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 September 30, 2008

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		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 November 5, 2008, there were 88,855,144 shares issued and outstanding of the issuer’s common stock, par value $0.0001 per share.

 

 

TABLE OF CONTENTS

PART I
Item 1. Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets at September 30, 2008 and December 31, 2007			3
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007			4
Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2008			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007			6
Notes to the Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			39
PART II
Item 1A. Risk Factors			40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 6. Exhibits			41
Items 1, 3, 4 and 5 are not applicable and have been omitted.
EX-10.3
EX-10.5
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Unaudited Consolidated Financial Statements

MARINER ENERGY, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

		September 30,				December 31,
		2008				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	11,147			$	18,589
Receivables, net of allowances of $2,659 and $2,449 as of September 30, 2008 and December 31, 2007, respectively			170,470				157,774
Insurance receivables			7,433				26,683
Derivative financial instruments			3,893				11,863
Intangible assets			2,036				17,209
Prepaid expenses and other			19,058				10,630
Deferred tax asset			14,744				6,232
Total current assets			228,781				248,980
Property and Equipment:
Proved oil and gas properties, full-cost method			4,034,532				3,118,273
Unproved properties, not subject to amortization			199,937				40,455
Total oil and gas properties			4,234,469				3,158,728
Other property and equipment			67,300				15,545
Accumulated depreciation, depletion and amortization			(1,113,718	)			(754,079	)
Total property and equipment, net			3,188,051				2,420,194
Restricted Cash			—				5,000
Goodwill			295,598				295,598
Insurance Receivables			17,791				56,924
Derivative Financial Instruments			84				691
Other Assets, net of amortization			58,836				56,248
TOTAL ASSETS		$	3,789,141			$	3,083,635
LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Accounts payable		$	3,514			$	1,064
Accrued liabilities			105,745				96,936
Accrued capital costs			224,330				159,010
Abandonment liability			38,520				30,985
Accrued interest			21,431				7,726
Derivative financial instruments			41,955				19,468
Total current liabilities			435,495				315,189
Long-term Liabilities:
Abandonment liability			222,610				191,021
Deferred income tax			489,024				343,948
Derivative financial instruments			12,240				25,343
Long-term debt			910,000				779,000
Other long-term liabilities			70,604				38,115
Total long-term liabilities			1,704,478				1,377,427
Commitments and Contingencies (see Note 8)
Minority Interest			—				1
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2008 and December 31, 2007			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 88,853,638 shares issued and outstanding at September 30, 2008; 180,000,000 shares authorized, 87,229,312 shares issued and outstanding at December 31, 2007			9				9
Additional paid-in capital			1,062,357				1,054,089
Accumulated other comprehensive loss			(32,901	)			(22,576	)
Accumulated retained earnings			619,703				359,496
Total stockholders’ equity			1,649,168				1,391,018
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,789,141			$	3,083,635

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

MARINER ENERGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues:
Natural gas		$	192,804			$	111,455			$	622,705			$	386,069
Oil			97,987				69,842				356,157				196,971
Natural gas liquids			24,541				14,317				78,579				34,879
Other revenues			2,558				870				5,798				3,251
Total revenues			317,890				196,484				1,063,239				621,170
Costs and Expenses:
Lease operating expense			64,456				33,034				164,603				105,106
Severance and ad valorem taxes			4,813				3,085				14,686				8,963
Transportation expense			4,061				2,215				11,277				5,520
General and administrative expense			12,963				11,170				39,249				35,224
Depreciation, depletion and amortization			114,398				91,136				375,170				283,791
Other miscellaneous (income) expense			(469	)			4,648				745				5,110
Total costs and expenses			200,222				145,288				605,730				443,714
OPERATING INCOME			117,668				51,196				457,509				177,456
Other Income (Expense):
Interest income			369				475				976				997
Interest expense, net of amounts capitalized			(17,507	)			(14,003	)			(53,641	)			(40,223	)
Other income			—				—				—				5,058
Income Before Taxes and Minority Interest			100,530				37,668				404,844				143,288
Provision for Income Taxes			(35,839	)			(15,140	)			(144,449	)			(49,595	)
Minority Interest Expense			—				—				(188	)			—
NET INCOME		$	64,691			$	22,528			$	260,207			$	93,693
Earnings per share:
Basic		$	0.74			$	0.26			$	2.98			$	1.09
Diluted		$	0.73			$	0.26			$	2.95			$	1.09
Weighted average shares outstanding:
Basic			87,595,792				85,701,696				87,447,280				85,615,542
Diluted			88,183,715				85,964,108				88,239,859				85,808,112

