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

MARINER ENERGY, INC.

Delaware		86-0460233
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

One BriarLake Plaza, Suite 2000
2000 West Sam Houston Parkway South
Houston, Texas 77042
(Address of principal executive offices and zip code)

(713) 954-5500
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 1, 2010, there were 103,268,257 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 September 30, 2010 and December 31, 2009			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009			5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009			6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009			7
Notes to the Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			51
Item 4. Controls and Procedures			53
PART II
Item 1A. Risk Factors			54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 6. Exhibits			58
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
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

Item 1. Unaudited Condensed Consolidated Financial Statements

MARINER ENERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

		September 30,				December 31,
		2010				2009
ASSETS
Current Assets:
Cash and cash equivalents		$	9,846			$	8,919
Receivables, net of allowances of $1,024 and $3,408 as of September 30, 2010 and December 31, 2009, respectively			128,719				148,725
Insurance receivables			7,681				8,452
Derivative financial instruments			42,809				2,239
Intangible assets			7,268				22,615
Prepaid expenses and other			28,384				11,667
Deferred income tax			—				9,704
Total current assets			224,707				212,321
Property and Equipment:
Proved oil and gas properties, full cost method			5,472,404				5,117,273
Unproved properties, not subject to amortization			453,164				292,237
Total oil and gas properties			5,925,568				5,409,510
Other property and equipment			56,268				55,695
Accumulated depreciation, depletion and amortization:
Proved oil and gas properties			(3,142,994	)			(2,884,411	)
Other property and equipment			(11,116	)			(8,235	)
Total accumulated depreciation, depletion and amortization			(3,154,110	)			(2,892,646	)
Total property and equipment, net			2,827,726				2,572,559
Derivative Financial Instruments			33,366				902
Deferred Income Tax			—				12,491
Other Assets, net of amortization			75,858				68,932
TOTAL ASSETS		$	3,161,657			$	2,867,205
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	6,320			$	3,579
Accrued liabilities			127,460				137,206
Accrued capital costs			94,200				140,941
Deferred income tax			12,649				—
Abandonment liability			80,249				54,915
Accrued interest			28,533				8,262
Derivative financial instruments			7,329				27,708
Total current liabilities			356,740				372,611
Long-Term Liabilities:
Abandonment liability			301,569				362,972
Deferred income tax			18,052				—
Derivative financial instruments			3,613				15,017
Long-term debt			1,463,930				1,194,850
Other long-term liabilities			35,431				38,800
Total long-term liabilities			1,822,595				1,611,639

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2010				2009
Commitments and Contingencies (see Note 9)
Stockholders’ Equity:
Preferred stock, $.0001 par value; 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2010 and December 31, 2009			—				—
Common stock, $.0001 par value; 180,000,000 shares authorized, 103,227,031 shares issued and outstanding at September 30, 2010; 180,000,000 shares authorized, 101,806,825 shares issued and outstanding at December 31, 2009			10				10
Additional paid-in capital			1,272,043				1,257,526
Accumulated other comprehensive income (loss)			40,107				(25,955	)
Accumulated deficit			(329,838	)			(348,626	)
Total stockholders’ equity			982,322				882,955
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	3,161,657			$	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								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues:
Natural gas		$	92,655			$	130,046			$	302,581			$	425,747
Oil			91,434				80,908				283,569				220,787
Natural gas liquids			22,808				15,736				70,634				30,398
Other revenues			3,780				656				7,778				25,720
Total revenues			210,677				227,346				664,562				702,652
Costs and Expenses:
Lease operating expense			59,436				65,325				172,089				165,816
Severance and ad valorem taxes			6,691				4,406				19,711				11,668
Transportation expense			4,484				4,468				14,574				13,627
General and administrative expense			18,379				18,922				69,690				57,455
Depreciation, depletion and amortization			93,620				106,218				288,250				301,305
Full cost ceiling test impairment			—				—				—				704,731
Other miscellaneous expense			2,045				1,193				5,662				11,960
Total costs and expenses			184,655				200,532				569,976				1,266,562
OPERATING INCOME (LOSS)			26,022				26,814				94,586				(563,910	)
Other Income (Expense):
Interest income			4				56				773				443
Interest expense, net of amounts capitalized			(20,769	)			(19,702	)			(61,124	)			(51,076	)
Income (Loss) Before Taxes			5,257				7,168				34,235				(614,543	)
(Provision) Benefit for Income Taxes			(3,436	)			(2,946	)			(15,447	)			211,860
NET INCOME (LOSS)		$	1,821			$	4,222			$	18,788			$	(402,683	)
Net Income (Loss) per share:
Basic		$	0.02			$	0.04			$	0.19			$	(4.29	)
Diluted		$	0.02			$	0.04			$	0.18			$	(4.29	)
Weighted average shares outstanding:
Basic			101,521,119				100,752,532				101,296,525				93,848,859
Diluted			102,775,156				101,084,502				102,600,971				93,848,859

