As filed with the Securities and Exchange Commission on February 13, 1997

Registration No. 333-18233
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________
FORM S-1/A
Pre-Effective Amendment Number 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

PANACO, Inc.
(Exact name of registrant as specified in its charter)

Delaware 1311 43-1593374
(State or other jurisdiction of (Primary Standard Industrial (I.R.S.Employer
incorporation or organization) Classification Code Number) Identification No.)

1050 West Blue Ridge Boulevard
PANACO Building
Kansas City, Missouri 64145-1216
(816) 942-6300
(Address, including ZIP code, and telephone number,
including area code, of registrant principal executive offices)
______________________________________________________

Copies to:
Steven H. Goodman, Esq. Louis J. Bevilacqua, Esq.
Shughart Thomson & Kilroy, P.C. Cadwalader, Wickersham & Taft
Twelve Wyandotte Plaza 100 Maiden Lane
120 West 12th Street New York, New York 10038
Kansas City, Missouri 64105

As soon as practicable after Effectiveness of this Registration Statement
(Approximate date of commencement of proposed sale to the public)

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant
to Rule 415 under the Securities Act of 1933 check the following: [ ]
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier registration statement for the same offering: [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434, please check the following: [ ]

Calculation of Registration Fee
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount to be Offering Aggregate Amount of
Registered Registered (1) Price per Share (2) Offering Price Registration Fees
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
Common Stock, par 9,663,801
value, $.01 per share. Shares $5.50 $53,150,905.00 $16,106.33
- ---------------------------- ----------------- ------------------------- ------------------------- -------------------------
(1) Based upon the maximum number of shares that may be sold in the transactions described herein.
(2) Estimated in accordance with Rule 457(g) & (c).

________________________________

CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K

Showing Location in Prospectus of
Information Required by Items of Form S-1

Number and Caption Location in Prospectus

1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus........................................... Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................................. Inside Front Cover Page; Other Matters
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................................... Use of Proceeds
5. Determination of Offering Price.......................... Use of Proceeds
6. Dilution................................................. *
7. Selling Security Holders................................. Principal Shareholders; Selling Shareholders
8. Plan of Distribution..................................... Underwriting
9. Description of Securities to be Registered............... Front Cover Page; Description of
Capital Shares and Other Securities
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information With Respect to the Registrant............... Front Cover Page; Prospectus Summary;
The Company; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Management; Description of
Capital Shares and Other Securities; Index
to Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......... Other Matters

*Omitted because answer is not applicable or negative.

PROSPECTUS

[GRAPHIC OMITTED]

8,403,305 Common Shares
___________________
Of the up to 8,403,305 Common Shares, par value $.01 per share (the Common Shares), offered hereby (this "Offering"),
6,000,000 Common Shares are being offered and sold by the Company and 2,403,305 are being sold directly by the Selling Shareholders.
See Selling Shareholders. The Company will not receive any proceeds from the sale of Common Shares by the Selling Shareholders.
The Common Shares are traded on the NASDAQ National Market under the symbol PANA. On February 11, 1997, the last reported
sale price of the Common Shares was $4.25 per share. See Price Range of Common Shares.
The Common Shares are being offered through the Underwriter on a best efforts basis. The Offering will terminate
on March 16, 1997. The Offering is subject to a minimum required purchase of 75% of the Common Shares offered hereby
(6,302,479 shares). Pending receipt of subscriptions for at least 6,302,479 Common Shares, each prospective investor's payment for
Common Shares will be deposited in a segregated escrow account with U.S. Trust Company of New York, as escrow
agent. If the Company does not receive subscriptions for at least 6,302,479 Common Shares by the Offering Termination Date,
subscription proceeds will be returned to investors without interest or penalty.

An investment in the Common Shares offered hereby involves a high degree of risk See Risk Factors beginning on page 5 for certain
considerations relevant to an investment in the Common Shares.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
Proceeds to the
Price to Underwriting Proceeds to Selling
Public Discount (1) Company(2) Shareholders (3)
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
Per Share ......... $ $ $ $
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
Total Minimum ..... $ $ $ $
Total Maximum ..... $ $ $ $
- -------------------------------- ---------------------- ------------------- ------------------ ---------------------
(1) The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See Underwriting.
(2) Before deducting expenses payable by the Company, estimated to be $ .
(3) Before deducting expenses payable by the Selling Shareholders, estimated to be $ .

____________________

The shares of Common Shares are offered by the Underwriter, subject to prior sale, when, as and if issued to and accepted
by them, subject to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify such offer and reject
orders in whole or in part. It is expected that delivery of the shares of Common Shares offered hereby will be made in New York, New
York on or about , 1997.

Nolan Securities Corporation

The date of this Prospectus is , 1997

IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the "Company" shall mean PANACO, Inc. and its
predecessors. An investment in the Common Shares offered hereby involves a high
degree of risk. Investors should carefully consider the information set forth
under the heading "Risk Factors". See "Glossary of Selected Oil and Gas Terms"
for the definitions of certain terms used in this Prospectus.

The Company

PANACO, INC. (the "Company") is a Delaware corporation, incorporated
October 4, 1991. When used herein the word "Company" includes its predecessor
Pan Petroleum MLP, which merged into the Company on September 1, 1992. The
Company is in the oil and gas business, acquiring, developing and operating
offshore oil and gas properties in the Gulf of Mexico. Including the recently
acquired Amoco Properties (as defined herein) and excluding the Bayou Sorrel
Field (as defined herein) which was recently sold, the Company owned oil and gas
properties containing, as of December 31,1996, Proved Reserves of 2,169,000 Bbls
of oil and 51,412,000 Mcf of gas. The SEC 10 Value of such Proved Reserves as of
December 31, 1996 was $139,946,000. See "Risk Factors -Estimates of Reserves and
Future Net Revenue." The Company operates 52 offshore wells and owns interests
in 71 offshore wells operated by others. It operates nine of the twenty-five
offshore blocks in which it owns an interest. In addition the Company owns and
operates some onshore properties which generate less than 4% of its revenues.
For a description of the properties owned and the activities conducted by the
Company, see "The Company" and "Property."

Common Shares are quoted on the NASDAQ-National Market under the symbol
"PANA".

The Company's Board of Directors consists of nine persons, three of which
are employees of the Company. See "Management - Officers and Directors."

The Company's headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building, Kansas City, Missouri 64145-1216, and its telephone number at
such offices is (816)942-6300, FAX (816) 942-6305. The Houston office is located
at 1100 Louisiana, Suite 5110, Houston, Texas 77002-5220, and the telephone
number is (713) 652-5110, FAX (713) 651-0928.

Business Strategy

The Company's objective is to enhance shareholder value through sustained
growth in its reserve base, production levels and resulting cash flows from
operations. In pursuing this objective, the Company maintains a geographic focus
in the Gulf of Mexico and identifies properties that may be acquired preferably
through negotiated transactions or, if necessary, sealed bid transactions. The
properties the Company seeks to acquire generally are geologically complex, with
multiple reservoirs, have an established production history and are candidates
for exploitation. Geologically complex fields with multiple reservoirs are
fields in which there are multiple reservoirs at different depths and wells
which penetrate more than one reservoir that have the potential for recompletion
in more than one reservoir. Once properties are acquired, the Company focuses on
reducing operating costs and implementing production enhancements through the
application of technologically advanced production and recompletion techniques.
Over the past five years, the Company has taken advantage of opportunities to
acquire interests in a number of producing properties which fit these criteria.

Recent Developments

Amoco Acquisition

On October 8, 1996, the Company closed on its acquisition of interests in
six offshore fields from Amoco Production Company for $40.4 million (the "Amoco
Acquisition"). In consideration for such interests, the Company issued Amoco
2,000,000 Common Shares and paid the sum of $32 million in cash. The interests
acquired include (1) a 33.3% working interest in the East Breaks 160 Field (2
Blocks) and a 33.3% interest in the High Island 302 Field, both operated by
Unocal Corporation; (2) an average 50% interest in the High Island 309 Field (2
Blocks), a 12% interest in the High Island 330 Field (3 Blocks) and a 12%
interest in the High Island 474 Field (4 Blocks), all operated by Phillips
Petroleum Company; and (3) a 12.5% interest in the West Cameron 180 Field (1
Block) operated by Texaco (collectively the "Amoco Properties"). Current
production, for the interests acquired, is 698 barrels of oil per day and 13.4
MMcf of natural gas per day. See "Amoco Acquisition."

Explosion and Fire

The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta resulting in the fields being shut-in from April 24th,
until resumption of production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues of approximately $6 million. The fire was the principal contributor to
the losses of $.08 per share for the second quarter of 1996 and $.11 per share
for the third quarter of 1996. During the second quarter the Company expensed
$500,000 for its loss as a result of this explosion. No further losses have been
recognized or are anticipated. This $500,000 amount included $225,000 in
deductibles under the Company's insurance.

The Company has spent $8.5 million on Tank Battery #3 inclusive of the
$500,000 expensed during second quarter and has received reimbursement from its
insurance company of $3.9 million, after satisfaction of the $225,000 in
deductibles. The excess of expenditures over insurance reimbursement will be
capitalized. No additional expenditures have been made or are anticipated. The
Company is considering filing suits against the employers of the persons who
caused the incidents for recovery of these costs and its lost profits. No
assurance can be given that the Company will successfully recover any amounts
sought in any such suits.

Sale of Bayou Sorrel

Effective September 1, 1996 the Company sold its interest in the Bayou
Sorrel oil and gas field ( the "Bayou Sorrel Field") to National Energy Group,
Inc. for $11 million. The Company received $9 million in cash and 477,612 shares
of National Energy Group, Inc. common stock, which were valued at $2 million as
of the closing date . The Company also retained a 3% overriding royalty interest
in the deep rights of the field below 11,000 feet.

The Offering

Common Shares offered by the Company................................. 4,500,000 shares minimum (a)
6,000,000 shares maximum (a)

Common Shares offered by the Selling Shareholders............... 1,802,479 shares minimum
2,403,305 shares maximum

Common Shares offered hereby......................................... 6,302,479 shares minimum (a)
8,403,305 shares maximum (a)

Common Shares to be outstanding after this Offering............... 18,850,255 shares minimum (a)(b)
20,350,255 shares maximum (a)(b)

Use of Proceeds......................................................For repayment of existing long term debt,
development of existing oil and gas
properties and acquisition of additional oil
and gas properties.

The Offering.........................................................This Offering will terminate on March 16, 1997
(the "Offering Termination Date"). Pending receipt
of subscriptions for at least 6,302,479, each
prospective investor's payment for Common Shares
will be deposited in a segregated escrow account with
U.S. Trust Company of New York, as escrow agent.
If the Company does not receive subscriptions
for at least 6,302,479 Common Shares by the Offering
Termination Date, subscription proceeds will be returned to
investors without interest or penalty.

NASDAQ National Market Symbol........................................PANA..

(a) If less than the maximum number of Common Shares offered hereby are sold,
then the individual number of shares offered by Company and the Selling
Shareholders shall be reduced pro-rata, but in no event below the aggregate
minimum offering amount.
(b) Excludes 289,365 Common Shares issuable upon the exercise of outstanding
warrants, 2,060,606 issuable upon the conversion of the Tranche A
Convertible Subordinated Notes, and up to 600,000 Common Shares which would
be issuable upon the exercise of warrants to be issued to the Underwriters
should all of the Common Shares offered hereby be sold.

Summary Financial Data

The following table sets forth summaries of certain selected historical
financial and reserve information for the Company as of the dates and for the
periods indicated. Effective December 31, 1995, the Company changed its method
of accounting for oil and gas operations from the full cost method to the
successful efforts method. Prior periods have been restated to give effect to
this change. Future results may vary significantly from the amounts reflected in
the information set forth hereafter because of, among other reasons, normal
production declines, acquisitions, and changes in the price of oil and gas. See
"Risk Factors - Estimates of Reserves and Future Net Revenues" and "Risk Factors
- - General Market Conditions."

As of and For the Nine Months As of and For the Year
Ended September 30, Ended December 31,
(unaudited)

1996(a) 1995 1995 1994 1993
Operations Data

Oil & Gas Sales............... $ 13,257,000 13,660,000 18,447,000 17,338,000 12,605,000
Exploration Expenses.......... 0 2,174,000 8,112,000 0 0
Provision for losses and
(gains) on disposition of
and write-down of asset....... 0 0 751,000 1,202,000 3,824,000
Depletion, depreciation &
amortization.......... 4,981,000 6,277,000 8,064,000 6,038,000 4,288,000
Net income (loss)............. (618,000) (2,492,000) (9,290,000) 1,115,000 (3,986,000)
Net Income (loss) per share (0.05) (.21) (.81) .11 (.53)

Balance Sheet Data
Oil and gas properties, net... $ 20,489,000 21,515,000 29,485,000 23,945,000 19,183,000
Total assets.................. 44,444,000 26,795,000 36,169,000 29,095,000 24,432,000
Long-term debt................ 25,137,000 8,865,000 22,390,000 12,500,000 12,465,000
Stockholders' equity.......... 10,498,000 15,335,000 9,174,000 14,882,000 8,744,000
Book value per share.......... $ .85 1.38 .80 1.46 1.07

Oil and Gas Data
Production:
Oil and condensates (Bbls)....... 203,000 122,000 170,000 137,000 180,000
Gas (Mcf)..................... 4,590,000 7,578,000 9,850,000 8,139,000 5,586,000

Estimated Proved
Reserves:
Oil and condensates (Bbls)(c).... 2,169,000 --- 900,000 943,000 745,000
Gas (Mcf)(c).................. 51,412,000 --- 46,711,000 41,582,000 43,696,000
SEC 10 Value(c)..................$ 139,946,000 --- 72,432,000 47,159,000 58,185,000

(a) Results for the period ended September 30, 1996, were substantially affected
by the explosion and fire. See "Recent Explosion and Fire". Such results include
the results of operations through August 31 for the Bayou Sorrel Field, which
the Company sold effective September 1.
(b) Funds provided by operations is revenues less lease operating expenses and
production and ad valorem taxes.
(c)Reserve information was not prepared as of September 30, 1996 and 1995.
Information shown is from a reserve report prepared by the Company as of
December 31, 1996, which includes the recent effect of the Amoco Acquisition and
excludes the Bayou Sorrel Field, which was recently sold. Reserve reports have
not yet been prepared as of December 31, 1996 by independent petroleum
engineers. The reserve information for the years ended December 31, 1995, 1994
and 1993 was derived by the Company from reports prepared by the Company's
independent petroleum engineers. See "Risk Factors - Estimates of Reserves and
Future Net Reserves."

RISK FACTORS

Prospective investors should carefully read this entire document and
should give particular attention to the following risk factors.

General Market Conditions

Revenues generated from the oil and gas operations of the Company are
highly dependent on the future prices of and demand for oil and gas. Various
factors beyond the control of the Company affect prices of oil, gas, and natural
gas liquids, including the worldwide supply of oil and gas, the ability of the
members of OPEC to agree to and maintain production controls, political
instability or armed conflict in oil-producing regions, the price of foreign
imports, the levels of consumer demand, the price and availability of
alternative fuels and changes in existing regulation. Prices for oil, gas, and
natural gas liquids have fluctuated greatly during the past few years, and
markets for oil, natural gas, and natural gas liquids continue to be volatile.
The currently unsettled energy markets make it particularly difficult to
estimate future prices of oil, natural gas, and natural gas liquids, and any
assumptions about future prices may prove incorrect. In addition, demand for
natural gas and fuel oil can fluctuate significantly with seasonal and annual
variations in weather patterns because those products are used in large part as
heating fuels. See "Risk Factors - Estimates of Reserves and Future Net
Revenues" and "The Company - Competition, Markets, Seasonality and Regulation".

Historical Operating Losses

The Company has sustained losses in two of the past three years, 1993 and
1995. No assurance may be given that the Company will be profitable in the
future. The Company sustained losses in 1993 and 1995 primarily as a result of
an accounting change in 1995 that required property write-downs in both years
and expensing of three unsuccessful exploratory wells in 1995. On April 24,
1996, the Company experienced an explosion and fire at its West Delta Tank
Battery #3 which has been the primary factor in the Company's loss through
September 30, 1996 of $.05 per share. As such, the Company can not assure a
profit will result for the year ended December 31, 1996. Due to the change in
accounting method, any future unsuccessful exploratory wells, as well as adverse
events beyond management's control, such as the fire, could also result in
losses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and the related
notes thereto included elsewhere herein.

Risks of Development, Exploration, and Other Activities

The Company engages in exploration activities on Undeveloped Acreage,
drills development wells, and reworks and recompletes wells on the properties it
owns as well as on properties it may acquire, and anticipates that it will
expend a significant portion of its net cash flow for those activities. See "The
Company - Acquisition, Development and Other Activities." Those activities
involve a significant degree of risk. For example, the drilling of exploratory
and development wells involves risks such as encountering unusual or unexpected
formations, pressures, and other conditions that could result in the Company
incurring substantial losses. In addition, all drilling is subject to the risk
of dry holes or a failure to produce oil or gas in commercial quantities. The
degree of risk will vary depending on the geological features of the area.

Other Operating Risks

The Company is also subject to all the operating hazards and risks
normally incident to drilling for or producing, processing and transporting oil
and gas, including blowouts, pollution, and fires, each of which could result in
damage to or destruction of oil and gas wells, producing formations, production
platforms, pipeline, or processing plants, or persons or other property.
Although the Company maintains insurance coverage that is similar to that
maintained by comparable companies in the oil and gas industry, there can be no
assurance that the coverage will be adequate to insure fully against all risks.

Replacement of Reserves

In general, the volume of production from natural gas and oil properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful development and
exploration activities, or both, the proved reserves of the Company will decline
as reserves are produced. The Company's future natural gas and oil production
is, therefore, highly dependent upon its level of success in finding or
acquiring additional reserves. The business of exploring for, developing or
acquiring reserves is capital intensive. To the extent cash flow from operations
is reduced and external sources of capital become limited or unavailable, the
Company's ability to make the necessary capital investments to maintain or
expand its asset base of natural gas and oil reserves could be impaired. In
addition, there can be no assurance that the Company's future development,
acquisition and exploration activities will result in additional proved reserves
or that the Company will be able to drill productive wells at acceptable costs.

Estimates of Reserves and Future Net Revenues

Numerous uncertainties exist in estimating quantities of Proved Reserves
and future net revenues. Oil and gas engineering is a subjective process of
estimating underground accumulations of oil and gas that cannot be measured
exactly. The accuracy of any reserve estimate is a result of the quality of
available geologic and engineering data, geological interpretation, and
judgment. Actual results of drilling, testing, and production after the date of
an estimate may indicate the need to revise the estimate. In addition, the
prices used affect the calculation of quantities of reserves and future net
revenues. A higher price can generally result in a longer estimated economic
life for reserves and can increase estimated future net revenues because both
the estimated reserves are larger and the price per reserve unit (Bbl or Mcf) is
higher. Reserve reports as of December 31, 1996 were prepared by the Company.
Reserve information for the years ended December 31, 1995, 1994 and 1993 was
derived by the Company from reports prepared by the Company's independent
petroleum engineers.

SEC 10 Values presented in certain disclosures of reserves and the present
value of estimated future net revenues represent a reporting convention adopted
by the SEC that uses prices at the date of the reserve presentation and a 10%
discount rate. While SEC 10 Values provide a common basis for comparing oil and
gas companies subject to the rules and regulations of the SEC, the use of prices
on the presentation date may not represent the prices ordinarily received or
that will be received for oil and gas because of seasonal price fluctuations or
other varying market conditions. SEC 10 Values are not necessarily indicative of
future results of operations. Accordingly, reserve estimates set forth herein
may be materially different from the quantities of oil and gas that are
ultimately recovered, and estimates of future net revenues may also be
materially different from the net revenues that are ultimately received.

Environmental Risks

The discharge of oil, gas, or other pollutants into the air, soil, or
water may give rise to liability to the government or third parties and may
require the Company to incur costs to remedy the discharge. Oil or gas may be
discharged in many ways, including from a well or drilling equipment at a drill
site, leakage from pipelines or other gathering and transportation facilities,
leakage from storage tanks, and sudden discharges from damage or explosion at
processing plants or oil or gas wells. Hydrocarbons tend to degrade slowly in
soil and water, which makes remediation costly, and discharged hydrocarbons may
migrate through soil to water supplies or adjoining property, giving rise to
additional liabilities. A variety of federal and state laws and regulations
govern the environmental aspects of oil and gas production, transportation, and
processing and may, in addition to other law, impose liability in the event of
discharges (whether or not accidental), a failure to notify the proper
authorities of a discharge, and other noncompliance with those laws. The Company
has both an offshore Regional Spill Response Plan (RSRP) and onshore Spill
Prevention Control Countermeasure Plans (SPCC). Environmental laws may also
affect the costs of the Company's acquisitions of oil and gas properties.

The Company does not believe that its environmental risks are materially
different from those of comparable companies in the oil and gas industry.
Nevertheless, no assurance can be given that environmental laws will not, in the
future, result in a curtailment of production or processing or a material
increase in the costs of production, development, or exploration or otherwise
adversely affect the Company's operations and financial condition. Pollution and
similar environmental risks generally are not fully insurable.

Acquisitions

Although acquisitions of oil and gas properties with Proved Reserves
involve less risk than is inherent in exploratory or developmental drilling, the
criteria on which decisions to acquire properties are usually based (such as the
estimates of reserve quantities and the projections of future rates of
production, future development and production costs, and prices to be received
on sale) may prove to be incorrect, and consequently adversely affect the
profitability of an acquisition. The Company intends to continue acquiring oil
and gas properties. Although the Company performs a review of the properties to
be acquired that it believes is consistent with industry practices, such reviews
are inherently incomplete. Generally, it is not feasible to review in-depth
every individual property involved in each acquisition. Ordinarily, the Company
will focus its review efforts on the higher-valued properties and will sample
the remainder. However, even an in-depth review of all properties and records
may not necessarily reveal existing or potential problems, nor will it permit a
buyer to become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not always be performed on every
facility, and environmental problems are not necessarily observable even when an
inspection is undertaken. Furthermore, the Company must rely on information,
including financial, operating and geological information, provided by the
seller of the properties without being able to verify fully all such information
and without the benefit of knowing the history of operations of all such
properties.

Dependence On Key Personnel

The success of the Company will depend almost entirely upon the ability
of a small group of key executives to manage the business of the Company. Should
one or more of these executives leave the Company or become unable to perform
his duties, no assurance can be given that the Company will be able to attract
competent new management. The key executives do not have employment contracts
and the Company does not have "key man" life insurance.

Future Issuances of Shares

Of the 40,000,000 Common Shares authorized, 14,350,255 are presently
issued, leaving 25,649,745 shares which may be issued without further approval
from the shareholders. If the Company issues additional

Common Shares or preferred shares, the interest in the assets, liabilities, cash
flows, and results of operations of the Company represented by the Common Shares
may be diluted. Additional issuances may occur for many reasons, including
pursuant to the Company's Long-Term Incentive Plan described in "Management -
Other Compensation Arrangements - Long-Term Incentive Plan." As of the date
hereof there are outstanding warrants to acquire 289,365 Common Shares,
exercisable at prices per share ranging from $2.00 to $2.375. In connection with
this Offering the Underwriter will receive warrants to acquire up to 600,000
Common Shares at 130 percent of the price at which Common Shares are sold
hereunder, which warrants are exercisable any time within two years of the date
of this Prospectus. The exercise of such warrants would likely occur primarily
when the exercise prices are below the then current market prices. After the
expiration of 180 days following the conclusion of this offering, the Tranche A
Convertible Subordinated Notes are convertible into 2,060,606 Common Shares, at
$4.125 per share.

Hedging of Production

The Company's bank lenders have generally required it to reduce its
exposure to the volatility of crude oil and natural gas prices by hedging a
portion of its production. In a typical hedge transaction, the Company will have
the right to receive from the counter party to the hedge, the excess of the
fixed price specified in the hedge over a floating price. If the floating price
exceeds the fixed price, the Company is required to pay the counter party all or
a portion of this difference multiplied by the quantity hedged, regardless of
whether the Company has sufficient production to cover the quantities specified
in the hedge. Significant reductions in production at times when the floating
price exceeds the fixed price could require the Company to make payments under
the hedge agreements even though such payments are not offset by sales of
production. However, the Company hedges up to, but not more than, 50% of its
anticipated production. Hedging will also prevent the Company from receiving the
full advantage of increases in crude oil or natural gas prices above the fixed
amount specified in the hedge.

Governmental Regulation

The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for and development and
production of oil and gas, as well as environmental and safety matters. Such
laws and regulations have generally become more stringent in recent years, often
imposing greater liability on a larger number of potentially responsible
parties. Because the requirements imposed by such laws and regulations are
frequently changed, the Company is unable to predict the ultimate cost of
compliance with such requirements and their effect on the Company. See "The
Company - Competition, Markets, Seasonality and Regulation".