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

MARINER ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

														Accumulated
														Other
										Additional				Comprehensive				Accumulated				Total
										Paid-In-				Income/				Retained				Stockholders’
		Common Stock				Stock Amount				Capital				(Loss)				Earnings				Equity
Balance at December 31, 2007			87,229			$	9			$	1,054,089			$	(22,576	)		$	359,496			$	1,391,018
Common shares issued — restricted stock			1,729				—				—				—				—				—
Treasury stock bought and cancelled on same day			(137	)			—				(4,239	)			—				—				(4,239	)
Forfeiture of restricted stock			(23	)			—				—				—				—				—
Amortization of unearned compensation			—				—				11,365				—				—				11,365
Share-based compensation expense — stock options			—				—				401				—				—				401
Stock options exercised			56				—				741				—				—				741
Comprehensive income:
Net income			—				—				—				—				260,207				260,207
Change in fair value of derivative hedging instruments — net of income taxes of $25,790			—				—				—				69,224				—				69,224
Hedge settlements reclassified to income — net of income taxes of ($43,980)			—				—				—				(79,549	)			—				(79,549	)
Total comprehensive income			—				—				—				(10,325	)			260,207				249,882
Balance at September 30, 2008			88,854			$	9			$	1,062,357			$	(32,901	)		$	619,703			$	1,649,168

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

MARINER ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

		Nine Months
		Ended September 30,
		2008				2007
Operating Activities:
Net income		$	260,207			$	93,693
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for doubtful receivables			210				984
Deferred income tax			140,854				48,164
Depreciation, depletion and amortization			375,170				283,791
Amortization of deferred financing costs			2,329				2,019
Ineffectiveness of derivative instruments			1,647				2,645
Share-based compensation			11,953				5,892
Minority interest			(1	)			—
Changes in operating assets and liabilities:
Receivables			(12,356	)			(16,610	)
Insurance receivables			64,378				(27,140	)
Prepaid expenses and other			1,640				(9,654	)
Accounts payable and accrued liabilities			15,777				18,690
Net cash provided by operating activities			861,808				402,474
Investing Activities:
Acquisitions and additions to oil and gas properties			(952,105	)			(409,504	)
Additions to other property and equipment			(49,647	)			(1,470	)
Property conveyances			—				1,131
Restricted cash designated for investment			5,000				31,830
Net cash used in investing activities			(996,752	)			(378,013	)
Financing Activities:
Credit facility borrowings			938,000				264,000
Credit facility repayments			(807,000	)			(585,000	)
Proceeds from note offering			—				300,000
Deferred offering costs			—				(6,685	)
Repurchase of stock			(4,239	)			(1,421	)
Proceeds from exercise of stock options			741				648
Net cash provided by (used in) financing activities			127,502				(28,458	)
Decrease in Cash and Cash Equivalents			(7,442	)			(3,997	)
Cash and Cash Equivalents at Beginning of Period			18,589				9,579
Cash and Cash Equivalents at End of Period		$	11,147			$	5,582
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest, net of amount capitalized		$	35,059			$	21,592
Income taxes, net of refunds		$	2,906			$	550

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

MARINER ENERGY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting Policies

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

     Interim Financial Statements — The accompanying unaudited 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 SEC 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. The unaudited 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 fiscal 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 September 30, 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 period amounts have been reclassified to conform to current year presentation. Amounts for producing overhead recovery were presented as “General and administrative expense” in the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2007. These amounts are presented herein as “Lease operating expense” for comparability to 2008 presentation. Stock compensation expense attributable to those non-officer employees directly engaged in exploration, development and acquisition activities is capitalized. Other reclassifications are insignificant in nature. These reclassifications had no effect on total operating income or net income.

     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 uncertain tax positions during the nine months ended September 30, 2008. For a detail of the Company’s uncertain 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 fiscal year ended December 31, 2007.

