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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		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 4, 2010, there were 103,211,735 shares issued and outstanding of the issuer’s common stock, par value $0.0001 per share.

 

 

TABLE OF CONTENTS

PART I
Item 1. Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009			4
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009			6
Notes to the Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			39
Item 4. Controls and Procedures			41
PART II
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			44
Item 6. Exhibits			45
Items 1, 3, 4 and 5 are not applicable and have been omitted.
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Item 1. Unaudited Condensed Consolidated Financial Statements

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)

		March 31,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	10,821			$	8,919
Receivables, net of allowances of $1,781 and $3,408 as of March 31, 2010 and December 31, 2009, respectively			150,830				148,725
Insurance receivables			9,781				8,452
Derivative financial instruments			40,011				2,239
Intangible assets			19,571				22,615
Prepaid expenses and other			35,810				11,667
Deferred income tax			—				9,704
Total current assets			266,824				212,321
Property and Equipment:
Proved oil and gas properties, full cost method			5,218,933				5,117,273
Unproved properties, not subject to amortization			337,693				292,237
Total oil and gas properties			5,556,626				5,409,510
Other property and equipment			55,976				55,695
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(2,975,205	)			(2,884,411	)
Other property and equipment			(8,948	)			(8,235	)
Total accumulated depreciation, depletion and amortization			(2,984,153	)			(2,892,646	)
Total property and equipment, net			2,628,449				2,572,559
Derivative Financial Instruments			13,080				902
Deferred Income Tax			—				12,491
Other Assets, net of amortization			93,884				68,932
TOTAL ASSETS		$	3,002,237			$	2,867,205
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	7,355			$	3,579
Accrued liabilities			158,882				137,206
Accrued capital costs			143,845				140,941
Deferred income tax			5,254				—
Abandonment liability			81,743				54,915
Accrued interest			28,992				8,262
Derivative financial instruments			25,351				27,708
Total current liabilities			451,422				372,611
Long-Term Liabilities:
Abandonment liability			340,687				362,972
Deferred income tax			4,998				—
Derivative financial instruments			5,401				15,017
Long-term debt			1,222,204				1,194,850
Other long-term liabilities			36,280				38,800
Total long-term liabilities			1,609,570				1,611,639
Commitments and Contingencies (see Note 8)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2010 and December 31, 2009			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 103,122,652 shares issued and outstanding at March 31, 2010; 180,000,000 shares authorized, 101,806,825 shares issued and outstanding at December 31, 2009			10				10
Additional paid-in capital			1,262,245				1,257,526
Accumulated other comprehensive income (loss)			12,353				(25,955	)
Accumulated deficit			(333,363	)			(348,626	)
Total stockholders’ equity			941,245				882,955
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,002,237			$	2,867,205

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

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except share data)

		Three Months Ended
		March 31,
		2010				2009
Revenues:
Natural gas		$	117,512			$	153,338
Oil			95,639				60,925
Natural gas liquids			27,660				6,469
Other revenues			2,302				22,604
Total revenues			243,113				243,336
Costs and Expenses:
Lease operating expense			52,943				53,399
Severance and ad valorem taxes			6,919				3,532
Transportation expense			5,689				4,584
General and administrative expense			27,580				17,411
Depreciation, depletion and amortization			100,503				94,805
Full cost ceiling test impairment			—				704,731
Other miscellaneous expense			2,689				8,009
Total costs and expenses			196,323				886,471
OPERATING INCOME (LOSS)			46,790				(643,135	)
Other Income (Expense):
Interest income			135				85
Interest expense, net of amounts capitalized			(20,463	)			(14,402	)
Income (Loss) Before Taxes			26,462				(657,452	)
(Provision) Benefit for Income Taxes			(11,199	)			233,334
NET INCOME (LOSS)		$	15,263			$	(424,118	)
Net Income (Loss) per share:
Basic		$	0.15			$	(4.77	)
Diluted		$	0.15			$	(4.77	)
Weighted average shares outstanding:
Basic			100,991,254				88,864,648
Diluted			101,885,493				88,864,648

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

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
For the three months ended March 31, 2010 and 2009

														Accumulated
														Other
										Additional				Comprehensive								Total
		Common				Stock				Paid-In-				Income/				Accumulated				Stockholders’
		Stock				Amount				Capital				(Loss)				Deficit				Equity
Balance at December 31, 2009			101,807			$	10			$	1,257,526			$	(25,955	)		$	(348,626	)		$	882,955
Common shares issued — restricted stock			1,458				—				—				—				—				—
Treasury stock bought and cancelled on same day			(144	)			—				(2,190	)			—				—				(2,190	)
Forfeiture of restricted stock			—				—				—				—				—				—
Share-based compensation			—				—				6,891				—				—				6,891
Stock options exercised			2				—				18				—				—				18
Comprehensive income:
Net income			—				—				—				—				15,263				15,263
Change in fair value of derivative hedging instruments — net of income taxes of $21,083			—				—				—				37,809				—				37,809
Hedge settlements reclassified to income — net of income taxes of $206			—				—				—				367				—				367
Foreign currency translation adjustment			—				—				—				132				—				132
Total comprehensive income			—				—				—				38,308				15,263				53,571
Balance at March 31, 2010			103,123			$	10			$	1,262,245			$	12,353			$	(333,363	)		$	941,245

