UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Mariner Energy, Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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MARINER ENERGY, INC.

One Briar Lake Plaza
2000 West Sam Houston Parkway South, Suite 2000
Houston, Texas 77042
(713) 954-5500

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 11, 2009

 

 

To the Stockholders of Mariner Energy, Inc.

 

The annual meeting of holders of common stock of Mariner Energy, Inc. will be held on Monday, May 11, 2009 at 10:30 a.m., Central Time, at One BriarLake Plaza, 2000 West Sam Houston Parkway South, Suite 2000, Houston, Texas 77042, for the following purposes:

 

 

The board of directors of Mariner has determined that owners of record of Mariner’s common stock at the close of business on March 17, 2009 are entitled to notice of, and have the right to vote at, the annual meeting and any reconvened meeting following any adjournment or postponement of the meeting.

 

By Order of the Board of Directors
of Mariner Energy, Inc.

Teresa G. Bushman,
Senior Vice President, General Counsel,
and Secretary

 

Houston, Texas

April 3, 2009

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Stockholders to be Held on May 11, 2009. The proxy statement and annual report to stockholders are available at http://www.proxydocs.com/me.

 

 

 

MARINER ENERGY, INC.

One Briar Lake Plaza
2000 West Sam Houston Parkway South, Suite 2000
Houston, Texas 77042
(713) 954-5500

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

 

MAY 11, 2009

 

This proxy statement is furnished to stockholders of Mariner Energy, Inc. Our board of directors is soliciting proxies for use at our annual meeting of stockholders to be held Monday, May 11, 2009, at 10:30 a.m. Central Time, and any reconvened meeting following any adjournment or postponement of the meeting. The annual meeting will be held at Mariner’s headquarters at the address above.

 

We are first sending to stockholders this proxy statement, and accompanying proxy card and Notice of Annual Meeting of Stockholders on or about April 8, 2009.

 

ACTION TO BE TAKEN AT ANNUAL MEETING

 

When you have appropriately specified how your proxy should be voted, the proxy will be voted accordingly. Unless you otherwise specify in your proxy, your proxy will be voted:

 

(1) FOR the election as directors the nominees listed under “Election of Directors,”

 

(2) FOR the ratification of the selection of Deloitte & Touche LLP as Mariner’s independent auditors for the fiscal year ending December 31, 2009,

 

(3) FOR the approval of the Mariner Energy, Inc. Third Amended and Restated Stock Incentive Plan, and

 

(4) at the discretion of the proxy holders, either FOR or AGAINST any other matter or business that may properly come before the annual meeting. Our board of directors is not currently aware of any such other matter or business. If other matters are properly brought before the meeting or any adjourned meeting, your proxies will have discretion to act on those matters or to adjourn the meeting, according to their judgment.

 

QUORUM AND VOTING

 

Quorum

 

A quorum of stockholders is necessary to have a valid meeting of stockholders. The presence in person or by proxy of the holders of a majority of the outstanding shares of our common stock is necessary to constitute a quorum at the annual meeting. Shares that are not voted will not count for purposes of calculating a quorum. Abstentions and broker “non-votes” count as present for establishing a quorum. A broker “non-vote” occurs on an item when a broker is not permitted to vote on that item without instructions from the beneficial owner of the shares and no instructions are given. We expect that, in the event that a quorum is not present at the meeting, the meeting will be adjourned or postponed to solicit additional proxies.

 

Required Vote

 

You are a stockholder of record if your shares of our common stock are held in your name on the records of our stock transfer agent and registrar, The Continental Stock Transfer & Trust Company. Only stockholders of record of our common stock at the close of business on March 17, 2009, the record date for this annual meeting, are entitled to receive notice of, and have the right to vote at, the annual meeting and any reconvened

meeting following any adjournment or postponement of the meeting. On the record date, 90,048,906 shares of our common stock were issued and outstanding and entitled to vote at the meeting.

 

Stockholders of record of our common stock on the record date are each entitled to one vote per share on the proposals. With respect to proposals to be voted upon at the annual meeting:

 

 

Voting

 

Stockholders of record may effect voting of their stock by any of the following methods:

 

 

The Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
Facsimile (212) 509-5152; or

 

 

If your shares are held of record in the name of a broker, bank or other fiduciary, only the broker, bank or other fiduciary may vote your shares by proxy or in person at the meeting. Brokers currently have discretion to vote in the election of directors and ratification of the selection of our independent auditors. A broker therefore can vote those of your shares held in its name on those matters in its discretion unless you instruct the broker how to vote your shares or obtain a proxy from the broker to vote at the meeting.

 

Brokers do not have discretion to vote upon approval of our Third Amended and Restated Stock Incentive Plan, and a bank or other non-broker fiduciary may not have discretion to vote those of your shares that may be held of record in its name on this or other meeting matters. In these cases, your shares will not be voted unless you instruct the broker or fiduciary how to vote your shares or obtain a proxy from the broker or fiduciary to vote at the meeting.

 

You may revoke your proxy at any time before your proxy is voted. To revoke your proxy, you can deliver a later dated proxy using any of the methods listed above, or you can deliver written notice of revocation to The Continental Stock Transfer & Trust Company at the above address. You also can attend the meeting, withdraw your proxy and vote your shares personally. Your attendance at the meeting will not constitute automatic revocation of your proxy. If your shares are held in the name of a broker, bank or other

fiduciary and you have directed the record holder to vote your shares, you should instruct the record holder to change your vote or obtain a proxy from the broker, bank or other fiduciary to do so yourself.

 

Internet and telephone voting will close at 7:00 p.m. Eastern time on the day before the meeting. Thereafter, voting (including revocations of proxies) can be made by mail or facsimile received before the meeting, or in person at the meeting.

 

Proxies received at or before the meeting will be counted in the vote on the approval of the proposals.

 

Proxy Solicitation

 

We will bear the entire cost of soliciting proxies from stockholders. In addition to solicitation by mail, our directors, officers and employees may also solicit proxies from stockholders by telephone, facsimile or in person. We also will make arrangements with brokerage houses and other custodians, nominees and fiduciaries to send the proxy materials to beneficial owners. Upon request, we will reimburse those brokerage houses and custodians for their reasonable expenses in so doing.

 

We have retained Morrow & Co., LLC to provide advice and to aid in the solicitation of proxies from our stockholders. We will pay Morrow a fee of $5,500, plus $5.00 per stockholder contact, as compensation for its services, and reimburse Morrow for its related out-of-pocket expenses.

 

ELECTION OF DIRECTORS

 

The board of directors of Mariner currently is composed of six directors. The following table sets forth the names and ages (as of March 17, 2009) of the individuals who are the directors of Mariner whose term of office is expected to continue after this annual meeting, including directors standing for reelection. All directors are elected for terms in accordance with their class, as described below. There are no family relationships among any of our directors or executive officers.

 

 

Our certificate of incorporation and bylaws provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, stockholders elect a portion of our board of directors each year. Class I directors’ term expire at this annual meeting of stockholders, and Class II and Class III directors’ terms expire at the annual stockholders meeting to be held in 2010 and 2011, respectively. At each annual meeting of stockholders, the successors to the class of directors whose terms then expire will be elected to serve from the time of election until the third annual meeting following election.

 

Our bylaws provide that the authorized number of directors to constitute the whole board of directors may be changed by resolution duly adopted by the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors. Vacancies and newly created directorships may be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum.

 

Nominees for Election as Director

 

Information concerning the persons nominated for election as directors follows. Our board of directors recommends a vote FOR the election of these nominees.

Nominees for Election as a Class I Director to Serve until the Annual Meeting in 2012:

 

Bernard Aronson — Mr. Aronson has been a director since March 2004. He is a founding partner of ACON Investments, a private equity fund. Prior to founding ACON Investments in 1996, Mr. Aronson was International Advisor to Goldman Sachs & Co. for Latin America from 1994 to 1996. From 1989 through 1993, Mr. Aronson served as Assistant Secretary of State for Inter-American Affairs. He is a member of the Council on Foreign Relations. Mr. Aronson serves on the boards of directors of Liz Claiborne, Inc. and Royal Caribbean International Inc., each of which is publicly traded, and Global Hyatt Corporation and Chroma Oil & Gas, LP.