     Recent Accounting Pronouncements — In October 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) and clarifies the application of SFAS 157 in a market that is not active. This FSP also provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP was effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation technique or its application are accounted for as a change in accounting estimate according to SFAS No. 154 “Accounting Changes and Error Corrections”. The adoption of FSP 157-3 did not have a material effect on the Company’s results of operations or financial position.

     In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS 162 to have a material effect on its results of operations or financial position.

     In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued after December 15, 2008. The Company does not expect the adoption of FSP 142-3 to have a material effect on its results of operations or financial position.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). 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 SFAS 161.

     In December 2007, the 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, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained 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 does not expect the application of SFAS 160 to have a material effect on its consolidated financial statements.

     In April 2007, the 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. The provisions of FIN 39-1 were consistent with the Company’s accounting practice. The adoption of FIN 39-1 did not impact the 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 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 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 was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued 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 the Company’s 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). The Company is still in the process of evaluating SFAS 157 with respect to its effect on nonfinancial assets and liabilities and therefore has not yet determined the impact that it will have on its financial statements upon full adoption in 2009. Nonfinancial assets and liabilities for which the Company has not applied the provisions of SFAS 157 include its asset retirement obligations and assets held for future sale when applicable.

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.

     Pro Forma Financial Information — The pro forma information set forth below gives effect to the acquisition of MGOM as if it had been consummated as of the beginning of the applicable period. The pro forma information has

been derived from the historical Consolidated Financial Statements of the Company and the statements of revenues and direct operating expenses of MGOM. The pro forma information is for illustrative purposes only. The financial results may have been different had MGOM been an independent company and had the companies always been combined. You should not rely on the pro forma financial information as being indicative of the historical results that would have been achieved had the acquisition occurred in the past or the future financial results that the Company will achieve after the acquisition.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands, except per share amounts)
Pro Forma:
Revenue		$	317,890			$	246,018			$	1,077,932			$	788,878
Net income available to common stockholders		$	64,670			$	30,072			$	263,806			$	122,692
Basic earnings per share		$	0.74			$	0.35			$	3.02			$	1.43
Diluted earnings per share		$	0.73			$	0.35			$	2.99			$	1.43

     Permian Basin 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 operates 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 which Mariner funded with cash flow from operations.

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

3. Long-Term Debt

As of September 30, 2008 and December 31, 2007 our long-term debt was as follows:

		September 30,				December 31,
		2008				2007
		(In thousands)
Bank credit facility		$	310,000			$	179,000
8% Senior Notes			300,000				300,000
71/2% Senior Notes			300,000				300,000
Total long-term debt		$	910,000			$	779,000

     Bank Credit Facility — On June 2, 2008, the Company’s secured bank credit facility was amended to increase the borrowing base to $850.0 million, subject to periodic redetermination. On January 31, 2008, the credit facility was amended to:

	•		increase the facility’s maximum credit availability to $1.0 billion, including up to $50.0 million in letters of credit,
	•		fix the borrowing base at $750.0 million as of January 31, 2008,
	•		extend the facility’s term to January 31, 2012,
	•		terminate a dedicated $40.0 million letter of credit facility due to Mariner’s satisfaction of its obligations under a drill-to-earn program, and
	•		add as a permitted use of loan proceeds the funding of Mariner’s purchase of MGOM.

     The Company’s payment and performance of its obligations under the bank credit facility (including any obligations under commodity and interest rate hedges entered into with facility lenders) are secured by liens upon substantially all of the assets of the Company and its subsidiaries. Borrowings under the bank credit facility bear interest at either a LIBOR-based rate or a prime-based rate, at the Company’s option, plus a specified margin.

     As of September 30, 2008, five letters of credit totaling $7.2 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 September 30, 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 which is included in “Accrued interest” in the “Consolidated Balance Sheet” in Item 1 of Part 1 of this Quarterly Report. As of September 30, 2008, the borrowing base remained $850.0 million, and the Company had $532.8 million available to borrow under the credit facility.

     Senior Notes — In 2007, the Company sold and issued $300.0 million aggregate principal amount of its 8% Senior Notes due 2017 (the “8% Notes”). In 2006, the Company sold and issued $300.0 million aggregate principal amount of its 7¹/₂% Senior Notes due 2013 (the “7¹/₂% Notes” and together with the 8% Notes, the “Notes”). The Notes are senior unsecured obligations of the Company. The 8% Notes mature on May 15, 2017 with interest payable on May 15 and November 15 of each year. The 7¹/₂% Notes mature on April 15, 2013 with interest payable on April 15 and October 15 of each year. There is no sinking fund for the Notes. The Company and its restricted subsidiaries are subject to certain financial and non-financial covenants under each of the indentures governing the Notes.

