings per share—basic:		$	0.83			$	0.45
Earnings per share—diluted:		$	0.82			$	0.45

     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 390,000 and 693,000 shares issuable upon exercise of stock options were excluded from the computation for the three months ended March 31, 2008 and March 31, 2007, respectively.

     Please refer to Note 6, “Stockholders’ Equity” for option and share activity for the three months ended March 31, 2008 and 2007.

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, 2008 and 2007:

		Three Months Ended
		March 31,
		2008				2007
		(in thousands)
Net Income		$	72,126			$	38,207
Other comprehensive (loss) income:
Derivative contracts settled and reclassified, net of income taxes of ($5,067) and $7,534			(9,164	)			13,940
Change in unrealized mark-to-market losses arising during period, net of income taxes of ($45,111) and ($27,123)			(81,089	)			(48,194	)
Change in accumulated other comprehensive loss			(90,253	)			(34,254	)
Comprehensive (loss) income		$	(18,127	)		$	3,953

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, 2008 and December 31, 2007. 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 3 inputs are unobservable (meaning they reflect our 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 instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Mariner 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, 2008:

		As of March 31, 2008
										Fair Value Measurements Using:
														Significant
										Quoted Prices				other				Significant
		Carrying				Total Fair				in Active				Observable				Unobservable
		Amount				Value				Markets				Inputs				Inputs
Derivative Financial Instruments		(In thousands)								(Level 1)				(Level 2)				(Level 3)
Oil and Gas price swaps and collars – Short Term		$	(132,546	)		$	(132,546	)		$	—			$	(119,010	)		$	(13,536	)
Oil and Gas price swaps and collars – Long Term			(44,066	)			(44,066	)			—				(44,066	)			—

     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 oil and gas 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 Mariner’s credit rating as of March 31, 2008.

Level 3 Fair Value Measurements  

     The fair values of the oil and gas price collars are estimated valuations using the Black-Scholes valuation model based upon the forward commodity price curves, implied volatilities of commodities, and a credit adjustment based on Mariner’s credit rating as of March 31, 2008. The following table provides fair value measurement information for the Company’s Level 3 financial instruments as of March 31, 2008:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

		(In thousands)
Fair value of collars at December 31, 2007		$	(4,058	)
Total gains / (losses):
Included in Natural gas and Oil Revenues (realized/unrealized)			(4,006	)
Included in other comprehensive income (realized/unrealized)			(9,478	)
Purchases, issuances, and settlements, net			4,006
Transfers in and/or out of Level 3			—
Fair value of collars at March 31, 2008		$	(13,536	)
The amount of net losses for the period included in earnings attributable to the change in net unrealized gains relating to assets still held at the reporting date		$	—

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 they 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.

     We measure financial performance as a single enterprise, allocating capital resources on a project-by-project basis across our entire asset base to maximize profitability. We utilize a company-wide management team that administers all enterprise operations encompassing the exploration, development and production of natural gas and oil. All operations are located in the United States. Inasmuch as we are one enterprise, we do track basic operational data by area, but do not maintain comprehensive financial statement information 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 future domestic subsidiaries (“Subsidiary Guarantors”).

     The following information sets forth our Consolidating Balance Sheets as of March 31, 2008 and December 31, 2007, our Condensed Consolidating Statements of Operations for the three months ended March 31, 2008 and 2007, and our Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2008 and 2007.

Investments in our subsidiaries are accounted for on the consolidation method; accordingly, entries necessary to consolidate Mariner, the parent company, and its 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.

CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2008
(In thousands except share data)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	3,475			$	397			$	—			$	3,872
Receivables, net of allowances			99,813				108,602				—				208,415
Insurance receivables			3,950				22,733				—				26,683
Intangible assets			8,444				875				—				9,319
Prepaid expenses and other			22,888				1,637				—				24,525
Deferred tax asset			51,015				—				—				51,015
Total current assets			189,585				134,244				—				323,829
Property and Equipment:
Proved oil and gas properties, full-cost method			1,572,284				1,943,957				—				3,516,241
Unproved properties, not subject to amortization			107,926				14,397				—				122,323
Total oil and gas properties			1,680,210				1,958,354				—				3,638,564
Other property and equipment			15,842				49,459				—				65,301
Accumulated depreciation, depletion and amortization			(462,130	)			(406,258	)			—				(868,388	)
Total property and equipment, net			1,233,922				1,601,555				—				2,835,477
Investment in Subsidiaries			1,082,909				—				(1,082,909	)			—
Intercompany Receivables / (Payables)			377,503				(377,503	)			—				—
Goodwill			—				295,598				—				295,598
Insurance receivables			2,663				54,261				—				56,924
Other Assets, net of amortization			64,270				1,172				—				65,442
TOTAL ASSETS		$	2,950,852			$	1,709,327			$	(1,082,909	)		$	3,577,270
Current Liabilities:
Accounts payable		$	11,273			$	2,621			$	—			$	13,894
Accrued liabilities			62,923				42,608				—				105,531
Accrued capital costs			78,768				86,250				—				165,018
Abandonment liability			5,692				26,991				—				32,683
Accrued interest			20,840				—				—				20,840
Derivative financial instruments			132,546				—				—				132,546
Total current liabilities			312,042				158,470				—				470,512
Long-Term Liabilities:
Abandonment liability			50,117				182,586				—				232,703
Deferred income tax			98,168				280,785				—				378,953
Derivative financial instruments			44,066				—				—				44,066
Long-term debt, bank credit facility			430,000				—				—				430,000
Long-term debt, senior unsecured notes			600,000				—				—				600,000
Other long-term liabilities			40,618				4,486				—				45,104
Total long-term liabilities			1,262,969				467,857				—				1,730,826
Commitments and Contingencies (see Note 8)
Minority Interest			—				91				—				91
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2008			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 87,810,265 shares issued and outstanding at March 31, 2008			9				5				(5	)			9
Additional paid-in capital			1,057,039				886,142				(886,142	)			1,057,039
Partner capital			—				29,173				(29,173	)			—
Accumulated other comprehensive loss			(112,829	)			—				—				(112,829	)
Accumulated retained earnings			431,622				167,589				(167,589	)			431,622
Total stockholders’ equity			1,375,841				1,082,909				(1,082,909	)			1,375,841
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,950,852			$	1,709,327			$	(1,082,909	)		$	3,577,270

MARINER ENERGY, INC. AND SUBSIDIARIES

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

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	18,589			$	—			$	—			$	18,589
Receivables, net of allowances			64,727				93,047				—				157,774
Insurance receivables			3,950				22,733				—				26,683
Derivative financial instruments			11,863				—				—				11,863
Intangible assets			16,209				1,000				—				17,209
Prepaid expenses and other			9,092				1,538				—				10,630
Deferred tax asset			6,232				—				—				6,232
Total current assets			130,662				118,318				—				248,980
Property and Equipment:
Proved oil and gas properties, full-cost method			1,469,989				1,648,284				—				3,118,273
Unproved properties, not subject to amortization			40,025				430				—				40,455
Total oil and gas properties			1,510,014				1,648,714				—				3,158,728
Other property and equipment			15,495				50				—				15,545
Accumulated depreciation, depletion and amortization			(403,159	)			(350,920	)			—				(754,079	)
Total property and equipment, net			1,122,350				1,297,844				—				2,420,194
Investment in Subsidiaries			1,014,548				—				(1,014,548	)			—
Intercompany Receivables / (Payables)			222,215				(222,215	)			—				—
Restricted cash			—				5,000				—				5,000
Goodwill			—				295,598				—				295,598
Insurance Receivables			2,663				54,261				—				56,924
Derivative Financial Instruments			691				—				—				691
Other Assets, net of amortization			55,607				641				—				56,248
TOTAL ASSETS		$	2,548,736			$	1,549,447			$	(1,014,548	)		$	3,083,635
Current Liabilities:
Accounts payable		$	1,064			$	—			$	—			$	1,064
Accrued liabilities			70,467				26,469				—				96,936
Accrued capital costs			85,839				73,171				—				159,010
Abandonment liability			4,383				26,602				—				30,985
Accrued interest			7,726				—				—				7,726
Derivative financial instruments			19,468				—				—				19,468
Total current liabilities			188,947				126,242				—				315,189
Long-Term Liabilities:
Abandonment liability			49,827				141,194				—				191,021
Deferred income tax			80,095				263,853				—				343,948
Derivative financial instruments			25,343				—				—				25,343
Long-term debt, bank credit facility			179,000				—				—				179,000
Long-term debt, senior unsecured notes			600,000				—				—				600,000
Other long-term liabilities			34,506				3,609				—				38,115
Total long-term liabilities			968,771				408,656				—				1,377,427
Commitments and Contingencies (see Note 8)
Minority Interest			—				1				—				1
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2007			—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 87,229,312 shares issued and outstanding at December 31, 2007			9				5				(5	)			9
Additional paid-in capital			1,054,089				886,142				(886,142	)			1,054,089
Partner capital			—				6,000				(6,000	)			—
Accumulated other comprehensive loss			(22,576	)			—				—				(22,576	)
Accumulated retained earnings			359,496				122,401				(122,401	)			359,496
Total stockholders’ equity			1,391,018				1,014,548				(1,014,548	)			1,391,018
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,548,736			$	1,549,447			$	(1,014,548	)		$	3,083,635