 

H. Clayton Peterson — Mr. Peterson has been a director since March 2006. During his 33-year career with Arthur Andersen, he specialized in audits of oil and gas companies. Most recently, from January 2000 to September 2002, Mr. Peterson was Managing Partner of the Denver office of Arthur Andersen and Regional Managing Partner of the audit practices of Arthur Andersen in Tulsa, Oklahoma City and Dallas. Since September 2002, Mr. Peterson has been a business consultant, including to the Estate of Kim Magness from August 2003 to August 2006. He has been a member of the board of directors of RE/MAX International, Inc. since May 2005 and is co-chair of its audit committee.

 

Directors Remaining in Office

 

Information regarding the members of our board of directors who do not stand for reelection this year and whose term continues after this annual meeting follows:

 

Class II Directors who Serve until the Annual Meeting in 2010:

 

Alan R. Crain, Jr. — Mr. Crain has been a director since April 2006. He is Senior Vice President and General Counsel of Baker Hughes Incorporated and has served in that capacity since October 2000. He was Executive Vice President, General Counsel and Secretary of Crown, Cork & Seal Company, Inc. from 1999 to 2000. He was Vice President and General Counsel from 1996 to 1999, and Assistant General Counsel from 1988 to 1996, of Union Texas Petroleum Holdings, Inc.

 

John F. Greene — Mr. Greene has been a director since August 2005. He served as Executive Vice President of Worldwide Exploration, Production and Natural Gas Marketing and as a corporate director at Louisiana Land & Exploration Company before his retirement in 1995. Prior to joining Louisiana Land & Exploration Company, Mr. Greene was the President and Chief Operating Officer of Milestone Petroleum, Inc. (later known as Burlington Resources, Inc.) from 1981 to 1985. Mr. Greene served as a director and member of the compensation committee of Basin Exploration, Inc. from 1996 through 2001. Mr. Greene began his industry career with Conoco in 1970 after serving in the United States Navy from 1963 until 1968. He is a partner and director of the Shoreline Companies and Leaf River Resource Corporation.

 

Class III Directors who Serve until the Annual Meeting in 2011:

 

Jonathan Ginns — Mr. Ginns has been a director since March 2004. He is a founding partner of ACON Investments, a Washington, D.C. based private equity investment firm formed in 1996. Mr. Ginns serves on the board of directors of the The Optimal Group, which is publicly traded, and Signal International, LLC, Milagro Exploration, LLC and Chroma Oil & Gas, LP.

 

Scott D. Josey — Mr. Josey has served as Chairman of the Board since August 2001. Mr. Josey was appointed Chief Executive Officer of Mariner in October 2002 and President in February 2005. From 2000 to 2002, Mr. Josey served as Vice President of Enron North America Corp. and co-managed its Energy Capital Resources group. From 1995 to 2000, Mr. Josey provided investment banking services to the oil and gas industry and portfolio management services. From 1993 to 1995, Mr. Josey was a Director with Enron Capital & Trade Resources Corp. in its energy investment group. From 1982 to 1993, Mr. Josey worked in all phases of drilling, production, pipeline, corporate planning and commercial activities at Texas Oil and Gas Corp. Mr. Josey is a member of the Society of Petroleum Engineers and the Independent Producers Association of America.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information as of March 17, 2009 (except as otherwise indicated) with respect to the beneficial ownership of Mariner’s common stock by (i) 5% stockholders, (ii) directors, (iii) each of our executive officers named under the caption “Executive Compensation” below, and (iv) current executive officers and directors as a group. As used in the footnotes to the table, “Ownership Date” means March 17, 2009.

 

Unless otherwise indicated in the footnotes to this table, each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 

 

 

 

 

 

Equity Compensation Plan Information

 

The following table summarizes information about our equity compensation plans as of December 31, 2008.

 

 

 

 

Stock Incentive Plan

 

Our Stock Incentive Plan has been approved by our stockholders and is proposed to be further amended and restated at this annual meeting. Please refer to “Proposal to Amend Stock Incentive Plan” below. The Stock Incentive Plan is intended to encourage our directors, officers and other employees to acquire or increase an equity interest in Mariner and to provide a means whereby they may develop a sense of proprietorship and personal involvement in our development and financial success. The Stock Incentive Plan also is designed to enhance our ability to attract and retain the services of individuals who are essential for our growth and profitability. Awards to participants under the Stock Incentive Plan may be made in the form of incentive stock options, non-qualified stock options or restricted stock. The compensation committee of our board of directors determines participants to whom awards are granted, the type or types of awards granted to a participant, the number of shares covered by each award, the purchase price, conditions and other terms of each award. Our chief executive officer may make recommendations to the committee regarding awards to other executives and employees.

 

A total of 6.5 million shares of our common stock are subject to the Stock Incentive Plan. No more than 2.85 million shares issuable upon exercise of options or as restricted stock can be issued to any individual. As of December 31, 2008, all non-employee directors and all executive officers had been granted awards under the Stock Incentive Plan.

 

The compensation committee intends that in any given year, the aggregate awards made to employees and directors under the Stock Incentive Plan not result in dilution to existing stockholders in excess of two percent, and that in any given rolling seven-year period, the cumulative equity awards, less forfeitures, not result in dilution in excess of 10%. Aggregate grants during each of 2008 and 2007 under the Stock Incentive Plan constituted approximately two percent and one percent of shares of our common stock outstanding as of December 31, 2008 and 2007, respectively.

 

CORPORATE GOVERNANCE

 

Availability of Corporate Governance Materials

 

Our board of directors and committees of the board have adopted a number of committee charters and other materials relating to our corporate governance, many of which are discussed in this proxy statement. The following governance materials adopted by our board of directors or board committees are available free of charge on our website at www.mariner-energy.com:

 

 

These materials as well as our certificate of incorporation and bylaws, as each may be amended or restated from time to time, are available in print, free of charge, by contacting the corporate secretary at our principal executive offices at the address on the first page of this proxy statement.

Corporate Governance Guidelines

 

Our common stock is listed on the New York Stock Exchange (NYSE). Our board of directors has adopted Corporate Governance Guidelines that give effect to the NYSE’s requirements related to corporate governance and various other corporate governance matters. These guidelines provide a framework for our corporate governance initiatives and cover topics such as director qualifications and selection, board composition, director responsibilities, director compensation, board and committee self-evaluations, and management succession planning.

 

Code of Business Conduct and Ethics

 

Our board of directors has adopted a Code of Business Conduct and Ethics, which is designed to help officers, directors and employees resolve ethical issues in an increasingly complex business environment. The Code of Business Conduct and Ethics is applicable to all of our officers, directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions. The Code of Business Conduct and Ethics covers topics such as conflicts of interest, confidentiality of information, fair dealing, protection of corporate opportunities, proper use of our assets, compliance with laws and regulations, and prompt reporting of illegal or unethical behavior.

 

Waivers from our Code of Business Conduct and Ethics are discouraged, but any waivers from the Code of Business Conduct and Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions, or any other executive officer or director must be approved by the nominating and corporate governance committee of our board of directors, which is composed solely of directors whom the board has determined are independent of management. Any waiver from, or substantive amendment to, our Code of Business Conduct and Ethics that applies to our directors or executive officers (including the principal executive officer, principal financial officer, principal accounting officer or controller and other persons performing similar functions) either will be posted on our website at www.mariner-energy.com or filed with the Securities and Exchange Commission (SEC) on a Form 8-K, in each case, within four business days after any such waiver or amendment.

 

Independent Directors

 

The NYSE requires that a majority of directors be “independent directors,” as defined in the NYSE corporate governance standards. Generally, a director does not qualify as an independent director if the director (or in some cases, members of the director’s immediate family) has, or in the past three years has had, certain material relationships or affiliations with Mariner, its external or internal auditors, or other companies that do business with us. To assist it in making determinations of independence, our board of directors has adopted categorical standards as permitted by the NYSE corporate governance standards. A relationship a director has with Mariner falls within these categorical standards if it:

 

 

Our board of directors has affirmatively determined that five of our six current directors have no other direct or indirect material relationships with Mariner and therefore are independent directors on the basis of the NYSE corporate governance standards and an analysis of all relevant facts and circumstances specific to each director. The independent directors are Bernard Aronson, Alan R. Crain, Jr., Jonathan Ginns, John F. Greene, and H. Clayton Peterson. Except as disclosed below, none of the directors whom our board has determined are independent has any other relationships with Mariner. Our board of directors has carefully

reviewed each relationship discussed below and unanimously determined (with the affected director abstaining) that such relationship is not material.