     Capitalized Interest — For the three-month periods ended September 30, 2008 and 2007, capitalized interest totaled $0.6 million and $0.1 million, respectively. For the nine-month periods ended September 30, 2008 and 2007, capitalized interest totaled $1.5 million and $0.4 million, respectively.

4. Oil and Gas Properties

     Mariner’s oil and gas properties are accounted for using the full-cost method of accounting. All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and gas properties are capitalized, including certain general and administrative expenses (“G&A”). For the three-month periods ended September 30, 2008 and 2007, capitalized G&A totaled $4.5 million and $2.2 million, respectively. For the nine-month periods ended September 30, 2008 and 2007, capitalized G&A totaled $14.2 million and $6.7 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. The Company uses derivative financial instruments that qualify for cash flow hedge accounting under SFAS 133 to hedge against the volatility of natural gas and oil prices and, in accordance with SEC guidelines, the Company includes estimated future cash flows from its hedging program in its 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 143 on January 1, 2003. SFAS 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, the Company employs a present value technique, which reflects certain assumptions, including the Company’s 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			14,899
Liabilities settled			(42,826	)
Accretion expense			15,531
Revisions to previous estimates			7,100
Liabilities from assets acquired			44,420
Abandonment liability as of September 30, 2008 (2)		$	261,130

6. Share-Based Compensation

     Mariner has a stockholder-approved Stock Incentive Plan, as amended and restated from time to time (the “Stock Incentive Plan”), pursuant to which the Board of Directors (or a committee thereof) can grant to Mariner’s directors and employees restricted shares of its common stock or options to purchase common stock on terms determined in the Board’s discretion. Restricted common stock and option grants are outstanding under the Stock Incentive Plan. Options to purchase Mariner common stock granted to certain employees in connection with a March 2006 merger transaction also are outstanding but are not governed by the Stock Incentive Plan (“Rollover Options”).

     Mariner recorded compensation expense related to restricted stock and stock options of $4.8 million and $2.5 million for the three-month periods ended September 30, 2008 and 2007, respectively, and $12.0 million and $5.9 million for the nine-month periods ended September 30, 2008 and 2007, respectively. Unrecognized compensation expense at September 30, 2008 was $66.8 million for the unvested portion of restricted stock granted under the Stock Incentive Plan, and approximately $107,000 for unvested Rollover Options.

     The following table presents a summary of stock option activity under the Stock Incentive Plan and under Rollover Options for the nine months ended September 30, 2008:

						Weighted
						Average
						Exercise				Aggregate
		Shares				Price				Intrinsic Value (1)
										(In thousands)
Outstanding at beginning of year			720,488			$	13.82			$	4,812
Granted			—				—				—
Exercised (2)			(56,348	)			13.18				(412	)
Forfeited			(18,264	)			13.97				(119	)
Outstanding at September 30, 2008			645,876				13.87			$	4,281

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of September 30, 2008 and 2007, respectively, and changes during the nine-month periods is as follows:

		Restricted Shares under
		Stock Incentive Plan
		September 30,
		2008				2007
Total unvested shares at beginning of period: January 1			1,484,552				875,380
Shares granted (1)			1,729,329				876,954
Shares vested			(460,897	)			(228,691	)
Shares forfeited			(23,383	)			(34,105	)
Total unvested shares at end of period: September 30			2,729,601				1,489,538
Available for future grant as options or restricted stock			2,522,823				4,084,584

     Long-Term Performance-Based Restricted Stock Program— In June 2008, Mariner’s Board of Directors adopted a Long-Term Performance-Based Restricted Stock Program (the “Program”) under the Stock Incentive Plan. Shares of restricted common stock subject to the Program were granted in June and July 2008. Vesting of these shares is contingent, begins upon satisfaction of specified thresholds for the market price of Mariner’s common stock, and continues in installments over five to seven years thereafter, assuming, in most instances, continued employment by Mariner. The fair value of restricted stock grants made under the Program is estimated using a Monte Carlo simulation. Stock-based compensation expense related to these restricted stock grants totaled $3.3 million and $3.4 million for the three months and nine months ended September 30, 2008, respectively.