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 nine months ended September 30, 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			1,709				—				—				—				—				—
Treasury stock bought and cancelled on same day			(300	)			—				(5,838	)			—				—				(5,838	)
Forfeiture of restricted stock			(13	)			—				—				—				—				—
Share-based compensation			—				—				20,071				—				—				20,071
Stock options exercised			24				—				284				—				—				284
Comprehensive income:
Net income			—				—				—				—				18,788				18,788
Change in fair value of derivative hedging instruments — net of income taxes of $45,695			—				—				—				81,780				—				81,780
Hedge settlements reclassified to income — net of income taxes of $(8,765)			—				—				—				(15,650	)			—				(15,650	)
Foreign currency translation adjustment			—				—				—				(68	)			—				(68	)
Total comprehensive income			—				—				—				66,062				18,788				84,850
Balance at September 30, 2010			103,227			$	10			$	1,272,043			$	40,107			$	(329,838	)		$	982,322

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

														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 — equity offering			11,500				1				159,673				—				—				159,674
Common shares issued — restricted stock			1,709				—				—				—				—				—
Treasury stock bought and cancelled on same day			(175	)			—				(1,991	)			—				—				(1,991	)
Forfeiture of restricted stock			(25	)			—				—				—				—				—
Share-based compensation			—				—				21,114				—				—				21,114
Stock options exercised			1				—				8				—				—				8
Comprehensive loss:
Net loss			—				—				—				—				(402,683	)			(402,683	)
Change in fair value of derivative hedging instruments — net of income taxes of $30,595			—				—				—				53,797				—				53,797
Hedge settlements reclassified to income — net of income taxes of $(68,115)			—				—				—				(121,780	)			—				(121,780	)
Total comprehensive loss			—				—				—				(67,983	)			(402,683	)			(470,666	)
Balance at September 30, 2009			101,856			$	10			$	1,250,151			$	10,198			$	(431,900	)		$	828,459

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)

		Nine Months
		Ended September 30,
		2010				2009
Operating Activities:
Net income (loss)		$	18,788			$	(402,683	)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax			15,447				(211,860	)
Depreciation, depletion and amortization			288,250				301,305
Ineffectiveness of derivative instruments			(1,757	)			812
Full cost ceiling test impairment			—				704,731
Share-based compensation			17,051				18,360
Derivative financial instruments			—				(14,128	)
Other			4,393				7,046
Changes in operating assets and liabilities:
Receivables			21,309				83,357
Insurance receivables			771				22,841
Cash from liquidation of hedges			—				52,562
Prepaid expenses and other			(37,005	)			(26,222	)
Intangible assets			1,847				888
Accounts payable and accrued liabilities			(26,972	)			1,100
Net cash provided by operating activities			302,122				538,109
Investing Activities:
Acquisitions and additions to oil and gas properties			(588,376	)			(468,980	)
Additions to other property and equipment			(573	)			(2,141	)
Proceeds from property conveyances			26,860				—
Net cash used in investing activities			(562,089	)			(471,121	)
Financing Activities:
Credit facility borrowings			551,000				350,221
Credit facility repayments			(283,000	)			(855,221	)
Repurchase of stock			(5,838	)			(1,991	)
Debt redetermination costs			(1,552	)			(2,306	)
Debt offering costs			—				(5,906	)
Proceeds from equity offering			—				159,736
Proceeds from debt issuance			—				291,279
Proceeds from exercise of stock options			284				8
Net cash provided by (used in) financing activities			260,894				(64,180	)
Increase in Cash and Cash Equivalents			927				2,808
Cash and Cash Equivalents at Beginning of Period			8,919				3,209
Cash and Cash Equivalents at End of Period		$	9,846			$	6,017
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)		$	37,301			$	29,238

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

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 September 30, 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 nine months ended September 30, 2010 or for the year ended December 31, 2009.