Large Shareholders

Richard A. Kayne indirectly controls four of the six lenders who are
advised by Kayne, Anderson Investment Management, Inc. with respect to the 1993
Subordinated Notes (the "1993 Subordinated Notes"). These four lenders own
694,047 of the 816,526 shares acquired upon exercise of warrants held by the six
lenders. Mr. Kayne also indirectly controls five of the eight lenders on the
1996 Tranche A Convertible Subordinated Notes (the "1996 Tranche A Convertible
Subordinated Notes"), which lenders could acquire 1,466,667 of the 2,060,606
shares issuable upon conversion of such Notes. See "The Company - Funding of
Business Activities - Borrowings and Obligations," for information with respect
to these transactions. Carl C. Icahn controls High River Limited Partnership
which owns 1,095,000 shares. Because of the substantial holdings of these
shareholders, they may be able to influence the outcome of votes on various
matters, including the election of directors, extraordinary corporate
transactions, and certain business combinations. See "Principal Shareholders".

Anti-takeover Provisions

Documents governing the Company's affairs provide for or contain several
procedures, provisions, and plans designed to reduce the likelihood of a change
in the management or voting control of the Company

without the consent of the then incumbent Board of Directors, including a
classified Board of Directors, "fair price" provisions, the ability of the Board
of Directors to issue classes or series of preferred shares, restrictions on the
ability of shareholders to call meetings and propose business at meetings of the
common shareholders, restrictions on the ability of shareholders to approve
actions or proposals by written consent rather than at meetings and acceleration
of vesting provisions in stock award and option plans upon a change in control.
These provisions may have the effect of reducing interest in the Company as a
potential acquisition target or encouraging persons considering an acquisition
or takeover of the Company to negotiate with the Company's Board of Directors
rather than pursue non-negotiated acquisition or takeover attempts, although no
assurance can be given that they will have that effect.

In 1995, the Company adopted a Shareholder Right Plan which may have the
effect of discouraging non-negotiated takeover attempts.

In addition, the Company chose to be governed by Section 203 of the
Delaware General Corporation Law, which prohibits business combination between
the Company and any interested shareholder of the Company for a period of three
years following the date on which that shareholder became an owner of 15% or
more of the outstanding voting shares of the Company unless certain statutory
exceptions are satisfied. Section 203 may also have the effect of discouraging
non-negotiated takeover attempts.

For a discussion of documents and provisions with potential anti-takeover
effects, see "The Company Funding of Business Activities - Borrowings and
Obligations," "Management - Long-Term Incentive Plan," "Description of Capital
Shares and Other Securities - Certain Anti-takeover Provisions," and
"Description of Capital Shares and Other Securities - Shareholder Rights Plan."

Best Efforts Offering

The Underwriter will be offering the Common Shares on a best efforts
basis. Consequently, there is no assurance that all or any of the Common Shares
offered hereby will be sold in the Offering. See "Use of Proceeds".

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of all of the
6,000,000 Common Shares offered hereby (assuming an offering price of $4.25 (per
share) are estimated to be approximately $23,365,000 after deducting the
anticipated underwriting discount and estimated offering expenses. The Offering
is being made on a "best efforts basis", subject to a minimum sale of 6,302,479
of the Common Shares offered hereby. See "Underwriting". The Company intends to
utilize the net proceeds of the minimum and maximum offering as follows:

Maximum Minimum
Approximate Approximate
Dollar Approximate Dollar Approximate
Amount (a) Percentage Amount (a) Percentage

Repay Tranche B Bridge Loan (b) $ 8,500,000 36.4% $ 8,500,000 48.7%
Repay 1993 Subordinated Notes (c) 5,000,000 21.4% -0- -0-
Development of Properties (d) 9,865,000 42.2% 8,936,000 51.3%
General Corporate Purposes (e) 0 0% 0 0%
$ 23,365,000 100.0% $ 17,436,000 100.0%

(a) The amount set forth with respect to each purpose represents the Company's
current estimate of the approximate amount of the net proceeds that will be used
for such purpose. However, the Company reserves the right to change the amount
of such net proceeds that will be used for any purpose to the extent that
management determines that such change is advisable. Consequently, management of
the Company will have broad discretion in determining the manner in which the
net proceeds of the Offering are applied.

(b) The Company intends to prepay $8.5 million of the Tranche B Bridge Loan
Subordinated Notes of October 8, 1996, which carry an interest rate of 12% until
August 8, 1997 (14% thereafter), are due October 8, 2003, and are prepayable at
any time. These funds were borrowed in connection with the Amoco Acquisition.

(c) If the maximum number of Common Shares offered hereby are sold, the Company
may also use $5 million to repay the 1993 Subordinated Notes, which carry an
interest rate of 12% (due December 31, 1999), and are repayable at any time.
These borrowings were made to finance development activities.

(d) Proceeds of this offering will be used to develop the properties acquired in
the Amoco Acquisition, particularly High Island 474, 309, and 330 Fields.

(e) The remaining net proceeds will be used for general corporate purposes,
including further development of properties owned by the Company in the Gulf of
Mexico, and for further acquisitions of properties in the Gulf of Mexico deemed
appropriate by management. Although the Company actively reviews oil and gas
acquisition candidates, it has not identified any specific acquisitions at this
time, and no assurances can be made that the Company will be able to identify
and consummate acquisitions that it deems suitable.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at November 30, 1996, and as adjusted to reflect the issuance of the
Common Shares offered by the Company hereby at an assumed price of $4.25 per
share and the application of the net proceeds therefrom as described in "Use of
Proceeds". This table should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, contained
elsewhere in this Prospectus.

Minimum Maximum
November 30, 1996 November 30, 1996
(amounts in thousands) (amounts in thousands)
Actual As Adjusted Actual As Adjusted

Long-term debt (less current maturities) $ 49,500 $ 41,000 $ 49,500 $ 36,000
Stockholders' Equity:
Preferred shares, $.01 par value,
5,000,000 shares authorized;
none issued or outstanding --- --- --- ---
Common Shares, $.01 par value,
40,000,000 shares authorized;
14,350,255 shares issued and
outstanding (18,850,255 and
20,350,255 as adjusted)(1) 144 189 144 204
Additional paid-in capital 31,490 48,881 31,490 54,795
Retained Earnings (deficit) (13,572) (13,572) (13,572) ( 13,572)
Total Stockholders' Equity 18,062 35,498 18,062 41,427
Total capitalization $ 67,562 $ 76,498 $ 67,562 $ 77,427

(1) Excludes 289,365 Common Shares issuable upon the exercise of outstanding
warrants, 2,060,606 issuable upon the conversion of the Tranche A
Convertible Subordinated Notes, and up to 600,000 Common Shares which
would be issuable upon the exercise of warrants to be issued to the
Underwriters should all of the Common Shares offered hereby be sold.

PRICE RANGE OF COMMON SHARES

The Common Shares are quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") - National Market, under the
symbol "PANA". They commenced trading September 21, 1989. The following table
sets forth, for the periods indicated, the high and low closing bid for the
Common Shares.

1994

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High 3 5/8 4 3/8 4 5/8 4 1/4
Low 2 9/16 2 15/16 3 1/2 3 5/8

1995

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High 4 5/16 4 7/8 5 5/16 5
Low 3 5/8 4 4 1/8 4
1996

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High 5 4 1/2 6 6 3/8
Low 3 7/16 3 11/16 3 3/8 4 3/8

On February 11, 1997, the last sale price of the Common Shares as
reported on the NASDAQ- NM was $4.25 per share. There are approximately 6,000
shareholders of the Common Shares.

DIVIDEND POLICY

The Company has not paid any cash dividends on the Common Shares. The
Delaware General Corporation Law, to which the Company is subject, permits the
Company to pay dividends only out of its capital surplus (the excess of net
assets over the aggregate par value of all outstanding capital shares) or out of
net profits for the fiscal year in which the dividend is declared or the
preceding fiscal year. The Bank Facility and the Subordinated Notes require the
consent of the lenders to any dividends or distributions by the Company and to
any purchases by the Company of Common Shares. The Company retains its earnings
and cash flow to finance the expansion and development of its business and
currently does not intend to pay dividends on the Common Shares. Any future
payments of dividends will depend on, among other factors, the earnings, cash
flow, financial condition, and capital requirements of the Company.

PRO FORMA FINANCIAL INFORMATION

On October 8,1996, the Company closed its acquisition of interests in
thirteen offshore blocks comprising six fields in the Gulf of Mexico from Amoco
Production Company. The purchase price for the assets acquired in this
transaction was $40.4 million, paid by the issuance of 2,000,000 Common Shares
and by payment to Amoco of $32 million in cash. Concurrently with this
transaction the Company entered into a new Bank Facility with First Union
National Bank of North Carolina and Banque Paribas under which its reducing
revolving loan was increased to $40 million, with an initial borrowing base
(credit limit) of $35 million. In addition to that facility, the Company
borrowed $17 million pursuant to the Tranche A Convertible and the Tranche B
Bridge Loan Subordinated Notes.

On July 26, 1995, the Company completed the acquisition of all of the
offshore oil and gas properties in the Gulf of Mexico owned by Zapata
Exploration Company, the "Zapata Properties." Proved reserves at December 31,
1994 attributable to the oil and gas interests acquired, net to the Company's
interest, were 308,000 barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's independent petroleum engineers
as of October 1, 1994. The purchase price for the Zapata properties and a
related receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an obligation to pay a production payment to Zapata based on future
production. See "Properties - Zapata Properties."

On November 22, 1996, the Company closed its sale of the Bayou Sorrel
Field to National Energy Group, Inc. for a sales price of $11 million,
consisting of $9 million in cash and 477,612 shares of National Energy Group,
Inc. common stock, which were valued at $2 million as of the closing date.
Because the sale was effective September 1, September revenues and expenses of
the Bayou Sorrel Field are not included in the Statement of Income for the Nine
Months Ended September 30, 1996.

The Company intends to prepay $13.5 million of its Long-Term Debt with a
portion of the proceeds from this Offering, assuming all shares offered are
sold, consisting of the $5 million of the 1993 Subordinated Notes and $8.5
million of the 1996 Tranche B Bridge Loan Subordinated Notes, both of which
carry an interest rate of 12%.

Effective December 31, 1995, the Company changed its method of
accounting for oil and gas operations from the full cost method to the
successful efforts method. The information provided in the Pro Forma Financial
Statements reflects this change.

PANACO, Inc.

Pro Forma Combined Balance Sheet
As of September 30, 1996
(Amounts in thousands except number of shares )
(Unaudited)

Amoco Bayou
PANACO, Inc. Properties Sorrel Prepayment
As of Pro Forma PANACO, Inc. Pro Forma PANACO, Inc. of Long- PANACO, Inc.
ASSETS 9/30/96 Adjustments Pro Forma Adjustments Pro Forma Term Debt Pro Forma
(Note 1) (Note 2) Combined (Note 3) Combined (Note 4) Combined
CURRENT ASSETS

Cash and cash equivalents $766 $766 $766 $766
Accounts receivable 4,435 4,435 4,435 4,435
Accounts receivable - sale of 0 0 0
Bayou Sorrel Field 11,152 11,152 (11,152) 0 0 0
Prepaid expenses 359 359 359 359
National Energy Group Common Stock 0 0 2,000 2,000 0 2,000
Total Current Assets 16,712 16,712 7,560 7,560

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
Oil and gas properties 98,015 40,400 138,415 138,415 138,415
Less: accumulated depreciation, depletion
and amortization (77,526) (77,526) (77,526) (77,526)
Net Oil and Gas Properties 20,489 60,889 60,889 60,889

PROPERTY, PLANT AND EQUIPMENT (net) 126 126 126 126

OTHER ASSETS
Earnest deposit - Amoco acquisition 5,000 (5,000) 0 0 0
Restricted deposits 1,733 1,733 1,733 1,733
Other 384 384 384 384
Total Other Assets 7,117 2,117 2,117 2,117

TOTAL ASSETS $44,444 $79,844 $70,692 $70,692

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable $8,809 $8,809 $8,809 $8,809
Current portion of long-term debt 0 0 0 0
Total Current Liabilities 8,809 8,809 8,809 8,809

LONG-TERM DEBT 25,137 27,000 52,137 (9,152) 42,985 (13,500) 29,485

STOCKHOLDERS' EQUITY
Preferred stock, ($.01 par value, 5,000,000
shares authorized and no shares issued and
outstanding) 0 0 0 0
Common stock, ($.01 par value, 40,000,000
shares authorized and 14,350,255 issued and
outstanding and 17,765,815 pro forma issued
and outstanding) 123 20 143 143 28 171
Additional paid-in capital 23,090 8,380 31,470 31,470 13,472 44,942
Retained earnings (deficit) (12,715) (12,715) (12,715) (12,715)
Total Stockholders' equity 10,498 18,898 18,898

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,444 $79,844 $70,692 $70,692

The accompanying notes to pro forma financial statements are an integral part of this statement
13

PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1996
(Amounts in thousands except per share data)
(Unaudited)

Amoco Bayou
Properties Sorrel Prepayment
Pro Forma PANACO, Inc. Pro Forma PANACO, Inc. of Long- PANACO, Inc.
Amoco Adjustments Pro Forma Adjustments Pro Forma Term Debt Pro Forma
PANACO, Inc. roperties (Note 2) Combined (Note 3) Combined (Note 4) Combined
REVENUES

Oil and gas revenue $13,257 $10,697 $0 $23,954 ($2,010) $21,944 $0 $21,944

COSTS AND EXPENSES
Lease operating 6,049 2,484 108 8,641 (733) 7,908 0 7,908
Depreciation, depletion and
amortization 4,981 0 5,655 10,636 (888) 9,748 0 9,748
Exploration expenses 0 0 0 0 0 0 0 0
Provision for losses and (gains)
on disposition and write-down
of assets (4) 0 0 (4) 0 (4) 0 (4)
General and administrative 573 0 0 573 0 573 0 573
Production and ad valorem taxes 429 0 0 429 (239) 190 0 190
West Delta fire loss 500 0 0 500 0 500 0 500
Total 12,528 2,484 5,763 20,775 (1,860) 18,915 0 18,915

NET OPERATING INCOME (LOSS) 729 8,213 (5,763) 3,179 (150) 3,029 0 3,029

OTHER INCOME (EXPENSE)
Interest expense (net) (1,347) 0 (1,611) (2,958) 588 (2,370) 1,215 (1,155)

NET INCOME (LOSS) BEFORE INCOME TAXES (618) 8,213 (7,374) 221 438 659 1,215 1,874

INCOME TAXES (BENEFIT) 0 0 0 0 0 0 0 0

NET INCOME (LOSS) ($618) $8,213 ($7,374) 221 $438 $659 $1,215 $1,874

PRIMARY EARNINGS (LOSS) PER COMMON SHARE ($0.05) $0.02 $0.05 $0.11

Weighted average shares outstanding 12,253 2,000 14,253 14,253 3,416 17,669

The accompanying notes to pro forma financial statements are an integral part of this statement

PANACO, Inc.
Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1995
(Amounts in thousands except per share data)
(Unaudited)

Prepayment
Pro Forma PANACO, Inc. of Long- PANACO, Inc.
Zapata Amoco Adjustments Pro Forma Term Debt Pro Forma
PANACO, Inc. PropertiesProperties (Note 2) Combined (Note 4) Combined

REVENUES

Oil and gas revenue $18,447 $3,623 $12,528 $0 $34,598 $0 $34,598

COSTS AND EXPENSES
Lease operating 8,055 1,460 2,991 314 12,820 0 12,820
Depreciation, depletion and amortization 8,064 0 0 10,064 18,128 0 18,128
Exploration expenses 8,112 0 0 0 8,112 0 8,112
Provision for losses and (gains) on 0
disposition and write-down of assets 751 0 0 0 751 0 751
General and administrative 690 0 0 0 690 0 690
Production and ad valorem taxes 1,078 0 0 0 1,078 0 1,078
Total 26,750 1,460 2,991 10,378 41,579 0 41,579

NET OPERATING INCOME (LOSS) (8,303) 2,163 9,537 (10,378) (6,981) 0 (6,981)

OTHER INCOME (EXPENSE)
Interest expense (net) (987) 0 0 (2,941) (3,928) 1,620 (2,308)

NET INCOME (LOSS) BEFORE INCOME TAXES (9,290) 2,163 9,537 (13,319) (10,909) 1,620 (9,289)

INCOME TAXES (BENEFIT) 0 0 0 0 0 0 0

NET INCOME (LOSS) ($9,290) $2,163 $9,537 ($13,319) ($10,909) $1,620 ($9,289)

PRIMARY EARNINGS (LOSS) PER COMMON SHARE ($0.81) ($0.81) ($0.55)

Weighted average shares outstanding 11,505 2,000 13,505 3,416 16,921

The accompanying notes to pro forma financial statements are an integral part of this statement
15

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
At September 30, 1996

1. Basis of Presentation

The Unaudited Pro Forma Balance Sheet presents the combined effects of
the acquisition of the Amoco Properties (which closed on October 8, 1996), the
sale of Bayou Sorrel Field (which closed on November 22, 1996), and the
prepayment of $13.5 million of Long-Term Debt with a portion of the proceeds of
this offering as if the transactions had occurred on September 30, 1996. The
information presented in the Unaudited Pro Forma Balance Sheet assumes that the
maximum number of Common Shares offered hereby are sold.

2. Amoco Properties Pro Forma Adjustments

The purchase price for the Amoco Properties was $32 million in cash and
2,000,000 Common Shares, valued at $4.20 per share, for a total of $40.4
million. At September 30, 1996, the Company had made an earnest deposit of $5
million to Amoco Production Company in connection with this acquisition. The pro
forma information includes a reclassification of this deposit to oil and gas
properties. The increases in Long-Term Debt and Stockholders' Equity represent
the additional borrowing for the cash portion of the purchase price and the
issuance of 2,000,000 Common Shares to Amoco.

3. Bayou Sorrel Pro Forma Adjustments

The Company sold the Bayou Sorrel Field effective September 1, 1996 for
$11 million, consisting of $9 million in cash and 477,612 shares of National
Energy Group, Inc. common stock valued at $2 million at September 30th. The
number of shares of National Energy Group, Inc. common stock was determined by
using the average closing price of the stock over the 10 days prior to closing.
National Energy Group, Inc. also reimbursed the Company $152,000 for the amounts
it had deposited in an escrow account for the plugging and abandonment
obligations of the Field.

The total cash proceeds from the sale of $9,152,000 are presented as if
it was all applied to the Company's Long-Term Debt balance at September 30,
1996.

4. Prepayment of Long-Term Debt

The total number of Common Shares being offered hereby is a minimum of
6,302,479 and a maximum of 8,403,305. Of these amounts, the Company is selling a
minimum of 4,500,000 up to a maximum of 6,000,000 Common Shares, with selling
shareholders accounting for the additional Common Shares being sold. Assuming
the maximum number of shares from this Offering are sold, the Company intends to
prepay $13.5 million of its Long-Term Debt. The pro forma balance sheet presents
only the additional $13.5 million and 3,415,560 Common Shares to present the
impact of the prepayment of long-term debt on the Company's financial position
at September 30, 1996. Although this prepayment will occur only if the maximum
(6,000,000) number of shares are sold, the 2,584,440 additional Common Shares
and $10.2 million additional equity from the proceeds of the offering is not
included in this presentation. As the balance sheet presentation shown in the
"Capitalization" Table on page 10 includes the total number of Common Shares and
proceeds from this Offering, these two presentations will differ.

The total proceeds from the sale of 3,415,560 Common Shares in the pro
forma presentation at an offering price of $4.25 will be $14,516,127, the net
proceeds received by the Company from these shares will be that amount less the
Underwriter's commisssion of 7%, or $13.5 million.

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)
For the nine months ended September 30, 1996
and the year ended December 31, 1995

1. Basis of Presentation

The Unaudited Pro Forma Statement of Income (Operations) for the nine
months ended September 30, 1996 presents the combined effects of the acquisition
of the Amoco Properties, which closed on October 8, 1996, the sale of the Bayou
Sorrel Field, effective September 1, 1996 and the prepayment of $13.5 million of
Long-Term Debt with a portion of the proceeds of this Offering as if all of
these transactions had been consummated on January 1, 1995. The information
presented in the Unaudited Pro Forma Statement of Income assumes that the
maximum number of Common Shares offered hereby are sold.
16

The Unaudited Pro Forma Statements of Income (Operations) for the year
ended December 31, 1995 presents the combined effects of the acquisition of the
Amoco Properties, which closed on October 8, 1996, and the Zapata Properties,
closed on July 26, 1995, as if the acquisitions had been consummated on January
1, 1995.

Because the Bayou Sorrel Field was purchased on December 28, 1995,
there was no activity included in the Company's results of operations in 1995,
and therefore, no pro forma elimination adjustments are necessary for 1995.

The results of the Zapata properties are included in the Company's 1995
results of operations after the closing date, July 26, 1995. The pro forma
adjustments for the Zapata properties are only for the period of January 1 to
July 25, 1995.

Each period presented includes the issuance of 2,000,000 Common Shares
to Amoco Production Company in connection with the Amoco Acquisition and
3,415,560 in additional Common Shares issued to allow the Company to prepay
$13.5 million of its Long-Term Debt.

There are no pro forma adjustments for income tax expense for the nine
months ended September 30, 1996 because the Company has an Income Tax Net
Operating Loss that would not have required it to pay income taxes. The Company
has not previously recognized any benefits from this Income Tax Net Operating
Loss. There are also no pro forma adjustments for General and Administrative
expenses because the Company anticipates no increases in this category based on
the nature of the assets acquired.

The pro forma weighted average shares outstanding (in thousands) for the
nine months ended September 30, 1996 is based on the actual weighted average
number of 12,253, the 2,000 Common Shares issued in connection with the Amoco
Acquisition and the 3,416 Common Shares to allow the Company to prepay $13.5
million in Long-Term Debt, for a pro forma total of 17,669.

The pro forma weighted average shares outstanding (in thousands) for the
year ended December 31, 1995 is based on the actual weighted average number of
11,505, the 2,000 Common Shares issued in connection with Amoco Acquisition and
the 3,416 Common Shares to allow the Company to prepay $13.5 million in
Long-Term Debt, for a pro forma total of 16,921.

The October 8, 1996 Kayne, Anderson Tranche A Convertible Subordinated
Notes are not considered common stock equivalents and are not included in the
weighted average shares outstanding calculation.

2. Amoco and Zapata Properties Pro Forma Adjustments

Additional lease operating expenses of $108,000 in 1996 and $314,000 in
1995 represent the estimated additional insurance costs of owning the Amoco
Properties and the Zapata Properties. These amounts are estimated using the
Company's current insurance rates for owning the properties acquired or similar
properties.

Additional depletion and depreciation expense of $5,655,000 in 1996 and
$10,064,000 in 1995 represents the estimated depletion and depreciation for
assets acquired in the respective acquisitions assuming the purchase prices and
proved reserve amounts were identical to those that existed at the time of the
actual acquisitions.

Additional interest expense of $1,611,000 in 1996 and $2,941,000 in
1995 represents the increased borrowings at January 1, 1995. The purchase price
assumed for each acquisition is the same as at the actual date of acquisition.
It is assumed that cash on hand at the beginning of 1995 was used for the
acquisitions, with the balance of any cash required being funded with the
Company's Bank Facility and the 1996 Subordinated Notes, using the rates in
effect at the time of the acquisition for the Bank Facility and 12% for the 1996
Subordinated Notes, also the same rate received at the time of the acquisition.
These assumptions would have required the Company to borrow $32 million for the
cash portion of the Amoco Acquisition, $17 million under the 1996 Subordinated
Notes and $15 million under the Company's Bank Facility, with an assumed
interest rate of 7.25%, the actual weighted average rate the Company incurred at
the time of the acquisition.

3. Bayou Sorrel Pro Forma Adjustments

The adjustments with respect to the sale of the Bayou Sorrel Field
represent the revenues and expenses of the Field from January 1 to August 31,
1996. Interest expense is reduced to reflect the elimination of the financing
for the acquisition, closed on December 28, 1995. The reduction in interest
expense is based on the Company's pro forma elimination of the debt associated
with the purchase of the Bayou Sorrel Field. The Company borrowed $10.5 million
for the purchase which closed on December 28, 1995, and had reduced this amount
throughout 1996. The interest rate averaged approximately 7.5%. The purchase
price for the Field

was $10,455,000 which included a related receivable of $600,000 and a brokers
fee of $205,000.

Although the sale of the Bayou Sorrel field closed on November 22,
1996, the buyer assumed all benefits and liabilities of the assets sold after
the effective date of the sale, September 1, 1996.