														Accumulated
														Other
										Additional				Comprehensive								Total
		Common				Stock				Paid-In-				Income/				Accumulated				Stockholders’
		Stock				Amount				Capital				(Loss)				Deficit				Equity
Balance at December 31, 2008			88,846			$	9			$	1,071,347			$	78,181			$	(29,217	)		$	1,120,320
Common shares issued — restricted stock			1,213				—				—				—				—				—
Treasury stock bought and cancelled on same day			(52	)			—				(448	)			—				—				(448	)
Forfeiture of restricted stock							—				—				—				—				—
Share-based compensation			—				—				6,778				—				—				6,778
Stock options exercised							—				—				—				—				—
Comprehensive income (loss):
Net (loss)			—				—				—				—				(424,118	)			(424,118	)
Change in fair value of derivative hedging instruments — net of income taxes of $(10,398)			—				—				—				(19,496	)			—				(19,496	)
Hedge settlements reclassified to income — net of income taxes of $22,885			—				—				—				40,916				—				40,916
Total comprehensive income (loss)			—				—				—				21,420				(424,118	)			(402,698	)
Balance at March 31, 2009			90,007			$	9			$	1,077,677			$	99,601			$	(453,335	)		$	723,952

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

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

		Three Months
		Ended March 31,
		2010				2009
Operating Activities:
Net income (loss)		$	15,263			$	(424,118	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			11,199				(233,334	)
Depreciation, depletion and amortization			100,503				94,805
Ineffectiveness of derivative instruments			(2,458	)			179
Full cost ceiling test impairment			—				704,731
Share-based compensation			5,891				6,778
Derivative financial instruments			—				(3,591	)
Other			1,486				(2,450	)
Changes in operating assets and liabilities:
Receivables			(4,622	)			12,784
Insurance receivables			(1,329	)			(4,674	)
Cash from liquidation of hedges			—				10,024
Prepaid expenses and other			(50,655	)			(14,005	)
Intangible assets			(1,456	)			548
Accounts payable and accrued liabilities			39,300				(21,720	)
Net cash provided by operating activities			113,122				125,957
Investing Activities:
Acquisitions and additions to oil and gas properties			(135,767	)			(190,880	)
Additions to other property and equipment			(281	)			(524	)
Net cash used in investing activities			(136,048	)			(191,404	)
Financing Activities:
Credit facility borrowings			180,000				140,000
Credit facility repayments			(153,000	)			(70,000	)
Repurchase of stock			(2,190	)			(448	)
Debt redetermination costs			—				(17	)
Proceeds from exercise of stock options			18				—
Net cash provided by financing activities			24,828				69,535
Increase in Cash and Cash Equivalents			1,902				4,088
Cash and Cash Equivalents at Beginning of Period			8,919				3,251
Cash and Cash Equivalents at End of Period		$	10,821			$	7,339
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest		$	2,821			$	6,836

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

MARINER ENERGY, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting Policies

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

     Interim Financial Statements — The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of a normal and recurring nature) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements included herein should be read in conjunction with the Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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

     Principles of Consolidation — Mariner’s condensed consolidated financial statements as of and for the period ended March 31, 2010 and consolidated financial statements as of and for the period ended December 31, 2009 include its accounts and the accounts of its subsidiaries. All inter-company balances and transactions have been eliminated.

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

     The Company had no uncertain tax positions during the three months ended March 31, 2010 or for the year ended December 31, 2009.

     Recent Accounting Pronouncements — In February 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance which requires additional information to be disclosed principally in respect of Level 3 fair value measurements and transfers to and from Level 1 and Level 2 measurements. In addition, enhanced disclosure is required concerning inputs and valuation techniques used to determine Level 2 and Level 3 fair value measurements. The guidance is generally effective for interim and annual reporting periods beginning after December 15, 2009; however, the requirements to disclose separately purchases, sales, issuances, and settlements in the Level 3 reconciliation are effective for fiscal years beginning after December 15, 2010 (and for interim periods within such years). Early adoption is allowed. The Company adopted the standard effective January 1, 2010. The

adoption did not have a material impact on the Company’s consolidated financial position, cash flows or results of operations.

2. Acquisitions and Dispositions

     Onshore Acquisition — On December 31, 2009, Mariner acquired the reorganized subsidiaries and operations of Edge Petroleum Corporation (“Edge”). The assets acquired consist primarily of (i) estimated proved reserves, (ii) undeveloped oil and gas property, primarily in Texas and New Mexico, (iii) exploration assets in the form of seismic data, and (iv) certain tax attributes of the acquired subsidiaries. The effective date of the acquisition was June 30, 2009 and the purchase price was $260.0 million, less adjustments which resulted in a net purchase price as of December 31, 2009 of approximately $213.6 million, subject to final adjustments. Mariner financed the net purchase price by borrowing under its secured revolving credit facility.

     Pro Forma Financial Information: The unaudited pro forma information set forth below gives effect to the acquisition of the reorganized Edge subsidiaries as if it had been consummated as of the beginning of the applicable period. The unaudited pro forma information has been derived from the historical Consolidated Financial Statements of the Company and of Edge. The unaudited pro forma information is for illustrative purposes only. The financial results may have been different had each of the acquired Edge subsidiaries been an independent company and had the companies always been combined. No reliance should be placed 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, 2009
		(In thousands, except
		per share amounts)
Pro Forma:
Revenue		$	267,821
Net loss available to common stockholders		$	(499,538	)
Basic loss per share		$	(5.62	)
Diluted loss per share		$	(5.62	)

3. Long-Term Debt

     As of March 31, 2010 and December 31, 2009, the Company’s long-term debt was as follows:

		March 31,				December 31,
		2010				2009
		(In thousands)
Bank credit facility		$	332,000			$	305,000
7 1/2% Senior Notes, due April 15, 2013, net of discount			298,268				298,125
8% Senior Notes, due May 15, 2017			300,000				300,000
11 3/4% Senior Notes, due June 30, 2016, net of discount			291,936				291,725
Total long-term debt		$	1,222,204			$	1,194,850