     Recent Accounting Pronouncements — In July 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which requires an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. In addition, an entity is required to disclose credit quality indicators, past due information, and modifications of its financing receivables. These disclosures are intended to help financial statement users assess an entity’s credit risk exposures and evaluate the adequacy of its allowance for credit losses. The guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company is currently evaluating the potential impact of adopting the guidance.

Mariner will begin complying with the disclosure requirements in its annual report on Form 10-K for the year ended December 31, 2010.

     In April 2010, the FASB issued authoritative guidance which provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade should not be considered to contain a condition that is not a market, performance or service condition. Therefore, the award would be classified as an equity award if it otherwise qualifies as equity. The guidance is effective for interim and annual reporting periods beginning on or after December 15, 2010. The Company is currently evaluating the potential impact of adopting the guidance.

     In February 2010, the 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). 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				For the Nine Months
		Ended September 30, 2009
		(In thousands, except
		per share amounts)
Pro Forma:
Revenue		$	238,838			$	750,782
Net loss available to common stockholders		$	(3,177	)		$	(492,186	)
Basic loss per share		$	(0.03	)		$	(5.24	)
Diluted loss per share		$	(0.03	)		$	(5.24	)

3. Long-Term Debt

     As of September 30, 2010 and December 31, 2009, the Company’s long-term debt was as follows:

		September 30,				December 31,
		2010				2009
		(In thousands)
Bank credit facility		$	573,000			$	305,000
7 1/2% Senior Notes, due April 15, 2013, net of discount			298,552				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			292,378				291,725
Total long-term debt		$	1,463,930			$	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 September 30, 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 $950.0 million. As of September 30, 2010, there were $573.0 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 September 30, 2010, after accounting for the $4.7 million of letters of credit, the Company had $372.3 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 September 30, 2010, when borrowings at both LIBOR and prime-based rates were outstanding, the blended interest rate was 2.77% on all amounts borrowed. During the nine months ended September 30, 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. Financial covenants under the credit facility require the Company to, among other things:

	•		maintain a ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities of not less than 1.0 to 1.0; and
	•		maintain a ratio of total debt to EBITDA (as defined in the credit agreement) of not more than 3.5 to 1.0.

     The Company was in compliance with these covenants as of September 30, 2010 when the ratio of consolidated current assets plus the unused borrowing base to consolidated current liabilities was 2.16 to 1.0 and the ratio of total debt to EBITDA was 2.71 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 September 30, 2010.

     Capitalized Interest — For the three-month periods ended September 30, 2010 and 2009, capitalized interest totaled $6.8 million and $4.5 million, respectively. For the nine-month periods ended September 30, 2010 and 2009, capitalized interest totaled $18.3 million and $9.7 million, respectively.

4. Stockholders’ Equity

     Common Stock Offering — On June 10, 2009, the Company sold and issued 11.5 million shares of its common stock, par value $.0001 per share, at a public offering price of $14.50 per share in an underwritten offering registered under the 1933 Act. The total sold included 1.5 million shares issued upon full exercise of the underwriters’ overallotment option. Net offering proceeds, after deducting underwriters’ discounts and estimated offering expenses but before giving effect to the underwriters’ reimbursement of up to $0.5 million for offering expenses, were approximately $159.2 million. The Company used net offering proceeds to repay debt under its bank credit facility.

5. 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 September 30, 2010 and 2009, capitalized G&A totaled $7.0 million and $5.0 million, respectively. For the nine-month periods ended September 30, 2010 and 2009, capitalized G&A totaled $20.8 million and $15.3 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.

     For the three months ended September 30, 2010 the ceiling limit exceeded the net capitalized costs of the Company’s proved oil and gas properties and no impairment was recorded. The ceiling limit of its proved reserves for the three months ended September 30, 2010 was calculated based upon 12-month average prices of $4.41 per Mcf for gas and $77.34 per barrel for oil, 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. 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 September 30, 2010, the Company had 67,383,758 MMbtus of natural gas and 3,656,456 Bbls of oil of future production hedged.