     Weighted average fair values and valuation assumptions used to value these restricted stock grants at each grant date is as follows:

		June 2008				July 2008
Weighted average fair value of grants		$	33.70			$	34.80
Expected volatility			42.29	%			42.43	%
Risk-free interest rate			4.58	%			4.35	%
Dividend yield			0.00	%			0.00	%
Expected life		10 years				10 years

     Expected volatility is calculated based on the average historical stock price volatility of Mariner and its peer group listed under “Performance Graph” in Item 5 (Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities) of Part II of Mariner’s Form 10-K for the fiscal year ended December 31, 2007. The risk-free interest rate is determined at the grant date and is based on ten-year, zero-coupon government bonds with maturity equal to the contractual term of the awards, converted to a continuously compounded rate. The expected life is based upon the contractual terms of the restricted stock grants under the Program.

7. Derivative Financial Instruments and Hedging Activities

     The energy markets historically have been very volatile, and Mariner 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 natural gas and oil on the Company’s operations, management has elected to hedge natural gas and oil 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 Mariner’s 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 natural gas and oil revenue. Loss of hedge accounting and cash flow designation will cause volatility in earnings. The estimated shut-in from the Company’s Gulf of Mexico properties resulting from the effects of Hurricanes Gustav and Ike is approximately 7-9 Bcfe of net production. Mariner evaluated its open contract positions under the provisions of SFAS 133 and determined that all outstanding contracts continue to qualify for hedge accounting. The fair values Mariner reports in its financial statements change as estimates are revised to reflect actual results, changes in market conditions or other factors, many of which are beyond Mariner’s control. At September 30, 2008 and December 31, 2007, there were no collateral assets or liabilities associated with derivative assets and liabilities.

     The effects on Mariner’s natural gas and oil revenues from its hedging activities were as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(In thousands)
Cash (loss) gain on settlements		$	(46,968	)		$	11,547			$	(121,882	)		$	42,037
Gain (loss) on hedge ineffectiveness (1)			4,827				(599	)			(1,647	)			(2,646	)
Total		$	(42,141	)		$	10,948			$	(123,529	)		$	39,391

     As of September 30, 2008, the Company had the following hedge contracts outstanding:

								Weighted Average		Fair Value
Period		Instrument Type		Quantity				Price		Asset/(Liability)
										(In thousands)
Natural Gas (MMbtus)
2008
October 1—December 31		Fixed Price Swaps			8,121,944			$8.36 Fixed		$	6,367
October 1—December 31		Costless Collars			2,760,000			$7.83 Floor - $14.60 Ceiling			37
2009
January 1—September 30		Fixed Price Swaps			25,116,524			$8.47 Fixed			11,633
October 1—December 31		Fixed Price Swaps			6,525,560			$8.48 Fixed			(637	)
Crude Oil (Bbls)
2008
October 1—December 31		Fixed Price Swaps			483,920			$78.69 Fixed			(10,407	)
October 1—December 31		Costless Collars			243,432			$61.64 Floor - $86.80 Ceiling			(3,757	)
2009
January 1—September 30		Fixed Price Swaps			1,715,890			$76.22 Fixed			(41,935	)
October 1—December 31		Fixed Price Swaps			456,320			$75.88 Fixed			(11,519	)
Total										$	(50,218	)

     As of September 30, 2008, the Company expects $38.1 million in accumulated other comprehensive income to be reclassified as a decrease to natural gas and oil revenues within the next 12 months. As of November 5, 2008, the Company had not entered into any hedge transactions subsequent to September 30, 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 September 30, 2008 are as follows:

		(In thousands)
2009		$	2,260
2010			2,532
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 September 30, 2008 and December 31, 2007, the Company’s seismic obligations totaled $2.0 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 Minerals Management Service of the United States Department of the Interior (“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 two held by MERI that are producing or have produced 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 September 30, 2008 was $57.8 million, including interest. The potential liability of MERI under its leases relate to production from the leases commencing July 1, 2005, the effective date of Mariner’s acquisition of MERI.

     In May 2006 and September 2008, the MMS issued orders asserting price thresholds were exceeded in calendar years 2000, 2001 and each of the years from 2003 through 2007 and, accordingly, that royalties were due under such leases on oil and gas produced in those years. Mariner has filed and is pursuing administrative appeals of those orders.