     Bank Credit Facility — The Company has a secured revolving credit facility with a group of banks pursuant to an amended and restated credit agreement dated March 2, 2006, as further amended. The credit facility matures January 31, 2012 and is subject to a borrowing base which is redetermined periodically. The outstanding principal balance of loans under the credit facility may not exceed the borrowing base. The most recent borrowing base redetermination concluded in April 2010 when the credit facility was amended to:

•

Increase the borrowing base by $150.0 million to $950.0 million until the next redetermination under the credit agreement,

•

Reschedule the regular periodic borrowing base redeterminations to begin in February and August of each year,

•

Give the lenders an option to redetermine the borrowing base upon termination of hedge contracts with more than six months remaining in their original nominal term,

•

Increase the maximum permitted ratio of total debt to EBITDA (as defined in the credit agreement) to 3.5 to 1.0 from 2.5 to 1.0, and

•

Give Mariner optionality to issue before January 1, 2011 up to $400.0 million in additional unsecured debt with a non-default interest rate of up to 13% per annum (plus a maximum default rate of 3%) and a scheduled maturity date no earlier than March 2, 2015. Upon closing such a debt issuance, the borrowing base automatically would reduce by 25% of the aggregate principal amount of the debt issued until otherwise redetermined under the credit agreement.

     As of March 31, 2010, maximum credit availability under the facility was $1.0 billion, including up to $50.0 million in letters of credit, subject to a borrowing base of $800.0 million. As of March 31, 2010, there were $332.0 million in advances outstanding under the credit facility and four letters of credit outstanding totaling $4.7 million, of which $4.2 million is required for plugging and abandonment obligations at certain of the Company’s offshore fields. As of March 31, 2010, after accounting for the $4.7 million of letters of credit, the Company had $463.3 million available to borrow under the credit facility.

     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. At March 31, 2010, when borrowings at both LIBOR and prime-based rates were outstanding, the blended interest rate was 2.6% on all amounts borrowed. During the three months ended March 31, 2010, the commitment fee on unused capacity was 0.5% per annum. Commitment fees are included in “Accrued interest” in the Condensed Consolidated Balance Sheets in Item 1 of Part I of this Quarterly Report.

     The credit facility subjects the Company to various restrictive covenants and contains other usual and customary terms and conditions, including limits on additional debt, cash dividends and other restricted payments, liens, investments, asset dispositions, mergers and speculative hedging. As of March 31, 2010, financial covenants under the credit facility required the Company to, among other things:

•

maintain a ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities of not less than 1.0 to 1.0; and

•

maintain a ratio of total debt to EBITDA (as defined in the credit agreement) of not more than 2.5 to 1.0.

     The Company was in compliance with these covenants as of March 31, 2010 when the ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities was 2.04 to 1.0 and the ratio of total debt to EBITDA was 2.07 to 1.0.

     The Company’s payment and performance of its obligations under the credit facility (including any obligations under commodity and interest rate hedges entered into with facility lenders) are secured by liens upon substantially all of the assets of the Company and its subsidiaries, except its Canadian subsidiary, and guaranteed by its subsidiaries, other than Mariner Energy Resources, Inc. which is a co-borrower, and its Canadian subsidiary.

     Senior Notes — In 2009, the Company sold and issued $300.0 million aggregate principal amount of its 11³/4% senior notes due 2016 (the “11³/4% 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 11³/4% Notes and the 8% Notes, the “Notes”). The Notes are governed by indentures that are substantially identical for each series. The Notes are senior unsecured obligations of the Company. The 11³/4% Notes mature on June 30, 2016 with interest payable on June 30 and December 30 of each year beginning December 30, 2009. The 8% Notes mature on May 15, 2017 with interest payable on May 15 and November 15 of each year. The 7¹/2% Notes mature on April 15, 2013 with interest payable on April 15 and October 15 of each year. There is no sinking fund for the Notes. The Company and its restricted subsidiaries are subject to certain financial and non-financial covenants under each of the indentures governing the Notes. The Company was in compliance with the financial covenants under the Notes as of March 31, 2010.

     Capitalized Interest — For the three-month periods ended March 31, 2010 and 2009, capitalized interest totaled $5.3 million and $2.2 million, respectively.

4. Oil and Gas Properties

     The Company’s oil and gas properties are accounted for using the full cost method of accounting. All direct costs and certain indirect costs associated with the acquisition, exploration and development of oil and gas properties are capitalized, including eligible general and administrative costs (“G&A”). G&A costs associated with production, operations, marketing and general corporate activities are expensed as incurred. These capitalized costs, coupled with the Company’s estimated asset retirement obligations recorded in accordance with accounting for asset retirement and environmental obligations under GAAP, are included in the amortization base and amortized to expense using the unit-of-production method. Amortization is calculated based on estimated proved oil and gas reserves. Proceeds from the sale or disposition of oil and gas properties are applied to reduce net capitalized costs unless the sale or disposition causes a significant change in the relationship between costs and the estimated value of proved reserves. For the three-month periods ended March 31, 2010 and 2009, capitalized G&A totaled $6.6 million and $5.0 million, respectively.