     Based on quoted market prices adjusted for market differentials of $3.30 per Mcf for gas and $70.21 per barrel for oil at September 30, 2009, the net capitalized cost of proved oil and gas properties exceeded the ceiling limit and the Company calculated a non-cash ceiling test impairment of $4.6 million ($3.0 million, net of tax) for the third quarter. The indicated impairment would have been $71.6 million ($46.0 million, net of tax) if the Company had not used hedge adjusted prices for the volumes that were subject to hedges. In accordance SEC guidelines in effect at September 30, 2009, subsequent commodity price increases could be utilized to calculate the ceiling value and reserves. Subsequent to September 30, 2009 the quoted market prices of gas and oil increased. Based on commodity prices of $4.10 per Mcf for gas and $77.04 per barrel for oil at October 30, 2009, the net capitalized cost of proved oil and gas properties did not exceed the ceiling limit and the Company did not record an impairment for the three months ended September 30, 2009.

     No ceiling test impairment was recorded for the nine months ended September 30, 2010. The Company recorded a non-cash ceiling test impairment of $704.7 million ($454.6 million, net of tax) for the nine months ended September 30, 2009 as a result of the net capitalized cost of proved oil and gas properties exceeding the ceiling limit at March 31, 2009. The impairment would have been $808.0 million ($521.3 million, net of tax) if the Company had not used hedge adjusted prices for the volumes that were subject to hedges. The ceiling limit of its proved reserves was calculated based upon quoted market prices adjusted for market differentials of $3.63 per Mcf for gas and $49.65 per barrel for oil at March 31, 2009.

6. 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			1,092
Liabilities settled			(42,597	)
Accretion expense			26,786
Revisions to previous estimates			(21,350	)
Abandonment liability as of September 30, 2010 (2)		$	381,818

     In September 2010, the Bureau of Ocean Energy Management, Regulation and Enforcement (“BOEM”) along with the U.S. Department of the Interior (“DOI”) issued a Notice to Lessees (“NTL”) to require oil and gas companies operating in the Gulf of Mexico to set permanent plugs in nonproducing wells that are currently completed with a subsurface safety valve in place and to dismantle oil and gas production platforms no longer being used for exploration or production. The NTL mandates that any well that has not been used during the past five years for exploration or production must be plugged, and associated production platforms and pipelines must be decommissioned if no longer involved with exploration or production activities. The NTL became effective October 15, 2010 and companies have 120 days from then to submit a company-wide plan for decommissioning these facilities and wells. Mariner is developing a plan and evaluating the impact that compliance with the NTL will have on the Company’s abandonment liability.

7. 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 $6.1 million and $7.0 million for the three-month periods ended September 30, 2010 and 2009, respectively and $20.1 million and $21.1 million for the nine-month periods ended September 30, 2010 and 2009, respectively. Unrecognized compensation expense at September 30, 2010 for the unvested portion of restricted stock granted under the Stock Incentive Plan was $51.0 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								Nine Months
		Ended September 30,
		2010				2009				2010				2009
		(In thousands)
Share-based compensation included in:
General and administrative expense		$	5,211			$	6,152			$	17,051			$	18,360
Oil and natural gas properties under full cost method			889				818				3,020				2,754
Total share-based compensation		$	6,100			$	6,970			$	20,071			$	21,114

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

		Three Months								Nine Months
		Ended September 30,
		2010				2009				2010				2009
		(In thousands)
Charged to earnings		$	5,211			$	6,152			$	17,051			$	18,360
Tax benefit			(2,319	)			(2,184	)			(6,786	)			(6,554	)
		$	2,892			$	3,968			$	10,265			$	11,806

     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, 2010:

						Weighted
						Average				Aggregate Intrinsic
						Exercise				Value (1)
		Shares				Price				(In thousands)
Outstanding at January 1, 2010			644,160			$	13.88			$	6,667
Granted			—				—				—
Exercised			(24,118	)			11.77				(301	)
Forfeited			(1,600	)			14.00				(16	)
Outstanding and exercisable at September 30, 2010			618,442				13.96			$	6,350