 

Bernard Aronson and Jonathan Ginns.  During 2008, each of Messrs. Aronson and Ginns (through an entity controlled by him) made open market purchases of our 8% Senior Notes due May 15, 2017 (the “Notes”) which are described in more detail below under “Transactions with Related Persons — 8% Senior Notes due May 15, 2017.” Mr. Aronson purchased $335,000 and the entity controlled by Mr. Ginns purchased $365,000 in aggregate principal amount of the Notes. Interest payable directly or indirectly to each director in respect of these Notes is less than $30,000 a year.

 

Our board of directors has determined that the purchases and resulting Note ownership do not involve material relationships, and that Messrs. Aronson and Ginns remain independent. In making these determinations, the board considered that the purchases were made in the open market in arms-length transactions that did not involve Mariner or its management. The purchases resulted in ownership of Notes amounting to substantially less than one percent of the aggregate principal amount of Notes outstanding. Our obligations in respect of the Notes are governed by an existing indenture entered into in April 2007 — long before the subject purchases — and administered for the noteholders by a third-party trustee. Since the amount of Notes owned is less than one percent of the aggregate principal amount of Notes outstanding, Messrs. Aronson and Ginns have immaterial and non-controlling voting power under the indenture.

 

Alan R. Crain, Jr. Mr. Crain is an executive officer of Baker Hughes Incorporated. Mariner purchased products and services in the ordinary course of business from Baker Hughes in each of its last three fiscal years ended December 31, 2008, 2007 and 2006. Our board of directors has determined that this relationship is not material. In making this determination, the board considered that the annual amount paid by Mariner to Baker Hughes in each of those years was substantially less than one percent of the consolidated gross revenues reported by Baker Hughes for each of those years.

 

Non-Management Director Meetings and Presiding Independent Director

 

Pursuant to the our Corporate Governance Guidelines, our non-management directors meet separately from the other director in regularly scheduled executive sessions following each regularly scheduled board of directors meeting and at such other times as the non-management directors may choose.

 

The independent directors serving on our board of directors have appointed Bernard Aronson to serve as the board’s presiding independent director. During 2008, the independent directors held six meetings without management. Interested parties who wish to communicate with the presiding independent director or the non-management directors as a group should follow the procedures found under “— Stockholder Communications.”

 

Director Nominating Process

 

Stockholders may recommend a director nominee by following the procedures described in our bylaws and Corporate Governance Guidelines, which are summarized below under “— Stockholder Proposals.” Recommendations will be brought to the attention of, and be considered by, the nominating and corporate governance committee. The committee will not alter the manner in which it evaluates candidates, including the minimum criteria described below, based on whether or not the candidate was recommended by a stockholder.

 

Under our Corporate Governance Guidelines and the Nominating and Corporate Governance Committee Charter, the nominating and corporate governance committee establishes selection criteria for board candidates from time to time. It reviews with our board of directors these criteria and the appropriate skills and characteristics required of board members in the context of the then current composition of the board. At a minimum, the nominating and corporate governance committee must be satisfied that each director (1) has business or professional knowledge and experience that will benefit Mariner, (2) is well regarded in the community, with a long-term reputation for honesty and integrity, (3) has good common sense and judgment, (4) has a positive record of accomplishment in present and prior positions, and (5) has the time, energy, interest and willingness to become involved in Mariner and its future. In addition, the committee considers,

among other factors, strategic contacts and involvement in business and civic affairs, and financial and regulatory experience.

 

In the case of an incumbent director whose term is expiring, the committee reviews the director’s overall service during his term, including the quantity and quality of his performance, as well as whether he satisfies NYSE and SEC independence standards. In the case of new director candidates, the committee also considers whether the candidate meets these independence standards and his experience in finance and accounting. Candidates first are interviewed by the nominating and corporate governance committee. If approved, they are interviewed by other board members. Finally, the full board of directors acts upon all final nominations after considering the committee’s recommendations.

 

Based upon this review process, the nominating and corporate governance committee recommended to the board of directors, and the board approved, the nomination of incumbent directors Bernard Aronson and H. Clayton Peterson for reelection to the board at this annual stockholders meeting.

 

The committee has engaged SpencerStuart, an executive search consulting firm, to assist in identifying a potential additional independent director.

 

Stockholder Proposals

 

Our bylaws provide that stockholders seeking to nominate candidates for election as directors at, or bring other business before, an annual meeting of stockholders must provide timely notice of their proposal in writing to the corporate secretary. The stockholder must be a stockholder of record at the time of giving notice and be entitled to vote at the meeting. The notice must satisfy information criteria summarized below.

 

With respect to the nomination of directors, our bylaws provide that to be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices (i) with respect to an election of directors to be held at the annual meeting of stockholders, not later than 120 days before the anniversary date of the proxy statement for the immediately preceding annual meeting of stockholders, and (ii) with respect to an election of directors to be held at a special meeting of stockholders, not later than the close of business on the 10^th day following the day on which notice of the date of the special meeting was first mailed to our stockholders or public disclosure of the date of the special meeting was first made, whichever first occurs. The stockholder’s notice must include (i) as to each director nominee, information required pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, (including the written consent of the person to be named in the proxy statement as a nominee and to serve as a director if elected), and (ii) as to the stockholder giving notice, the stockholder’s name and address (as they appear on Mariner’s books), and the class and number of shares of our capital stock the stockholder beneficially owns. The stockholder also must comply with the Exchange Act and related rules and regulations.

 

In addition to the requirements of our bylaws concerning nomination of directors, the Nominating and Corporate Governance Committee Charter provides that the stockholder’s notice also must include (1) the name and address of the beneficial owner, if any, on whose behalf the nomination is made, (2) the acquisition date, class and number of our shares beneficially owned by the noticing stockholder and any such beneficial owner, (3) any material interest of the stockholder or beneficial owner in the nomination, (4) a representation that the stockholder intends to appear in person or by proxy at the meeting to bring the nomination before the meeting, and (5) whether either the stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of a sufficient number of holders of our voting shares to elect such nominee(s).

 

With respect to other business to be brought before a meeting of stockholders, our bylaws provide that to be timely, a stockholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 120 days before the anniversary date of the proxy statement for the preceding annual meeting of stockholders. The stockholder’s notice must include (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the stockholder’s name and address (as they appear on Mariner’s books), (iii) the acquisition date, class and number of shares of our voting stock the stockholder beneficially owns, (iv) any material interest in such

business, and (v) a representation that the stockholder intends to appear in person or by proxy at the annual meeting to bring the proposed business before the meeting.

 

Stockholder Communications

 

Mariner’s stockholders and other interested persons may communicate with our board of directors, any committee of the board, or any individual director by sending communications to the attention of the corporate secretary at our principal executive offices at the address on the first page of this proxy statement. The corporate secretary will forward the communication to the designated or appropriate committee(s) of the board of directors, the designated director(s), or the Chairman of the Board, as may be applicable.

 

Board Attendance

 

Our Corporate Governance Guidelines provide that all directors are expected to attend all meetings of the board of directors and committees on which they serve. During 2008, the board of directors held 14 meetings. Each director attended at least 75% of the aggregate number of meetings of the board of directors and meetings of committees of the board on which he served. Four directors attended our 2008 annual meeting of stockholders. All directors are requested and encouraged to attend the annual meeting of stockholders.

 

Board Committees

 

Our board of directors has established four standing committees, the audit committee, the compensation committee, the nominating and corporate governance committee, and the executive committee. A current copy of the written charter of each of these committees is available free of charge on our website at www.mariner-energy.com and in print by contacting the corporate secretary at our principal executive offices at the address on the first page of this proxy statement. Information regarding each committee, including membership, function and the number of meetings held during 2008, follows:

 

 

 

A = audit committee financial expert under SEC rules

C = chairman of the committee

F = financially literate under NYSE listing standards

I = independent under NYSE listing standards and SEC rules

 

Audit Committee.  Each of Messrs. Aronson, Crain, Ginns and Peterson (Chairman) is a member of the audit committee and is “independent” under NYSE corporate governance listing standards and SEC rules. In addition, our board of directors has determined that Mr. Peterson is an “audit committee financial expert,” as defined under SEC rules. The board has determined that all members of the audit committee meet the financial literacy requirements of the NYSE corporate governance listing standards. The Audit Committee Report appears under the caption “Audit Committee Report” in this proxy statement. During 2008, this committee met eight times.