     Capitalized costs (net of accumulated depreciation, depletion and amortization and deferred income taxes) of proved oil and gas properties are subject to a full cost ceiling limitation. The ceiling limits these costs to an amount equal to the present value, discounted at 10%, of estimated future net cash flows from estimated proved reserves less estimated future operating and development costs, abandonment costs (net of salvage value) and estimated related future income taxes. In accordance with SEC rules, the natural gas and oil prices used to calculate the full cost ceiling limitation for periods ending on or after December 31, 2009 are the 12-month average prices, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements. Prices are adjusted for “basis” or location differentials. Price is held constant over the life of the reserves. The Company uses derivative financial instruments that qualify for cash flow hedge accounting under GAAP to hedge against the volatility of oil and natural gas prices. In accordance with SEC guidelines, Mariner includes estimated future cash flows from its hedging program in the ceiling test calculation. If net capitalized costs related to proved properties exceed the ceiling limit, the excess is impaired and recorded in the Condensed Consolidated Statement of Operations.

     At March 31, 2010 the ceiling limit exceeded the net capitalized costs of the Company’s proved oil and gas properties and no impairment was recorded. At March 31, 2009, the net capitalized cost of proved oil and gas properties exceeded the ceiling limit and the Company recorded a non-cash ceiling test impairment of $704.7 million ($454.6 million, net of tax). The impairment would have been $808.0 million ($521.3 million, net of tax) if the Company had not used hedge adjusted prices for the volumes that were subject to hedges. The ceiling limit of its proved reserves was calculated based upon quoted market spot prices of $3.63 per Mcf for gas and $49.65 per barrel for oil, adjusted for market differentials for the three-month period ended March 31, 2009. The Company may be required to recognize non-cash impairment charges in future reporting periods if average 12-month market prices for oil and natural gas were to decline. At March 31, 2010, the Company had 89,777,790 MMbtus of natural gas and 5,336,130 Bbls of oil of future production hedged.

5. Accrual for Future Abandonment Liabilities

     In accordance with accounting for asset retirement and environmental obligations under GAAP, the Company records the fair value of a liability for the legal obligation to retire an asset in the period in which it is incurred with the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. Upon adoption, the Company recorded an asset retirement obligation to reflect the Company’s legal obligations related to future plugging and abandonment of its oil and natural gas wells. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, the difference is recognized in proved oil and gas properties.

     To estimate the fair value of an asset retirement obligation, the Company employs a present value technique, which reflects certain assumptions, including its credit-adjusted risk-free interest rate, the estimated settlement date of the liability and the estimated current cost to settle the liability. Changes in timing or to the original estimate of cash flows will result in changes to the carrying amount of the liability.

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

		(In thousands)
Abandonment liability as of January 1, 2010 (1)		$	417,887
Liabilities incurred			—
Liabilities settled			(4,454	)
Accretion expense			8,997
Revisions to previous estimates			—
Abandonment liability as of March 31, 2010 (2)		$	422,430

6. Share-Based Compensation

     Applicable Plans — In May 2009, the Company’s stockholders approved the Mariner Energy, Inc. Third Amended and Restated Stock Incentive Plan (the “Stock Incentive Plan”) in which the Company’s directors, employees and consultants are eligible to participate. Awards of up to an aggregate 12,500,000 shares of the Company’s common stock may be made under the Stock Incentive Plan in the form of incentive stock options, non-qualified stock options or restricted stock. Restricted common stock and non-qualified stock options are outstanding under the Stock Incentive Plan. Options to purchase the Company’s 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”).

     Plan Activity — The Company recorded total compensation expense related to restricted stock and stock options of $6.9 million and $6.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. Unrecognized compensation expense at March 31, 2010 for the unvested portion of restricted stock granted under the Stock Incentive Plan was $59.0 million and for unvested options was $0.

     Share-based compensation, including restricted stock and options under each of the Company’s plans, for the periods reflected was as follows:

		Three Months Ended March 31,
		2010				2009
		(In thousands)
Share-based compensation included in:
General and administrative expense		$	5,891			$	5,924
Oil and natural gas properties under full cost method			1,000				854
Total share-based compensation		$	6,891			$	6,778

     Share-based compensation charged to earnings for the periods reflected was as follows:

		Three Months Ended March 31,
		2010				2009
		(In thousands)
Charged to earnings		$	5,891			$	5,924
Tax benefit			(2,117	)			(2,103	)
		$	3,774			$	3,821

     The following table presents a summary of stock option activity under the Stock Incentive Plan and under Rollover Options for the three months ended March 31, 2010:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at January 1, 2010			644,160			$	13.88			$	702
Granted			—				—				—
Exercised			(1,782	)			11.59				(6	)
Forfeited			(1,600	)			14.00				(2	)
Outstanding and exercisable at March 31, 2010			640,778				13.89			$	694

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of March 31, 2010 and 2009, respectively, and changes during the three-month periods then ended is as follows:

		Restricted Shares under
		Stock Incentive Plan
		March 31,
		2010				2009
Total unvested shares at beginning of period: January 1			3,660,265				2,697,926
Shares granted (1)			1,458,044				1,212,654
Shares vested			(431,847	)			(170,724	)
Shares forfeited			—				—
Total unvested shares at end of period: March 31			4,686,462				3,739,856
Available for future grant as options or restricted stock			5,758,379				1,369,868

     The following table summarizes the status under the provisions for accounting for stock compensation under GAAP of the Company’s restricted stock, including long-term performance based restricted stock, at March 31, 2010 and the changes during the three months then ended:

														Weighted
										Aggregate				Average
		Equity				Weighted				Intrinsic				Remaining
		Instruments				Average				Value				Contractual
		(thousands)				Fair Value				($ thousands)				Life (Years)
Unvested at January 1, 2010			3,660,265			$	21.51			$	78,734
Granted			1,458,044				14.78				21,549
Vested			(431,847	)			16.00				(6,907	)
Forfeited			—				—				—
Unvested at March 31, 2010			4,686,462				19.92			$	93,376				5.54

     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. As of March 31, 2010, shares of restricted common stock subject to the Program were granted in 2008 and 2009. Vesting of these shares is contingent, begins upon satisfaction of specified thresholds of $38.00 and $46.00 for the market price per share of Mariner’s common stock, and continues in installments over five to seven years thereafter, assuming, in most instances, continued employment by Mariner. The fair value of restricted stock grants made under the Program is estimated using a Monte Carlo simulation. Stock-based compensation expense related to these restricted stock grants totaled $2.3 million for the three months ended March 31, 2010.