     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

     Insurance through which Mariner could make claims pertaining to hurricanes include policies provided by OIL Insurance Limited (“OIL”), an energy industry insurance cooperative, and separate commercial difference-in-condition or excess insurance policies. As of September 30, 2008, the Company accrued a liability of $14.4 million for a multiple-year retrospective premium payable to OIL in connection with Mariner’s membership.

Hurricane Ike (2008)

     In 2008, the Company’s operations were adversely affected by Hurricane Ike. The hurricane resulted in shut-in and delayed production as well as facility repairs and replacement expenses. We are evaluating the nature and extent of damage resulting from the hurricane. With respect to Hurricane Ike, Mariner’s OIL coverage has a $10.0 million per occurrence deductible and a $250.0 million per occurrence limit, subject to an industry-wide loss limit per occurrence that OIL may establish. OIL advised that it has established an incurred-but-not reported reserve of $750.0 million for industry-wide losses from Hurricane Ike. To the extent that aggregate claims exceed an OIL industry-wide loss limit per-occurrence, Mariner expects its insurance recovery would be reduced pro-rata with all other competing claims from Hurricane Ike and the shortfall covered by its excess insurance, subject to policy limits.

Hurricanes Katrina and Rita (2005)

     In 2005, the Company’s operations were adversely affected by Hurricanes Katrina and Rita, resulting in substantial shut-in and delayed production, as well as necessitating extensive facility repairs and hurricane-related abandonment operations. Since 2005 through September 30, 2008, Mariner incurred approximately $170.0 million in expenditures resulting from Hurricanes Katrina and Rita. As of September 30, 2008, insurance recoveries totaled approximately $63.2 million, of which $2.5 million was received in 2007 and $60.7 million was received during the first nine months of 2008.

     At September 30, 2008, the OIL insurance receivable balance for Mariner’s Hurricane Katrina and Rita claims was approximately $24.8 million, of which $17.8 million is included in “Insurance Receivables” on the Consolidated Balance Sheet at September 30, 2008. With respect to Hurricanes Katrina and Rita, OIL applies to properties Mariner acquired from Forest Oil Corporation (“Forest”) in 2006 and is subject to a deductible of $5.0 million per occurrence and a $1.0 billion industry-wide loss limit per occurrence. OIL has advised that the aggregate claims resulting from each of Hurricanes Katrina and Rita are expected to exceed the $1.0 billion per-occurrence loss limit and accordingly, Mariner’s insurance recovery is expected to be reduced pro-rata with all other competing claims from the storms.

Hurricane Ivan (2004)

     In September 2004, Mariner incurred damage from Hurricane Ivan that affected the Mississippi Canyon 66, known as Ochre (“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 through September 30, 2008, Mariner incurred approximately $9.5 million of property damage related to Hurricane Ivan. As of September 30, 2008, approximately $6.1 million has been recovered through insurance, with the balance of $0.4 million, net of deductible, recorded as insurance receivable.

     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 dedicated $40.0 million letter of credit under its bank credit facility that was not included as a use of the borrowing base. The balance of this letter of credit as of December 31, 2007 was $3.2 million. In January 2008, the letter of credit was reduced to zero and was cancelled.

     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 September 30, 2008, five such letters of credit totaling $7.2 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 upon vesting of restricted common stock or exercise of options to purchase common stock.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(In thousands, except per share data)
Numerator:
Net Income		$	64,691			$	22,528			$	260,207			$	93,693
Denominator:
Weighted average shares outstanding			87,596				85,702				87,447				85,616
Add dilutive securities
Options			246				175				265				169
Restricted Stock			342				87				528				23
Total weighted average shares outstanding and dilutive securities		$	88,184			$	85,964			$	88,240			$	85,808
Earnings per share
Basic		$	0.74			$	0.26			$	2.98			$	1.09
Diluted		$	0.73			$	0.26			$	2.95			$	1.09

     Those 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 400,000 and 381,000 shares issuable upon exercise of stock options were excluded from the computation for the three months and nine months ended September 30, 2008, respectively. Approximately 560,000 and 565,000 shares issuable upon exercise of stock options were excluded from the computation for the three months and nine months ended September 30, 2007, respectively.