 

The audit committee oversees Mariner’s accounting and financial reporting processes, and the annual audit. The audit committee has sole authority to retain, compensate, evaluate and terminate our independent auditors. The audit committee provides assistance to the board of directors in fulfilling its oversight responsibility relating to the integrity of our financial statements, our compliance with legal and regulatory

requirements, the independent auditor’s qualifications and independence, and the performance of our internal audit function. The committee oversees our system of disclosure controls and procedures and system of internal controls regarding financial, accounting, legal compliance and ethics that management and the board of directors have established. In doing so, it is the responsibility of the committee to maintain free and open communication between the committee and our independent auditors, the internal accounting function and our management.

 

Nominating and Corporate Governance Committee.  Each of Messrs. Aronson (Chairman), Crain and Greene serves on the nominating and corporate governance committee and is “independent” under NYSE listing standards and SEC rules. During 2008, this committee met twice.

 

The nominating and corporate governance committee nominates candidates to serve on our board of directors, and nominates directors to serve on the audit committee and compensation committee of the board. The committee is responsible for taking a leadership role in shaping the corporate governance of Mariner. It also is responsible for monitoring a process to assess board effectiveness. The committee oversees our policies and procedures relating to honest and ethical conduct of our directors, officers and employees, including the Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Related Party Transaction Approval Policy. The committee’s policy regarding director candidates nominated by stockholders is described above under “— Director Nominating Process” and “— Stockholder Proposals.”

 

Compensation Committee.  Each of Messrs. Crain, Ginns and Greene (Chairman) serves on the compensation committee and is “independent” under NYSE listing standards and SEC rules. During 2008, this committee met 10 times.

 

The compensation committee reviews the compensation and benefits of our executive officers and non-employee directors, reviews and makes recommendations to the board of directors with respect to our incentive compensation and other stock-based plans, and administers our Stock Incentive Plan. The compensation committee determines and approves, either as a committee or together with other independent directors (as directed by the board), the compensation of our chief executive officer. The committee recommends to the board of directors compensation for our other executive officers. The compensation committee may delegate all or a portion of its duties and responsibilities to a subcommittee of the compensation committee.

 

Executive Committee.  Each of Messrs. Ginns, Josey (Chairman) and Peterson serves on the executive committee. The executive committee may exercise the powers and authority of the Board in managing the business and affairs of the Company when the Board is not in session, subject to our certificate of incorporation, applicable law and any limits on authority determined from time to time by the Board. During 2008, this committee met twice.

 

COMPENSATION OF DIRECTORS

 

Under our Corporate Governance Guidelines and Compensation Committee Charter, the compensation committee of the board of directors annually reviews compensation of our non-employee directors. The compensation committee is to consider that directors’ independence may be jeopardized if their compensation and perquisites exceed customary levels, if we make substantial charitable contributions to organizations with which a director is affiliated, of if we provide indirect forms of compensation to a director or organization with which he is affiliated. The compensation committee from time to time makes recommendations to the board of directors regarding non-employee director compensation, which must be approved by the board. Directors who are employed by us are not separately compensated for their service as directors. No changes have been recommended or made regarding cash compensation for our non-employee directors since 2007.

During 2008, cash compensation of non-employee members of our board of directors was as follows:

 

 

Each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board or committees.

 

As reflected in the following table, total non-employee director compensation in 2008 had cash and equity components:

 

2008 Director Compensation Table

 

 

 

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

This discussion explains executive compensation detailed in the tables and other disclosures that follow it. The disclosures contain specific information regarding compensation amounts and terms for each person serving as our principal executive officer and principal financial officer during 2008, as well as our three other most highly compensated executive officers serving as of December 31, 2008. These officers are identified in the “2008 Summary Compensation Table.” We refer to them as the named executive officers or named executives. This discussion addresses the objectives of our executive compensation, elements of compensation, how we determined the amounts reflected in the tables, and related matters. Total direct compensation in respect of 2008, including bonuses and restricted stock grants, and 2009 base salary determinations are expected to be made in April 2009. Accordingly, with respect to those elements of compensation, this discussion is limited to explaining how those determinations are expected to be made.

 

Overview of Objectives and Elements

 

In 2006 our total assets more than tripled, we became a reporting company under the Securities Exchange Act of 1934, and our common stock began trading on the New York Stock Exchange. As part of our evolution in 2006 to a much larger and publicly-traded company, the compensation committee of our board of directors proposed guidelines for compensating our senior executive officers. These guidelines continue to guide executive compensation considerations.

 

The main objective of the guidelines is to compensate our senior executives competitively and in a manner responsive to corporate performance so that we may attract, motivate and retain executives who can foster achievement of our business goals. The guidelines focus on total direct compensation and contemplate three primary components of an executive’s annual compensation:

 

 

Total direct compensation is expected to be determined primarily by reference to our performance against a peer group. It is intended to link executive compensation to our performance and therefore help align the interests of our executives with those of our stockholders. Our executives also receive benefits generally available to all of our regular full-time employees and minimal perquisites. In 2008, our executives and other senior personnel received both the annual equity award contemplated by the guidelines and an additional extraordinary restricted stock grant under our Stock Incentive Plan. The extraordinary grants are the long-term performance-based restricted stock awards discussed below and summarized in note (1) to, and indicated for named executives in the corresponding “Equity Incentive Plan Awards” column in, the “2008 Grants of Plan-Based Awards.”

The compensation committee’s guidelines for compensating all of our senior executives are consistent with guidelines for compensating our chief executive officer contained in our Corporate Governance Guidelines and Compensation Committee Charter. The compensation committee is to consider the performance of the chief executive officer, Mariner’s performance and relative stockholder return, compensation paid to chief executive officers of comparable companies, compensation given to our chief executive officer in past years, and recommendations of independent consultants, if any.

 

Worldwide Financial Crisis Impact on Compensation and Risk Assessment

 

The committee is considering compensation of our executives in light of the world-wide economic recession, including the unprecedented decline in oil and gas prices since July 2008. As discussed further below, we performed well above average in 2008 relative to our peers on metrics considered by the committee. The committee anticipates this will be reflected in total direct compensation for our executives in respect of 2008. In 2009, the prospect of continued low commodity prices and persistent high service costs has constrained the industry’s capital reinvestment and undermined expected rates of return in new projects. In order to manage our capital program within expected cash flows, we tentatively have reduced our 2009 capital budget by more than 50% from 2008. The committee anticipates that the current economic recession will modestly impact base salaries for 2009. To the extent that adverse macroeconomic conditions or our reduced capital budget impact our performance in 2009, they may affect the aggregate amount of total direct compensation for 2009 anticipated to be determined in 2010. The committee does not expect adverse macroeconomic conditions, including their impact on our stock price, to result in changes to the objectives, guidelines or mechanics for determining executive compensation.

 

An example of the impact of adverse macroeconomic conditions on compensation involves our 2008 long-term performance-based restricted stock awards. In June and July 2008, the compensation committee, in consultation with its compensation consultant, Hay Group, recommended and our board of directors authorized these awards to officers and other senior employees. These awards vest over a longer period (five to seven years) than the typical three to four year vesting of our annual awards and unlike the annual awards, do not begin vesting until our stock price reaches a sustained $38.00 and $46.00 per share. During 2008, our stock price came to within approximately $3.00 and $11.00 of the threshold prices necessary to trigger initial vesting of these awards. By year-end 2008, our stock price was almost $30.00 less than the initial per share vesting threshold due to the significant decline in our stock price that paralleled declines in industry stock prices and the market generally. The committee intended these additional longer-term awards to incentivize and reward value creation, help retention, and compensate for our lack of a retirement program. The subsequent unanticipated decline in our stock price and depressed industry conditions have frustrated the committee’s goals due to the reduced likelihood of vesting in a time frame that may meaningfully reward value creation. Nevertheless, consistent with aligning the interests of our executives with those of our stockholders and the retirement aspect of the awards, the committee does not expect to adjust them. The 2008 long-term performance-based restricted stock awards are an additional extraordinary element of total direct compensation. They are expected to have minimal impact on 2008 total direct compensation considerations due to the contingent nature of their actual realization, particularly in light of depressed industry and broader market stock prices.