     Weighted average fair values and valuation assumptions used to value Program grants for the quarter ended March 31, 2010 are as follows:

		Quarter Ended
		March 31,
		2010
Weighted average fair value of grants		$	33.73
Expected volatility			42.29	%
Risk-free interest rate			4.57	%
Dividend yield			0.00	%
Expected life		10 years

     Expected volatility is calculated based on the average historical stock price volatility of Mariner and a peer group as of March 31, 2010. The peer group consisted of the following seven independent oil and gas exploration and production companies: ATP Oil & Gas Corporation, Callon Petroleum Co., Energy Partners, Ltd., McMoRan Exploration Co., Plains Exploration & Production Company, Stone Energy Corporation and W&T Offshore, Inc. The risk-free interest rate is determined at the grant date and is based on 10-year, zero-coupon government bonds with maturity equal to the contractual term of the awards, converted to a continuously compounded rate. The expected life is based upon the contractual terms of the restricted stock grants under the Program.

7. Derivative Financial Instruments and Hedging Activities

     The energy markets historically have been very volatile, and Mariner expects oil and gas prices will be subject to wide fluctuations in the future. In an effort to reduce the effects of the volatility of the price of oil and natural gas on the Company’s operations, management has elected to hedge oil and natural gas prices from time to time through the use of commodity price swap agreements and costless collars. While the use of these hedging arrangements limits the downside risk of adverse price movements, it also limits future gains from favorable movements. In addition, forward price curves and estimates of future volatility are used to assess and measure the ineffectiveness of the Company’s open contracts at the end of each period.

     For derivative contracts that are designated and qualify as cash flow hedges pursuant to accounting for derivatives and hedging under GAAP, the portion of the gain or loss on the derivative instrument that is effective in offsetting the variable cash flows associated with the hedged forecasted transaction is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (e.g., in “revenues” when the hedged transactions are commodity sales). The remaining gain or loss on the derivative contract in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) is recognized in earnings during the current period. The Company currently does not exclude any component of the derivative contracts’ gain or loss from the assessment of hedge effectiveness.

     On January 29, 2009, the Company liquidated crude oil fixed price swaps that previously had been designated as cash flow hedges for accounting purposes in respect of 977,000 barrels of crude oil in exchange for a cash payment to Mariner of $10.0 million and installment payments of $13.5 million to be paid monthly to Mariner through 2009. Since, at the time of liquidation, the forecasted sales of crude oil volumes were still expected to occur, the accumulated losses through January 29, 2009 on the related derivative contracts remained in accumulated other comprehensive income. These accumulated losses were reclassified to oil revenues throughout 2009 as the physical transactions occurred. Additionally, all changes in the value of these derivative contracts subsequent to January 29, 2009 were also reclassified monthly from accumulated other comprehensive income to current period oil revenues.

     Derivative gains and losses are recorded by commodity type in oil and gas revenues in the Condensed Consolidated Statements of Operations. The effects on the Company’s oil and gas revenues from its hedging activities were as follows:

		Three Months Ended March 31,
		2010				2009
		(In thousands)
Cash (Loss) Gain on Settlements (1)		$	(1,885	)		$	57,457
Reclassification of Liquidated Swaps (2)			—				6,523
Gain (Loss) on Hedge Ineffectiveness (3)			2,458				(179	)
Total		$	573			$	63,801

     As of March 31, 2010, the Company had the following hedge contracts outstanding:

						Weighted Average				Fair Value
Fixed Price Swaps		Quantity				Fixed Price				Asset/(Liability)
										(In thousands)
Natural Gas (MMbtus)
April 1 — December 31, 2010			32,209,145			$	5.56			$	42,026
January 1 — December 31, 2011			29,389,843			$	5.79				13,340
January 1 — December 31, 2012			22,338,802			$	6.11				6,705
January 1 — December 31, 2013			5,840,000			$	6.76				3,744
Crude Oil (Bbls)
April 1 — December 31, 2010			2,454,866			$	73.92				(26,461	)
January 1 — December 31, 2011			1,978,364			$	79.33				(12,842	)
January 1 — December 31, 2012			494,100			$	80.76				(2,665	)
January 1 — December 31, 2013			408,800			$	82.81				(1,508	)
Total										$	22,339

     The Company has reviewed the financial strength of its counterparties and believes the credit risk associated with these swaps to be minimal. Hedges with counterparties that are lenders under the Company’s bank credit facility are secured under the bank credit facility.

     For derivative instruments that are not designated as a hedge for accounting purposes, all realized and unrealized gains and losses are recognized in the consolidated statement of operations during the current period. This will result in non-cash gains or losses being reported in Mariner’s operating results.

     As of March 31, 2010, the Company expects to realize within the next 12 months a net gain of approximately $14.7 million resulting from hedging activities that are currently recorded in accumulated other comprehensive income. The net hedging gain is expected to be realized as a decrease of $31.7 million to oil revenues and an increase of $46.4 million to natural gas revenues.