4. Prepayment of Long-Term Debt

Assuming all shares from this Offering are sold, the Company intends to
prepay $13.5 million of its Long-Term Debt. The pro forma statements of income
take this prepayment of debt into account by reducing interest expense for each
period, and increasing the weighted average shares outstanding. The increase in
average shares outstanding is the number of shares required to be sold, at the
current offering price and net of the Underwriter's commission to provide the
$13.5 million. The decrease of $1,215,000 and $1,620,000 in interest expense for
the nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively, is based on the reduction in borrowing of $13.5 million at January
1, 1995, which carries an interest rate of 12%. The decrease is based on twelve
months in 1995 and nine months in 1996.

SELECTED FINANCIAL DATA

Selected financial data as of the dates and for the the periods
indicated is presented below. Effective December 31, 1995, the Company changed
its method of accounting for oil and gas operations from the full cost method to
the successful efforts method. The information provided below reflects this
change for all periods. This data also reflects a retroactive restatement for
all periods presented to reflect the merging of the Company's predecessor, Pan
Petroleum MLP, into the Company effective September 1, 1992 and reflects the
acquisition of the West Delta offshore properties as of May 28, 1991, accounted
for utilizing the "purchase" method.

Summary of Operations: ( Amounts in thousands except per share data)

For the nine months ended For the year ended
September 30, December 31,
(unaudited) (unaudited)
1996(a) 1995 1995 1994 1993 1992 1991

Oil and Gas revenue $ 13,257 13,660 18,447 17,338 12,605 13,335 8,149
Depreciation, depletion
& amortization 4,981 6,277 8,064 6,038 4,288 4,245 3,305
Lease operating expense 6,049 5,729 8,055 5,231 5,297 5,762 3,728
Production and ad valorem taxes 429 810 1,078 1,006 754 867 635
Exploration expenses - 2,174 8,112 - - - -
Provision for losses and (gains)
on disposition and write-downs
of assets (4) - 751 1,202 3,824 - (91)
West Delta fire loss 500 - - - - - -
Net operating income (loss) 729 (1,772) (8,303) 3,274 (2,100) 1,922 128
Interest expense (net) 1,347 720 987 1,623 1,886 2,323 1,597
Net income (loss) (618) (2,492) (9,290) 1,115 (3,986) (401) (1,469)
Net income (loss) per
Common Share $ (0.05) (0.21) (0.81) 0.11 (0.53) (0.05) (0.23)

Summary Balance Sheet Data:

Oil and Gas Properties (net) $ 20,489 21,515 29,485 23,945 19,183 26,448 29,018
Total assets 44,444 26,795 36,169 29,095 24,432 31,085 33,827
Long-term debt 25,137 8,865 22,390 12,500 12,465 15,380 18,945
Stockholders' equity 10,498 15,335 9,174 14,882 8,744 11,700 10,889
Dividends per Common Share $ 0.00 0.00 0.00 0.00 0.00 0.00 0.03

(a) Results for the period ended September 30, 1996, were substantially affected
by the explosion and fire.

See "Recent Explosion and Fire". Such results include the results of operations
through August 31 for the Bayou Sorrel Field, which was sold by the Company
effective September 1.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the nine months ended September 30, 1996 and 1995:

General

The oil and gas industry has experienced significant volatility in recent
years because of the fluctuatory relationship of the supply of most fossil fuels
relative to the demand for such products and other uncertainties in the world
energy markets. These industry conditions should be considered when this
analysis of the Company's operations is read.

The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta resulting in the fields being shut-in from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues estimated by management to be approximately $6 million. The fire was
the principal contributor to the losses of $.08 per share for the second quarter
of 1996 and $.11 per share for the third quarter of 1996. During the second
quarter the Company expensed $500,000 for its loss as a result of this
explosion. No further losses have been recognized or are anticipated. This
$500,000 amount included $225,000 in deductibles under the Company's insurance.

Results of Operations

"Oil and Gas revenue" decreased only 3% for the nine months ended
September 30, 1996 when compared to the nine months ended September 30, 1995, in
spite of the explosion and fire at West Delta. The fire and explosion
substantially reduced oil and natural gas production for the nine months in
1996, as production from the West Delta Fields was shut-in from the day of the
explosion and fire (April 24, 1996) until October 7, 1996. The decrease in
production from West Delta was offset by production from properties acquired.
The Bayou Sorrel Field was acquired on December 28, 1995 and had no production
realized by the Company in 1995. The offshore properties of Zapata Exploration
Company were acquired on July 26, 1996 with the production from these properties
being included in the Company's results of operations from July 27 through
September 30, 1995.

Production. Natural gas production decreased 39% to 4,590,000 Mcf for the
first nine months of 1996 from 7,578,000 Mcf in 1995. Natural gas production
from West Delta decreased from 6,700,000 Mcf for the first nine months of 1995
to 1,500,000 Mcf for the same period in 1996, primarily a result of the
explosion and fire on April 24, 1996. A secondary factor in the decrease in West
Delta production was a decline in 1996 production from four horizontal wells
drilled in 1994. These four wells produced more natural gas in January to April,
1995 than they did for the same period in 1996 (in the period prior to the
explosion and fire). Natural

gas production primarily from the Zapata Properties, and from the Bayou Sorrel
Field (primarily an oil field), somewhat offset the decrease in West Delta
production. The increase in Zapata production realized by the Company is due to
the fact that they were acquired on July 26, 1995. The production from these
properties included in the nine months ended September 30, 1995 is only from
July 27 to September 30, while the production for the full nine months is
included in 1996.

Oil production from the West Delta Fields also decreased for the nine
months ended September 30, 1996 when compared to the same period in 1995, from
103,000 barrels to 52,000 barrels. However, as with natural gas, 1995
acquisitions offset the decrease from West Delta. The Bayou Sorrel Field
acquisition, which produces primarily oil, produced 93,000 barrels in 1996, with
no oil production realized by the Company in 1995, more than offset the decrease
from West Delta. Also, oil production from the Zapata Properties is included for
the first nine months of 1996, with only the period of July 27 to September 30
included in the same period of 1995, due to the July 26 acquisition date, also
offsetting the decrease from West Delta. These factors resulted in a 66%
increase in oil production, from 122,000 barrels for the first nine months of
1995 to 203,000 barrels in 1996.

On an Mcf equivalent basis, total oil and natural gas production decreased
30% for the first nine months in 1996 compared to the same period in 1995.

Prices. Natural gas prices increased for the first nine months of 1996 to
$2.65 per Mcf compared to $1.54 for the same period in 1995. The Company entered
into a natural gas swap agreement beginning January 1, 1996 for the sale of
15,000 MMBtu of gas each day in 1996, with contract prices ranging from $1.75
per MMBtu to $2.25 per MMBtu. A swap loss for the nine months ended September
30, 1996 of $2.7 million, decreased the net price received by the Company to
$2.08 per Mcfe for the same period of 1996.

Oil prices also increased, from $16.30 per barrel in the first nine months
of 1995 to $18.33 per barrel in the same period of 1996.

"Depletion, depreciation and amortization" decreased 21% for the first
nine months of 1996 primarily due to the decreased production from the West
Delta Properties as a result of the April 24th explosion and fire, see
discussion of production volumes in "Oil and Gas revenue".

"Lease operating expenses" increased $320,000 in the first nine months of
1996 primarily due to the acquisition of the Zapata Properties and Bayou Sorrel
Field. With the Zapata Properties, the Company acquired interest in five
offshore producing properties. Since the acquisition of the Zapata Properties
closed on July 26, 1995, only the lease operating expenses from July 27, to
September 30, 1995 are included in the 1995 results of operations, while the
1996 period includes these expenses for the full nine months. 1996 also includes
a full nine months of lease operating expenses for the Bayou Sorrel Field,
acquired on December 28, 1995, with none of these expenses in the same period of
1995. West Delta lease operating expenses did decrease in the first nine months
of 1996 ($805,000 from expected levels) with the fields being shut-in from April
25 through October 7, however, a part of these lease operating expenses are
fixed in nature and continued.

"Production and ad valorem taxes" decreased to 3.2% of oil and natural gas
sales in the first nine months of 1996 from 5.9% of oil and natural gas sales
for the same period in 1995. A part of the decrease ($178,000 from expected
levels) is due to the lost production from the West Delta Properties for 67 days
in the second quarter and the entire third quarter due to the explosion and
fire. A large percentage of this production is in Louisiana State waters which
are subject to severance taxes. The decrease is also due to the shift in the
Company's production volumes from properties subject to severance taxes to
properties in federal offshore waters (primarily the Zapata Properties) that are
not subject to such taxes.

"Exploration expenses" in the first nine months of 1995 consist of two dry
exploratory wells drilled on South Timbalier Block 33 and Eugene Island Block 50
in the second quarter. The Company did not drill any exploratory wells in 1996.

The "West Delta fire loss" is the Company's expense of repairing and
rebuilding Tank Battery # 3, the central processing facility in the West Delta
Fields.

"Interest expense (net)" increased $627,000 , or 87% for the first nine
months of 1996 compared to the same period in 1995. Average Long-Term Debt
levels increased from $9 million for the nine months in 1995 to $21 million for
the same period in 1996, resulting in the primary cause of the increase in
interest expense. On December 27, 1995 the Company borrowed $10 million in
connection with the Bayou Sorrel Field acquisition. Through April, 1996, the
Company began to aggressively reduce Long-Term Debt, and it had reduced it by $4
million. The April 24th explosion and fire at West Delta reduced the Company's
discretionary cash flows and restricted the Company's ability to continue to
lower its Long-Term Debt. These two factors caused the average borrowing levels
to be higher in the first nine months of 1996 versus the same period of 1995.
The weighted average interest rate for the first nine months of 1996 was
actually slightly lower than that for the same period of 1995. Throughout both
nine month periods, the Company's Long-Term Debt included the 1993 Subordinated
Notes, bearing interest at 12%. The remainder of Long-Term Debt in each year was
borrowed under the Company's Bank Facility, which carried interest rates ranging
from 7% to 7 3/4%. The increased weighted average Long-Term Debt levels in the
first nine months of 1996, with a smaller percentage borrowed at 12%, decreased
the weighted average interest rate from 10% in the first nine months of 1995 to
8.6% in the same period of 1996. The Company borrowed $5 million on the Bank
Facility in late August 1996, for an earnest money deposit in connection with
the acquisition of the Amoco Properties, which closed on October 8, 1996.

Sale of Bayou Sorrel

Effective September 1, 1996, the Company sold its Bayou Sorrel Field to
National Energy Group, Inc. for $9 million in cash and 477,612 shares of
National Energy Group, Inc. common stock. The Company also retained an
overriding royalty interest in the deep rights of the field for depths below
11,000'. The field was acquired by the Company from Shell Western E.P., Inc. for
$10.5 million on December 28,1995, which included a broker's fee and a related
receivable. During the eight months the Company owned the field two wells were
drilled which did not result in production in commercial quantities. The Company
received an offer to purchase the Field. After having made the Amoco
Acquisition, Management believed that the Company's resources could be better
utilized elsewhere. The effective date of the sale was September 1, 1996, the
date at which National Energy Group, Inc. assumed all benefits and liabilities
of owning the property. The Company did not record a gain or loss on the sale.
For the nine months ended September 30, 1996, the Bayou Sorrel field had
accounted for $2 million, or 15% of the Company's total oil and gas revenue. The
Field had also accounted for $733,000, or 12% of lease operating expenses,
$888,000, or 18% of depreciation, and amortization and $239,000 or 56% of
production and ad valorem taxes. The net results of the field contributed
$150,000 to operating income, or 21%. The purchase price was paid in cash,
borrowed on the Company's Bank Facility. The interest expense incurred in 1996
by owning the field totaled $588,000 for the nine months ended September 30. The
operating income of the field and interest expense incurred resulted in a
decrease in net income of $438,000.

Liquidity and Capital Resources

At September 30, 1996, 46% of the Company's total assets were represented
by oil and gas properties, net of accumulated depreciation, depletion and
amortization.

bank's prime rate or at 1 to 1 3/4% (depending upon the percentage of the
facility being used) over the applicable London Interbank Offered Rate ("LIBOR")
on Eurodollar loans. Eurodollar loans can be for terms of one, two, three or six
months and interest on such loans is due at the expiration of the terms of such
loans, but no less frequently than every three months. Beginning April 1, 1997,
the interest rate will increase by an additional .5% at the beginning of each
quarter to a maximum of 3 3/4% over LIBOR as long as the Company has in excess
of $13,500,000 in Subordinated Notes outstanding, specifically the 1993
Subordinated Notes and the 1996 Tranche B Bridge Loan Subordinated Notes. See
"Use of Proceeds." Management feels that this bank facility greatly enhances its
ability to make necessary capital expenditures to maintain and improve
production from its properties and makes available to the Company additional
funds for future acquisitions. The bank facility is collateralized by a first
mortgage on the Company's offshore properties. The loan agreement contains
certain covenants including a requirement to maintain a positive indebtedness to
cash flow ratio, a positive working capital ratio, a certain tangible net worth,
as well as limitations on future debt, guarantees, liens, dividends, mergers,
material change in ownership by management, and sale of assets.

From time to time the Company has borrowed funds from institutional lenders
who are advised by Kayne, Anderson Investment Management, Inc. In each case
these loans are due at a stated maturity, require payments of interest only at
12% per annum 45 days after the end of each calendar quarter and are secured by
a second mortgage on the Company's offshore oil and gas properties. The
respective loan documents contain certain covenants including a requirement to
maintain a net worth ratio, as well as limitations on future debt, guarantees,
liens, dividends, mergers, material change in ownership by management, and sale
of assets. The loans are as follows:

(a) 1993 Subordinated Notes. In 1993, $5,000,000 was borrowed, due
December 31, 1999, but prepayable at any time. The Company may deliver up
to $1,000,000 in PIK (payment in kind) notes in satisfaction of interest
payment obligations. The lenders were issued, and during 1996 exercised,
warrants to acquire 816,526 Common Shares at $2.25 per share.

(b) 1996 Tranche A Convertible Subordinated Notes. On October 8,
1996, $8,500,000 was borrowed, due October 8, 2003, but prepayable any
time after May 8, 1998. The Notes are convertible into 2,060,606 Common
Shares on the basis of $4.125 per share. The Company may deliver up to
$2,000,000 in PIK notes in satisfaction of interest payment obligations.

(c) 1996 Tranche B Bridge Loan Subordinated Notes. On October 8,
1996, $8,500,000 was borrowed, due October 8, 2003, but prepayable at any
time. Should this loan not be prepaid by August 8, 1997 the interest rate
will increase from 12% to 14% per annum. The Company may deliver PIK notes
in satisfaction of this additional interest.

Management intends to pre-pay the 1993 Subordinated Notes and the 1996
Tranche B Bridge Loan Subordinated Notes with a portion of the proceeds of this
Offering. (See - "Use of Proceeds").

In 1991, in connection with a debt financing which has subsequently been
repaid, certain former lenders received a net profits interest (NPI) in the West
Delta Properties, which is a continuing obligation with respect to these
properties. During the three months ended March 31, 1996, payments with respect
to this NPI averaged $53,000 per month. Due to the explosion and fire at Tank
Battery #3, no NPI payments were made in the three months ended June 30 or
September 30, 1996.

Pursuant to existing agreements the Company is required to deposit funds
in escrow accounts to provide a reserve against satisfaction of its eventual
responsibility to plug and abandon wells and remove structures when certain
fields no longer produce oil and gas. Each month, until November 1997, $25,000
is deposited in a bank escrow account, to satisfy such obligations with respect
to a portion of its West Delta Properties. The Company has entered into an
escrow agreement with Amoco Production Company under which the Company will
deposit, for the life of the fields, in a bank escrow account ten percent (10%)
of the net cash flow, as defined in the agreement, from the Amoco properties.
These funds and interest earned thereon will be available for the expenses of
plugging wells and removing structures when that time comes. The Company has
established

the "PANACO East Breaks 110 Platform Trust" at Bank One, Texas, NA in favor of
the Minerals Management Service of the U.S. Department of the Interior. This
Trust requires an initial funding of $846,720 in December 1996, and remaining
deposits of $244,320 due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of $2,400,000. In addition, the
Company has $9,250,000 in surety bonds to secure its plugging and abandonment
obligations; including a $4,100,000 bond which was provided to the original
sellers of the West Delta Properties; a $2,400,000 supplemental bond provided to
the Minerals Management Service of the U.S. Department of the Interior in
connection with the plugging and structure removal obligations for the Company's
East Breaks Block 110 Platform and a $300,000 Pipeline Right-of-Way Bond.

During 1996 the Company hedged the price of natural gas by selling the
equivalent of 15,000 MMBtu per day for 1996 at fixed prices which ranged from
$2.25 for January to $1.75 for July. When the closing price (settlement price)
on NYMEX for natural gas futures was greater than the swap price for a given
month the Company paid that difference to the bank which effected the swap. If
the settlement price was less than the swap price the bank paid that difference
to the Company. By entering into the swap in December 1995 the Company locked in
the fixed prices on 15,000 MMBtu per day for each month in 1996. Since the
Company sells its natural gas on the spot market, in 1996 it realized prices
which approximated the settlement prices on NYMEX, less differences for
transportation due to pipeline locations that are varying distances from Henry
Hub, Louisiana which is the delivery point used for natural gas futures on
NYMEX. Starting in 1997 the Company's hedge transactions on natural gas are
based upon published gas pipeline index prices and not the NYMEX. This change
has eliminated the possibility of price differences due to transportation. For
1997, 14,000 MMBtu's per day are hedged, reduced to 10,000 MMBtu's per day in
1998 and 7,000 MMBtu's per day in 1999. Also the Company is hedging at a swap
price of $1.80 for 1997, which was below the market when the hedges were put in
place. The Company then has varying levels of participation (93% in January of
1997 to 40% in September) in settlement prices above to $1.80 swap price level.
Management has generally used hedge transactions to protect its cash flows when
the Company's borrowings under long-term debt have been higher and refrained
from hedge transactions when long-term debt has been lower. For accounting
purposes, gains or losses on swap transactions are recognized in the production
month to which a swap contract relates.

Despite a net loss for the nine months ended September 30, 1996 of
$618,000, the Company had cash provided by operations of $8.7 million. A
significant factor in cash flows from operations was a $4.2 million increase in
accounts payable, primarily a result of work being done on repairing and
rebuilding West Delta through the second and third quarters of 1996, while the
Company had not begun to receive any advances from its insurance company until
the third quarter.

Through September 30, 1996, the Company had borrowed $7.5 million under
its Bank Facility, $5 million of which was used for the earnest deposit made in
August in connection with the Amoco Acquisition. The remaining borrowings were
for development of oil and gas properties and repair and rebuilding of the West
Delta Tank Battery #3. The Company had repaid $4.8 million of these borrowings
through September, most of which was repaid through April.

During 1995, Shareholders' Equity increased $3,173,000, by virtue of the
exercise of options and warrants. During the first nine months of quarter 1996
Shareholders' Equity increased $1,837,000, as a result of the exercise of
warrants.

Capital Spending

In the nine month period ended September 30, 1996, the Company had $11.8
million in capital expenditures, including (1) a $5 million earnest money
deposit with respect to the purchase of the Amoco Properties, which were
subsequently acquired on October 8, 1996, (2) $1.9 million for repair and
rebuilding of the West Delta Tank Battery #3, net of insurance reimbursements,
and (3) $4.5 million for development of its oil and gas properties. The majority
of the development costs were incurred to drill two unsuccessful development
wells in the Bayou Sorrel Field and for the Company's share of successfully
recompleting two wells on Eugene Island Block 372, which is operated by Unocal
Corporation.

For the years ended December 31, 1991 - December 31, 1995

Results of Operations

"Oil and Gas revenue" during the years ended December 31, 1991 through
1995 has varied due to several factors. The prices of oil and gas have
fluctuated widely during the years shown. Oil prices are influenced by world
political events as well as decisions made by OPEC regarding the production
quotas of its members. Prices are further influenced by world economic
conditions which affect industrial output and the need for oil.

The average natural gas price received by the Company has fluctuated
but generally followed the trend of national gas prices. During 1995, gas
revenue contributed 85% of the Company's revenue compared with 46% in 1990.
While 1995 saw a production increase of 21%, the drop in natural gas prices to
$1.58 offset most of the benefit. Part of the increase was due to the
acquisition of the Zapata Properties in July 1995. By drilling four horizontal
wells and recompleting eight existing wells, the Company increased production by
34% in 1994. With the acquisition of the West Delta Properties in 1991, gas
production increased in 1992, 1993 and 1994 to 5,811,000, 5,586,000 and
8,139,000 Mcf, which sold for an average price of $1.81, $2.24 and $1.88 per
Mcf, before the effects of various natural gas hedge agreements. In 1991, the
Company sold 3,714,000 Mcf for an average price of $1.49.

From time to time, upon the insistence of its bank lenders the Company has
entered into natural gas hedging agreements which have the effect of raising or
lowering the price it receives for natural gas. In 1992, a contract loss of $1.1
million lowered the average price received per Mcf by $.19 to $1.73. In 1993, a
contract loss of $3 million lowered the average price received per Mcf by $.54
to $1.72.

In 1995, the Company sold 170,000 barrels of oil for an average of
$16.78 per barrel accounting for 15% of oil and gas revenue. In 1994, oil was
12% of such revenue with 137,000 barrels at an average price of $15.35. In 1993,
oil was 19% of such revenue with 180,000 barrel at an average price of $16.69.
In 1992, oil was 25% of such revenue with 174,000 barrels at an average price of
$19.41. In 1991, the Company sold 129,000 barrels of oil for an average price of
$19.68 per barrel; accounting for 29% of its oil and gas revenue.

A large part of the changes affecting most operating accounts in 1992
was due to West Delta being operated for twelve months compared with only seven
months in 1991.

"Depreciation, depletion and amortization" increased in 1995 primarily
as a result of the acquisition of the Zapata Properties for $2,748,000, $1.5
million in capitalized costs on existing properties and the increase in
production bringing about an increase in the rate of depletion. The increase in
1994 is due to the 1994 drilling and rework program increasing capitalized cost
and the 34% increase in production. The expense for 1993 remained relatively
constant over 1992 with only a slight decrease due to lower production.

"Lease operating expense" increased significantly during 1995 by (1)
$1,008,000 related to the acquisition of the Zapata Properties in July which
added interests on six offshore platforms and 44 wells, (2) $1,105,000 of
additional operating expenses on the West Delta Properties required to maintain
production from some of the more rapidly declining wells, and (3) $711,000 of
expensed items which might otherwise have been capitalized. Such expenses rose
from $.58 per Mcfe in 1994 (a year of very high production) to $.74 per Mcfe in
1995, after having been $.84, $.84, and $.79 per Mcfe in 1991, 1992, and 1993,
respectively.

"Production and ad valorem taxes" increased 33% in 1994 due to
increased production from four horizontal wells drilled in state waters on the
West Delta Properties in 1994.

"Exploration expense" in 1995 consisted of dry hole exploratory costs
of $796,000 on Eugene Island Block 50, $1,378,000 on South Timbalier Block 33,
(both drilled during the second quarter of 1995), and $5,938,000 on West Delta
Block 54 (drilled during the fourth quarter of 1995). The Company currently
plans no further exploratory activity in these blocks.

"Provision for write-downs of assets" in 1993, 1994 and 1995 were for
the Company's group of onshore properties, acquired in the early 1980's which
were becoming a less significant part of its operations.

"Net operating income (loss)" for 1995 would have been $560,000 were it
not for the $8,112,000 exploratory expenses and $751,000 property write-down. Of
the $8,112,000 in exploration expenses in 1995, $5,938,000 was incurred in the
fourth quarter in the drilling of a dry exploratory well in the West Delta Block
54. This $5,938,000 exploration expense, together with the $751,000 write-down
(also recognized in the fourth quarter), were the primary contributors to a net
operating loss of $6.5 million for the fourth quarter of 1995. The increased
production in 1994, along with $2.6 million lower asset write-downs brought
about the large increase in 1994. The operating income for 1993 decreased due to
lower production, and an asset write-down of $3.8 million. Net operating income
increased from 1991 to 1992 primarily due to the realization of the benefit of a
large number of expenses incurred in 1991 and again the ownership of the West
Delta Properties for a full twelve months.