 

Our board of directors considers that our compensation, as well as policies and procedures identified above in “Corporate Governance” and below in “Transactions with Related Persons,” are intended to mitigate incentives to take excessive risks. Our board approves our capital budget and material transactions, the board’s executive committee approves our production hedging activities pursuant to guidelines approved by the board, and the board’s compensation and nominating and corporate governance committees consider overriding royalty interest programs in which some employees and executives participate (see “Transactions with Related Persons — Overriding Royalty Interests”). The compensation committee considers that the three-year period it uses in measuring our performance relative to that of our peers and the three to four-year vesting of annual equity awards helps disincentivize excessive risk taking by encouraging a focus on sustainable and sustained performance.

Role of Compensation Consultants

 

The compensation committee has sole authority to retain and terminate any compensation consulting firm. The committee independently retains a compensation consultant to assist the committee in its deliberations regarding executive compensation. Since 2006, consultants to the committee have provided independent, third-party executive compensation reviews, including peer group comparative analyses of total direct compensation and its elements. The consultants also have advised the committee regarding implementation in a given year of its executive compensation guidelines, based largely upon the committee’s request for advice to achieve the objectives outlined above.

 

The consultants have included Longnecker & Associates in 2006, Mercer Human Resource Consulting, Inc. in 2006 and 2007, and Hay Group, Inc. in 2007 and 2008.

 

The committee asked Hay Group for advice regarding base salary, annual bonus, nature and amount of long-term incentives, retirement benefits, perquisites, severance and change-of-control provisions, performance measures for near and long-term incentives, peer group size and constituents, and market data. Hay Group evaluated our executive compensation and executive employment agreements. It recommended continued focus on total direct compensation and our goal to achieve the compensation objectives outlined above while remaining competitive with the external market. It recommended no material changes to existing arrangements.

 

Role of CEO

 

The compensation committee typically provides to our chief executive officer guidelines regarding compensation of the other named executive officers based upon its deliberations concerning data and recommendations from the compensation consultant. These guidelines usually include information regarding the compensation of the four or five most highly paid executives of our peer group companies. Our chief executive officer then makes recommendations to the compensation committee regarding total direct compensation for each of our other named executives, including base salaries, bonuses and long-term incentive grants. The compensation committee considers, discusses, and as appropriate, modifies and takes action on such recommendations. The compensation committee determines and approves, either as a committee or together with other independent directors (as directed by the board), the compensation of our chief executive officer. The committee recommends to the board of directors compensation for our other executive officers.

 

Tally Sheets

 

In considering executive compensation for 2008, the compensation committee analyzed tally sheets prepared by Hay Group with our assistance. Tally sheets were prepared for each of our executive officers covering each year from 2004 through 2008. The tally sheets presented the dollar amount of each component of compensation, including annual base salary, annual bonus, the grant date fair value of equity awards, our annual cost of benefits, and perquisites. The tally sheets included information about equity grants made during those years, including type, amount, vesting status, values and unrealized gains. The tally sheets also presented potential payments upon employment termination or change of control under the executive employment agreements and our equity plans.

 

The overall purpose of the tally sheets was to aggregate on a uniform basis all of the elements of actual and potential executive compensation. The compensation committee concluded that compensation of the named executives was consistent with its expectations. In respect of total direct compensation for 2008, the committee expects to use an essentially formulaic application of its guidelines, relying primarily on peer group analyses outlined in this compensation discussion and analysis.

 

Peer Group

 

The peer group is selected annually by the compensation committee with the assistance of an independent compensation consultant. Members of the peer group used in determining compensation in respect of 2008 are publicly-traded independent oil and gas companies selected based on annual revenue, market capitalization,

total assets, and areas of operation. The committee anticipates that these will continue to be relevant criteria in selecting constituents of the peer group from time to time, and that peer group constituents may change if selection criteria change or circumstances particular to peers or Mariner change. While we anticipate that there will be overlap in the peer groups used for purposes of executive compensation and the stock performance graph in our annual report on Form 10-K, we also anticipate that the criteria for the stock performance graph primarily will focus on publicly-traded independent oil and gas companies with Gulf of Mexico operations, as well as take into account revenue, capitalization and asset considerations.

 

For purposes of considering in 2008 base salaries for 2008 and total direct compensation in respect of 2007, including annual bonuses and restricted stock awards reported in the “2008 Grants of Plan-Based Awards” table, the peer group was: ATP Oil & Gas Corporation; Bois d’Arc Energy, Inc.; Cimarex Energy Co.; Comstock Resources, Inc.; Energy Partners, Ltd.; Newfield Exploration Company; Plains Exploration & Production Company; Stone Energy Corporation; St. Mary Land & Exploration Company; Swift Energy Company; and W&T Offshore, Inc.

 

With the exceptions of Bois d’Arc Energy, Inc., which was acquired by peer group member Stone Energy Corporation in 2008, and the addition of McMoRan Exploration Co., the same peer group is being used for purposes of considering base salaries for 2009 and total direct compensation in respect of 2008, including annual bonuses and restricted stock awards. The compensation committee is considering comparative peer group data provided by Hay Group for 2008 annual bonuses and equity awards and 2009 base salaries.

 

Total Direct Compensation

 

As a guideline, the compensation committee recommends that total direct compensation target the same percentile level as the percentile ranking that Mariner achieves when its performance is compared to the peer group. In making this comparison, the committee expects to take into account Mariner’s performance against its peers as of the end of the most recently completed fiscal year in certain areas, appropriately weighted. In determining the measurement period, the committee has considered that the performance of our business may be influenced by factors occurring over a period greater than one year. For example, results of capital expenditures made during a year to acquire leasehold, or to drill or develop properties may not be reflected in proved reserve growth or production until a later year. The committee also has considered that a longer measurement period may foster executive focus on sustained improvements in corporate performance and disincentivize excessive risk taking. Accordingly, the committee has lengthened the measurement period and is measuring 2008 performance metrics over the three-year period ended December 31, 2008. The committee anticipates that it will continue to use a three-year measurement period.

 

The metrics used to determine total direct compensation have evolved since 2006. Although the six metrics used in 2008 have been streamlined to the three outlined below, both sets of metrics yielded essentially the same results. In considering total direct compensation for 2008, the committee is using the following three metrics, weighted equally (references to appreciation, three-year, or growth compare results over a three-year period as of and for the years ended December 31, 2008 and 2005):

 

 

Stock price appreciation (as of December 31, 2005, the last trade of Mariner’s common stock on PORTAL^tm reported by Friedman, Billings, Ramsey & Co., Inc. was at $17.75 per share on December 23, 2005).

 

 

The recycle ratio compares operating cash flow per unit of production to costs incurred per unit of production replaced. The committee uses this metric as an indicator of the return for each dollar of capital invested. The recycle ratio is calculated by dividing one fraction (netback divided by production (MMcfe)) by another fraction (total costs incurred in property acquisition, exploration and development activities, divided by net additions to estimated proved reserves (MMcfe)). Netback is oil and gas sales minus the sum of lease operating costs, severance and ad valorem taxes, and transportation expense. For netback components, as well as production, total costs and estimated proved reserve additions,

please refer to the indicated notes to the consolidated financial statements included in our annual reports on Form 10-K for the years ended December 31, 2008, as amended (notes 15 and 16), and 2007 (notes 14 and 15) filed with the SEC.

 

 

Operating cash flow is calculated by netting cash flow from operating activities against changes in operating assets and liabilities. For these components, please refer to the consolidated statements of cash flows in our annual reports on Form 10-K for the years ended December 31, 2008, as amended, and 2007 filed with the SEC.

 

To illustrate, if after applying these metrics, Mariner ranks in the 75th percentile in weighted average performance against the peer group, the compensation committee would consider whether our total direct compensation for an executive officer’s position should be calculated at the 75th percentile of the total direct compensation for a comparable position with our peers.

 

In respect of 2008, after applying these metrics, the compensation committee determined, in consultation with Hay Group, that Mariner ranked third and at approximately the 70th percentile in weighted average performance against the 11-member peer group which excludes Mariner. We anticipate that total direct compensation in respect of 2008 for our executive officers will be targeted at the 70th percentile of the total direct compensation for comparable positions within our peer group subject to individual and team performance considerations.

 

Salary

 

Base salary is intended to compensate core competence in the executive role relative to skills, experience and contributions to Mariner. Base salary provides fixed compensation determined by reference to competitive market practice.