Additional Disclosures about Derivative Instruments and Hedging Activities

     At March 31, 2010 and December 31, 2009, the Company had derivative financial instruments under GAAP recorded in its consolidated balance sheets as set forth below (in thousands):

Fair Value of Derivative Contracts

Asset Derivatives

March 31, 2010

December 31, 2009

Balance sheet

Balance sheet

Location

Fair value

Location

Fair value

Derivatives designated as cash flow hedging contracts

Fixed Price Swaps

Current Assets: Derivative financial instruments

$

40,011

Current Assets: Derivative financial instruments

$

2,239

Long-Term Assets: Derivative Financial Instruments

13,080

Long-Term Assets: Derivative Financial Instruments

902

Total:

$

53,091

Total:

$

3,141

Fair Value of Derivative Contracts

Liability Derivatives

March 31, 2010

December 31, 2009

Balance sheet

Balance sheet

Location

Fair value

Location

Fair value

Derivatives designated as cash flow hedging contracts

Fixed Price Swaps

Current Liabilities: Derivative financial instruments

$

25,351

Current Liabilities: Derivative financial instruments

$

27,708

Long-Term Liabilities: Derivative financial instruments

5,401

Long-Term Liabilities: Derivative financial instruments

15,017

Total:

$

30,752

Total:

$

42,725

     For the three months ended March 31, 2010 and 2009, the effect on income (loss) of derivative financial instruments under GAAP was as follows (in thousands):

		Amount of								Location of				Amount of gain/(loss)
		gain/(loss)								gain/(loss)				reclassified from												Amount of (loss)
Derivatives		recognized in OCI								reclassified from				Accumulated OCI into												recognized in income
designated as cash		on derivative								Accumulated OCI				income (effective								Location of (loss)				on derivative
flow hedging		(effective portion)								into income				portion)								recognized in income				(ineffective portion)
contracts under		First Quarter								(effective				First Quarter								on derivative				First Quarter
GAAP		2010				2009				portion)				2010				2009				(ineffective portion)				2010				2009
Fixed Price Swaps		$	22,339			$	138,212			Revenues-Natural Gas				$	3,509			$	43,145			Revenues-Natural Gas				$	2,458			$	(179	)
										Revenues-Crude Oil					(5,394	)			14,312
										Total				$	(1,885	)		$	57,457

Amount of gain/(loss) recognized

Location of gain/(loss)

in income on derivative

Derivatives not designated as cash flow hedging contracts

recognized in income on

First Quarter

First Quarter

under GAAP

derivative

2010

2009

Fixed Price Swaps

Revenues-Crude Oil

$

—

$

6,523

8. Commitments and Contingencies

     Minimum Future Lease Payments — The Company leases certain office facilities and other equipment under long-term operating lease arrangements. Minimum future lease obligations under the Company’s operating leases in effect at March 31, 2010 are as follows:

		(In thousands)
2011		$	2,261
2012			2,502
2013			2,173
2014			2,028
2015 and thereafter			7,931

     Other Commitments — In the ordinary course of business, the Company enters into long-term commitments to purchase seismic data and other geological information such as maps, logs and studies. The minimum annual payments under these contracts are $4.8 million in 2011.

     Insurance Matters

     Current Insurance Against Hurricanes

     Mariner is a member of OIL Insurance Limited (“OIL”), an energy industry insurance cooperative, which provides Mariner windstorm insurance coverage. During 2009, the coverage was subject to a $10.0 million per-occurrence deductible, a $250.0 million per-occurrence loss limit, and a $750.0 million industry aggregate per-event loss limit. Effective January 1, 2010, the coverage is subject to a per-occurrence deductible which remains under consideration, a $150.0 million per-occurrence loss limit per member, an annual maximum of $300.0 million per member, and a $750.0 million industry aggregate per-event loss limit. In addition, annual industry windstorm losses exceeding $300.0 million will be mutualized among windstorm members in two pools, one for offshore and one for onshore, with future premiums based upon a pool’s loss experience and a member’s weighted percent of the pool’s asset base. Mariner anticipates these changes to increase its loss retention by approximately $100.0 million for windstorm losses, which it expects to either self insure, insure through the commercial market, insure through the purchase of additional OIL coverage or a combination of these.

     Each year, Mariner considers whether to purchase from the commercial market supplemental or excess insurance which in the past has provided coverage when OIL limits have been exceeded. The supplemental insurance coverage offered by the commercial market in 2009 would not have provided similar coverage and Mariner elected not to purchase it when it expired on June 1, 2009. Mariner believes its assets are sufficiently insured through OIL and Mariner’s expected ability to cover losses in excess of OIL coverage. Mariner intends to monitor the commercial market for insurance that would, based on Mariner’s historical experience, cover its expected hurricane-related risks on a cost-effective basis once OIL limits are exceeded.

     As of March 31, 2010, Mariner accrued approximately $41.2 million for an OIL withdrawal premium contingency. As part of its OIL membership, Mariner is obligated to pay a withdrawal premium if it elects to withdraw from OIL. Mariner does not anticipate withdrawing from OIL; however, due to the contingency, Mariner periodically reassesses the sufficiency of its accrued withdrawal premium based on OIL’s periodic calculation of the potential withdrawal premium in light of past losses, and Mariner may adjust its accrual accordingly in the future. OIL requires smaller members to provide a letter of credit or other acceptable security in favor of OIL to secure payment of the withdrawal premium. Acceptable security has included a letter of credit or a security agreement pursuant to which a member grants OIL a security interest in certain claim proceeds payable by OIL to the member. Mariner has entered into such a security agreement, granting to OIL a senior security interest in up to the next $50.0 million in excess of $100.0 million of Mariner’s Hurricane Ike claim proceeds payable by OIL. Mariner has the ability to replace the security agreement with a letter of credit or other acceptable security in favor of OIL.