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended March 31, 2008
(In thousands)
(Unaudited)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Natural gas		$	85,533			$	94,090			$	—			$	179,623
Oil			61,931				51,683				—				113,614
Natural gas liquids			11,743				9,238				—				20,981
Other revenues			334				1,345				—				1,679
Total revenues			159,541				156,356				—				315,897
Costs and Expenses:
Operating expenses			21,106				31,355				—				52,461
General and administrative expense			11,227				699				—				11,926
Depreciation, depletion and amortization			60,155				59,163				—				119,318
Other miscellaneous expense			521				16				—				537
Total costs and expenses			93,009				91,233				—				184,242
OPERATING INCOME			66,532				65,123				—				131,655
Earnings of Affiliates			45,188				—				(45,188	)			—
Other Income (Expense):
Interest income			3,043				7				(2,724	)			326
Interest expense, net of amounts capitalized			(18,374	)			(2,921	)			2,724				(18,571	)
Income Before Taxes and Minority Interest			96,389				62,209				(45,188	)			113,410
Provision for Income Taxes			(24,263	)			(16,931	)			—				(41,194	)
Minority Interest Expense			—				(90	)			—				(90	)
NET INCOME		$	72,126			$	45,188			$	(45,188	)		$	72,126

MARINER ENERGY, INC. AND SUBSIDIARIES

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

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Revenues:
Natural gas		$	75,548			$	64,984			$	—			$	140,532
Oil			32,103				28,348				—				60,451
Natural gas liquids			4,799				4,350				—				9,149
Other revenues			1,332				140				—				1,472
Total revenues			113,782				97,822				—				211,604
Costs and Expenses:
Operating expenses			16,145				20,801				—				36,946
General and administrative expense			9,990				2,603				—				12,593
Depreciation, depletion and amortization			40,098				58,757				—				98,855
Other miscellaneous expense			967				(799	)			—				168
Total costs and expenses			67,200				81,362				—				148,562
OPERATING INCOME			46,582				16,460				—				63,042
Earnings of Affiliates			12,374				—				(12,374	)			—
Other Income (Expense):
Interest income			3,897				—				(3,606	)			291
Interest expense, net of amounts capitalized			(12,214	)			(3,739	)			3,606				(12,347	)
Other income			—				5,431				—				5,431
Income Before Taxes and Minority Interest			50,639				18,152				(12,374	)			56,417
Provision for Income Taxes			(12,432	)			(5,778	)			—				(18,210	)
NET INCOME		$	38,207			$	12,374			$	(12,374	)		$	38,207

MARINER ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2008
(In thousands)
(Unaudited)

										Consolidated
		Parent				Subsidiary				Mariner
		Company				Guarantors				Energy, Inc.
Net cash (used in) provided by operating activities		$	(66,066	)		$	280,237			$	214,171
Cash flow from investing activities:
Acquisitions and additions to oil and gas properties			(176,853	)			(260,712	)			(437,565	)
Additions to other property and equipment			(347	)			(47,301	)			(47,648	)
Restricted cash designated for investment			—				5,000				5,000
Net cash used in investing activities			(177,200	)			(303,013	)			(480,213	)
Cash flow from financing activities:
Credit facility borrowings, net			251,000				—				251,000
Other financing activities			(22,848	)			23,173				325
Net cash provided by financing activities			228,152				23,173				251,325
(Decrease) Increase in Cash and Cash Equivalents			(15,114	)			397				(14,717	)
Cash and Cash Equivalents at Beginning of Period			18,589				—				18,589
Cash and Cash Equivalents at End of Period		$	3,475			$	397			$	3,872