 

The compensation committee targets an executive’s base salary at approximately the 50th percentile level of peer group salaries comparable to his or her position. The committee believes that while salaries should be competitive, they are not the principal motivator for sustained performance. The 2008 base salaries of the executives included in the “2008 Summary Compensation Table” were established primarily on this basis, and we anticipate that 2009 base salaries will be similarly established. This approach resulted in base salary increases in 2008 from 2007 levels of approximately 9% for Mr. Josey, 4% for Messrs. Karnes, van den Bold and Hansen, and 3% for Mr. Polasek.

 

Bonus

 

The annual performance bonus is intended to link executive compensation with corporate and individual performance. It provides annual performance-based cash incentive compensation to motivate performance that may further our long-term success. We anticipate that executive bonuses in respect of 2008 will be determined in April 2009.

 

The compensation committee’s guidelines contemplate that bonuses be determined by two calculations. The first calculation, which determines the maximum bonus opportunity, involves corporate performance. The second calculation, which determines the extent to which an executive may realize the bonus opportunity, involves individual or team performance. An individual’s performance may be measured against a set of personal goals that may be established annually in consultation among the executive, our chief executive officer and the committee, or in the case of the chief executive officer, in consultation with the committee, and in all cases, approved by the committee. Team performance may involve the entire executive management team or segments of it by operational function. Performance weighting and metrics used to measure corporate and individual or team performance may vary from year to year and may be proposed in advance or considered at the time of total direct compensation considerations for a given year, as is expected to be the case in determining in April 2009 total direct compensation for 2008.

In respect of 2008, we expect corporate performance will be measured by reference to the percentile level at which Mariner ranked against its peers. After applying the criteria used to determine total direct compensation outlined above, Mariner ranked at approximately the 70th percentile in weighted average performance against the peer group, yielding a bonus opportunity at this level of peer group bonuses. In considering individual and team performance, the committee intends to assess the degree to which we achieved budgeted operating cash flow, capital expenditures and production; strategic diversification of assets, including expansion in the Permian Basin and Gulf of Mexico shelf; hydrocarbon discoveries; and increased efficiency in complying with Section 404 of the Sarbanes-Oxley Act of 2002.

 

Equity Award

 

The long-term incentive portion of total direct compensation is intended to foster executive retention as well as further link executive compensation with corporate performance. The compensation committee expects that long-term incentives will continue to be in the form of restricted stock awards under our Stock Incentive Plan which is discussed above under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information” and below under “Proposal to Amend Stock Incentive Plan.” The awards are expected to vest over three to four years in equal annual increments, assuming continued employment, except for certain acceleration events described further below under “— Employment, Severance and Change-of-Control Arrangements.” Assuming that corporate performance is reflected in the value of our common stock and given that restricted stock awards vest over time, the awards may foster executive retention and encourage executives to focus on, and enable them to share in, sustained improvements in corporate performance.

 

The compensation committee considers allocating to equity awards the difference between total direct compensation and the sum of salaries and bonuses. The sum of salary and bonus plus the grant date fair value of an equity award would be set at the same percentile level as Mariner’s rank against its peers. For example, if after applying the metrics used to determine total direct compensation outlined above Mariner ranks at the 75^th percentile in weighted average performance against the peer group, the equity award value would be at a level equal to, or greater than the 75^th percentile, depending upon whether the effect of paying salaries at the 50^th percentile is offset through the amount of cash bonus or through the amount of equity awarded, and achieve a sum of salary, bonus and equity award consistent with total direct compensation at the 75^th percentile.

 

The grants indicated in the “All Other Stock Awards” column of the “2008 Grants of Plan-Based Awards” table are restricted stock awards made in respect of 2007 compensation. The compensation committee recommended for each officer, and the board approved, a restricted stock award under the Stock Incentive Plan with a grant date value equal to the difference between total direct compensation and the sum of salary and bonus. The effect of paying salaries at the 50^th percentile was offset through the amount of equity awarded rather than the amount of bonus paid, consistent with a goal of fostering executive focus on long-term corporate performance while achieving 2007 total direct compensation at approximately the 63^rd percentile of our peer group.

 

In determining the 2008 grants made in respect of 2007, the compensation committee considered equity awards of 115% of the difference between total direct compensation and the sum of salaries and bonuses. To determine the number of shares to award, the committee used a targeted gain methodology that was based upon the closing price per share of our common stock on the NYSE on the date of grant, and assumed 10% annual appreciation, a five-year holding period and a four percent discount rate.

 

Although 2008 total direct compensation and, therefore, the annual restricted stock component have not yet been determined, the committee recommended, and the board approved, an initial grant made on January 28, 2009 pending finalization of executive compensation. The final annual grant in respect of 2008 will take these initial grants into account. As noted above, we do not expect the 2008 long-term performance-based restricted stock grants to significantly impact the determination of the size of the annual restricted stock grants or total direct compensation for 2008. The initial grants were made in anticipation that the determination of total direct compensation may be delayed this year and were made at the same time as the

annual non-executive employee grants. They were not based upon any particular performance metric but instead were roughly one half of the value of the annual grant made in 2008. The initial grants are as follows (the closing price per share of our common stock on the NYSE on January 28, 2009 was $10.59):

 

 

Our Insider Trading Policy, which applies to all of our directors, officers and employees, prohibits certain forms of hedging or monetization transactions, such as zero-cost collars and forward sale contracts, in any way measured by or tied to Mariner’s securities.

 

Other Compensation

 

Consistent with our focus on total direct compensation, other compensation available to our executive officers is limited primarily to benefits available to all of our regular full-time employees, minimal perquisites or other personal benefits noted in note (4) to the “2008 Summary Compensation Table,” and termination and change of control benefits negotiated in 2005.

 

Employment, Severance and Change-of-Control Arrangements

 

In consultation with Hay Group, the compensation committee has considered our executive employment agreements, including severance and change-of-control provisions, and proposed no changes at this time. These arrangements are discussed below under “— Employment, Severance and Change-of-Control Arrangements.” The basis for payments in connection with particular severance and change-of-control events primarily are negotiations with the executives. The employment agreements with the named executives originally were negotiated in 2005, except that the agreement with Mr. Karnes was negotiated when he joined us in 2006. From Mariner’s perspective, the 2005 employment agreements were negotiated with a goal of retaining key executives critical to furthering our business objectives at a time when we were contemplating significant transformational transactions. In addition to executive retention considerations, the change-in-control arrangements were designed to help provide continuity of management in the event of an actual or threatened change in control.

 

The terms of outstanding equity grants made to all of our employees under the Stock Incentive Plan provide for accelerated vesting in the event of a change of control and certain employment terminations. As described below under “— Employment, Severance and Change-of-Control Arrangements,” officer employment agreements also provide for such accelerated vesting.

 

Tax and Accounting Treatment of Compensation

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), imposes a $1 million limit on the amount that a public company may deduct for compensation paid to its chief executive officer or any of its four other most highly compensated executive officers employed as of the end of the year. This limitation does not apply to certain performance-based compensation arrangements approved by stockholders. Our Stock Incentive Plan has been approved by our stockholders and we expect performance-based awards under it to be deductible. With the adoption of FAS 123R, we do not expect accounting treatment of differing forms of equity awards to vary significantly and, therefore, accounting treatment is not expected to have a material effect on the selection of forms of equity compensation in the future.

 

We will continue to review our executive compensation practices and seek to preserve tax deductions for executive compensation to the extent consistent with our objective of attracting, motivating and retaining executive talent that can foster achievement of our business goals. We also expect to consider the tax and

accounting impact of various possible compensation programs to balance the potential cost to us with the benefit or value to the executive.

 

Compensation Tables

 

The table below summarizes the total compensation for 2008, 2007 and 2006 of each of the named executive officers for services rendered in all capacities to us.

 

2008 Summary Compensation Table

 

 

 

 

 

 

 

The following tables provide information about equity awards granted to the named executive officers in 2008, outstanding at December 31, 2008, and exercised or vested in 2008.

 

2008 Grants of Plan-Based Awards

 

 

 

 

 

Partial accelerated vesting also occurs upon a qualified retirement and if there is a tax liability upon retirement eligibility with no employment termination. Upon a termination of employment by us without cause or by participant for good reason which occurs after a (i) 100% Qualification Event, one-fifth of 40% of the shares granted plus one-seventh of 60% of the shares granted vests, and (ii) 40% Qualification Event, one-fifth of 40% of the shares granted vests. Shares which do not vest upon a change of control or employment termination are forfeited.