"Interest expense (net)" decreased in 1995 as a result of lower levels
of long-term debt that prevailed throughout most of the year. Long-term debt
increased during 1995 to fund the acquisitions of the Zapata Properties in July
and more importantly the acquisition of the Bayou Sorrel Field in late December.
The average debt outstanding in 1995 was $11 million with a weighted average
interest rate of 8.6%. The interest expense decreases of 19% in 1993 and 13% in
1994 were due to the significant decrease in long-term debt from 1992 levels and
the refinancing of such debt on July 1, 1994 at lower interest rates. The
average debt outstanding in 1994 was $14 million with a weighted average
interest rate of 11.5% versus average debt outstanding of $14 million and a
weighted average interest rate of 14% in 1993. Interest expense increased
significantly in 1992 because of the debt incurred to acquire the West Delta
Properties being in place a full twelve months. The average debt outstanding in
1992 and 1991 was $17 million and $16 million, respectively. However, the
weighted average interest rate was 14% in 1992 versus 10% in 1991. The increase
in the average rate is a full year of the higher rate financing of the West
Delta acquisition in 1992.

"Net income (loss) per common share" is based upon the weighted average
number of shares outstanding of 11,504,615 for 1995, 10,039,042 for 1994,
7,583,761 for 1993, 7,314,041 for 1992, and 6,399,338 for 1991.

Liquidity and Capital Resources

Cash flow from operations was used to reduce long term debt, drill
wells, recomplete wells and acquire properties.

On July 1, 1994 the Company entered into a Credit Agreement with the
First Union National Bank of North Carolina. The loan was a reducing revolver
designed to provide the Company up to $30 million depending upon the Company's
borrowing base. The principal amount of the loan was due July 1, 1998.

During the last part of 1993 the Company increased Stockholders' Equity
$1,163,000, primarily by virtue of options and warrants being exercised. During
1994, the Company increased Stockholders' Equity $5,023,000, primarily as the
result of such exercises of options and warrants. Likewise most of the
$3,173,000 increase in 1995 was from the exercise of options and warrants. As
explained under "The Company - Funding of Business Activities," the Company
issued Subordinated Notes at year-end 1993. The Company utilized this
$5,000,000, along with equity proceeds and cash flow from operations described
above, to drill the wells and perform the recompletions in 1994 and 1995.

Capital Spending

The Company spent $12,603,000 on property acquisition costs, for
purchases of the Zapata Properties and the Bayou Sorrel Field. In 1995 the
Company also spent $8,112,000 on exploratory drilling which did not result in a
discovery and $1,497,000 on developmental costs. During 1994 over $11,749,000
was spent on eight offshore recompletions and the drilling of four horizontal
wells. All four horizontal wells and all eight

recompletions in 1994 were successful and offshore natural gas production
increased significantly.

THE COMPANY
General

PANACO, Inc. (the "Company") is a Delaware corporation that was
organized in October 1991. Effective September 1, 1992, Pan Petroleum MLP, the
Company's predecessor, was merged into the Company. The Company is in the oil
and gas business, acquiring, drilling and operating offshore oil and gas
properties in the Gulf of Mexico.

Between 1984 and 1988 a total of 114 limited partnerships were
consolidated into the Company's predecessor. With the acquisition of the West
Delta Properties in 1991, the Company shifted its emphasis offshore. Additional
offshore properties were acquired in 1994, 1995 and 1996. In recent years the
Company has been disposing of numerous onshore properties. The onshore
properties presently generate less than 4% of the Company's revenues. These
onshore property sales are part of management's plan to concentrate on
properties in the Gulf of Mexico, which the Company considers to be more
profitable.

Business Strategy

The Company's objective is to enhance shareholder value through
sustained growth in its reserve base, production levels and resulting cash flows
from operations. In pursuing this objective, the Company maintains a geographic
focus in the Gulf of Mexico and identifies properties that may be acquired
preferably through negotiated transactions or, if necessary, sealed bid
transactions. The properties the Company seeks to acquire generally are
geologically complex, with multiple reservoirs, have an established production
history and are candidates for exploitation. Geologically complex fields with
multiple reservoirs are fields in which there are multiple reservoirs at
different depths and wells which penetrate more than one reservoir that have the
potential for recompletion in more than one reservoir. Once properties are
acquired, the Company focuses on reducing operating costs and implementing
production enhancements through the application of technologically advanced
production and recompletion techniques. Over the past five years, the Company
has taken advantage of opportunities to acquire interests in a number of
producing properties which fit these criteria.

Business Activities

The Company owns interests in 123 offshore wells, located offshore
Louisiana and Texas. It also owns interests in 314 onshore wells in Kansas,
Louisiana, Oklahoma and Texas, but these interests generate less than 4% of its
revenues. As of December 31, 1996, these properties, including the recently
acquired Amoco Properties and excluding the Bayou Sorrel Field which was
recently sold, contained estimated Proved Reserves of approximately 2,169,000
Bbls of oil and condensate and approximately 51,412,000 Mcf of gas and the SEC
10 Value of such Proved Reserves was approximately $139,946,000. Approximately
20% of such Proved Reserves are attributable to oil and 80% to natural gas,
based on six Mcf of gas being equivalent to one Bbl of oil. Information included
herein with respect to Proved Reserves and the SEC 10 Value thereof has been
prepared by the Company. See "Properties - Significant Proved Properties."

The Company expects to hold its producing properties until the
economically recoverable reserves attributable thereto are depleted, although
the Company may sell any of its properties if management believes that such sale
would be in the Company's best interest.

Recent Explosion and Fire

The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta resulting in the fields being shut-in from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues of approximately $6 million. The fire was the principal contributor to
the losses of $.08 per share for the second quarter of 1996 and $.11 per share
for the third quarter of 1996. During the second quarter the Company expensed
$500,000 for its loss as a result of this explosion. No further losses have been
recognized or are anticipated. This $500,000 amount included $225,000 in
deductibles under the Company's insurance.

The expenditures, net of insurance payments, coupled with the decrease
in net operating cash flows discussed above resulted in higher borrowing levels
and interest expense for the second and third quarters. The resulting decrease
in revenues and higher interest expense decreased current assets by
approximately $1.9 million at the end of the third quarter of 1996.

Well Operations

The Company operates 52 offshore wells and owns all of the working
interests in substantially all of those wells. The Company's 71 remaining
offshore wells are operated by third party operators, including Unocal
Corporation, Phillips Petroleum Company, Texaco, Anadarko Petroleum Corporation
and Louisiana Land and Exploration Company. Operations are conducted pursuant to
joint operating agreements that were in effect at the time the Company acquired
its interest in these properties. The Company considers these joint operating
agreements to be on terms customary within the industry. The operator of an oil
and gas property supervises production, maintains production records, employs
field personnel, and performs other functions required in the production and
administration of such property. The compensation paid to the operator for such
services customarily varies from property to property, depending on the nature,
depth, and location of the property being operated. Where properties are
operated by the Company, it generally owns all of the working interests or a
majority of the working interest in the properties. Therefore, its revenue and
expense associated with portions of properties it operates for other working
interest holders is not material.

Acquisition, Development, and Other Activities

The Company utilizes its capital budget for (a) the acquisition of
interests in other producing properties, (b) recompletions of its existing
wells, and (c) the drilling of development and exploratory wells.

In recent years, major oil companies have been selling certain offshore
properties to independent oil companies because they feel these properties do
not have the remaining reserve potential needed by a major oil company. Several
independent oil companies have acquired these offshore properties and achieved
significant success in further exploitation of these properties. Even though a
property does not meet the criteria for further development by a major oil
company, that does not mean it is lacking further exploitation potential. The
majors are simply moving further offshore into deeper water and to other
countries where they can find and produce the super-fields that fit their
criteria. Present day technology permits drilling and completing wells in water
as deep as 10,000 feet.

On October 8, 1996, the Company closed on its acquisition of interests in
six offshore fields from Amoco Production Company for $40.4 million. In
consideration for such interests, the Company issued Amoco 2,000,000 Common
Shares and paid the sum of $32 million in cash. The interests acquired include
(1) a

33.3% working interest in the East Breaks 160 Field (2 Blocks) and a 33.3%
interest in the High Island 302 Field, both operated by Unocal Corporation; (2)
an average 50% interest in the High Island 309 Field (2 Blocks), a 12% interest
in the High Island 330 Field (3 Blocks) and a 12% interest in the High Island
474 Field (4 Blocks), all operated by Phillips Petroleum Company; and (3) a
12.5% interest in the West Cameron 180 Field (1 Block) operated by Texaco.
Current production for the interests acquired is 698 barrels of oil per day and
13.4 MMcf per day of natural gas. See "Properties - Amoco Acquisition."

Depending on the sales prices of oil and gas and its ability to finance
such activities, the Company may also drill exploratory wells on properties it
acquires. The Company does not currently have plans to drill exploratory wells
during 1997 but will evaluate potential prospects to determine the economic
benefit to the Company and may drill exploratory wells if the benefit to the
Company is reasonable when measured against the risks involved.

The number and type of wells drilled by the Company will vary from period
to period depending on the amount of the capital budget available for drilling,
the cost of each well, the Company's commitment to participate in the wells
drilled on properties operated by third parties, the size of the fractional
working interest acquired by the Company in each well and the estimated
recoverable reserves attributable to each well.

Acquisitions of properties may include acquisitions of working interests,
royalty interests, net profits interests, production payments, and other forms
of direct or indirect ownership interest or interests in oil and gas production.
The Company may also acquire general or limited partner interests in general or
limited partnerships and interests in joint ventures, corporations, or other
entities that own, manage, or are formed to acquire, explore for, or develop oil
and gas properties or conduct other activities associated with the ownership of
oil and gas production. The Company may also acquire or participate in the
expansion of natural gas processing plants and natural gas transportation or
gathering systems.

The success of the Company's acquisitions will depend on (a) the Company's
ability to establish accurately the volumes of reserves and rates of future
production from producing properties being considered for acquisition and the
future net revenues attributable to reserves from such properties, taking into
account future operating costs, market prices for oil and gas, rates of
inflation, risks attendant to production of oil and gas, and a suitable return
on investment, and (b) the Company's ability to purchase properties and produce
and market oil and gas therefrom at prices and rates that over time will
generate cash flows resulting in an attractive return on the initial investment.
The Company's cash flow and return on investment will vary to the extent that
the Company's production from an acquired property is greater or less than that
estimated at the time of acquisition because of, for example, the results of
drilling or improved recovery programs, the demand for oil and gas, or changes
in the prices of oil and gas from the prices used to calculate the purchase
price for producing properties. The Company will evaluate any economically
feasible project that would enhance the value of its properties. Such a project
may involve both the acquisition of developed and undeveloped properties and the
drilling of infield wells.

The Company expects that its primary activities will continue to be
concentrated offshore in the Gulf of Mexico. The Company can, if it so chooses,
invest in any geographic area. Drilling on and production from offshore
properties often involves higher costs than does drilling on and production from
onshore properties, but the production achieved on successful wells is generally
much greater.

The Company may also seek to acquire oil and gas companies through stock
purchases, asset purchases, and purchases of interests in partnerships. The
Company intends to pay for such possible acquisitions with its own securities,
cash or any other property, or any combination of the foregoing. The consent of
the Company's lenders is required for any such purchases. See "Funding of
Business Activities - Borrowings and Obligations".

Capital Spending

Through the nine months ended September 30, 1996 the Company had made
$11.8 million in capital

expenditures for (1) the earnest money deposit of $5 million for the Amoco
Properties, which were subsequently acquired on October 8, 1996, (2) the repair
and rebuilding of the West Delta Tank Battery #3 (net of insurance payments) and
(3) the development of its oil and gas properties. The majority of the
development costs were incurred to drill two unsuccessful development wells in
the Bayou Sorrel Field and for the Company's share of two successful
recompletions on Eugene Island Block 372, which is operated by Unocal
Corporation. The sources of funds for capital expenditures were cash flow from
operations, borrowings on the Company's Bank Facility and proceeds of the
issuances of Common Shares.

Use of 3-D Seismic Technology

The use of 3-D seismic and computer-aided exploration ("CAEX")
technology is an integral component of the Company's acquisition, exploitation,
drilling and business strategy. In general, 3-D seismic is the process of
obtaining seismic data along multiple lines and grids within a large geographic
area. 3-D seismic differs from 2-D seismic in that it provides information with
respect to multiple horizontal and vertical points within a geological formation
instead of information on a single vertical line or multiple vertical lines
within the formation. By expanding the amount of data obtained with respect to a
geological formation, the user is better able to correlate the data and obtain a
greater understanding and image of the formation. While it is impossible to
predict with certainty the specific configuration or composition of any
underground geological formation, 3-D seismic provides a mechanism by which
clearer and more accurate projected images of complex geological formations can
be obtained prior to drilling for hydrocarbons therein. In particular, 3-D
seismic delineates smaller reservoirs with greater precision than can be
obtained with 2-D seismic.

CAEX technology is the process of accumulating and analyzing the various
seismic, production and other data obtained relating to a potential prospect. In
general, the process of prospect evaluation through CAEX technology requires
inputting various 2-D and 3-D seismic data obtained with respect to a prospect,
correlating that data with historical well control and production data from
similar properties and analyzing the available data through computer programs
and modeling techniques in order to project the likely geological composition of
a prospect and potential locations of hydrocarbons. This process relies on a
comparison of actual data with respect to the prospect and historical data with
respect to the density and sonic characteristics of different types of rock
formations, hydrocarbons and other subsurface minerals, resulting in a projected
three dimensional image of the subsurface. This modeling is performed through
the use of advanced interactive computer workstations and various combinations
of available computer programs that have been developed solely for this
application.

3-D seismic and CAEX technology have been in existence since the mid
1970's; however, it was not until the late 1980's, with the development of
improved data acquisition equipment and techniques capable of gathering
significant amounts of data through a large number of channels and the
availability of improved computer technology at reasonable costs, that the
method became economically available to firms such as the Company. Prior to
that, it was the exclusive province of large multinational oil companies. The
Company owns 2-D seismic on all of its offshore properties and, owns 3-D seismic
on East Breaks Block 160 Field, High Island 304 Field, High Island 474 Field and
West Delta Block 58 Field. In addition to this proprietary 3-D seismic, much
group seismic data is available on the Companys' remaining properties. A new 3-D
seismic survey will be shot by Flores & Rucks, Inc. on the Companys' properties
in West Delta. The Company owns its own seismic processing equipment, but it
also utilizes the services of outside firms to process and interpret seismic
data.

The Company believes that its application of 3-D seismic and CAEX
technology in the exploration of oil and natural gas provides it with a number
of benefits in the exploration, delineation and development process that are not
generally available to those who only use 2-D seismic data and conventional
processing methods. In particular, the Company believes that, by obtaining
clearer and more accurate projected images of underground formations through
computer modeling, the Company is able to specifically identify potential
locations of hydrocarbon accumulations based on the characteristics of the
formations and analogies made with nearby fields and formations where
hydrocarbons have been found. This enhanced data can be used to assist the
Company in eliminating prospects and prospect locations that might otherwise
have been drilled had

the Company relied solely on 2-D seismic data. This data can be used to assist
the Company in identifying the perceived most desirable location for the well to
maximize the likelihood of a successful exploratory or development well and
production from the reservoir.

The Company believes that the collective application of 3-D seismic and
CAEX technology enables a much more accurate definition of the risk profile of a
prospect than was previously available using traditional exploration techniques.
To the extent the Company is successful in increasing its success rate and
reducing its dry hole costs through the use of advanced technology the Company
believes it has a competitive advantage over companies that do not use such
technology.

The Company generated a prospect in the northern portion of West Delta
Block 58 using 3-D seismic, which it farmed out to Tana Oil & Gas Corporation in
1996. Tana drilled a successful well to 12,800 feet which encountered 85 feet of
net pay and could produce as much as 15,000 Mcf per day based upon a recent well
test. The Company retained a 5.833% overriding royalty interest in the farmout.
Three of the fields in the Amoco Acquisition have proprietary 3-D seismic, while
all of the Amoco Properties have group 3-D seismic. A group 3-D seismic shooting
was recently completed on the western portion of the Company's properties in
West Delta.

Marketing of Production

Production from the Company's properties is marketed in accordance with
industry practices, which include the sale of oil at the wellhead to third
parties and the sale of gas to third parties at prices based on factors normally
considered in the industry, such as the spot price for gas or the posted price
for oil, and the quality of the oil and gas.

The Company markets all of its offshore oil production to Amoco, Citgo,
Conoco, Texaco, Unocal and Vastar. Citgo, Conoco, Texaco and Vastar each have
25% calls (exclusive rights to purchase) on the oil production from the West
Delta Fields at their average posted price for each month. Amoco has a call on
all of the oil production from the Amoco Properties at their posted prices. If
the Company has a bona fide offer from a crude oil purchaser at a higher price
than Amoco's posted price, then Amoco must match that price or release the call.
Oil from the Zapata Properties is currently being sold to Unocal and Amoco, but
can be sold to any crude oil purchaser of the Company's choice. Natural gas is
sold on the spot market. There are numerous potential purchasers for offshore
gas. Notwithstanding this, natural gas purchased by Tennoco Gas Marketing
Company accounted for 69% of the revenues in 1995. There are numerous gas
purchasers doing business in the areas involved as well as natural gas brokers
and clearing houses. Furthermore, the Company can contract to sell the gas
directly to end users. The Company does not believe that it is dependent upon
any one customer or group of customers for the purchase of natural gas.

Plugging and Abandonment Escrows

when certain fields no longer produce oil and gas. Each month, until November
1997, $25,000 is deposited in a bank escrow account, to satisfy such obligations
with respect to a portion of its West Delta Properties. The Company has entered
into an escrow agreement with Amoco Production Company under which the Company
will deposit, for the life of the fields, in a bank escrow account ten percent
(10%) of the net cash flow, as defined in the agreement, from the Amoco
properties. These funds and interest earned thereon will be available for the
expenses of plugging wells and removing structures when that time comes. As of
December 31, 1996 the Company has established the "PANACO East Breaks 110
Platform Trust" at Bank One, Texas, NA in favor of the Minerals Management
Service of the U.S. Department of the Interior. This Trust requires an initial
funding of $846,720 in December 1996, and remaining deposits of $244,320 due at
the end of each quarter in 1999 and $144,000 due at the end of each quarter in
2000, for a total of $2,400,000. In addition, the Company has $9,250,000 in
surety bonds to secure its plugging and abandonment obligations; including a
$4,100,000 bond which was provided to the original sellers of the West Delta
Properties; a $2,400,000 supplemental bond provided to the Minerals Management
Service of the U.S. Department of the Interior in connection with the plugging
and structure removal obligations for the Company's East Breaks Block 110
Platform and a $300,000 Pipeline Right-of-Way Bond.

Insurance

The Company maintains insurance coverage as is customary for companies of
a similar size engaged in operations similar to the Company's. The Company's
insurance coverage includes comprehensive general liability insurance in the
amount of $50 million per occurrence for personal injury and property damage and
cost of control and operators extra expense insurance of $3 million on onshore
wells, $20 million on wells in Louisiana State waters and $50 million per
occurrence in Federal offshore waters, which limits are proportionately reduced
when the Company owns less than 100% of the respective property. The Company
maintains $65 million in property insurance on its offshore properties. There is
no assurance that such insurance will be adequate to cover all such costs or
that such insurance will continue to be available in the future or that such
insurance will be available at premium levels that justify its purchase. The
occurrence of a significant event not fully insured or indemnified against could
have a material adverse effect on the Company's financial condition and
operations.

Funding of Business Activities

Cash Flow from Operations. Funding for the Company's activities is
provided primarily by cash flow from operations, however, the Company may use
its Bank Facility and other sources described below. Generally, cash flow from
properties declines over time as production declines. The cash flow generated by
the Company's activities would decline in the absence of (a) the acquisition and
development of other oil and gas properties, (b) increases in the Company's
production of oil and gas resulting from the development of its properties, or
(c) increases in the prices that the Company receives for oil and gas
production.

Issuance of Additional Common Shares and Other Securities. The Company may
issue additional Common Shares or other securities for cash, to the extent that
market and other conditions permit, and use the proceeds to fund its activities.
Additional securities issued by the Company may be of a class preferred as to
the Common Shares with respect to such matters as dividends and liquidation
rights and may also have other rights and preferences as determined by the Board
of Directors. The Certificate of Incorporation and By-laws of the Company
generally do not require the Company to obtain the consent of its shareholders
for the issuance and sale of Common Shares or other securities.

During 1995 Shareholders' Equity increased by $3,173,000, by virtue of the
exercise of options and warrants. During 1996 Shareholders' Equity increased by
$1,837,000, as a result of the exercise of warrants, and $8,400,000 as a result
of 2,000,000 shares being issued to Amoco Production Company as part of the
Amoco Acquisition.

Borrowings and Obligations. The Company is permitted to incur indebtedness
for any Company purpose. It is currently expected that Company indebtedness will
consist primarily of borrowings from
31

commercial banks and credit corporations, the sale of debt instruments, and
possibly by advances from oil and gas purchasers.

On October 8, 1996, the Company amended its bank facility with First Union
National Bank of North Carolina (60% participation), and Banque Paribas (40%
participation), herein "Bank Facility". The loan is a reducing revolver designed
to provide the Company up to $40 million depending on the Company's borrowing
base, as determined by the lenders. The Company's borrowing base at December 31,
1996 was $31 million, with an availability under the revolver of $2.5 million.
The principal amount of the loan is due July 1, 1999. However, at no time may
the Company have outstanding borrowings under the Bank Facility in excess of its
borrowing base. Should the borrowing base ever be determined to be less than the
outstanding principal owed, the Company must immediately pay that difference to
the lenders. Interest on the loan is computed at the bank's prime rate or at 1
to 1 3/4% (depending upon the percentage of the facility being used) over the
applicable London Interbank Offered Rate ("LIBOR") on Eurodollar loans.
Eurodollar loans can be for terms of one, two, three or six months and interest
on such loans is due at the expiration of the terms of such loans, but no less
frequently than every three months. Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over LIBOR as long as the Company has in excess of $13,500,000 in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. See "Use of Proceeds." Management
feels that this bank facility greatly enhances its ability to make necessary
capital expenditures to maintain and improve production from its properties and
makes available to the Company additional funds for future acquisitions. The
bank facility is collateralized by a first mortgage on the Company's offshore
properties. The loan agreement contains certain covenants including a
requirement to maintain a positive indebtedness to cash flow ratio, a positive
working capital ratio, a certain tangible net worth, as well as limitations on
future debt, guarantees, liens, dividends, mergers, material change in ownership
by management, and sale of assets.

In 1991, the Company borrowed $21,600,000 from New England Mutual Life
Insurance Company, NMB Post Bank, Groep, N.V. (now ING Bank), the Lincoln
National Life Insurance Company and En Cap 1989-1 Limited Partnership. The
balance owed on this facility was prepaid in 1994 with part of the proceeds of
the Company's Bank Facility. As part of the 1991 transaction these former
lenders received a net profits interest in part of the West Delta Properties.

(b) 1996 Tranche A Convertible Subordinated Notes. On October 8,
1996, $8,500,000 was borrowed, due October 8, 2003, but prepayable any
time after May 8, 1998. After the expiration of 180 days following the
conclusion of this offering, the Notes are convertible into 2,060,606
Common Shares on the basis of $4.125 per share. The Company may deliver up
to $2,000,000 in PIK notes in satisfaction of interest payment
obligations.

Management intends to pre-pay the 1993 Subordinated Notes and the 1996
Tranche B Bridge Loan Subordinated Notes with a portion of the proceeds of this
Offering.

Competition, Markets, Seasonality and Regulation

Competition. There are a large number of companies and individuals engaged
in the exploration for and development of oil and gas properties. Competition is
particularly intense with respect to the acquisition of oil and gas producing
properties. The Company encounters competition from various independent oil
companies in raising capital and in acquiring producing properties. Many of the
Company's competitors have financial resources and staffs considerably larger
than the Company.

Markets. The ability of the Company to produce and market oil and gas
profitably depends on numerous factors beyond the control of the Company. The
effect of these factors cannot be accurately predicted or anticipated. These
factors include the availability of other domestic and foreign production, the
marketing of competitive fuels, the proximity and capacity of pipelines,
fluctuations in supply and demand, the availability of a ready market, the
effect of federal and state regulation of production, refining, transportation,
and sales of oil and gas, political instability or armed conflict in
oil-producing regions, and general national and worldwide economic conditions.
In recent years, worldwide oil production capacity and gas production capacity
in the United States exceeded demand and resulted in a substantial decline in
the price of oil and natural gas in the United States.

Since early 1986, certain members of the Organization of Petroleum
Exporting Countries ("OPEC") have, at various times, dramatically increased
their production of oil, causing a significant decline in the price of oil in
the world market. The Company cannot predict future levels of production by the
OPEC nations, the prospects for war or peace in the Middle East, or the degree
to which oil and gas prices will be affected, and it is possible that prices for
any oil, natural gas liquids, or gas produced by the Company will be lower than
those currently available.