     Hurricane Ike (2008)

     In 2008, the Company’s operations were adversely affected by Hurricane Ike. The hurricane resulted in shut-in and delayed production as well as facility repairs and replacement expenses. The Company estimates that repairs and plugging and abandonment costs resulting from Hurricane Ike will total approximately $160.0 million net to Mariner’s interest. OIL has advised the Company that industry-wide damages from Hurricane Ike are expected to substantially exceed OIL’s $750.0 million industry aggregate per event loss limit and that OIL expects to initially prorate the payout of all OIL members’ Hurricane Ike claims at approximately 50%, subject to further adjustment. OIL also has indicated that the scaling factor it expects to apply to Mariner’s Hurricane Ike claims will result in settlement at less than 70%. Mariner expects that approximately 75% of the shortfall in its primary insurance coverage will be covered under its commercial excess coverage. In respect of Hurricane Ike claims that the Company made through March 31, 2010, the Company received approximately $37.0 million from OIL and $11.9 million from excess carriers. Although in 2009 Mariner started receiving payment in respect of its Hurricane Ike claims, due to the magnitude of the storm and the complexity of the insurance claims being processed by the insurance industry, Mariner expects to maintain a potentially significant insurance receivable through 2010 while it actively pursues settlement.

     Litigation — The Company, in the ordinary course of business, is a claimant and/or a defendant in various legal proceedings, including proceedings as to which the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets. The Company does not consider its exposure in these proceedings, individually or in the aggregate, to be material.

     Letters of Credit — Mariner’s bank credit facility has a letter of credit subfacility of up to $50.0 million that is included as a use of the borrowing base. As of March 31, 2010, four such letters of credit totaling $4.7 million were outstanding of which $4.2 million is required for plugging and abandonment obligations at certain of Mariner’s offshore fields.

9. Earnings per Share

     Basic earnings per share does not include dilution and is computed by dividing net income or loss attributed to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur upon vesting of restricted common stock or exercise of options to purchase common stock.

		Three Months Ended
		March 31,
		2010				2009
		(In thousands, except per share data)
Numerator:
Net Income (Loss)		$	15,263			$	(424,118	)
Denominator:
Weighted average shares outstanding			100,991				88,865
Add dilutive securities
Options			123				—
Restricted stock			771				—
Total weighted average shares outstanding and dilutive securities			101,885				88,865
Net Income (Loss) per share:
Basic:		$	0.15			$	(4.77	)
Diluted:		$	0.15			$	(4.77	)

     Shares issuable upon exercise of options to purchase common stock and unvested shares of restricted stock that would have been anti-dilutive are excluded from the computation of diluted earnings per share. For the three months ended March 31, 2010, none of the Company’s shares issuable upon exercise of stock options and approximately 1,212,000 unvested shares of restricted stock were excluded from the computation of diluted earnings per share because the effect was anti-dilutive. As a result of the Company’s net loss for the three months ended March 31, 2009, all of the Company’s shares issuable upon exercise of stock options and unvested shares of restricted stock (approximately 645,000 and 2,992,000, respectively) were excluded from the computation of diluted earnings per share because the effect was anti-dilutive.

10. Comprehensive Income (Loss)

     Comprehensive income (loss) includes net income (loss) and certain items recorded directly to stockholders’ equity and classified as other comprehensive income (loss). The table below summarizes comprehensive income (loss) and provides the components of the change in accumulated other comprehensive income (loss) for the three months ended March 31, 2010 and 2009:

		Three Months Ended
		March 31,
		2010				2009
		(in thousands)
Net Income (Loss)		$	15,263			$	(424,118	)
Other comprehensive income (loss), net of tax:
Change in unrealized mark-to-market gains (losses) arising during period, net of taxes			37,809				(19,496	)
Derivative contracts settled and reclassified, net of taxes			367				40,916
Foreign currency translation adjustment			132				—
Change in accumulated other comprehensive income			38,308				21,420
Comprehensive income (loss)		$	53,571			$	(402,698	)

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, 2010 and December 31, 2009. These assets and liabilities are not included in the following tables.

     GAAP 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.

     GAAP 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, 2010:

						Fair Value Measurements Using:
										Significant
						Quoted Prices				other				Significant
						in Active				Observable				Unobservable
		Total Fair				Markets				Inputs				Inputs
Derivative Financial Instruments		Value				(Level 1)				(Level 2)				(Level 3)
		(In thousands)
Natural gas and crude oil fixed price swaps — Short Term		$	14,660			$	—			$	14,660			$	—
Natural gas and crude oil fixed price swaps — Long Term			7,679				—				7,679				—
Total		$	22,339			$	—			$	22,339			$	—

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

Level 2 Fair Value Measurements

     The fair values of the natural gas and crude oil fixed price swaps are estimated using internal discounted cash flow calculations based upon forward commodity price curves, terms of each contract, and a credit adjustment based on the credit rating of the Company and its counterparties as of March 31, 2010.

Level 3 Fair Value Measurements

     The Company had no Level 3 financial instruments as of March 31, 2010.