 

 

2008 Outstanding Equity Awards at Fiscal Year-End

 

 

 

 

 

 

2008 Option Exercises and Stock Vested

 

 

 

Employment, Severance and Change-of-Control Arrangements

 

We have employment agreements with our executive officers. Each employment agreement automatically renews for an additional one-year term on each March 2 for Messrs. Josey, Polasek, van den Bold and Hansen, and each October 15 for Mr. Karnes, in each case, unless 90 days’ prior notice is given.

 

The employment agreements provide for a base salary that may be adjusted annually in the sole discretion of Mariner’s Board of Directors and a discretionary annual performance bonus. Discretionary salary adjustments and bonuses are based on market survey data, corporate performance, and the executive’s performance. The agreements also provide for participation in our benefit plans and programs. Mr. Josey’s agreement additionally provides for life insurance equal to two times his base salary.

 

Severance Benefits

 

Under the employment agreements, we agree to provide the following severance benefits if we terminate the executive’s employment without cause or upon his disability, he terminates his employment for good reason, or in the case of Mr. Josey, we do not renew his agreement:

 

 

To be eligible for severance under the employment agreements, the executive must agree in writing to waive and release claims against us arising before termination. He also must keep in confidence and not use our confidential information for two years after termination. If within one year after an executive’s termination our Board of Directors determines cause existed before, on or after the termination, he is ineligible for severance and must return to us any severance paid.

 

The employment agreements define “cause,” “good reason” and “disability” as follows:

 

 

 

 

 

 

 

Change of Control Benefits

 

The employment agreements provide for the following change-of-control benefits:

 

 

 

then he becomes entitled to a lump sum payment equal to 2.99 (for Mr. Josey) or 2.5 (for Messrs. Polasek, van den Bold and Hansen) times the sum of his base salary plus his three-year average annual bonus, less any severance previously paid in respect of our termination without cause or his termination for good reason.

 

If within one year after an executive’s termination our Board of Directors determines cause existed before, on or after the termination, he is ineligible for these change-of-control benefits and must return to us any benefits paid.

 

Under the employment agreements, a “change of control” means:

 

 

 

The merger of our subsidiary with a subsidiary of Forest Oil Corporation on March 2, 2006 resulted in a change of control under then outstanding employment agreements. Each executive officer of Mariner as of March 2, 2006 became entitled to receive a cash payment of $1,000 in exchange for waiving certain rights under his or her employment agreement that otherwise would have applied as a result of the merger. Rights waived included accelerated vesting of restricted stock and options upon the merger, and the right to receive a lump sum cash payment if the officer terminated his or her employment with or without good reason within nine months after the merger.

 

The employment agreements with Messrs. Karnes and Hansen prohibit the executive from soliciting our employees for employment during the year following his termination, except that these non-solicitation provisions cease to apply after a change of control, a termination by us without cause or a termination by the executive for good reason. As a result of the change of control upon the merger of our subsidiary with a subsidiary of Forest Oil Corporation, the non-solicitation provisions of employment agreements with the other named executive officers ceased to apply on March 2, 2006.

Potential Payments Upon Termination or Change of Control

 

The following table estimates the value of the termination payments and benefits that each of our named executive officers would receive if his employment terminated or a change of control occurred on December 31, 2008 under the circumstances shown and making the indicated assumptions. The table excludes (i) amounts accrued through December 31, 2008 that would be paid in the normal course of continued employment, such as accrued but unpaid salary and earned annual bonus for 2008, and (ii) benefits generally available to all of our regular full-time employees.

 

 

 

 

 

COMPENSATION COMMITTEE REPORT

 

The compensation committee of Mariner’s board of directors has reviewed and discussed with Mariner’s management the Compensation Discussion and Analysis included in this proxy statement. Based on these reviews and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this proxy statement.

 

Members of the Compensation Committee:

 

John F. Greene (Chairman)
Alan R. Crain
Jonathan Ginns

 

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such acts.

 

COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION

 

The following directors served on the compensation committee of our board of directors during 2008: Alan R. Crain, Jonathan Ginns and John F. Greene. None of such persons was an officer or employee of Mariner during 2008 or at any time in the past, or had any relationship requiring disclosure under “Transactions with Related Persons” in this proxy statement.

 

TRANSACTIONS WITH RELATED PERSONS

 

Overriding Royalty Interests

 

We have obligations concerning overriding royalty interest (ORRI) arrangements with four of our officers that are summarized below. The nominating and corporate governance committee of our board of directors has approved and ratified these ORRI arrangements pursuant to the Related Party Transaction Approval Policy described below under “— Policies.” The committee considered that our ongoing obligations and the officers’ ongoing rights under these arrangements were established in 2002, that these rights and obligations continue to exist regardless of the relationship of the parties to one another, that these rights and obligations have not had in the last three years and do not have any relationship to the performance of these officers in their capacity as officers or employees of Mariner, and that there were valid business reasons for us to enter into the original arrangements.

 

In 2002, two of our current executive officers, Dalton F. Polasek, Chief Operating Officer, and Judd A. Hansen, Senior Vice President — Shelf and Onshore, received assignments of ORRIs in certain leases acquired by us. A consulting company owned in part by Mr. Polasek was assigned a 2% ORRI from us in four federal

offshore leases as partial consideration for having brought the related prospect to us. With our knowledge and consent, the consulting company subsequently assigned portions of the ORRIs to Mr. Hansen and a company owned by Mr. Polasek. At the time of the assignments, Messrs. Polasek and Hansen served Mariner as officers and consultants but were not employed by Mariner. No payments were made in respect of these ORRIs until 2004. In 2008 and 2007, Mariner paid $41,115 and $77,480, respectively, to each of Messrs. Polasek (through an entity owned by him) and Hansen in respect of these ORRIs. Mariner made no such payments in 2006.

 

We may have obligations under previously terminated employment and consulting agreements to assign additional ORRIs in some of our oil and natural gas prospects to current and former employees and consultants. Cory L. Loegering, Senior Vice President — Deepwater, and Richard A. Molohon, Vice President — Reservoir Engineering, are the only current executive officers who may be entitled to receive ORRIs from time to time under any of these agreements. Mariner made net cash payments to each of Mr. Loegering of $754,037, $638,055 and $493,186 in 2008, 2007 and 2006, respectively, and Mr. Molohon of $568,510, $480,260 and $369,863 in 2008, 2007 and 2006, respectively, in respect of ORRIs assigned from time to time pursuant to an ongoing right to receive such ORRIs that was established in 2002 when these officers ceased participating in our ORRI Incentive Compensation Program.

 

All ORRIs assigned to these parties are excluded from Mariner’s interests evaluated in our reserve report.

 

8% Senior Notes due May 15, 2017

 

In 2007, we sold and issued $300 million aggregate principal amount of our 8% Senior Notes due May 15, 2017 (the “Notes”), all of which remained outstanding as of March 17, 2009 and may trade in the open market. The Notes mature on May 15, 2017 unless we earlier redeem or purchase them. Interest on the Notes is payable by us on May 15 and November 15 of each year. Additional information regarding the Notes is included in note 3 (Long-Term Debt) to Mariner’s consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2008, as amended.

 

During 2008, directors Bernard Aronson and Jonathan Ginns reported to us purchases of Notes in the open market amounting to substantially less than one percent of the aggregate principal amount of Notes outstanding. Mr. Aronson purchased $335,000 in aggregate principal amount of the Notes for which he paid market prices of $162,000 for $300,000 in principal amount and $16,975 for the remaining $35,000 in principal amount. An entity controlled by Mr. Ginns purchased $365,000 in aggregate principal amount of the Notes for which it paid market prices of $162,000 for $300,000 in principal amount and $31,525 for the remaining $65,000 in principal amount. Mr. Aronson and the entity controlled by Mr. Ginns purchased the Notes after November 15, 2008 and no interest was payable or paid to them in 2008 in respect of their Notes. As of March 17, 2009, we had made no payments to Messrs. Aronson or Ginns (or the purchasing entity controlled by him) in respect of the Notes.

 

Our Related Party Transaction Approval Policy described below under “— Policies” preapproves transactions available to our employees generally. The open market purchase of Notes is available to our employees generally, subject, in the case of directors and employees, to compliance with our Insider Trading Policy. Accordingly, open market purchases of Notes by Messrs. Aronson and Ginns are preapproved under the Related Party Transaction Approval Policy. In addition, as discussed above under “Corporate Governance — Independent Directors,” our board of directors has determined that the purchases and resulting Note ownership do not involve material relationships, and that Messrs. Aronson and Ginns remain independent.