The demand for gas in the United States has fluctuated in recent years due
to economic factors, a deliverability surplus, conservation and other factors.
This lack of demand has resulted in increased competitive pressure on producers.
However, environmental legislation is requiring certain markets to shift
consumption from fuel oils to natural gas, thereby increasing demand for this
cleaner burning fuel.

In view of the many uncertainties affecting the supply and demand for oil,
gas, and refined petroleum products, the Company is unable to predict future oil
and gas prices. In order to minimize these uncertainties the Company, from time
to time, hedges prices on a portion of its production with futures contracts.

Seasonality. Historically the nature of the demand for natural gas caused
prices and demand to vary on a seasonal basis. Prices and production volumes
were generally higher during the first and fourth quarters of each calendar
year. For example, during 1991 the price the Company receives for its natural
gas fell from a high of $1.78 per Mcf in January to a low of $1.09 in July and
then climbed to a new high of $1.95 in December, averaging $1.49 for the year.
However, the substantial amount of gas storage becoming available in the U.S. is
altering this seasonality. During 1993, 1994 and 1995 the Company's gas prices
ranged from $2.78 to $1.64, $2.43 to $1.39 and $2.37 to $1.37, averaging $2.13,
$1.88 and $1.58, respectively, in each case, per Mcf. Gas prices averaged $2.08
per Mcf during the first nine months of 1996. The Company sells its natural gas
on the spot market based upon published index prices for each pipeline.
Historically the net price received by the Company for its gas has averaged
about $.10 per MMbtu below the NYMEX Henry Hub index price, due to
transportation differentials. Fields that are located further offshore, such as
the Amoco Properties, will generally sell their gas for as much as $.20 below
that index price. Recent pipeline index prices have been at historical highs.
During December 1996 the Company sold its gas for an average of $2.86.

Regulation. The Company's business is affected by governmental laws and
regulations, including price control, energy, environmental, conservation, tax
and other laws and regulations relating to the petroleum industry. For example,
state and federal agencies have issued rules and regulations that require
permits for

the drilling of wells, regulate the spacing of wells, prevent the waste of
natural gas and crude oil reserves, and regulate environmental and safety
matters including restrictions on the types, quantities and concentration of
various substances that can be released into the environment in connection with
drilling and production activities, limits or prohibitions on drilling
activities on certain lands lying within wetlands and other protected areas, and
remedial measures to prevent pollution from current and former operations.
Changes in any of these laws, rules and regulations could have a material
adverse effect on the Company's business. In view of the many uncertainties with
respect to current law and regulations, including their applicability to the
Company, the Company cannot predict the overall effect of such laws and
regulations on future operations.

The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence of such laws and
regulations have no more restrictive effect on the Company's method of
operations than on other similar companies in the industry. The following
discussion contains summaries of certain laws and regulations and is qualified
in its entirety by reference thereto.

Various aspects of the Company's oil and natural gas operations are
regulated by administrative agencies under statutory provisions of the states
where such operations are conducted and by certain agencies of the federal
government for operations of federal leases. The Federal Energy Regulatory
Commission (the FERC) regulates the transportation and sale for resale of
natural gas in interstate commerce pursuant to the Natural Gas Act of 1938 (the
"NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). In the past, the
federal government has regulated the prices at which oil and gas could be sold.
Currently, sales by producers of natural gas, and all sales of crude oil,
condensate and natural gas liquids can be made at uncontrolled market prices,
but Congress could reenact price controls at any time. Deregulation of wellhead
sales in the natural gas industry began with the enactment of the NGPA in 1978.
In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act which removed
all NGA and NGPA price and non-price controls affecting wellhead sales of
natural gas effective January 1, 1993.

Commencing in April 1992, the FERC issued Order NOS. 636, 636-A, and 636-B
("Order No. 636"), which require interstate pipelines to provide open-access
transportation on a basis that is equal for all gas shippers. Although Order No.
636 does not directly regulate the Company's activities, the FERC has stated
that it intends for Order No. 636 to foster increased competition within all
phases of the natural gas industry. It is unclear what impact, if any, increased
competition within the natural gas industry under Order No. 636 will have on the
Company's activities. Although Order No. 636, assuming it is upheld in its
entirety, could provide the Company with additional market access and more
fairly applied transportation service rates, Order No. 636 could also subject
the Company to more restrictive pipeline imbalance tolerances, delivering more
or less than anticipated deliveries, and greater penalties for violation of
those tolerances. The FERC has issued final orders in virtually all Order No.
636 pipeline restructuring proceedings. Appeals of Order No. 636 as well as
orders in the individual pipeline restructuring proceedings, are currently
pending and Company cannot predict the ultimate outcome of court review. This
review may result in the repeal, in whole or in part, of Order No. 636.

The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
the Company only indirectly, the FERC's current rules and policies may have the
effect of enhancing competition in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions. The Company cannot predict what action the FERC will take on
these matters, nor can it accurately predict whether the FERC's actions will
achieve the goal of increasing competition in markets in which the Company's
natural gas is sold. However, the Company does not believe that it will be
affected by any action taken in a manner that is materially different than the
effect upon other natural gas producers with which it competes.

The FERC has issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While this policy
statement affects the Company only indirectly, in its present form, the new
policy should enhance competition in natural gas markets and facilitate
construction of gas supply laterals. However, requests for rehearing of this
policy statement are currently pending. The Company cannot

predict what action the FERC will take on these requests.

Sales of crude oil, condensate and gas liquids by the Company are not
regulated and are made at market prices. The price the Company receives from the
sale of these products is affected by the cost of transporting the products to
market. Effective as of January 1, 1995, the FERC implemented regulations
establishing an indexing system for transportation rates for oil pipelines,
which would generally index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost of
transporting crude oil, liquids and condensates by pipeline. These regulations
are subject to pending petitions for judicial review. The Company is not able to
predict with certainty what effect, if any, these regulations will have on it,
but other factors being equal, the regulations may tend to increase
transportation costs or reduce wellhead prices for such conditions.

Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC and the courts. The Company
cannot predict when or whether any such proposals may become effective. In the
past, the natural gas industry historically has been very heavily regulated.
There is no assurance that the current regulatory approach pursued by the FERC
will continue indefinitely into the future. Notwithstanding the foregoing, it is
not anticipated that compliance with existing federal, state and local laws,
rules and regulations will have a material or significantly adverse effect upon
the capital expenditures, earnings or competitive position of the Company.

Extensive federal, state and local laws and regulations govern oil and
natural gas operations regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. Some laws, rules and regulations
relating to protection of the environment may, in certain circumstances, impose
"strict liability" for environmental contamination, rendering a person liable
for environmental damages and response costs without regard to negligence or
fault on the part of such person. For example, the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, also
known as the "Superfund" law, imposes strict liability on an owner and operator
of a facility or site where a release of hazardous substances into the
environment has occurred and on companies that disposed or arranged for the
disposal of the hazardous substances released at the facility or site. The
regulatory burden on the oil and natural gas industry increases its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations affect the operations and costs of the Company. While compliance
with environmental requirements generally could have a material adverse effect
upon the capital expenditures, earnings or competitive position of the Company,
the Company believes that other independent energy companies in the oil and gas
industry likely would be similarly affected. The Company believes that it is in
substantial compliance with current applicable environmental laws and
regulations and that continued compliance with existing requirements will not
have a material adverse impact on the Company.

Offshore operations of the Company are conducted on both federal and
state lease blocks of the Gulf of Mexico. In all offshore areas the more
stringent regulation of the federal system, as implemented by the Mineral
Management Service of the Department of the Interior, are to be applicable to
state leases as well as federal leases. The Oil Pollution Act of 1990 requires
operators of oil and gas leases on or near navigable waterways to provide $35
million in "financial responsibility", as defined in the Act. At present the
Company is satisfying the financial responsibility requirement with insurance
coverage.

Employees

The Company has thirteen full time employees, some of whom are officers.
The Company utilizes an additional thirty-two contract personnel in the
operation of the offshore properties, and uses numerous outside geologists,
production engineers, reservoir engineers, geophysicists and other professionals
on a consulting basis.

Office Facilities

The Company's headquarters are located at 1050 West Blue Ridge Boulevard,
PANACO Building, Kansas City, Missouri 64145-1216, and its telephone number is
(816) 942-6300, FAX (816) 942-6305. The Houston, Texas office is located at 1100
Louisiana, Suite 5110, Houston, Texas 77002-5220, telephone (713) 652-5110, FAX
(713) 651-0928.

Legal Proceedings

The Company is presently a party to several legal proceedings, which it
considers to be routine and in the ordinary course of its business. Management
has no knowledge of any pending or threatened claims that could give rise to any
litigation which management believes would be material to the Company.

PROPERTIES

The Company's offshore properties are located offshore Louisiana and
Texas. The following table sets forth certain information with respect to the
Company's significant properties as of December 31,1996. Such properties account
for 96% of the aggregate SEC 10 Value of its properties.

Significant Proved Properties

Proved Reserves
Oil Gas SEC 10
Property Area (Bbls) (Bcf) Value

AMOCO PROPERTIES Offshore TX 1,143,000 16.3 $ 42,107,000
WEST DELTA PROPERTIES Offshore LA 540,000 24.2 $ 69,903,000
ZAPATA PROPERTIES Offshore TX & LA 143,000 8.5 $ 21,711,000

Amoco Acquisition

On August 26, 1996 the Company entered into a Purchase and Sale
Agreement with Amoco Production Company to acquire Amoco's interest in 13
offshore blocks comprising six fields in the Gulf of Mexico ("Amoco
Properties"). The acquisition closed October 8, 1996. The purchase price for the
assets acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares, at $4.20 per share, and by payment to Amoco of $32
million in cash.

In addition to the interests acquired, the Company purchased a 33.3%
interest in a 12.67 mile 12" pipeline connecting East Breaks Block 160 platform
to the High Island Offshore System ("HIOS"), a natural gas pipeline system in
the Gulf of Mexico and a 33.3% interest in a 17.47 mile 10" pipeline connecting
the East Breaks Block 160 platform to the High Island Pipeline System ("HIPS"),
a crude oil pipeline system in the Gulf of Mexico. HIOS and HIPS are the primary
natural gas and crude oil pipeline systems in that part of the Gulf of Mexico.

The East Breaks Block 160 platform also serves a subsea well owned by
Mobil Oil Corporation in East Breaks Block 117. Under agreements with Mobil the
owners of the East Breaks Block 160 platform share in certain fees paid by
Mobil.

The following table lists the field names, block numbers, working
interests, net revenue interests and number of wells of the properties.

Working Net Revenue Number of
Field/Block Interest Interest Active Wells

East Breaks 160 Field
EB 160 (OCS 2647) 0.3333 0.2778 13
EB 161 (OCS 2648) 0.3333 0.2778 10

High Island A-302 Field
HI A-302 (OCS 2732) 0.3333 0.2778 5

High Island A-309 Field
HI A-309 (OCS 2735) 0.4500 0.3750 9
HI A-310 (OCS 3378) 0.5500 0.4583 8

High Island A-330 Field
HI A-330 (OCS 2421) 0.1200 0.1000 25
HI A-349 (OCS 2743) 0.1200 0.1000 6
WC 613 (OCS 3286) 0.1200 0.1000 3

High Island A-474 Field
HI A-474 (OCS 2366) 0.1200 0.1000 18
HI A-489 (OCS 2372) 0.1200 0.1000 22
HI A-499 (OCS 3118) 0.1310 0.1092 6
HI A-475 (OCS 2367) 0.1200 0.1000 0

West Cameron 180 Field
WC 144 (OCS 1953) 0.1250 0.1042 7

Average net production from these fields during 1995 was 15.6 MMcf of gas
per day and 592 barrels of oil per day and cash flow net to the interests was
$9.5 million. Management believes that these fields have potential for
substantial reserve and production increases. Three of the fields have
proprietary 3-D seismic.

East Breaks 160 Field

This field consists of two blocks, East Breaks 160 and 161. The water
depth ranges from 900' to 1,100'. The Company owns a 33.3% working interest with
a 27.8% net revenue interest. Unocal Corporation is the operator. The 1995 net
cash flow was $2.8 million. East Breaks 160 field produces from an anticlinal
ridge with 12 productive horizons. A proprietary 3-D survey was shot and
processed in 1990. Net proved reserves are estimated to be 11.2 Bcf and 1,002
MBO. The GA-2 and HB-2 reservoirs account for most of the reserves.
Additional income is derived from processing fees from the Mobil Oil
Corporation recent discovery in adjacent Block 117. This subsea well is tied
back to the East Breaks 160 platform. Management believes there are numerous
reservoirs in the field which have not been adequately evaluated with wells.
Additional wells on Blocks 160 and 161 and in adjacent blocks are under
consideration by Unocal Corporation. The first well in Unocal's recompletion
program was recently recompleted and is producing 550 barrels of oil per day and
1,200 Mcfd.

High Island A-302 Field

High Island Block A-302 is in approximately 200' of water. The Company owns
a 33.3% working interest with a 27.8% net revenue interest. Unocal Corporation
is the operator. Production is from four producing horizons on a faulted
anticlinal structure. A speculative 3-D survey was shot in 1991 and processed in
1992. One well is producing, with one well scheduled to be recompleted in 1997.
Management believes additional reserves should be recoverable from two sands in
an area which seismic data shows to be undrained by the existing wells.

High Island A-309 Field

High Island A-309 field consists of two blocks, High Island A-309 and
A-310, in approximately 200' of water. The Company owns a 45% working interest
in Block A-309 and a 55% working interest in Block A-310. Phillips Petroleum
Company is the operator. The 1995 net cash flow was $5.9 million. Production is
from three faulted anticlines with 18 productive horizons. Proprietary 3-D
seismic data has been reprocessed. Net Proved Reserves are estimated to be 3.3
Bcf. Management expects that one additional well will be drilled to recover the
estimated 4.8 Bcf in four zones. Numerous additional wells and recompletions are
planned for 1997 through 1999.

High Island A-330 Field

The field consists of three blocks, High Island A-330, High Island A-349
and West Cameron 613. The field is located in 280' of water. The Company owns a
12% working interest with a 10% net revenue interest. Costal Oil and Gas
Corporation is the operator. Three wells have been recompleted in 1996. This
field produces from a faulted anticline with 24 productive horizons. The Company
has 2-D seismic on this field, but a 3-D seismic survey was recently shot.
Management believes that significant upside potential was delineated by the 3-D
seismic. A well in West Cameron Block 613 has been proposed by the operator for
1997 to offset a field operated by Shell offshore in Block A-350 and other wells
and recompletions are under consideration.

High Island A-474 Field

This field consists of three full blocks in the High Island Area, A-474,
A-489, A-499, and part of Block A- 475. The water depth is 250' to 285 and
Phillips Petroleum Company ("Phillips") is the operator. The Company owns a 12%
working interest with a 10% net revenue interest in Blocks A-474 and A-489, a
13.1% working interest with a 10.9% net revenue interest in Block A-499, and a
12% working interest with a 9% net revenue interest in Block A-475. There are 23
productive horizons in this faulted anticline. A proprietary 3-D seismic was
shot in 1991 and processed in 1993. Net Proved Reserves are 1.0 Bcf and 138 MBO.
Phillips is currently drilling a well and is planning several recompletions and
additional wells in 1997. Phillips is in what it considers to be phase two of a
four phase development program which is expected to be implemented over the next
three years.

West Cameron 180 Field

This field consists of a single block, West Cameron 144, in 40' of water.
Texaco is the operator. The Company owns a 12.5% working interest with a 10.4%
net revenue interest. The producing feature is a north- plunging faulted
anticline that underlies West Cameron Blocks 173 and 180. There are three
productive horizons.

West Delta Properties

These properties consist of 13,565 acres in Blocks 52 through 56 and
Block 58 in the West Delta Area, offshore Louisiana. The properties have 36
wells, five of which were recently drilled. The West Delta Properties were
acquired from Conoco, Inc., Atlantic Richfield Company (now Vastar Resources,
Inc.), OXY USA, Inc. and Texaco Exploration and Production, Inc. in May 1991.
During 1995 the properties had net production averaging approximately 20,643 Mcf
of natural gas per day and 264 barrels of oil and condensate per day.

The Company has a 87.5% net revenue interest in the field, subject to a 5%
net profits interest on the shallower reservoirs in favor of the Companys'
former lenders and a 4.166% overriding royalty interest on the deeper reservoirs
in favor of Conoco and OXY. In 1994 the Company spent $6.9 million on drilling
four wells and the recompletion of eight wells on these properties. The Company
is the operator and generally owns 100% of the working interest in these wells.
Presently, the wells produce from depths ranging from 1,200 feet

to 12,500 feet. Because of the existing surface structures and production
equipment, management believes that additional wells can be added on the
properties with lower completion costs.

The Company has agreed to farmout the deep rights in West Delta Blocks 53
through 56 to Flores & Rucks, Inc., which has agreed to fund a new 3-D seismic
survey. The Company retains all presently producing reservoirs. Management
believes this farmout will bring about an evaluation of any deep reservoir
potential and allow the Company to further evaluate the presently producing
reservoirs using the new 3-D seismic. The Company will have the option of
retaining a 12 1/2% overriding royalty interest or participating up to 50% as a
working interest owner in any wells drilled by Flores & Rucks, Inc.

During 1994 the Company farmed out the deep rights (below 11,300 feet) to
an 1,875 acre parcel in Block 58 to Energy Development Corporation which drilled
a successful well to 16,500 feet. Production commenced in April, 1995. The
Company retained a 12 1/2% overriding royalty interest in that acreage that
converts to a 15% overriding royalty interest or a 27% working interest at
Payout. The well has produced as much as 21,000 Mcf per day and 1,500 barrels of
condensate per day. Energy Development Corporation was subsequently acquired by
Samedan Oil Corporation.

The main production facility on the West Delta Properties is a four
platform complex designated as Tank Battery #3. There are four ancillary
platforms in the eastern portion of the properties connected to Tank Battery #3.
Three wells are on one of these platforms. In the western portion there is one
production platform designated as Platform "D" in Block 58, with three wells.
The remaining 30 wells are located on satellite structures connected to Tank
Battery #3 or one of its ancillary platforms. Eight wells produce oil and
natural gas. The remaining wells produce only natural gas.

The Company is replacing the pipeline connecting "D" Platform in Block
58 with Tank Battery # 3 in Block 54 with two new 6" pipelines. For this reason
production from Block 58 is currently shut-in. Resumption of production is
anticipated in February.

In connection with the acquisition of the West Delta offshore
properties the Company provides the sellers with a $4,100,000 plugging and
abandonment bond collateralized in part with a bank escrow account.
See "The Company - Plugging and Abandonment Escrows".

Zapata Properties

On July 12th, 1995, the Company entered into a Purchase and Sale
Agreement with Zapata Exploration Company ("Zapata") to acquire all of Zapata's
offshore oil and gas properties in the Gulf of Mexico. The properties consist of
East Breaks Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372,
South Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross
acres. The transaction was closed July 26, 1995. The Company took over as
operator of the East Breaks and West Cameron properties effective at closing.
The East Cameron property is operated by Anadarko Petroleum Corporation. The
Eugene Island property is operated by Unocal Corporation and the South Timbalier
property is operated by Louisiana Land & Exploration Company. Proved reserves at
December 31, 1995 attributable to the Company's net working interests, were
222,000 Bbls of oil and 15.3 Bcf of natural gas. During 1995, subsequent to
closing on July 26th, the properties produced 20,000 barrels of oil and 1.8 Bcf
of natural gas, net to the Company's interest.

In addition to the mineral interests acquired, the Company purchased a
100% interest in a 31 mile natural gas pipeline connecting the Company's East
Breaks 110 platform to the High Island Offshore System and a 22 mile oil
pipeline which connects the East Breaks 110 platform with the High Island
Pipeline System. HIOS and HIPS are the primary natural gas and crude oil systems
in that part of the Gulf of Mexico.

The Company's East Breaks 110 platform has significant excess capacity
for both crude oil and natural gas. Prior to the acquisition of the properties,
Zapata had entered into a Facilities Sharing Agreement with
AGIP Petroleum Company, Inc. ("AGIP") to operate and process for AGIP's subsea
wells in Blocks 112 and 157. Under the Agreement AGIP will pay certain fees to
the Company and split the cost of operating the East Breaks 110 platform with
the Company, based upon each company's proportion of production. A portion, not
to exceed $6 million, of the monies earned pursuant to this Agreement are being
paid to Zapata as part of the acquisition of the properties.

The purchase price for the assets acquired in the transaction was
$2,748,000 in cash and the obligation to pay a production payment to Zapata
based upon future production. The production payment is based upon production
from the East Breaks 109 Field after production of 12 Bcfe gross (10 Bcfe net)
measured from October 1, 1994. The Company will pay to Zapata $.4167 per Mcfe on
the next 27 Bcfe of gross production, if that much is produced. Payments to
Zapata on this production payment are to be made by the Company when it is paid
for the oil or gas. The Company's oil and gas reserves are calculated net of
this production payment.

Bayou Sorrel Field

As of December 27, 1995 the Company acquired from Shell Western E &
P, Inc. all of its interest in the Bayou Sorrel Field in Iberville Parish,
Louisiana. The purchase price of the field and a related receivable of $600,000
was $10,455,000 in cash, including a $205,000 brokers' fee.

Effective September 1, 1996 the Company sold the Bayou Sorrel Field to
National Energy Group, Inc. for $11 million. The Company received $9 million in
cash and 477,612 shares of National Energy Group, Inc. common stock, which were
valued at $2 million as of the November 26, 1996, closing date. These shares are
restricted securities and are not freely tradeable. The Company has demand
registration rights and has made such a demand. The Company retained a 3%
overriding royalty interest in the deep rights of the field at depths below
11,000 feet.

Oil and Gas Information

The following tables set forth selected oil and gas information for the
Company, and certain forward looking information about its properties. Future
results may vary significantly from the amounts reflected in the information set
forth herein because of normal production declines and future acquisitions. See
"Risk Factors Estimates of Reserves and Future Net Revenue" and "Replacement of
Reserves".

Proved Reserves (a) (b)

The following table sets forth information as of December 31, 1996 as to
the estimated Proved Reserves attributable to the Company's properties.

Oil and liquids (Bbls):
Proved Developed Reserves .................................. 1,903,000
Proved Undeveloped Reserves ................................ 266,000
Total Proved Reserves .................................. 2,169,000

Natural gas (Mcf):
Proved Developed Reserves .................................. 41,205,000
Proved Undeveloped Reserves ................................ 10,207,000
Total Proved Reserves .................................. 51,412,000

(a) Calculated by the Company in accordance with the rules and regulations of
the SEC, based upon December 31, 1996 prices of $24.25 per barrel of oil
and $3.84 per MMBtu of gas, adjusted for basis differentials, Btu content
of gas and specific gravity of oil. The Company's independent reservoir

engineers prepare a reserve report as of the end of each calendar year.
(b) Includes the recently acquired Amoco Properties and excludes the recently
sold Bayou Sorrel Field.

Estimated Future Net Revenues
from Proved Reserves (a) (b)

The following table sets forth information as of December 31, 1996 as to
the estimated future net revenues (before deduction of income taxes) from the
production and sale of the Proved Reserves attributable to the Company's
properties.

Proved Total
Developed Proved
Reserves Reserves
Estimated Future net revenues (c):
1997...................................$ 44,888,000 $ 47,727,000
1998 .................................. 30,138,000 37,621,000
1999 .................................. 20,535,000 26,213,000
2000 .................................. 15,653,000 20,343,000
Thereafter ............................ 29,810,000 48,840,000
------------ -----------
Total .................................$141,024,000 $180,744,000
Present value (10%) of estimated future net
revenues (SEC 10 Value)............... $113,734,000 $139,946,000

(a) Calculated by the Company in accordance with the rules and regulations
of the SEC, based upon December 31, 1996 prices of $24.25 per barrel of oil and
$3.84 per MMBtu of offshore gas, adjusted for basis differentials, Btu content
of gas and specific gravity of oil. The Company's independent reservoir
engineers prepare a reserve report as of the end of each calendar year.
(b) Includes the recently acquired Amoco Properties and excludes the
recently sold Bayou Sorrel Field.
(c) Estimated future net revenues represent estimated future gross revenues
from the production and sale of Proved Reserves, net of estimated operating
costs, future development costs estimated to be required to achieve estimated
future production and estimated future costs of plugging offshore wells and
removing offshore structures.

Production, Price, and Cost Data

The following table sets forth certain production, price, and cost
data with respect to the Company's properties, for the three years ended
December 31, 1995, 1994 and 1993 and the nine months ended September 30, 1996
and 1995.