     A summary of the activity for unvested restricted stock awards under the Stock Incentive Plan as of September 30, 2010 and 2009, respectively, and changes during the nine-month periods then ended is as follows:

		Restricted Shares under
		Stock Incentive Plan
		September 30,
		2010				2009
Total unvested shares at beginning of period: January 1			3,660,265				2,697,926
Shares granted (1)			1,709,086				1,708,795
Shares vested			(965,222	)			(591,049	)
Shares forfeited (2)			(12,995	)			(25,131	)
Total unvested shares at end of period: September 30			4,391,134				3,790,541
Available for future grant as options or restricted stock			5,676,336				7,021,666

     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 September 30, 2010 and the changes during the nine 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			1,709,086				15.67				26,776
Vested			(965,222	)			17.61				(16,997	)
Forfeited			(12,995	)			15.21				(198	)
Unvested at September 30, 2010			4,391,134				20.11			$	88,315				5.83

     Long-Term Performance-Based Restricted Stock Program — In June 2008, Mariner’s board of directors adopted a Long-Term Performance-Based Restricted Stock Program (the “Program”) under the Stock Incentive Plan. Shares of restricted common stock subject to the Program were granted in 2008, 2009 and 2010. 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. For the three months and nine months ended September 30, 2010, stock-based compensation expense related to these restricted stock grants totaled $1.9 million and $6.4 million, respectively.

     Weighted average fair values and valuation assumptions used to value Program grants for the quarter ended September 30, 2010 are as follows:

		Quarter Ended
		September 30, 2010
Weighted average fair value of grants		$	16.02
Expected volatility			60.24	%
Risk-free interest rate			4.20	%
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 September 30, 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.

8. 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. On April 16, 2009, the Company received a $10.5 million cash settlement on the hedges that were settled in monthly installments at January 29, 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. The table immediately below reflects these reclassifications for the three months and nine months ended September 30, 2009.

     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 September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(In thousands)
Cash Gain on Settlements (1)		$	10,745			$	52,644			$	22,658			$	173,648
Reclassification of Liquidated Swaps (2)			—				3,859				—				17,059
Gain (Loss) on Hedge Ineffectiveness (3)			137				(809	)			1,757				(812	)
Total		$	10,882			$	55,694			$	24,415			$	189,895

     As of September 30, 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)
October 1 — December 31, 2010			9,815,113			$	5.57			$	15,897
January 1 — December 31, 2011			29,389,843			$	5.79				39,936
January 1 — December 31, 2012			22,338,802			$	6.11				22,701
January 1 — December 31, 2013			5,840,000			$	6.76				8,210
Crude Oil (Bbls)
October 1 — December 31, 2010			775,192			$	73.36				(6,044	)
January 1 — December 31, 2011			1,978,364			$	79.33				(10,315	)
January 1 — December 31, 2012			494,100			$	80.76				(3,004	)
January 1 — December 31, 2013			408,800			$	82.81				(2,148	)
Total										$	65,233

     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 September 30, 2010, the Company expects to realize within the next 12 months a net gain of approximately $35.5 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 $15.3 million to oil revenues and an increase of $50.8 million to natural gas revenues.

Additional Disclosures about Derivative Instruments and Hedging Activities

     At September 30, 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). The fair values are recorded by netting asset and liability positions where counterparty master netting arrangements contain provisions for net settlement. See Note 12, “Fair Value Measurement” for information regarding the methods and assumptions used to estimate the fair values of the Company’s derivative financial instruments.