     Please refer to Note 6, “Share-Based Compensation” for option and restricted stock activity for the nine months ended September 30, 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-month and nine-month periods ended September 30, 2008 and 2007.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(in thousands)								(in thousands)
Net Income		$	64,691			$	22,528			$	260,207			$	93,693
Other comprehensive (loss) income:
Derivative contracts settled and reclassified, net of income taxes of ($15,003), $3,841, ($43,980) and $13,820			(27,138	)			7,107				(79,549	)			25,571
Change in unrealized mark-to-market gains/(losses) arising during period, net of income taxes of $150,590, ($4,375), $25,790 and ($33,733)			272,381				(8,094	)			69,224				(60,423	)
Change in accumulated other comprehensive (loss) gain			245,243				(987	)			(10,325	)			(34,852	)
Comprehensive income		$	309,934			$	21,541			$	249,882			$	58,841

11. Fair Value Measurement

     Certain of Mariner’s assets and liabilities are reported at fair value in the accompanying Consolidated Balance Sheets. Such assets and liabilities include amounts for both financial and nonfinancial instruments. The carrying values of cash and cash equivalents, accounts receivable and accounts payable (including income taxes payable and accrued expenses) approximated fair value at September 30, 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 2 inputs are market-based and are directly or indirectly observable but not considered Level 1 quoted prices, including quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or valuation techniques whose inputs are observable. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Level 3 inputs are unobservable (meaning they reflect Mariner’s own assumptions regarding how market participants would price the asset or liability based on the best available information) and therefore have the lowest priority. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Mariner believes it uses appropriate valuation techniques based on the available inputs to measure the fair values of its assets and liabilities.

     SFAS 157 requires a credit adjustment for non-performance in calculating the fair value of financial instruments. The credit adjustment for derivatives in an asset position is determined based on the credit rating of the counterparty and the credit adjustment for derivatives in a liability position is determined based on Mariner’s credit rating.

     The following table provides fair value measurement information for the Company’s derivative financial instruments as of September 30, 2008.

		As of September 30, 2008
										Fair Value Measurements Using:
														Significant
										Quoted Prices				other				Significant
										in Active				Observable				Unobservable
		Carrying				Total Fair				Markets				Inputs				Inputs
Derivative Financial Instruments		Amount				Value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
Natural gas and crude oil fixed price swaps and costless collars — Short Term		$	(38,062	)		$	(38,062	)		$	—			$	(34,342	)		$	(3,720	)
Natural gas and crude oil fixed price swaps and costless collars — Long Term			(12,156	)			(12,156	)			—				(12,156	)			—
Total		$	(50,218	)		$	(50,218	)		$	—			$	(46,498	)		$	(3,720	)

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

Level 2 Fair Value Measurements

     The fair values of the natural gas and crude oil fixed price swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves, terms of each contract, and a credit adjustment based on the credit rating of the Company and its counterparties as of September 30, 2008.

Level 3 Fair Value Measurements

     The fair values of the natural gas and crude oil costless 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 September 30, 2008. The following table provides fair value measurement information for the Company’s Level 3 financial instruments as of September 30, 2008.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

		For the Three				For the Nine
		Months Ended				Months Ended
		September 30, 2008				September 30, 2008
		(In thousands)
Fair value of costless collars, beginning of period		$	(31,886	)		$	(4,058	)
Total gains/(losses):
Included in natural gas and oil revenues (realized/unrealized)			(8,716	)			(24,419	)
Included in other comprehensive loss (realized/unrealized)			28,166				338
Purchases, issuances, and settlements, net			8,716				24,419
Transfers in and/or out of Level 3			—				—
Fair value of costless collars, end of period		$	(3,720	)		$	(3,720	)
The amount of net gains/(losses) for the period included in earnings attributable to the change in net unrealized losses relating to costless collars still held at the reporting date		$	184			$	(152	)

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.

     Mariner measures financial performance as a single enterprise, allocating capital resources on a project-by-project basis across its entire asset base to maximize profitability. Mariner utilizes a company-wide management team that administers all enterprise operations encompassing the exploration, development and production of natural gas and oil. All operations are located in the United States. Mariner tracks basic operational data by area, but inasmuch as it is one enterprise, it does 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 guarantees are full and unconditional, and the guarantors are wholly-owned.