For the nine months For the years
ended September 30, ended December 31,

1996(a) 1995 1995 1994 1993
Oil:

Net Production (Bbls)(b) 203,000 122,000 170,000 137,000 180,000
Revenue........................$ 3,724,000 $ 1,989,000 $ 2,853,000 $ 2,103,000 $ 3,003,000
Average net Bbls per day 741 447 466 375 493
Average price per Bbl $ 18.34 $ 16.30 $ 16.78 $ 15.35 $ 16.69

Gas:
Net Production(Mcf)(b) 4,590,000 7,578,000 9,850,000 8,139,000 5,586,000
Revenue........................$ 9,533,000 $ 11,671,000 $ 15,594,000 $ 15,235,000 $ 9,602,000

Average net Mcf per day 16,800 27,800 27,000 22,300 15,300
Average price per Mcf $ 2.08 $ 1.54 $ 1.58 1.87 $ 1.72

Total Revenues..........................$ 13,257,000 $ 13,660,000 $ 18,447,000 $ 17,338,000 $ 12,605,000

Production Costs:
Production cost 6,049,000 5,729,0008,055, 5,231,000 5,297,000
Mcfe(c) 5,808,000 8,310,000 10,870,000 8,961,500 6,666,000
Production costs per Mcfe(c) 1.04 .69 .74 .58 .79

- ------
(a) The information shown for 1996 was impacted by the explosion and fire
on April 24th at West Delta Tank Battery #3, which resulted in those
fields being off production until October 7, 1996, when production
resumed. For that reason management would not consider these production
costs to be indicative of the future. Also this information includes
Bayou Sorrel Field through August 31, the date of its sale, and does
not include any information with respect to the recently acquired Amoco
Properties.
(b) Production information is net of all royalty interests, overriding
royalty interest and the net profits interest in the West Delta
Properties owned by the Company's former lenders.
(c) Oil production is converted to Mcfe (Equivalent Mcf) at the rate of 6
Mcf per Bbl, representing the estimated relative energy content of
natural gas to oil.

Productive Wells(a)

The following table sets forth the number of productive oil and gas
wells, as of the date hereof, attributable to the Company's properties.

Gross productive offshore wells (b): Productive Wells Company Operated

Oil . . . . . . . . . . . . . . . . .33. . . . . . . . . .10
Gas . . . . . . . . . . . . . . . . . .90. . . . . . . . . .42
Total . . . . . . . . . . . . .. . . .123. . . . . . . . . .52

Net productive offshore wells (c):
Oil . . . . . . . . . . . . . . . .. . .1. . . . . . . . . .10
Gas . . . . . . . . . . . . . . . . . . .49. . . . . . . . . .38
Total . . . . . . . . . . . . .. . . . 64. . . . . . . . . .48

- -----
(a) Productive wells consist of producing wells and wells capable of
production, including shut-in wells and water disposal and injection
wells. One or more completions in the same borehole are counted as one
well.
(b) A "gross well" is a well in which a working interest is owned. The
number of gross wells represents the sum of the wells in which a
working interest is owned.
(c) A "net well" is deemed to exist when the sum of the fractional working
interests in gross wells equals one. The number of net wells is the sum
of the fractional working interests in gross wells.

Leasehold Acreage

The following table sets forth the developed acreage as of the date hereof
attributable to the
42

Company's properties, excluding onshore acreage which is no longer significant.

Developed offshore acreage (a):
Gross acres (b)........................................ 103,771
Net acres (c).......................................... 43,645

(a) Developed acreage is acreage assignable to productive wells.
(b) A "gross acre" is an acre in which a working interest is owned. The
number of gross acres represents the sum of the acres in which a
working interest is owned.
(c) A "net acre" is deemed to exist when the sum of the fractional working
interests in gross acres equals one. The number of net acres is the sum
of the fractional working interests in gross acres.

Drilling Activities

The following table sets forth the number of gross productive and dry wells
in which the Company had an interest, that were drilled and completed during the
four years ended December 31, 1996. Such information should not be considered
indicative of future performance, nor should it be assumed that there is
necessarily any correlation between the number of productive wells drilled and
the oil and gas reserves generated thereby or the costs to the Company of
productive wells compared to the costs to the Company of dry wells.

Developmental Wells Exploratory Wells
Completed Dry Completed Dry
Oil Gas Oil Gas Oil Gas Oil Gas
1993 3 0 0 0 0 0 0 0
1994 5 4 0 0 0 1 0 0
1995 0 0 0 0 0 0 0 3
1996 0 0 2 0 0 0 0 0
Total 8 4 2 0 0 1 0 3

Title to Oil and Gas Properties

In the case of acquired properties title opinions are obtained for the
more significant properties. Prior to the commencement of drilling operations a
thorough drillsite title examination is conducted and curative work performed
with respect to significant defects.

Undeveloped Acreage and Unproved Properties

The Company does not hold interest in a significant amount of
Undeveloped Acreage to which no Proved Reserves have been assigned. However, the
Company retained a 3% overriding royalty interest in depths below 11,000 feet
when it sold the Bayou Sorrel Field, and no reserves have been attributed to
these depths.

MANAGEMENT

Officers and Directors

The Company has a classified Board of Directors. Directors are elected
to serve for three-year terms and until their successors are elected and
qualified. One-third of the directors stand for election each year as their
terms expire. The Board of Directors consists of three employees of the Company
and six independent directors.

Officers are elected by and serve at the discretion of the Board of
Directors.

Set forth below are the names, ages, and positions of the persons who
are executive officers and directors of the Company, and the committees of the
Board on which they serve.

Director
Name Age Since Position

H. James Maxwell .......... 52 1992 Chairman of the Board, President,
Chief Executive Officer, and Director(a)
Bob F. Mallory ............ 64 1992 Chief Operating Officer, Executive Vice
President and Director- Executive and
Personnel Committee (a)
Larry M. Wright ........... 52 1992 Executive Vice President and
Director-Executive and Personnel
Committee (b)
Robert G. Wonish .......... 43 --- Vice President

Edward A. Bush............. 53 --- Vice President

William J. Doyle .......... 45 --- Vice President

Todd R. Bart .............. 32 --- Chief Financial Officer, Secretary and
Treasurer
A. Theodore Stautberg, Jr.. 50 1993 Director(c)-Compensation Committee

Donald W. Chesser ......... 57 1992 Director(a)

James B. Kreamer .......... 57 1993 Director(c)

N. Lynne Sieverling ....... 59 1992 Director(b)-Audit and Compensation
Committees
Mark C. Barrett............ 46 1996 Director(b)-Audit and Compensation
Committees
Michael Springs............ 47 1996 Director(c)-Audit Committee

(a) These persons are designated as Class III directors, with their term of
office expiring at the annual meeting of shareholders in 1998.
(b) These persons are designated as Class II directors, with their term of
office expiring at the annual meeting of shareholders in 1997.
(c) These persons are designated as Class I directors, with their term of
office expiring at the annual meeting of shareholders in 1999.

Set forth below are descriptions of the principal occupations, during
at least the past five years, of the directors and executive officers of the
Company.

H. James Maxwell received a B.A. degree in Economics from the
University of Missouri-Kansas City and received his Law Degree from that same
university in 1972. Mr. Maxwell practiced securities law from 1972 to 1984, and
was a frequent author and speaker on oil and gas tax and securities law. He
served as a General Partner of Castle Royalty Limited Partnership from 1984 to
1988, Managing General Partner of PAN Petroleum MLP from 1987 to 1992, both of
which were predecessors of the Company, and President, CEO and Chairman of the
Company from 1992 to date.

Bob F. Mallory received his Ph.D. in Geology from the University of
Missouri in 1968 and a B.A. in Geology from the University of Wichita in 1961.
He began consulting in the oil industry in 1980. He served as a General Partner
of Castle Royalty Limited Partnership from 1984 to 1988, as a General Partner of
PAN Petroleum MLP from 1987 to 1992, both of which were predecessors of the
Company, and Executive Vice President and Chief Operating Officer of the Company
from 1992 to date.

Larry M. Wright received his B.S. Degree in Engineering from the
University of Oklahoma in 1966. From 1966 to 1976 he was with Union Oil Company
of California (UNOCAL). From 1976 to 1980, he was with Texas International
Petroleum Corporation, ultimately as division operations manager. From 1980 to
1981, he was with what is now Transamerica Natural Gas Company as Vice
President-Exploration and Production. From 1981-1982, he was Senior Vice
President of Operations for Texas International Petroleum Corporation, and, from
1983 to 1985, he was Executive Vice President of Funk Fuels Corp., a subsidiary
of Funk Exploration. From 1985 to 1993, Mr. Wright was an independent
consultant. From 1993 to date, he has served as Executive Vice President of the
Company.

Robert G. Wonish received his B.S. in Mechanical Engineering in 1975
from the University of Missouri-Rolla. He was a production engineer with Amoco
from 1975 to 1977, Napeco, Inc. from 1977 to 1979; Division Operation Engineer
with Texas International from 1979 to 1980; Production Manager with Cliffs
Drilling Company from 1980 to 1984 and District Superintendent with Ladd
Petroleum Corporation from 1985 to 1991. He then worked as a consultant,
starting with the Company in 1992, and became an employee in 1993, serving as
Vice President - Production.

Edward A. Bush received his B.S. Degree in Geology from Baldwin Wallace
College in 1964 and his M.A. in Geology from Bowling Green State University in
1966. He served in various geological and exploration capacities with Exxon
(1968-75), Union Texas Petroleum (1975-79), Home Petroleum Corp. (1979-81),
Traverse Oil Co. (1981-83) and Sohio Petroleum Co. (1983-85). From 1985 to 1995
he served first as Exploration Manager, then Vice President of Exploration and
later Vice President of Operations for Columbia Gas Devp. Corp. From 1995 to
1996 he served as Vice President-Exploration and then the President of Howell
Petroleum Corp.

William J. Doyle received his Masters in Geology in 1975 from Texas A&M
University and his B.S. in Earth Sciences from the University of New Orleans in
1973. From 1975 to 1978 he was a geologist with Mobil Oil focusing on offshore
Gulf of Mexico projects. From 1978 to the present he has worked as an employee
and consultant for various oil and gas exploration companies operating in the
Gulf Coast. He joined the Company as a consulting geologist in 1992 and became a
Vice President in 1995.

Todd R. Bart received his B.B.A. in Accounting from Abilene Christian
University in 1987. He worked in the energy industry with Pennzoil Company from
1987 to 1990 and the public accounting firm of Arthur Andersen and Company from
1990 until 1992. From 1992 to 1995 he worked for Yellow Freight System, Inc., a
trucking company, in financial accounting and reporting. He joined the Company
as Controller in 1995 and was elected Chief Financial Officer, Treasurer and
Secretary in 1996. He received his C.P.A. designation in Texas in 1990 and in
Kansas in 1993, and is a member of the A.I.C.P.A.

A. Theodore Stautberg, Jr. has since 1981 been the President and a director
of Triumph Resources
45

Corporation and its parent company, Triumph Oil and Gas Corporation of New York.
Triumph engages in the oil and gas business, assists others in financing energy
transactions, and serves as general partner of Triumph Production L.P. Mr.
Stautberg is also the president of Triumph Securities Corporation and BT Energy
Corporation. Prior to forming Triumph in 1981, Mr. Stautberg was a Vice
President of Butcher & Singer, Inc., an investment banking firm, from 1977 to
1981. From 1972 to 1977, Mr. Stautberg was an attorney with the Securities and
Exchange Commission. Mr. Stautberg is a graduate of the University of Texas and
the University of Texas School of Law.

Donald W. Chesser received his B.B.A. in Accounting from Texas Tech
University in 1963 and has served with several CPA firms since that time,
including eight years with Elmer Fox and Company. From 1977 to 1981, he was with
IMCO Enterprises, Inc. Since 1982 he has been a shareholder and President of
Chesser & Company, P.A., a CPA firm. He is also President of Financial Advisors,
Inc., a registered investment advisor.

James B. Kreamer received his B.S. Degree in Business from the
University of Kansas in 1963 and has been active in investment banking since
that time. Since 1982 he has managed his personal investments.

N. Lynne Sieverling received his B.S. Degree in Accounting from the
University of Kansas in 1959 and has practiced as a CPA since graduation,
serving 17 years as a partner with the accounting firm of Coopers & Lybrand. Mr.
Sieverling has also been actively involved in the oil and gas industry since
1984 both as an investor and as an operator of oil and gas leases in Kansas,
Oklahoma and North Dakota.

Mark C. Barrett received his B.S. Degree in Business
Administration/Accounting in 1972 and is licensed to practice as a Certified
Public Accountant in both Kansas and Missouri. He was a partner in the firm
Drees Dunn Lubow and Company from 1974 until 1981. He founded Barrett &
Associates, a CPA firm, in 1981 and is the president and majority shareholder in
that firm. His CPA firm served as the Company's independent public accountants
from 1985 to 1995.

Michael Springs graduated from the Medical Field Service School, Brooke
Hospital, San Antonio, Texas in 1971 and the University of Missouri, Kansas
City, in 1969 with a degree in Business. He is the President and founder of
Ortho-Care, Inc. of Kansas City, Missouri and Ortho-Care Southeast of Charlotte,
North Carolina. Ortho-Care, Inc. is a manufacturer of orthopedic fracture
management and sports medicine products, and holds a number of patents in the
field. Mr. Springs is also controlling partner in Ortho-Implants, a distributor
of total joint replacement prosthesis.

None of the officers or directors serve pursuant to employment
agreements.

Board of Directors

The Board of Directors has the responsibility for establishing broad
corporate policies and for the overall performance of the Company, although it
is not involved in day-to-day operating details. Directors are kept informed of
the Company's business by various reports and documents, as well as by operating
and financial reports presented at Board and committee meetings by the Chairman
and other officers.

Meetings of the Board of Directors are held regularly each quarter and
there is also a meeting following the annual meeting of the shareholders.
Additional meetings, including meetings by telephone conference call, of the
Board may be called whenever needed. The Board of Directors of the Company held
six (6) meetings in 1995, two of which were meetings by telephone conference
call. Each director attended all meetings of the Board, except for the two
telephone conference calls, of which James B. Kreamer was not connected either
time and Allen H. Sweeney and Thomas E. Clark ( then directors) were not
connected on one conference call.

Committees of the Board

The committees established by the Board of Directors to assist it in the
discharge of its responsibilities
46

are described below. The previous table identifies the committee memberships
currently held.

The Executive Committee has three members, all of whom are also
officers of the Company. The Committee meets on call whenever needed and has
authority to act on most matters during the intervals between Board meetings.
The Executive Committee also serves as the Personnel Committee.

The Audit Committee has three members, none of whom is an employee of
the Company. The Committee meets with management to consider the adequacy of the
internal controls of the Company and the objectivity of its financial reporting;
the Committee also meets with the independent accountants concerning these
matters. The Committee recommends to the Board the appointment of the
independent accountants, subject to ratification by the shareholders at the
annual meeting. The independent accountants periodically meet alone with the
Committee and have unrestricted access to the Committee. The Committee met once
in 1995.

The Compensation Committee has three members, none of whom is an
employee of the Company. It makes recommendations to the Board with respect to
the compensation of management of the Company and the Company's Long-Term
Incentive Plan. The Committee met twice in 1995.

Compensation of Directors

Directors receive travel expenses incurred in attending Board of
Directors or committee meetings. Officers of the Company who serve as directors
do not receive special compensation for serving on the Board of Directors or a
committee thereof. However, during 1995 Messrs. Stautberg, Chesser, Sweeney,
Kreamer and Sieverling, the then non-employee directors, were each issued 1,039
Common Shares as a $5,000 bonus. In 1995 Mr. Chesser was issued warrants to
acquire 25,000 Common Shares at $2.50 per share, which expired December 31,
1995, for services performed for the Company in 1991. During 1995 he exercised
those warrants. See "Certain Relationships and Related Transactions," herein.

Newly elected non-employee directors are granted a one-time restricted
stock award in Common Shares equal in value to $10,000 upon their being elected
to the Board. See "Long-Term Incentive Plan," herein.

Long-Term Incentive Plan

The Company's Long-Term Incentive Plan (the "Long-Term Incentive
Plan"), adopted in 1992, provides for the granting to certain officers and key
employees of the Company and its participating subsidiaries incentive awards in
the form of stock options, stock appreciation rights ("SARs"), Common Shares,
and cash awards. The Long-Term Incentive Plan is administered by a committee of
non-employee members of the Board of Directors with respect to awards to certain
executive officers of the Company but may be administered by the Board of
Directors with respect to any other awards (either, the "Plan Committee").
Except for certain automatic awards, the Plan Committee has discretion to select
the employees to be granted awards, to determine the type, size, and terms of
the awards, to determine when awards will be granted, and to prescribe the form
of the instruments evidencing awards.

Options, which include non-qualified stock options and incentive stock
options, are rights to purchase a specified number of Common Shares at a price
fixed at the time the option is granted. Payment may be made with cash or other
Common Shares owned by the optionee or a combination of both. Options are
exercisable at the time and on the terms that the Plan Committee determines. The
payment of the option price can be made either in cash or by the person
exercising the option turning in to the Company shares presently owned by the
person, which would be valued at the then current market price. SARs are rights
to receive a payment, in cash or Common Shares or both, based on the value of a
Common Share. A stock award is an award of Common Shares or denominated in
Common Shares that may be subject to a restriction against transfer as well as a
repurchase option exercisable by the Company. During the period of the
restriction, the employee may be given the right to vote and receive dividends
on the shares covered by restricted stock

awards. Cash awards are generally based on the extent to which pre-established
performance goals are achieved over a pre-established period but may also
include individual bonuses paid for previous, exemplary performance.

The Long-Term Incentive Plan provides for the issuance of a maximum
number of Common Shares equal to 20% of the total number of Common Shares
outstanding from time to time. Unexercised SARs, unexercised options, restricted
stock, and performance units under the Long-Term Incentive Plan are subject to
adjustment in the event of a stock dividend, stock split, recapitalization or
combination of the Company, merger, or similar transaction and are not
transferable except by will and by the laws of descent and distribution. Except
when a participant's employment terminates as a result of death, disability, or
retirement under an approved retirement plan or following a change in control in
certain circumstances, an award generally may be exercised (or the restriction
thereon may lapse) only if the participant is an officer, employee, or director
of the Company or a subsidiary at the time of exercise or lapse or, in certain
circumstances, if the exercise or lapse occurs within 180 days after employment
is terminated.

The Long-Term Incentive Plan allows for the satisfaction of a
participant's tax withholding with respect to an award by the withholding of
Common Shares issuable pursuant to the award or the delivery by the participant
of previously owned Common Shares, in either case valued at the fair market
value, subject to limitations the Plan Committee may adopt.

Awards granted pursuant to the Long-Term Incentive Plan may provide
that, upon a change of control of the Company, (a) each holder of an option will
be granted a corresponding SAR, (b) all outstanding SARs and stock options
become immediately and fully vested and exercisable in full, and (c) the
restriction period on any restricted stock award shall be accelerated and the
restriction shall expire. Options and SARs will remain exercisable for their
original terms whether or not employment is terminated following a change in
control.

The Long-Term Incentive Plan may be amended by the Board of Directors,
except that under current law no amendment that materially increases the number
of Common Shares subject to the Long-term Incentive Plan or that makes certain
other material changes may be made without shareholder approval. No grants or
awards may be made under the Long-Term Incentive Plan after the tenth
anniversary of the Closing Date. No shareholder approval will be sought for
amendments to the Long-Term Incentive Plan except as required by law (including
Rule 16b-3 under the Exchange Act) or the rules of any national securities
exchange on which the Common Shares are then listed.

There are no incentive awards pertaining to stock options, SARs or
Common Shares issued or outstanding under the Long-Term Incentive Plan.

Under the Company's Long-Term Incentive Plan beginning in 1996, all
employees on December 31 of each year share a bonus equal to 5% of the Company's
pre-tax net income, computed in accordance with GAAP, exclusive of extraordinary
and non-recurring items. The bonuses will be paid to all full time (1,000 +
hours) employees at December 31. The bonus will be paid upon delivery of the
independent audit. The bonus shall be allocated to the full time employees based
upon their salary at December 31 of that year.

Each non-employee director of the Company who becomes a director will,
on the day after the first meeting of the Board of Directors at which that
director is in attendance, automatically be granted a restricted stock award of
the number of Common Shares that have a value of $10,000, which will be
calculated based on the average trading price of the Common Shares during the 60
days immediately preceding the date of grant. These restricted stock awards will
vest over two years, with one-third vesting six months following the date of
grant, another one-third vesting on the first anniversary of the date of grant,
and the last one-third vesting on the second anniversary of the date of grant so
long as the non-employee director remains a director of the Company through
those vesting dates.

Each non-employee director will be entitled to vote each share subject
to these restricted stock

awards from the date of grant until the shares are forfeited, if ever. The
Long-Term Incentive Plan requires each non-employee director to make an election
under Section 83(b) of the Code to include the value of the restricted stock in
his income in the year of grant and provides for cash awards to the non-employee
directors in amounts sufficient to pay the federal income taxes due with respect
to the award.

The following table shows information with respect to restricted stock
awards owned by non-employee directors.

Name Date of Grant Shares Price
Michael Springs September 4, 1996 2,447 $4.09
Mark C. Barrett September 4, 1996 2,447 4.09
Total 4,894

Employee Stock Ownership Plan

In 1994, the shareholders approved the adoption of the PANACO, Inc.
Employee Stock Ownership Plan ("ESOP"). The primary purposes of the ESOP are to
enable participants to acquire ownership in the Company and to provide a source
of equity capital to the Company. The ESOP establishes a trust to hold ESOP
assets, which primarily consist of Common Shares of the Company. The ESOP is
administered by the Board of Directors. Subject to the discretion of the Board
of Directors, the Company may contribute up to fifteen percent (15%) of the
participant's (including employees and other consultants to the Company) annual
compensation to the ESOP. The ESOP does not allow contributions by participants
in the Plan.

Company contributions to the ESOP may be in the form of Common Shares
or cash. Cash contributions may be used, at the discretion of the Board of
Directors, to purchase Common Shares in the open market or from the Company at
prevailing prices.

The allocation of ESOP assets is determined by a formula based on
participant compensation. Participation in the ESOP requires completion of more
than one thousand (1,000) hours of service to the Company within twelve (12)
consecutive months.

The ESOP is intended to satisfy any applicable requirements of the
Internal Revenue Code of 1986 and the Employee Retirement and Income Security
Act of 1974. The Company has been advised that its contributions to the ESOP
will be deductible for Federal Income Tax purposes, and the participants will
not recognize income on their allocated share of ESOP assets until such assets
are distributed.

As of September 30, 1996, the ESOP owned of record 59,865 Common
Shares, allocable to the years prior to 1996, and will, subject to Board
approval, be issued 20,460 Common Shares for the first three quarters of 1996.
Such Common Shares are owned beneficially by the employees of the Company.

Summary Compensation Table

The following table sets forth the annual compensation paid to the
Company's Chief Executive Officer and each executive officer whose compensation
exceeds $100,000 during 1995.

Long-Term Incentive Plan
Annual Compensation Awards Payouts
Securities
Other Restricted Underlying LTIP All
Name and Principal Salary Bonus Annual Stock Options Payouts Other
Position Year ($)(1) ($) Comp. ($) Award(s) ($) (#) ($) Comp.($)(2)

H. James Maxwell 1995 153,500 0 0 0 24,615 0 22,500
President and Chief 1994 120,000 0 0 0 22,857 0 18,000
Executive Officer 1993 80,000 0 0 0 115,000 0 0

Larry M. Wright 1995 147,300 0 0 0 0 0 22,100
Executive Vice 1994 134,000 0 0 0 0 0 20,000
President 1993 120,000 0 0 0 0 0 0

Robert G. Wonish 1995 92,100 0 0 0 0 0 13,800
Vice President 1994 78,800 0 0 0 0 0 11,800
1993 77,000 0 0 0 0 0 0

(1) The 1993 salary figures for Messrs. Wright and Wonish include payments
made to them as independent consultants before becoming employees of
the Company in that year.
(2) The other compensation figures for 1995 and 1994 represent
contributions to the accounts of the employees under the Company's
Employee Stock Ownership Plan. The Plan was adopted in 1994.

Aggregated Option (Warrants) Exercises in Last Fiscal Year and Fiscal Year End Option Values

The following table provides information relating to the number and
value of Common Shares subject to options exercised during 1995 or held by the
named executive officers as of December 31, 1995.

Number of
securities underlying Value of unexercised
Securities unexercised options in-the-money
acquired Value at fiscal year-end ($) options at year-end($)(2)
Name on Exercise (#) Realized ($)(1) Exercisable/unexercisable Exercisable/Unexercisable

H. James Maxwell 250,972 410,129 -0- / -0- -0- / -0-
Larry M. Wright 0 0 250,000 / -0- 549,375 / -0-
Robert G. Wonish 0 0 -0 -/ -0- -0- / -0-

(1) Value realized is calculated based upon the difference between the
options exercise price and the market price of the Common Shares on the
date of exercise multiplied by the number of shares to which the
exercise price relates.
(2) Value of unexercised in-the-money options is calculated based on the
difference between the option exercise price and the closing price of
the Common Shares at year-end, multiplied by the number of shares
underlying the options. The closing price on December 29, 1995 of the
Common Shares was $4.4375.