 

Policies

 

We recognize that transactions between Mariner and any of its directors or executives can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations other than the best interests of Mariner and its stockholders. Therefore, as a general matter and in accordance with our Code of Business Conduct and Ethics, which applies to our directors, officers and employees, it is Mariner’s preference to avoid such transactions. Nevertheless, we recognize that there are situations where such transactions may be in, or may not be inconsistent with, Mariner’s best interests.

Therefore, the audit committee has adopted a formal policy which requires the nominating and corporate governance committee to review and, if appropriate, to approve or ratify related party transactions.

 

Pursuant to our Related Party Transaction Approval Policy, the nominating and corporate governance committee will review transactions in which Mariner participates, the amount involved is expected to exceed $120,000, and any of our directors or executives, or any holder of more than five percent of our common stock, has a direct or indirect interest. In determining whether to approve a related party transaction, the nominating and corporate governance committee will consider relevant factors, such as:

 

 

Certain transactions have been pre-approved or ratified under the policy, including:

 

 

RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

 

Under the Audit Committee Charter, the audit committee of our board of directors has sole authority to retain, compensate, evaluate and terminate Mariner’s independent auditors. Our independent auditors report directly to the audit committee. The audit committee has selected Deloitte & Touche LLP as Mariner’s independent auditors for the current fiscal year ending December 31, 2009. Although ratification by the stockholders of this selection is not required by law or Mariner’s bylaws, the audit committee believes it is appropriate to seek stockholder ratification of the selection in light of the critical role played by the independent auditors in auditing Mariner’s financial statements and the effectiveness of its internal control over financial reporting. If this selection is not ratified at the annual meeting, the audit committee intends to reconsider its selection of independent auditors for the fiscal year ending December 31, 2009.

 

Our board of directors recommends a vote FOR the ratification of the selection of Deloitte & Touche LLP as Mariner’s independent auditors for the fiscal year ending December 31, 2009.

 

Deloitte & Touche LLP served as Mariner’s independent auditors for the fiscal year ended December 31, 2008. Representatives of Deloitte & Touche are expected to be present at this annual meeting, will have an opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

 

Audit and Non-Audit Fees

 

Audit Fees.  The aggregate fees billed by Deloitte & Touche LLP for professional services rendered for the audit of Mariner’s financial statements for 2008 and 2007, and the reviews of Mariner’s financial statements included in its quarterly reports on Form 10-Q filed with the SEC during 2008 and 2007 were approximately $1,698,500 for 2008 and $1,849,175 for 2007.

 

Audit-Related Fees.  The aggregate fees billed by Deloitte & Touche LLP for assurance and related services that are reasonably related to the performance of the audit or review of Mariner’s financial statements and are not reported above under the caption “Audit Fees” were approximately $135,580 in 2008 and $279,700 in 2007. These services primarily related to the audit of our 401(k) plan and certifications required by our senior secured credit facility in both years, and consultations with us regarding Section 404 of the Sarbanes-Oxley Act of 2002 and registered offerings in 2007.

 

Tax Fees.  Deloitte & Touche LLP billed no fees in 2008 or 2007 for professional services to Mariner for tax compliance, tax advice or tax planning.

 

All Other Fees.  The aggregate fees billed by Deloitte & Touche LLP for professional services provided to Mariner that are not reported above under the captions “Audit Fees” and “Audit-Related Fees” were approximately $166,500 in 2008 and $55,000 in 2007 related to potential acquisition due diligence work. Deloitte & Touche LLP billed no other fees in 2008 or 2007 for products and services it provided to Mariner that are not reported above under the captions “Audit Fees” and “Audit-Related Fees.”

 

Audit Committee Pre-Approval of Audit and Non-Audit Services

 

Under the Audit Committee Charter, the audit committee of our board of directors must approve in advance (1) the retention of independent auditors for the performance of all audit and lawfully permitted non-audit services, and (2) the fees to be paid for such services. The audit committee must pre-approve any audit services and any permissible non-audit services to be provided by our independent auditors on our behalf that do not fall within any exception to the pre-approval requirements established by the SEC. The Audit Committee Charter specifies certain non-audit services that under the Sarbanes-Oxley Act of 2002 cannot be performed by our independent auditors.

 

AUDIT COMMITTEE REPORT

 

The audit committee oversees Mariner’s financial reporting process on behalf of the board of directors. Management is responsible for Mariner’s financial statements and the financial reporting process, including implementing and maintaining effective internal control over financial reporting and for the assessment of, and reporting on, the effectiveness of internal control over financial reporting. The independent auditor is responsible for expressing an opinion on the fairness of the presentation of Mariner’s audited financial statements in conformity with accounting principles generally accepted in the United States. The independent auditor also is responsible for expressing an opinion on the effectiveness of Mariner’s internal control over financial reporting. The audit committee meets with the independent auditor, with and without management present, to discuss the results of the independent auditor’s examinations, its evaluation of Mariner’s internal control over financial reporting and the overall quality of Mariner’s financial reporting.

 

In fulfilling its oversight responsibilities, the audit committee has reviewed and discussed with management and Deloitte & Touche LLP, Mariner’s independent auditor for 2008, Mariner’s audited financial statements for the year ended December 31, 2008. The audit committee has discussed with Deloitte & Touche various matters under applicable auditing standards, including information regarding the scope and results of the audit and other matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA Professional Standards, Vol. 1, AU§ 380), Communication with Audit Committees. The audit committee has received from Deloitte & Touche the written disclosures and letters required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor’s communications with the audit committee, and has discussed with Deloitte & Touche its independence from Mariner and its management. The audit committee also has considered the compatibility of any non-audit services with the auditor’s independence.

 

Based on the review and discussions referred to above, the audit committee recommended to the board of directors, and the board has approved, that the audited financial statements for fiscal 2008 be included in Mariner’s Annual Report on Form 10-K for the year ended December 31, 2008 for filing with the SEC.

 

Members of the Audit Committee

 

H. Clayton Peterson (Chairman)
Bernard Aronson
Alan R. Crain, Jr.
Jonathan Ginns

 

This report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not otherwise be deemed filed under such acts.

 

PROPOSAL TO AMEND STOCK INCENTIVE PLAN

 

We propose to amend our Stock Incentive Plan and as so amended, restate it as the Third Amended and Restated Stock Incentive Plan (the “Plan”). The amendments would add 6,000,000 shares of common stock for future awards, among other things. Following is a brief summary of material differences between the existing Plan and the Plan as proposed to be amended:

 

 

The foregoing summary of material differences and the following summary of the Plan’s principal features are qualified in its entirety by the specific language of the Plan, a copy of which is attached as Annex A to this proxy statement. Unless otherwise noted, the summaries describe the terms of the Plan as proposed to be amended.

 

General

 

The Plan’s objectives are to encourage our employees, directors and consultants to acquire or increase their equity interest in Mariner and to provide a means whereby they may develop a sense of proprietorship and personal involvement in our development and financial success. The Plan also is designed to enhance our ability to attract and retain the services of individuals who are essential for Mariner’s growth and profitability. The existing Plan became effective March 11, 2005, was amended and restated on March 2, 2006, further amended on March 16, 2006, and amended and restated on February 6, 2007. The Plan as proposed to be amended will become effective on the date it is approved by our stockholders. Our executive officers and most

of our employees have participated in the Plan since its inception in 2005 and all of our directors have participated annually since 2006.

 

Awards to participants under the Plan may be made in the form of incentive stock options (ISOs), non-qualified stock options or restricted stock. The participants to whom awards are granted, the type or types of awards granted, the number of shares covered by each award, and the purchase price, conditions and other terms of each award are determined by our board of directors or a committee thereof appointed by the board to administer the Plan (the “Committee”).

 

Shares Subject to the Plan

 

The Plan as proposed to be amended would increase by 6,000,000 the maximum number of shares of our common stock that could be issued to Plan participants to 12,500,000 from 6,500,000 currently, and increase the number of shares that could be issued to any one employee to 5,700,000 from 2,850,000. As of March 17, 2009, the number of shares remaining available for future awards to participants was 1,327,555.

 

The following table summarizes information about all of our equity compensation plans as of March 17, 2009, without taking into account the proposed Plan amendments.