Fair Value of Derivative Contracts

Asset Derivatives

September 30, 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

$

42,809

Current Assets: Derivative financial instruments

$

2,239

Long-Term Assets: Derivative Financial Instruments

33,366

Long-Term Assets: Derivative Financial Instruments

902

Total:

$

76,175

Total:

$

3,141

Fair Value of Derivative Contracts

Liability Derivatives

September 30, 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

$

7,329

Current Liabilities: Derivative financial instruments

$

27,708

Long-Term Liabilities: Derivative financial instruments

3,613

Long-Term Liabilities: Derivative financial instruments

15,017

Total:

$

10,942

Total:

$

42,725

     For the three months ended September 30, 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 gain/(loss)
Derivatives		recognized in OCI								reclassified from				Accumulated OCI into												recognized in income
designated as cash		on derivative								Accumulated OCI				income (effective								Location of gain/(loss)				on derivative
flow hedging		(effective portion)								into income				portion)								recognized in income				(ineffective portion)
contracts under		Third Quarter								(effective				Third Quarter								on derivative				Third Quarter
GAAP		2010				2009				portion)				2010				2009				(ineffective portion)				2010				2009
Fixed Price Swaps		$	38,638			$	(21,216	)		Revenues-Natural Gas				$	12,628			$	50,521			Revenues-Natural Gas				$	137			$	(809	)
										Revenues-Crude Oil					(1,883	)			2,123
										Total				$	10,745			$	52,644

						Amount of (loss)/gain recognized
		Location of (loss)/gain				in income on derivative
Derivatives not designated as cash flow hedging contracts		recognized in income on				Third Quarter				Third Quarter
under GAAP		derivative				2010				2009
Fixed Price Swaps		Revenues-Natural Gas				$	—			$	(1,837	)
		Revenues-Crude Oil					—				5,696
		Total				$	—			$	3,859

     For the nine months ended September 30, 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								gain/(loss)				reclassified from												Amount of gain/(loss)
Derivatives		recognized in OCI								reclassified from				Accumulated OCI into												recognized in income
designated as cash		on derivative								Accumulated OCI				income (effective								Location of gain/(loss)				on derivative
flow hedging		(effective portion)								into income				portion)								recognized in income				(ineffective portion)
contracts under		Nine Months Ended September 30,								(effective				Nine Months Ended September 30,								on derivative				Nine Months Ended September 30,
GAAP		2010				2009				portion)				2010				2009				(ineffective portion)				2010				2009
Fixed Price Swaps		$	127,475			$	42,135			Revenues-Natural Gas				$	32,985			$	152,334			Revenues-Natural Gas				$	1,757			$	(812	)
										Revenues-Crude Oil					(10,327	)			21,314
										Total				$	22,658			$	173,648

						Amount of (loss)/gain recognized
		Location of (loss)/gain				in income on derivative
Derivatives not designated as cash flow hedging		recognized in income on				Nine Months Ended September 30,				Nine Months Ended September 30,
contracts under GAAP		derivative				2010				2009
Fixed Price Swaps		Revenues-Natural Gas				$	—			$	(1,837	)
		Revenues-Crude Oil					—				18,896
		Total				$	—			$	17,059

     See Note 11, “Comprehensive Income (Loss)” for more information related to the Company’s derivative financial instruments.

9. 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, 2010 are as follows:

		(In thousands)
2011		$	739
2012			2,886
2013			2,467
2014			2,101
2015 and thereafter			8,228

     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 $4.0 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 $10.0 million per-occurrence deductible; a $150.0 million per-occurrence loss limit per member that Mariner elected to supplement with $25.0 million in additional coverage which if used, would be repayable, interest free, over five years; an annual maximum of $300.0 million per member; and a $750.0 million industry aggregate per-event loss limit. Annual industry windstorm losses of $300.0 million or less will be mutualized among all members. 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.

     Mariner annually considers whether the commercial market offers supplemental or excess insurance that would, based on Mariner’s historical experience, supplement its OIL coverage on a cost-effective basis. In 2010, Mariner elected to purchase insurance from the commercial market to supplement the reduced windstorm coverage offered by OIL. The supplemental insurance will provide up to an additional $78.3 million of aggregate annual coverage in respect of windstorms, of which up to $49.1 million could cover revenues lost as a result of constructive total losses of third-party owned structures through which a material amount of Mariner production is routed and cannot be rerouted.

     As of September 30, 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 applicable commercial excess coverage. In respect of Hurricane Ike claims that the Company made through September 30, 2010, the Company received approximately $37.0 million from OIL and $14.0 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 September 30, 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.