Option Grants in Last Fiscal Year

Number of Percent of
Securities total options
Underlying granted to Exercise or Market price
Options employees Base price at date Expiration Grant Date
Name Granted in fiscal year ($/Share) of grant($) Date Value($)

H. James Maxwell 24,615 (1) 33% 2.03125 4.0625 12/31/95 50,000
Larry M. Wright -0- -0- N/A N/A N/A N/A
Robert G. Wonish -0- -0- N/A N/A N/A N/A

(1) Mr. Maxwell's options were exercised in 1995.

PERFORMANCE GRAPHS

The following Performance Graph compares the annual change of the
cumulative total shareholder return, assuming reinvestment of dividends, of an
assumed $100 investment on January 1, 1991 in (1) Common Shares, (2) the NASDAQ
Market Index and (3) a peer group of all crude petroleum and natural gas
exploration and production companies (SIC Code 1311) listed on NASDAQ September
21, 1989.

FISCAL YEAR ENDING
COMPANY 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/29/95 11/29/96*

PANACO, Inc. 100.00 214.37 130.49 195.73 298.26 330.88 391.46
PEER GROUP 100.00 109.81 116.29 139.38 125.19 144.76 213.62
BROAD MARKET 100.00 128.38 129.64 155.50 163.26 211.77 257.90

SOURCE: MEDIA GENERAL FINANCIAL SERVICES.
* 1996 IS BASED ON ELEVEN MONTHS, THROUGH NOVEMBER 1996.

PRINCIPAL SHAREHOLDERS

The following table sets forth information with respect to record and
beneficial ownership of Common Shares by (a) each executive officer and director
of the Company, (b) all executive officers and directors of the Company as a
group, and (c) for each person who beneficially owns 5% or more of the Common
Shares as of November 15, 1996.
Shares Owned
Name and Positions of Owners Of Record Beneficially

Number Percent Number Percent

H. James Maxwell; Chief Executive Officer,
President, Chairman of the Board & Director ............ 313,386 2.18 322,971 (1) 2.01
Larry M. Wright; Executive Vice President &
Director................................................ 395,000 2.75 654,999 (1)(2) 4.08
Bob F. Mallory; Chief Operating Officer,
Executive Vice President & Director..................... 228,030 1.59 233,030 (1) 1.45
Robert G. Wonish; Vice President........................ 12,000 .08 18,328 (1) .11
William J. Doyle; Vice President ....................... - .00 4,405 (1) .03
A. Theodore Stautberg, Jr.; Director.................... 6,137 .04 9,137 .06
Donald W. Chesser; Director............................. 1,039 .01 1,039 .00
Michael Springs; Director............................... 3,096 .02 3,096 (3) .02
James B. Kreamer; Director.............................. 51,055 .36 51,055 .32
N. Lynne Sieverling; Director........................... 8,137 .06 8,137 .05
Mark C. Barrett; Director............................... 2,447 .02 2,447 (3) .02

All directors and officers as a group (13 persons)...... 1,020,327 7.11 1,308,644 (1) 8.15

Carl C. Icahn...(4)..................................... 1,095,000 7.63 1,095,000 6.82
c/o Icahn Associates Corp.
114 West 47th Street, 19th Fl
New York, NY 10036
Richard A. Kayne..(5)................................... 694,047 4.84 2,160,714 13.45
Kayne, Anderson Investment Management, Inc.
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Amoco Production Company................................ 2,000,000 13.94 2,000,000 12.45
550 WestLake Park Blvd.
Houston, TX 77079
Attn.: John M. Kaffenes

(1) Includes shares held in the Company's Employee Stock Ownership Plan for
each officer as follows: Mr. Maxwell - 9,585 shares, Mr. Wright - 9,999 shares,
Mr. Mallory - 5,000 shares, Mr. Wonish - 6,328 shares and Mr. Doyle - 4,405
shares, and for all directors and officers as a group - 35,307 shares.
(2) Includes 250,000 shares issuable pursuant to currently exercisable
warrants.
(3) These persons were each issued 2,447 shares upon election as a director
in 1996.
(4) Mr. Icahn is the sole shareholder of Riverdale Investors Corp, Inc.,
the general partner of High River Limited Partnership, the record holder of
these shares.
(5) Includes (i) 694,047 shares held of record by Offense Group Associates,
L.P. ("Offense"), Opportunity Associates, L.P. ("Opportunity"), Kayne, Anderson
Non-Traditional Investments, L.P. ("Investments") or ARBCO Associates, L.P.
("ARBCO"), each a California limited partnership, which shares were acquired on
exercise of certain warrants issued with the 1993 Subordinated Notes; and (ii)
1,466,667 shares that are issuable upon the conversion of the 1996 Tranche A
Convertible Subordinated Notes held by Offense, Opportunity, Investments, ARBCO
or Kayne, Anderson Offshore Limited. Mr. Kayne is the President and principal
shareholder of Kayne, Anderson Investment Management, Inc., which is the general
partner of KAIM Non-Traditional, L.P. ("KAIM"). KAIM is the general partner of
Offense, Opportunity and Investments. Mr. Kayne is the managing general partner,
and KAIM is the co-general partner, of ARBCO.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

A. Theodore Stautberg, Jr., a director of the Company since 1993, is an
officer, director and beneficial shareholder of Triumph Securities Corporation,
which is providing certain sevices in connection with this Offering, and will
receive one-seventh of the 7% Underwriters discount.

During 1996 two new non-employee directors, Michael Springs and Mark C.
Barrett, were each issued restricted stock awards of 2,447 Common Shares upon
election to the Board.

Mark C. Barrett became a director of the Company on September 4, 1996.
For the years 1985 through 1995 his CPA firm, Barrett and Associates, served as
the Company's independent accountants. During 1995 his CPA firm was paid $53,400
for accounting services, including the audit.

Lenders advised by Kayne, Anderson Investment Management, Inc., in
connection with the 1993 Subordinated Notes, own 816,526 Common Shares by virtue
of their exercise of warrants issued to them in 1993 and exercised in first
quarter 1996. They were paid interest with respect to the 1993 Subordinated
Notes, which totaled $600,000 in 1995. In addition, the Company is required to
pay certain expenses, including legal fees, of those lenders, of which there
were none during 1995.

During 1995 Donald W. Chesser, a director who is not an employee of the
Company was issued warrants to acquire 25,000 Common Shares at $2.50 per share
for past services to the Company. The warrants, which would have expired
December 31, 1995, were all exercised during 1995.

During 1995 each of the five directors who are not employees of the
Company were issued a stock bonus of $5,000, paid by the issuance of 1,039
Common Shares.

Employees of the Company are eligible to receive stock awards, stock
options, stock appreciation rights, and performance units pursuant to the
Company's Long-Term Incentive Plan.

The Company has several procedures, provisions, and plans designed to
reduce the likelihood of a change in the management or voting control of the
Company without the consent of the incumbent Board of Directors. These
provisions may have the effect of strengthening the ability of officers and
directors of the Company to continue as officers and directors of the Company
despite changes in share ownership of the Company.

Under the terms of the Company's Long-Term Incentive Plan, three of the
officers and directors surrendered Common Shares in January 1995 in exercise of
outstanding options during 1995. The following table sets forth the number of
shares surrendered and market value thereof and the number of options exercised
and the aggregate exercise price thereof.

Shares Market Options Aggregate
Surrendered (a) Value ($) Exercised Price ($) (b)
H. James Maxwell 24,615 99,998 43,100 100,245
Bob F. Mallory 24,615 99,998 42,400 100,018
Thomas E. Clark (c) 24,615 99,820 38,900 100,137

(a) Persons surrendering shares in payment of the exercise price of an
option were granted new options for a like number of shares at $2.03125
expiring December 31, 1995.
(b) Differences between the value of the share surrendered and the exercise
prices were paid in cash by the person exercising the option.
(c) Mr. Clark is a former officer and director.

Messrs. Maxwell and Mallory are the partners of 1050 Blue Ridge
Building Partnership, which owns a 5,200 square foot office building at 1050
West Blue Ridge Boulevard, Kansas City, Missouri, which they lease to the
Company on a triple net basis for $4,000 per month for a term of ten years,
expiring in 2003. The lease was approved by the Board of Directors, which
determined that the rate was as good or better than that which could be obtained
from a non-affiliated party.

H. James Maxwell and Bob F. Mallory, officers and directors of the
Company, are personal guarantors of the Company's obligation to plug the wells
and remove the platforms on the West Delta Properties acquired from Conoco, Arco
(now Vastar), Texaco and Oxy in 1991.

On October 8, 1996 the Company borrowed $17 million from lenders advised by
Kayne, Anderson Investment Management, Inc. Such lenders own 694,047 Common
Shares and would, upon conversion of the 1996 Tranche A Convertible Subordinated
Notes, own 2,160,714 Common Shares. See "The Company - Funding of Business
Activities - Borrowing and Obligations".

SELLING SHAREHOLDERS

The following table sets forth information as of November 15, 1996 as
adjusted to reflect the sale of all of the Common Shares offered hereby, with
respect to the Common Shares offered by the Selling Shareholders.

Shares Owned Shares Shares Beneficially
Name and Positions of Before Offering Offered Owned After
Beneficial Owners Directly Beneficially Hereby Offering

H. James Maxwell; Director, President 313,386 322,971 2.01% 30,000 292,971 1.82%
and CEO of the Company................
Offense Group Associates L.P. (1) 163,305 599,669(2) 3.73 70,000 529,669 3.30
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Opportunity Associates, L.P........... (1) 40,826 137,796(2) 0.86 40,826 96,970 0.60
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
ARBCO Associates, L.P................. (1) 285,785 722,149(2) 4.49 70,000 652,149 4.06
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Kayne, Anderson Non-Traditional
Investments, L.P................... (1) 204,131 604,495(2) 3.77 70,000 570,495 3.55
1800 Avenue of the Stars, #200
Los Angeles, CA 90067
Evanston Insurance Company............ (1) 81,653 81,653 0.51 81,653 0 0.00
P.O. Box 2009
Glen Allen, VA 23058-2009
Nobel Insurance Company............... (1) 40,826 40,826 0.25 40,826 0 0.00
3010 LBJ Freeway, Suite 320
Dallas, TX 75234
Amoco Production Company.............. 2,000,000 2,000,000 12.45 2,000,000 0 0.00
550 WestLake Park Blvd.
Houston, TX 77079

Total................. 3,129,912 4,509,559 28.07% 2,403,305 2,142,254 13.33%

(1) These firms are the Company's lenders under the 1993 Subordinated Notes
described under "The Company - Funding of Business Activities -
Borrowing and Obligations." In 1993 these lenders were issued warrants
to acquire a total of 816,526 Common Shares at an exercise price of
$2.25 anytime prior to December 31, 1998, all of which were exercised
during first quarter 1996.
(2) Includes 436,364, 96,970, 436,364, and 436,364 Common Shares,
respectively, issuable upon conversion of the 1996 Tranche A
Convertible Subordinated Notes.

DESCRIPTION OF CAPITAL SHARES AND OTHER SECURITIES

The authorized capital shares of the Company consist of 40,000,000
Common Shares, par value $.01 per share, and 5,000,000 preferred shares, par
value $.01 per share. The following description of the capital shares of the
Company does not purport to be complete or to give full effect to the provisions
of statutory or common law and is subject in all respects to the applicable
provisions of the Company's Certificate of Incorporation and the information
herein is qualified in its entirety by this reference.

Common Shares

The Company is authorized by its Certificate of Incorporation, as
amended, to issue 40,000,000 Common Shares, of which 14,350,255 shares are
issued and outstanding as of the date hereof and are held by over 6,000
shareholders.

The holders of Common Shares are entitled to one vote for each share
held on all matters submitted to a vote of common holders. The Common Shares
have no cumulative voting rights, which means that the holders of a majority of
the Common Shares outstanding can elect all the directors if they choose to do
so. In that event, the holders of the remaining shares will not be able to elect
any directors.

Each Common Share is entitled to participate equally in dividends, as
and when declared by the Board of Directors, and in the distribution of assets
in the event of liquidation, subject in all cases to any prior rights of
outstanding preferred shares. The Common Shares have no preemptive or conversion
rights, redemption rights, or sinking fund provisions. The outstanding Common
Shares are duly authorized, validly issued, fully paid, and nonassessable.

Warrants

The Company has outstanding warrants to acquire 289,365 Common Shares
at prices ranging from $2.00 to $2.375. These warrants contain limited
provisions for adjustment of the number of shares in the event of a subdivision,
combination or reclassification of Common Shares. They do not have any rights to
demand registration or "piggy back" rights in the event of a registration of
Common Shares.

A group of the Company's lenders, pursuant to the 1993 Subordinated
Notes, acquired 816,526 Common Shares upon the exercise of warrants, which are
restricted securities within the meaning of the Securities Act of 1933 and can
only be sold pursuant to an exemption from registration or an offering which is
the subject of an effective registration statement. The holders of these shares
have demand registration rights and "piggy back" rights in the event the Company
registers an offering of its Common Shares. Six of those lenders are offering
Common Shares pursuant to this Prospectus. See "Selling Shareholders". See also
"The Company - Funding of Business Activities - Borrowing and Obligations."

The Company has agreed to grant to the Underwriter, or its designees,
warrants to purchase Common Shares equal to 10% of the aggregate number of
Common Shares sold pursuant to this Prospectus. The warrants will expire two
years from the date of this Prospectus. The exercise price per warrant will
equal the Public Offering Price. See "Underwriting." The warrants will be
exercisable at any time and from time to time, in whole or in part, during said
two year term. The Company has also granted the Representative, or his designee,
"piggy back" registration rights with respect to the Common

Shares underlying the warrants.

Convertible Securities

After the expiration of 180 days following the conclusion of this
offering, a group of the Company's lenders, pursuant to the 1996 Tranche A
Convertible Subordinated Notes issued October 8, 1996, have the right to convert
$8,500,000 in notes into 2,060,606 Common Shares at $4.125 per share, which
Common Shares would be restricted securities within the meaning of the
Securities Act of 1933 and can only be sold pursuant to an exemption from
registration or an offering which is the subject of an effective registration
statement. The holders of these shares, after conversion, will have the right to
demand registration of the shares or "piggy back" in the event the Company
registers an offering of its Common Shares.

Preferred Shares

Pursuant to the Company's Certificate of Incorporation, the Company is
authorized to issue 5,000,000 preferred shares, and the Company's Board of
Directors, by resolution, may establish one or more classes or series of
preferred shares having the number of shares, designations, relative voting
rights, dividend rates, liquidation and other rights preferences, and
limitations that the Board of Directors fixes without any shareholder approval.

A number of preferred shares equal to one share for every one hundredth
of one Common Share outstanding has been reserved for issuance pursuant to the
Company's Shareholder Rights Plan, and designated as Series A Preferred Shares.
No shares of this Series A Preferred Shares have been issued or are outstanding.
Other than the designation as Series A, the Series A Preferred Shares have not
had designations, preferences and rights established by the Board of Directors.
See "Shareholder Rights Plan," below. The designations, preferences and rights
will be established if and when any of the Series A Preferred Shares are to be
issued.

Transfer Agent

The transfer agent, registrar and dividend disbursing agent for the
Common Shares is American Stock Transfer and Trust Company, 6201 15th Avenue,
Brooklyn, New York 11204.

Shareholder Rights Plan

On August 2, 1995, the Board of Directors declared a dividend
distribution of one Right for each outstanding Common Share of the Company to
the shareholders of record on August 3, 1995, (the "Record Date"). Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
one share of the Series A Preferred Shares (the "Preferred Shares"), or in some
circumstances, Common Shares, other securities, cash or other assets as
summarized below, at a price of $30.00 per share (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and American Stock
Transfer and Trust Company, as Rights Agent.

The Shareholder Rights Plan was designed to reduce the likelihood of
inadequate bids, partial bids, market accumulations and front-end loaded offers
to acquire the Company's Common Shares, which are not in the best interest of
all the Company's shareholders. The adoption of the Plan communicates the
Company's intention to resist such actions as are not in the best interest of
all shareholders and provides time for the Board of Directors to consider any
offer and seek alternative transactions to maximize shareholder value. The Plan
was adopted upon the advice of the Company's investment bankers in 1995.

Until the earlier to occur of (i) the date of a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") acquired, or obtained the right to acquire, beneficial ownership

of 20% or more of the outstanding Common Shares or (ii) ten days following the
commencement or announcement of an intention to make a tender offer or exchange
offer that would result in a Person or group beneficially owning 20% or more of
such outstanding Common Shares (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Company's Common Share certificates outstanding as of the Record Date, by such
Common Share certificate. The Rights Agreement provides that, until the
Distribution Date, the Rights will be transferred with and only with the Common
Shares. Until the Distribution Date (or earlier redemption or expiration of the
Rights), new Common Share certificates issued after the Record Date upon
transfer or new issuance of the Common Shares will contain a notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier redemption or expiration of the Rights), the surrender for transfer of
any of the Company's Common Share certificates outstanding as of the Record,
will also constitute the transfer of the Rights associated with the Common
Shares represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of the Common Shares as of
the close of business on the Distribution Date and such separate Rights
Certificates alone will evidence the Rights.

The Rights are not exercisable until the Distribution Date. The Rights
will expire on August 4, 2005, unless earlier redeemed by the Company as
described below.

The Purchase Price payable, and the number of Preferred Shares (or
Common Shares, other securities, cash or other assets, as may be necessary)
issuable upon exercise of the Rights are subject to adjustment from time to time
to prevent dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of the Preferred Shares, (ii) upon the grant to
holders of the Preferred Shares of certain rights or warrants to subscribe for
Preferred Shares or convertible securities at less than the current market price
of the Preferred Shares or (iii) upon the distribution to holders of the
Preferred Shares of evidences of indebtedness or assets (excluding regular
periodic cash dividends out of earnings or retained earnings or dividends
payable in the Preferred Shares) or of subscription rights or warrants (other
than those referred to above).

In the event that the Company were acquired in a merger or other
business combination transaction of 50% or more of its assets or earning power
were sold, proper provision shall be made so that each holder of a Right, other
than of Rights that are or were beneficially owned by an Acquiring Person (which
will thereafter be void) shall thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
common shares of the acquiring company which at the time of such transaction
would have a market value of two times the exercise price of the Right. In the
event that an Acquiring Person becomes the beneficial owner of 20% or more of
the outstanding Common Shares, proper provision shall be made so that each
holder of a Right, other than of Rights that are or were beneficially owned by
the Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of the Common Shares (or in certain
other circumstances, assets or other securities) having a market value of two
times the exercise price of the Right.

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued (other than fractional
shares which are integral multiples of one one-hundredth of one Preferred Share)
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Preferred Shares on the last Trading Date prior to the date of
exercise.

At any time prior to 5:00 P.M. Kansas City, Missouri time on the tenth
calendar day after the first date after the public announcement that a person or
group of affiliated or associated persons has acquired beneficial ownership of
20% or more of the outstanding Common Shares of the Company (the "Share
Acquisition Date"), the Company may redeem the Rights in whole, but not in part,
at a price of $0.005 per Right (the "Redemption Price"). Following the Share
Acquisition Date, but prior to an event listed in Section 13(a) of the Rights
Agreement, the Company may redeem the Rights in connection with any event
specified in Section 13(a) in which all shareholders are treated alike and which
does not include the Acquiring Person

or his Affiliates or Associates. Thereafter, the Company's right of redemption
may be reinstated if an Acquiring Person reduces his beneficial ownership to 10%
or less of the outstanding Common Shares in a transaction or series of
transactions not involving the Company. Immediately upon the action of the Board
of Directors of the Company electing to redeem the Rights, the Company shall
make announcement thereof, and upon such election, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.

Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.

The provisions of the Rights Agreement may be amended by the Board of
Directors in order to cure any ambiguity or correct any defect or inconsistency,
extend the Redemption Period and, prior to the Distribution Date, to make
changes deemed to be in the best interests of the holders of the Rights or,
after the Distribution Date, to make such other changes which do not adversely
affect the interests of the holders of the Rights (excluding the interests of
any Acquiring Person and its affiliates and associates).

Certain Anti-takeover Provisions

The provisions of the Company's Certificate of Incorporation and
By-laws summarized in the following paragraphs may be deemed to have an
anti-takeover effect and may delay, defer, or prevent a tender offer or takeover
attempt that a shareholder might consider to be in that shareholder's best
interests, including attempts that might result in a premium over the market
price for the shares held by shareholders. In addition, certain provisions of
Delaware law and the Company's Long-Term Incentive Plan may be deemed to have a
similar effect.

Certificate of Incorporation and By-laws. The Board of Directors of the
Company is divided into three classes. The term of office of one class of
directors expires at each annual meeting of shareholders, when their successors
are elected and qualified. Directors are elected for three-year terms.
Shareholders may remove a director only for cause. In general, the Board of
Directors, not the Company's shareholders, has the right to appoint persons to
fill vacancies on the Board of Directors.

Pursuant to the Company's Certificate of Incorporation, the Company's
Board of Directors, by resolution, may establish one or more classes or series
of preferred shares having the number of shares, designation, relative voting
rights, dividend rates, liquidation and other rights, preferences, and
limitations that the Board of Directors fixes without any shareholder approval.
Any rights, preferences, privileges, and limitations that are established could
have the effect of impeding or discouraging the acquisition of control of the
Company.

The Company's Certificate of Incorporation contains a "fair price"
provision that requires the affirmative vote of the holders of at least 80% of
the voting shares of the Company and the affirmative vote of at least two-thirds
of the voting shares of the Company not owned, directly or indirectly, by the
Related Person (hereafter defined) to approve any merger, consolidation, sale or
lease of all or substantially all of the assets of the Company, or certain other
transactions involving any Related Person. For purposes of the fair price
provision, a "Related Person" is any person beneficially owning 10% or more of
the voting shares of the Company who is a party to the Transaction at issue, a
director who is also an officer of the Company and is a party to the Transaction
at issue, an affiliate of either such person, and certain transferees of those
persons. The voting requirement is not applicable to certain transactions,
including those that are approved by the Company's Continuing Directors (as
defined in the Certificate of Incorporation) or that meet certain "fair price"
criteria contained in the Certificate of Incorporation.

The Company's Certificate of Incorporation further provides that
shareholders may act only at an annual or special meeting of shareholders and
not by written consent, that special meetings of shareholders may be called only
by the Board of Directors, and that only business proposed by the Board of
Directors may be considered at special meetings of shareholders.

The Company's Certificate of Incorporation also provides that the only
business (including election of directors) that may be considered at an annual
meeting of shareholders, in addition to business proposed (or persons nominated
to be directors) by the directors of the Company, is business proposed (or
persons nominated to be directors) by shareholders who comply with the notice
and disclosure requirements of the Certificate of Incorporation. In general, the
Certificate of Incorporation requires that a shareholder give the Company notice
of proposed business or nominations no later than 60 days before the annual
meeting of shareholders (meaning the date on which the meeting is first
scheduled and not postponements or adjournments thereof) or (if later) 10 days
after the first public notice of the annual meeting is sent to common
shareholders. In general, the notice must also contain certain information about
the shareholder proposing the business or nomination, his interest in the
business, and (with respect to nominations for director) information about the
nominee of the nature ordinarily required to be disclosed in public proxy
solicitations. The shareholder must also submit a notarized letter from each of
his nominees stating the nominee's acceptance of the nomination and indicating
the nominee's intention to serve as director if elected.

The Certificate of Incorporation also restricts the ability of
shareholders to interfere with the powers of the Board of Directors in certain
specified ways, including the constitution and composition of committees and the
election and removal of officers.

The Certificate of Incorporation provides that approval by the holders
of at least two-thirds of the outstanding voting shares is required to amend the
provisions of the Certificate of Incorporation discussed in the preceding
paragraphs and certain other provisions, except that approval by the holders of
at least 80% of the outstanding voting shares of the Company, together with
approval by the holders of at least two-thirds of the outstanding voting shares
not owned, directly or indirectly, by the Related Person, is required to amend
the fair price provisions and except that approval of the holders of at least
80% of the outstanding voting shares is required to amend the provisions
prohibiting shareholders from acting by written consent.

