Surviving Enron—And Thriving

How oil and gas driller Mariner overcame the stigma and became a Hot Growth star

When Enron Corp. sank in late 2001, so did the reputation of a small subsidiary called Mariner Energy Inc. (ME ) It was a perfectly healthy oil and gas drilling company, but Enron had abused it, systematically inflating its value to meet earnings targets. At the time of Enron's rapid collapse, Mariner was on the books at a value of $367.4 million. But a post-bankruptcy review of Mariner's business found that the company warranted a $257 million write-down.

Although they had no control over Enron's financial manipulations of its Mariner stake and claim to have no knowledge of the other widespread wrongdoing at the Houston parent, Mariner's 80 employees suffered nonetheless. The company's mere association with Enron sent bankers fleeing. As a result, credit lines evaporated, and Chairman Scott D. Josey struggled to keep Mariner afloat.

Yet since those trying days, Mariner has become an improbable success, thanks to new wells, rising natural gas prices, and a timely merger. Last year, earnings hit $121 million on revenue of $660 million. In the past three years, the company has seen sales grow 75% annually, on average, and profits 33%. Results like those propelled Mariner to the No. 48 spot on BusinessWeek's annual Hot Growth Companies list this year. "We threaded a needle to emerge from Enron," says Josey. "I still view it somewhat like a miracle."

In the fall of 2001, as Enron hurtled into bankruptcy and disgrace, Josey recalls staring out his office window and seeing vultures circling ominously. He knew that there was a buzzard roost on a nearby roof, but with Mariner's own fate uncertain, "you couldn't help but attach some significance to that," Josey says. An Enron veteran, he was named chairman of Mariner just days after Enron Chief Executive Jeffrey K. Skilling's abrupt departure set the scandal in motion. His mandate, says Josey, was to offset the company's risky strategy of deep-water drilling with safer inland projects.


Soon after, on Dec. 2, 2001, the parent company filed for bankruptcy. "Nobody thought [Enron] could go bankrupt—it was just too solid," remembers Richard A. Molohan, Mariner's vice-president for reservoir engineering. Mariner had been controlled by JEDI, one of Enron's special-purpose entities cooked up by now-imprisoned Chief Financial Officer Andrew Fastow. According to the Securities & Exchange Commission, employees in Enron's accounting department fraudulently inflated Mariner's value to help meet earnings targets.

By October, 2002, Mariner found its access to capital severely choked; no bank would extend Mariner credit "of any reasonable kind," says Josey, even though there was nothing obviously wrong with its very real oil-and-gas-drilling business. "We had to run an exploration business in the middle of the world's second-largest bankruptcy strictly on cash," he says. The staff was cut from 80 to 40. The de rigueur energy industry perks like country club memberships and car allowances were gone.

To raise cash, Mariner off-loaded half of its proven reserves for about $200 million. Josey refocused the drilling efforts on more predictable, less costly inland projects. The moves—slashing costs, reducing debt, and goosing cash flow—had teed up Mariner almost perfectly for its $271 million buyout in 2004, led by ACON Investments, a Washington (D.C.) private equity firm. In an attempt to make a fresh start in the wake of the ACON deal, Mariner employees tried to come up with a new company name, toying with options like Appaloosa, Saga, and Rialta. Ultimately, they stuck with Mariner. With ACON's infusion, and with the scandal's half-life dwindling, Mariner acquired shallow-water assets in the Gulf of Mexico, which nearly doubled its size, in a merger that brought it public in March, 2006.


The pinchpenny ways have stuck, even as Mariner's market value has reached $1.8 billion. According to New York's Calyon Securities, Mariner's finding-and-development cost—essentially, how much it spends to get natural gas out of the ground and into a pipeline—ran at $3.86 per million cubic feet equivalent last year, while other Gulf of Mexico players averaged nearly $5. And the company's debt-to-capital ratio is about 32%, points out Dahlman Rose & Co. analyst Neal Dingmann, while those of rivals are well above 50%.

Despite its success, Mariner shares have lingered around 21, making the company one of the lowest-valued energy exploration companies in terms of price to cash flow. Dingmann and Standard & Poor's equity analyst Michael Kay both believe that the company could be takeover bait in the deal-frenzied energy sector. For Josey's part, he says that Mariner "doesn't have a For Sale sign on it." But after all the years of being treated like the industry pariah, finally being sought after has got to feel sweet.

By Brian Hindo and Christopher Megerian

Edited by [Hindo/Woolley]

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