     Gulf of Mexico Oil Spill — As a result of the Deepwater Horizon incidents in April 2010, the DOI has issued a series of reforms to the oversight and management of offshore drilling activities on the federal Outer Continental Shelf (“OCS”). On July 12, 2010, the Secretary of the DOI directed the BOEM to issue a suspension until November 30, 2010 of drilling activities that use subsea blowout preventers or surface blowout preventers on floating facilities. The moratorium was suspended on October 12, 2010. However, Mariner’s Gulf of Mexico offshore operations have been impacted and likely may be impacted in the future by increased regulatory oversight and permitting delays, which may increase the cost of OCS wells such as Lucius, Heidelberg and Bass Lite, and delay drilling and production therefrom.

10. 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,
		2010				2009				2010				2009
		(In thousands, except per share data)
Numerator:
Net Income (Loss)		$	1,821			$	4,222			$	18,788			$	(402,683	)
Denominator:
Weighted average shares outstanding			101,521				100,753				101,297				93,849
Add dilutive securities
Options			220				11				196				—
Restricted stock			1,034				321				1,108				—
Total weighted average shares outstanding and dilutive securities			102,775				101,085				102,601				93,849
Net Income (Loss) per share:
Basic:		$	0.02			$	0.04			$	0.19			$	(4.29	)
Diluted:		$	0.02			$	0.04			$	0.18			$	(4.29	)

     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 nine months ended September 30, 2010, none of the Company’s shares issuable upon exercise of stock options and approximately 1,099,000 unvested shares of restricted stock were excluded from the computation of diluted earnings per share because the effect was anti-dilutive. For the three months ended September 30, 2010, none of the Company’s shares issuable upon exercise of stock options and approximately 1,085,000 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 nine months ended September 30, 2009, all of the Company’s shares issuable upon exercise of stock options and unvested shares of restricted stock (approximately 644,721 and 1,969,881, respectively) were excluded from the computation of diluted earnings per share because the effect was anti-dilutive. For the three months ended September 30, 2009, 612,805 shares issuable upon exercise of stock options and 1,793,914 unvested shares of restricted stock were excluded from the computation of diluted earnings per share because the effect was anti-dilutive.

     The provisions of Accounting Standards Codification Topic 260, “Earnings Per Share,” state that unvested share-based payment awards that contain rights to receive nonforfeitable dividends or dividend equivalents are participating securities prior to vesting and are required to be included in the earnings allocations in computing basic earnings per share under the two-class method. These participating securities had a negligible impact on earnings per share.

11. 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 and nine months ended September 30, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
		(In thousands)
Net Income (Loss)		$	1,821			$	4,222			$	18,788			$	(402,683	)
Other comprehensive income (loss), net of tax:
Change in fair value of derivative hedging instruments, net of taxes			24,767				6,921				81,780				53,797
Derivative contracts settled and reclassified, net of taxes			(6,975	)			(35,717	)			(15,650	)			(121,780	)
Foreign currency translation adjustment			95				—				(68	)			—
Change in accumulated other comprehensive income (loss)			17,887				(28,796	)			66,062				(67,983	)
Comprehensive income (loss)		$	19,708			$	(24,574	)		$	84,850			$	(470,666	)

12. 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 September 30, 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.

		Fair Value Measurements Using:
						Significant
		Quoted Prices				other				Significant
		in Active				Observable				Unobservable
		Markets				Inputs				Inputs				Total Fair								Carrying
		(Level 1)				(Level 2)				(Level 3)				Value(1)				Netting				Amount
		(In thousands)
As of September 30, 2010
Natural gas and crude oil fixed price swaps — Short Term		$	—			$	52,066			$	—			$	52,066			$	(16,586	)		$	35,480
Natural gas and crude oil fixed price swaps — Long Term			—				35,932				—				35,932				(6,179	)			29,753
Total Derivative Financial Instruments		$	—			$	87,998			$	—			$	87,998			$	(22,765	)		$	65,233
As of December 31, 2009
Natural gas and crude oil fixed price swaps — Short Term		$	—			$	(27,708	)		$	—			$	(27,708	)		$	2,239			$	(25,469	)
Natural gas and crude oil fixed price swaps — Long Term			—				(16,562	)			—				(16,562	)			2,447				(14,115	)
Total Derivative Financial Instruments		$	—			$	(44,270	)		$	—			$	(44,270	)		$	4,686			$	(39,584	)