     The following information sets forth Mariner’s Consolidating Balance Sheets as of September 30, 2008 and December 31, 2007, Condensed Consolidating Statements of Operations for the three months and nine months ended September 30, 2008 and 2007, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2008 and 2007.

     Mariner accounts for investments in its subsidiaries using the equity method of accounting; accordingly, entries necessary to consolidate Mariner, the parent company, and its Subsidiary Guarantors are reflected in the eliminations column. 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.
CONSOLIDATING BALANCE SHEET (Unaudited)
September 30, 2008
(In thousands except share data)

														Consolidated
		Parent				Subsidiary								Mariner
		Company				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	10,747			$	400			$	—			$	11,147
Receivables, net of allowances			68,416				102,054				—				170,470
Insurance receivables			155				7,278				—				7,433
Derivative financial instruments			3,893				—								3,893
Intangible assets			2,000				36				—				2,036
Prepaid expenses and other			16,756				2,302				—				19,058
Deferred tax asset			14,744				—				—				14,744
Total current assets			116,711				112,070				—				228,781
Property and Equipment:
Proved oil and gas properties, full-cost method			1,960,267				2,074,265				—				4,034,532
Unproved properties, not subject to amortization			185,580				14,357				—				199,937
Total oil and gas properties			2,145,847				2,088,622				—				4,234,469
Other property and equipment			32,632				34,668				—				67,300
Accumulated depreciation, depletion and amortization			(596,462	)			(517,256	)			—				(1,113,718	)
Total property and equipment, net			1,582,017				1,606,034				—				3,188,051
Investment in Subsidiaries			1,225,624				—				(1,225,624	)			—
Intercompany Receivables			139,116				120,523				(259,639	)			—
Intercompany Note Receivable			176,200				—				(176,200	)			—
Goodwill			—				295,598				—				295,598
Insurance Receivables			—				17,791				—				17,791
Derivative Financial Instruments			84				—				—				84
Other Assets, net of amortization			57,946				890				—				58,836
TOTAL ASSETS		$	3,297,698			$	2,152,906			$	(1,661,463	)		$	3,789,141
Current Liabilities:
Accounts payable		$	3,514			$	—			$	—			$	3,514
Accrued liabilities			69,080				36,665				—				105,745
Accrued capital costs			167,385				56,945				—				224,330
Abandonment liability			1,553				36,967				—				38,520
Accrued interest			21,431				—				—				21,431
Derivative financial instruments			41,955				—				—				41,955
Total current liabilities			304,918				130,577				—				435,495
Long-Term Liabilities:
Abandonment liability			55,916				166,694								222,610
Deferred income tax			181,743				307,281				—				489,024
Intercompany payables			120,523				139,116				(259,639	)			—
Derivative financial instruments			12,240				—				—				12,240
Long-term debt			910,000				—				—				910,000
Other long-term liabilities			63,190				7,414				—				70,604
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			1,343,612				796,705				(435,839	)			1,704,478
Commitments and Contingencies (see Note 8)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2008
Common stock, $.0001 par value; 180,000,000 shares authorized, 88,820,553 shares issued and outstanding at September 30, 2008			9				5				(5	)			9
Additional paid-in capital			1,062,357				886,142				(886,142	)			1,062,357
Partner capital			—				30,646				(30,646	)			—
Accumulated other comprehensive loss			(32,901	)			—				—				(32,901	)
Accumulated retained earnings			619,703				308,831				(308,831	)			619,703
Total stockholders’ equity			1,649,168				1,225,624				(1,225,624	)			1,649,168
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,297,698			$	2,152,906			$	(1,661,463	)		$	3,789,141

MARINER ENERGY, INC.
CONSOLIDATING BALANCE SHEET (Unaudited)
December 31, 2007
(In thousands except share data)

														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			46,015				—				(46,015	)			—
Intercompany Note Receivable			176,200				—				(176,200	)			—
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			$	1,771,662			$	(1,236,763	)		$	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
Intercompany payables			—				46,015				(46,015	)			—
Long-term debt			779,000				—				—				779,000
Other long-term liabilities			34,506				3,609				—				38,115
Intercompany note payable			—				176,200				(176,200	)			—
Total long-term liabilities			968,771				630,871				(222,215	)			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			$	1,771,662			$	(1,236,763	)		$	3,083,635