     The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of accounting for financial instruments under GAAP, which Mariner adopted effective March 31, 2009. The estimated fair value amounts have been determined using available market information and valuation methodologies described below. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

     The carrying amounts and fair values of the Company’s long-term debt are as follows:

		March 31, 2010
		Carrying
Long-term Debt		Amount				Fair Value
		(In thousands)
Bank credit facility		$	332,000			$	332,000
7 1/2% Notes, net of discount			298,268				304,500
8% Notes			300,000				298,500
11 3/4% Notes, net of discount			291,936				336,750
Total long-term debt		$	1,222,204			$	1,271,750

     The fair value of the amounts outstanding under the bank credit facility at March 31, 2010 is based on rates currently available for debt instruments with similar terms and average maturities from companies with similar credit ratings in the industry. The fair value of the Notes, excluding discount, is based on quoted market prices based on trades of such debt at March 31, 2010 or the nearest actual trade date.

12. Segment Information

     The FASB issued authoritative guidance establishing standards for reporting information about operating segments. Operating segments are defined as components of an enterprise that engage in activities from which it may earn revenues and incur expenses. Separate financial information is available and this information is regularly evaluated by the chief decision maker for the purpose of allocating resources and assessing performance.

     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. Since Mariner follows the full cost method of accounting and all of its oil and gas properties and operations are located in the United States, the Company has determined that it has one reporting unit. Inasmuch as Mariner is one enterprise, the Company does not maintain comprehensive financial statement information by area but does track basic operational data by area.

13. Supplemental Guarantor Information

     On June 10, 2009, the Company sold and issued $300.0 million aggregate principal amount of its 11 ³/4% Notes. 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 7 ¹/2% Notes. The Notes are jointly and severally guaranteed on a senior unsecured basis by the Company’s existing and certain of its future domestic subsidiaries (“Subsidiary Guarantors”). The guarantees are full and unconditional, and the guarantors are wholly-owned. In the future, the guarantees may be released or terminated under certain circumstances.

     The following information sets forth Mariner’s Condensed Consolidating Balance Sheets as of March 31, 2010 and December 31, 2009, its Condensed Consolidating Statements of Operations for the three months ended March 31, 2010 and 2009, and its Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2010 and 2009.

     Mariner accounts for investments in its subsidiaries using the equity method of accounting; accordingly, entries necessary to consolidate Mariner, the parent company, and its Subsidiary Guarantors are reflected in the eliminations column.

MARINER ENERGY, INC.
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
March 31, 2010
(In thousands except share data)

										Subsidiary								Consolidated
		Parent				Subsidiary				Non-								Mariner
		Company				Guarantors				Guarantors				Eliminations				Energy, Inc.
Current Assets:
Cash and cash equivalents		$	5,707			$	3,930			$	1,184			$	—			$	10,821
Receivables, net of allowances			76,093				74,737				—				—				150,830
Insurance receivables			74				9,707				—				—				9,781
Derivative financial instruments			40,011				—				—				—				40,011
Intangible assets			19,571				—				—				—				19,571
Prepaid expenses and other			33,591				2,219				—				—				35,810
Total current assets			175,047				90,593				1,184				—				266,824
Property and Equipment:
Proved oil and gas properties, full cost method			2,549,507				2,669,227				199				—				5,218,933
Unproved properties, not subject to amortization			287,995				49,240				458				—				337,693
Total oil and gas properties			2,837,502				2,718,467				657				—				5,556,626
Other property and equipment			20,184				35,358				434				—				55,976
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(1,551,871	)			(1,423,300	)			(34	)			—				(2,975,205	)
Other property and equipment			(6,599	)			(2,349	)			—				—				(8,948	)
Accumulated depreciation, depletion and amortization			(1,558,470	)			(1,425,649	)			(34	)			—				(2,984,153	)
Total property and equipment, net			1,299,216				1,328,176				1,057				—				2,628,449
Investment in Subsidiaries			721,480				—				—				(721,480	)			—
Intercompany Receivables			220,092				—				—				(220,092	)			—
Intercompany Note Receivable			7,175				—				—				(7,175	)			—
Derivative Financial Instruments			13,080				—				—				—				13,080
Other Assets, net of amortization			93,044				840				—				—				93,884
TOTAL ASSETS		$	2,529,134			$	1,419,609			$	2,241			$	(948,747	)		$	3,002,237
Current Liabilities:
Accounts payable		$	5,940			$	1,415			$	—			$	—			$	7,355
Accrued liabilities			117,154				41,728				—				—				158,882
Accrued capital costs			81,534				62,253				58				—				143,845
Deferred income tax			5,254				—				—				—				5,254
Abandonment liability			15,077				66,666				—				—				81,743
Accrued interest			28,992				—				—				—				28,992
Derivative financial instruments			25,351				—				—				—				25,351
Total current liabilities			279,302				172,062				58				—				451,422
Long-Term Liabilities:
Abandonment liability			69,265				271,422				—				—				340,687
Deferred income tax			(24,085	)			29,083				—				—				4,998
Intercompany payables			—				220,092				—				(220,092	)			—
Derivative financial instruments			5,401				—				—				—				5,401
Long-term debt			1,222,204				—				—				—				1,222,204
Other long-term liabilities			35,927				353				—				—				36,280
Intercompany note payable			—				7,175				—				(7,175	)			—
Total long-term liabilities			1,308,712				528,125				—				(227,267	)			1,609,570
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at March 31, 2010			—				—				—				—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 103,122,652 shares issued and outstanding at March 31, 2010			10				5				—				(5	)			10
Additional paid-in-capital			1,262,245				1,084,054				2,732				(1,086,786	)			1,262,245
Partner capital			—				35,219				—				(35,219	)			—
Accumulated other comprehensive income			12,228				—				125				—				12,353
Accumulated retained deficit			(333,363	)			(399,856	)			(674	)			400,530				(333,363	)
Total stockholders’ equity			941,120				719,422				2,183				(721,480	)			941,245
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,529,134			$	1,419,609			$	2,241			$	(948,747	)		$	3,002,237