Delaware Anti-takeover Statute. The Company is a Delaware corporation
and is subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prevents an "interested shareholder" (defined generally as
a person owning 15% or more of the Company's outstanding voting shares) from
engaging in a "business combination" (as defined in Section 203) with the
Company for three years following the date that person became an interested
shareholder unless (a) before that person became an interested shareholder, the
Board of Directors of the Company approved the transaction in which the
interested shareholder became an interested shareholder or approved the business
combination, (b) upon consummation of the transaction that resulted in the
interested shareholder's becoming an interested shareholder, the interested
shareholder owns at least 85% of the voting shares of the Company outstanding at
the time the transaction commenced (excluding shares held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer), or (c) following
the transaction in which that person became an interested shareholder, the
business combination is approved by the Board of Directors of the Company and
authorized at a meeting of shareholders by the affirmative vote of the holders
of at least two-thirds of the outstanding voting shares of the Company not owned
by the interested shareholder.

Under Section 203, these restrictions also do not apply to certain
business combinations proposed by an interested shareholder following the
announcement or notification of one of certain extraordinary transactions
involving the Company and a person who was not an interested shareholder during
the previous three years or who became an interested shareholder with the
approval of a majority of the Company's directors, if that extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors before any person became an interested shareholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.

Long-Term Incentive Plan. Awards granted pursuant to the Company's
Long-Term Incentive Plan may provide that, upon a change in control of the
Company, (a) each holder of an option will be granted a corresponding stock
appreciation right, (b) all outstanding stock appreciation rights and stock
options become

immediately and fully vested and exercisable in full, and (c) the restriction
period on any restricted stock award shall be accelerated and the restrictions
shall expire.

Debt. Certain provisions in the Bank Facility and Subordinated Notes
may also impede a change in control, in that they provide that the loans become
due if there is a change in the management of the Company or a merger with
another company.

UNDERWRITING

The Company and the Selling Shareholders have entered into an underwriting
agreement dated the date of this Prospectus (the "Underwriting Agreement").
Subject to the terms and conditions of the Underwriting Agreement, the Company
and the Selling Shareholders have appointed Nolan Securities Corporation as the
Underwriter and exclusive agent to offer and sell 8,403,305 Common Shares on
behalf of the Company and the Selling Shareholders, on a "best efforts", minimum
(6,302,475 shares)- maximum (8,403,305 shares) basis. The Underwriter has not
made a firm commitment to purchase any Common Shares.

The Underwriting Agreement provides that unless the minimum number of
Common Shares offered hereby (6,302,475, shares) are sold within 30 days of the
date of this Prospectus, the appointment of the Underwriter by the Company will
terminate and all amounts paid for Shares shall be returned to the purchasers.
If less than the maximum number of Common Shares offered hereby are sold, then
the individual numbers of shares offered by the Company and the Selling
Shareholders shall be reduced pro-rata, but in no event below the aggregate
minimum offering amount.

Pending receipt of subscriptions for at least 6,302,479 Common Shares, each
prospective investor's payment for Common Shares will be deposited in a
segregated escrow account with U.S. Trust Company of New York, as escrow agent.
If the Company does not receive subscriptions for at least 6,302,479 Common
Shares by the Offering Termination Date, subscription proceeds will be returned
to investors without interest or penalty.

The Underwriting Agreement provides that the obligations of the
Underwriter is subject to approval of certain legal matters by counsel to the
Underwriter and various other conditions. The Underwriter is obligated to use
its "best efforts" to sell all of the Common Shares offered hereby.

The Company has been advised by the Underwriter that it proposes to offer
the Common Shares directly to the public at the initial public offering price
per share set forth on the cover page of this Prospectus (the "Public Offering
Price"). Upon the closing of the sale of any of the Common Shares, the Company
will receive the net proceeds therefrom after deducting a discount equal to
seven percent (7%) of the Public Offering Price for each Common Share sold. The
Underwriter has agreed to pay Triumph Securities Corporation ("Triumph") in
connection with services provided in connection with the Offering, an amount
equal to one-seventh of such 7%. A. Theodore Stautberg Jr., a director of the
Company, is also an officer, director and beneficial shareholder of Triumph.

The Company has agreed to grant to the Underwriter, or its designees,
warrants (the "Warrants") to purchase Common Shares equal to 10% of the
aggregate number of Common Shares sold by the Company pursuant to this
Prospectus. The Warrants will expire two years from the date of this Prospectus.
The exercise price per Warrant will equal 130 percent of the Public Offering
Price. The Warrants will be exercisable at any time and from time to time, in
whole or in part, during said two year term. The Company has also granted the
Underwriter or his designee "piggy back" registration rights with respect to the
Common Shares underlying the Warrants.

The Company has agreed to pay all expenses of the Offering, including the
fees and expenses of counsel to the Underwriter and the Selling Shareholders and
the expenses of qualifying the Common Shares for sale under the laws of such
states as the Underwriter may designate, including expenses of counsel retained
for such purpose.

In the Underwriting Agreement, the Company, the Selling Shareholders
and the Underwriter have agreed to indemnify each other against liabilities
arising out of or based upon any untrue statement or alleged untrue statement of
any material fact or omission or alleged omission of a material fact required to
be stated or necessary to make the statements made not misleading (in the case
of the Underwriter only to the extent such statement or omission was made in
reliance upon or in conformity with written information furnished by the
Underwriter for use herein). If such indemnifications are unavailable or
insufficient, the Company, the Selling Shareholders and the Underwriter have
agreed to damage contribution arrangements between them based upon relative
benefits received from this Offering and relative fault resulting in such
damage.

The Underwriter does not intend to confirm sales of the Common Shares
offered hereby to discretionary accounts.

The Company, its directors and officers and the Selling Shareholders have
agreed not to offer, sell, contract to sell or otherwise dispose of any Common
Shares, for a period of 180 days after the date of this Prospectus without the
prior written consent of the Underwriter, other than the Common Shares offered
hereby. Notwithstanding the foregoing, the Company may issue Common Shares to a
party who executes a "lock-up agreement" pursuant to which such party will not
sell or dispose of such Common Shares for 180 days.

The Public Offering Price has been determined by negotiations among the
Underwriter, the Company and the Selling Shareholders. Among the factors
considered in such negotiations were certain financial and operating information
for recent periods, the future prospects of the Company, and its industry in
general, the general condition of the securities markets at the time of the
Offering, and the market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company. There can, however, be no assurance that the prices at which the Common
Shares will sell in the public market after the Offering will not be lower than
the price at which they are sold hereunder.

Pursuant to the Underwriting Agreement, the Public Offering will take place
only if certain material conditions are satisfied by the Company. Such material
conditions include that, except for matters disclosed in this Prospectus (i)
between the date of the last audited financial statements included in the
Prospectus and the Closing Date, the Company shall not have sustained any loss
on account of fire, explosion, flood, accident, calamity or any other cause,
which materially adversely affects its business or properties, whether or not
such loss is covered by insurance; (ii) there shall be no pending or threatened
action, suit or proceeding before any court or governmental agency, authority or
body or any arbitrator involving the Company that is not adequately disclosed
and there is no required contract or other document that is not adequately
disclosed; (iii) the Company (1) shall be in compliance with applicable
environmental laws, (2) has received all permits, licenses or other approvals
required of the Company under applicable environmental laws, and (3) shall be in
compliance with all such permits, licenses or approvals; (iv) the material
agreements, relating to the Company rights of ownership, lease or operation of
oil and gas properties, the acquisition of interests in oil and gas properties,
or exploration for, development of or production of oil and gas reserves thereon
are valid and binding agreements; (v) the statements in the Prospectus regarding
the legal matters and documents or proceedings, shall fairly represent and
summarize the information called for with respect to such legal

matters or proceedings; (vi) since the date of the most recent financial
statements included in the Prospectus, there shall have been no material adverse
change in the condition (financial or other), earnings, business or properties
of the Company; (vii) the lock up agreement between the Underwriter and certain
shareholders, officers and directors of the Company for sales and certain
dispositions of Common Shares shall have been delivered on a timely basis; and
(viii) since the date of the Registration Statement, no material adverse change
in the general affairs, business prospects, properties, management, condition
(financial or otherwise) or results of operations of the Company shall have
occurred.

The foregoing does not purport to be a complete statement of the terms
and conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Company, the Underwriter and the Securities and Exchange
Commission.

SHARES ELIGIBLE FOR FUTURE SALE

As of the date hereof the Company had outstanding 14,350,255 Common Shares,
warrants exercisable for 289,365 Common Shares, and the 1996 Tranche A
Convertible Subordinated Notes which are convertible into 2,060,606 Common
Shares. The Underwriter has also been granted warrants to acquire 600,000 Common
Shares if all shares offered hereby are sold. Following the consummation of the
Offering, and assuming the Underwriter receives warrants to acquire 600,000
Common Shares, the Company will then have 16,459,444 Common Shares available for
issuance at such times and upon such terms as may be approved by the Company's
Board of Directors. No prediction can be made as to the effect, if any, that
future sales or the availability of shares for sale will have on the market
price of the Common Shares prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Shares of the Company in the public market could
adversely affect the prevailing market price of the Common Shares and could
impair the Company's ability to raise capital through sales of its equity
securities.

After giving effect to the Offering, 3,436,358 Common Shares (including
shares issuable upon exercise of outstanding warrants and the 1996 Tranche A
Convertible Subordinated Notes) will be held by executive officers, directors
and affiliates of the Company and may be sold pursuant to an effective
registration statement covering such shares or pursuant to Rule 144 of the
Securities Act, subject to the contractual restrictions described below.

In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least two years, is entitled to
sell, within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding Common Shares or (ii) an amount equal
to the average weekly reported volume of trading in such shares during the four
calendar weeks preceding the date on which notice of such sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sale limitations, notice requirements and the availability of
current public information about the Company. Restricted shares properly sold in
reliance on Rule 144, are thereafter freely tradeable without restrictions or
registration under the Securities Act, unless thereafter held by an affiliate of
the Company. In addition, affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the two-year holding
period requirement, in order to sell Common Shares which are not restricted
shares (such as Common Shares acquired by affiliates of the Company in this
Offering). As defined in Rule 144, an "affiliate" of an issuer is a person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such issuer. If three years have
elapsed since the later of the date of any acquisition of restricted shares from
the Company or from any affiliate of the Company, and the acquiror or subsequent
holder thereof is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, such person would be entitled to sell
such shares in the public market pursuant to Rule 144(k) without regard to
volume limitations, manner of sale restrictions, or public information or notice

requirements.

The lenders under the 1993 Subordinated Notes have the right to request
registration of 816,526 restricted shares which they received upon the exercise
of warrants issued to them at the time of the borrowing under the 1993
Subordinated Notes; 373,305 of which are being sold pursuant to this Offering.
The lenders under the 1996 Tranche A Convertible Subordinated Notes have the
right to receive 2,060,606 shares upon conversion of the Notes, which may take
place anytime after 180 days from the date of this Prospectus. They have the
right to request registration with respect to those shares. There can be no
assurance that the holders of such rights will not exercise these registration
rights in a manner and at a time which may adversely impact the market price of
the Common Shares or business plans of the Company or may adversely affect the
Company's efforts to seek additional capital.

OTHER MATTERS

Available Information

The Company is subject to the informational requirements of the
Exchange Act, as amended, and, in accordance therewith, files reports and other
information with the SEC. Reports, proxy and information statements and other
information filed by the Company with the SEC pursuant to the informational
requirements of the Exchange Act may be inspected at the public reference
facilities maintained by the SEC at 450 Fifth Street, NW, Judiciary Plaza,
Washington, D.C. 20549-1004, and at the following Regional Offices of the SEC:
Chicago Regional Office, 500 West Madison Street, Suite 1400 , Chicago, Illinois
60661-2511, and New York Regional Office, 7 World Trade Center, New York, New
York 10048. Copies of such material may also be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, NW Washington, D.C. 20549-1004
at prescribed rates. The Common Shares are traded on the NASDAQ National Market.
The Company's registration statements, reports, proxy and information
statements, and other information may also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C.
20006. Copies of such material may also be obtained from the SEC EDGAR archives
on the Internet at the following SEC address:
HTTP://WWW.SEC.GOV/CGI-BIN/SRCH-EDGAR.

The Company will furnish to the holders of the Common Shares the
Company's annual reports containing audited financial statements and interim
reports containing unaudited financial statements.

This Prospectus constitutes a part of a Registration Statement on Form
S-1 filed by the Company with the SEC under the Securities Act. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC are not
necessarily complete and in each instance reference is made to the copy of such
document so filed.
Each such statement is qualified in its entirety by such reference.

SEC Position on Indemnification

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, or persons controlling the
registrant pursuant to any provisions described in this Prospectus, the
registrant has been informed that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.

LEGAL MATTERS

The validity of the Common Shares offered hereby, including those shares
offered by the Selling
61

Shareholders, and certain other legal matters will be passed upon for the
Company by Shughart Thomson & Kilroy P.C., Kansas City, Missouri, counsel to the
Company. Certain legal matters in connection with the selling shareholders will
be passed upon by counsel for the Selling Shareholders. Certain legal matters in
connection with the Offering are being passed upon for the Underwriters by
Cadwalader, Wickersham & Taft, New York, New York.

EXPERTS

The financial statements of the Company as of December 31, 1995 and
1994 and for each of the years in the three year period ended December 31, 1995
and the audit of Schedules of Revenues, Direct Operating Expenses and Production
Taxes of the Zapata Properties and the Bayou Sorrel Field for each of the two
years in the period ended December 31, 1994 included herein have been examined
by Barrett and Associates, independent certified public accountants, to the
extent and for the periods indicated in their reports with respect thereto, and
are included herein in reliance upon those reports and upon the authority of
that firm as experts in accounting and auditing. On September 4, 1996 Mark C.
Barrett became a director of the Company.

The Schedule of Revenues and Direct Operating Expenses of the Amoco
Properties for each of the three years in the period ended December 31, 1995
included herein have been examined by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
reports.

The firm of Arthur Andersen LLP has been engaged to do the annual
audits of the Company commencing with the year ending December 31, 1996. They
have not audited any period of the Company during 1996.

The information with respect to the independent reserve reports as of
December 31, 1995, 1994 and 1993 was prepared by the petroleum engineering firms
of Ryder Scott Company (offshore and Bayou Sorrel Field) and McCune Engineering,
P.E. (onshore other than Bayou Sorrel Field), and are referenced herein in
reliance upon such firms as experts with respect to such information. Dwayne
McCune, the sole proprietor of McCune Engineering, P.E., was an employee of the
Company from September 1992 to July 1995. Other reserve information referenced
herein was based upon reports prepared by the Company, which is solely
responsible for its content.

GLOSSARY OF SELECTED OIL AND GAS TERMS

The following are abbreviations and definitions of certain terms
commonly used in the oil and gas industry and this Prospectus.

"3-D seismic" means seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

"Bank Facility" means the Company's reducing revolving bank facility with
First Union National Bank of North Carolina and Banque Paribas.

"Bbl" means a barrel of oil and condensate or natural gas liquids, being 42
U.S. gallons.

"Bcf" means billion cubic feet of natural gas.

"Bcfe" means billion cubic feet of natural gas equivalents.

"Block" means one offshore unit of lease acreage, generally 5,000 acres.

"Btu" or "British Thermal Unit" means the quantity of heat required to
raise the temperature of one pound of water by one degree Fahrenheit.

"Condensate" means a hydrocarbon mixture that becomes liquid and separates
from natural gas when the gas is produced and is similar to crude oil.

"Developed acreage" means oil and gas acreage spaced for or assignable to
productive wells.

"Development well" means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.

"Dry hole" means a well found to be incapable of producing either oil or
gas in sufficient quantities to justify completion as an oil or gas well.

"Equivalent Bbls" means a measure of gas volumes representing the estimated
relative energy content of natural gas to oil, being 6 Mcf of natural gas per
Bbl of oil.

"Estimated future net revenues" means revenues from production of oil and
gas, net of all production -related taxes, lease operating expenses and capital
costs.

"Exploratory well" means a well drilled to find and produce oil or gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil and gas in another reservoir, or to extend a known reservoir.

"Farmout" means an agreement whereby the lease owner agrees to allow
another to drill a well or wells and thereby earn the right to an assignment of
a portion or all of the lease, with the original lease owner typically retaining
an overriding royalty interest and other rights to participate in the lease.

"Gross," when used with respect to acres or wells, refers to the total
acres or wells in which the Company has a working interest.

"Group 3-D seismic" means seismic procured by a group of parties or shot on
a speculative basis by a seismic company.
63

"MBbls" means thousands of barrels of oil.

"MBO" means one thousand barrels of oil.

"Mbtu" means one thousand Btus.

"Mcf" means thousand cubic feet of natural gas.

"Mcfe" means thousand cubic feet of natural gas equivalents.

"MMBbls" means millions of barrels of oil.

"MMBtu" means one million British Thermal Units.

"MMcf" means million cubic feet of natural gas.

"MMcfe" means million cubic feet of natural gas equivalents.

"Natural gas equivalents" means a volume, expressed in Mcf's of natural
gas, that includes not only natural gas but also liquids converted to an
equivalent quantity of natural gas on an energy equivalent basis. Equivalent gas
reserves are based on a conversion factor of 6 Mcf of gas per barrel of liquids.

"Net," when used with respect to acres, wells or reserves refers to gross
acres, wells or reserves multiplied, in each case, by the percentage working
interest owned by the Company.

"Net pay" means the thickness of a productive reservoir capable of
containing hydrocarbons.

"Net production" means production that is owned by the Company less
royalties and production due others.

"NGLs" means the natural gas liquids such as ethane, propane, iso-butane,
normal butane and natural gasoline that have been extracted from natural gas.

"Oil" means crude oil or condensate.

"Operator" means the individual or company responsible for the exploration,
development and production of an oil or gas well or lease.

"Overriding royalty interest" or "ORRI" means an interest in an oil and gas
property entitling the owner to a share of oil and gas production free of costs
of exploration and production.

"Payout" means that point in time when a party has recovered monies out of
the production from a well equal to the cost of drilling and completing the well
and the cost of operating the well through that date.

"Present value of future net revenues" or "Present value of proved
reserves" means the present value of estimated future revenues to be generated
from the production of proved reserves calculated in accordance with Securities
and Exchange Commission guidelines, net of estimated production and future
development costs, using prices and costs as of the date of estimation without
future escalation, except as otherwise provided by contract, without giving
effect to non-property related expenses such as general and administrative
expenses, debt service, future income tax expense and depreciation, depletion
and amortization, and discounted using an annual discount rate of 10%.

"Production costs" means costs necessary for the production of a well or
field and sale of oil and gas,
64

including production and ad valorem taxes.

"Productive well" means a well that is producing oil or gas or that is
capable of production.

"Proprietary 3-D seismic" means seismic privately procured and owned by the
procurer.

"Proved developed nonproducing reserves" means those reserves that exist
behind the casing if existing wells or at minor depths below the present bottom
of such wells and that are expected to be produced through these wells in the
predictable future, when the cost of making such oil and gas available for
production should be relatively small compared to the cost of a new well.

"Proved developed producing reserves" means those reserves that are
expected to be produced from existing completion intervals now open for
production in existing wells.

"Proved developed reserves" means reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery will be included as "proved developed
reserves" only after testing by a pilot project or after the operation of an
installed program has confirmed through production response that increased
recovery will be achieved.

"Proved reserves" means the estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on escalation
based upon future conditions.

i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.

ii. Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program
was based.

iii. Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified
separately as "indicated additional reserve", (B) crude oil, natural
gas and natural gas liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics or economic factors; (C) crude oil, natural gas and
natural gas liquids that may occur in undrilled prospects; and (D)
crude oil, natural gas and natural gas liquids that may be recovered
from oil shales, coal, gilsonite and other such sources.

"Proved undeveloped reserves" means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage is limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances are estimates of proved undeveloped reserves attributable
to any acreage for which an application of fluid injection or other improved
recovery technique is contemplated, unless such techniques

have been proved effective by actual tests in the area and in the same
reservoir.

"Recompletion" means the completion for production of an existing wellbore
in another formation from that in which the well has previously been completed.

"Reserves" means proved reserves.

"Royalty" means an interest in an oil and gas lease that gives the owner of
the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the lease acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by the owner of the leasehold
in connection with a transfer to a subsequent owner.

"SEC 10 Value" means the present value of estimated future net revenues,
before taxes, of the specified reserves or property, determined in all material
respects in accordance with the rules and regulations of the SEC (generally
using prices and costs in effect at a fixed date and a 10% discount rate).

"Shut-in" means to close down a producing well or field temporarily for
repair, cleaning out, building up reservoir pressure, lack of a market or
similar conditions.

"Undeveloped acreage" means the oil and gas acreage on which wells have not
been drilled or to which no Proved Reserves other than Proved Undeveloped
Reserves have been attributed by independent petroleum engineers.

"Unproved properties" means the oil and gas acreage to which no Proved
Reserves have been attributed by independent petroleum engineers.

"Unproved reserves" means those reserves based on geologic and/or
engineering data similar to that used in estimates of proved reserves; but
technical, contractual, economic, or regulatory uncertainties preclude such
reserves being classified as proved. They may be estimated assuming future
economic conditions different from those prevailing at the time of the estimate.
Unproved reserves may be divided into two subclassifications: "probable" and
"possible."

"Working interest" means an interest in an oil and gas lease that gives the
owner of the interest the right to drill for and produce oil and gas on the
leased acreage and requires the owner to pay a share of the costs of drilling
and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the
working interest owner is required to bear, with the balance of the production
accruing to the owners of royalties. For example, the owner of a 100% working
interest in a lease burdened only by a landowner's royalty of 12.5% would be
required to pay 100% of the costs of a well but would be entitled to retain only
87.5% of the production.

PANACO, INC.
INDEX TO FINANCIAL STATEMENTS

PRO FORMA COMBINED FINANCIAL INFORMATION Page

Balance Sheet, September 30, 1996 13
Statements of Income (Operations) for the nine months
ended September 30, 1996 14
Statements of Income (Operations) for the year ended
December 31, 1995 15
Notes to Pro Forma Financial Statements 16

PANACO, INC. - AUDITED FINANCIAL STATEMENTS

Independent Auditors' Report F-2
Balance Sheets, December 31, 1995 and 1994 F-3
Statements of Income (Operations) for the Years Ended
December 31, 1995, 1994 and 1993 F-5
Statements of Changes in Stockholders' Equity and Retained Earnings (Deficit)
for the Years Ended December 31, 1995, 1994 and 1993 F-6
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Financial Statements for the Years Ended
December 31, 1995, 1994 and 1993 F-8

ZAPATA PROPERTIES AND BAYOU SORREL FIELD

Independent Auditors' Report F-21
Schedules of Revenues, Selected Direct Operating Expenses and Production Taxes
for the Years Ended December 31, 1994 and 1993 F-22
Notes to the Schedules of Revenues, Selected Directed Expenses and Production
Taxes for the Years Ended December 31, 1994 and 1993 F-23

PANACO, INC. - UNAUDITED FINANCIAL STATEMENTS

Balance sheets, September 30, 1996 and December 31, 1995 F-27 Statements of
Income operating for the nine months ended
September 30, 1996 F-29
Statement of Changes in Stockholders' Equity for the nine months ended
September 30, 1996 F-30
Statements of Cash Flows for the nine months ended September 30, 1996 F-31
Notes to Financial Statements for the nine months ended September 30, 1996 F-32

AMOCO PROPERTIES

Independent Auditors' Report F-40
Statement of Revenues and Direct Operating Expenses F-41
Notes to the Statement F-42

F-1

Independent Auditors' Report

To the Board of Directors
PANACO, Inc.

We have audited the accompanying balance sheets of PANACO, Inc. (a Delaware
corporation) as of December 31, 1995 and 1994, and the related statements of
income (operations), changes in Stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the Financial Statements, the Company has given
retroactive effect to the change in accounting for its oil and gas operations.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PANACO, Inc. as of December 31,
1995 and 1994, and the results of its operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.

BARRETT & ASSOCIATES
Overland Park, Kansas

February 26, 1996, except for Note 1, which the date is June 7, 1996.

F-2

PANACO, INC.
BALANCE SHEETS

ASSETS

December 31,
1995 1994
CURRENT ASSETS:

Cash and cash equivalents $ 1,198,000 $ 1,583,000
Accounts receivable
Trade 3,294,000 2,230,000
Other 1,092,000 1,000
Prepaid expenses 465,000 272,000
--------------- ---------------
Total current assets 6,049,000 4,086,000
-------------- --------------

OIL AND GAS PROPERTIES, AS DETERMINED
BY THE SUCCESSFUL EFFORTS METHOD
OF ACCOUNTING
Oil and gas properties 103,105,000 89,010,000
Less accumulated depreciation, depletion, amortization,
and valuation allowances (73,620,000) (65,065,000)
----------- -----------
Net oil and gas properties 29,485,000 23,945,000
------------ ------------

PROPERTY, PLANT, AND EQUIPMENT
Equipment 196,000 158,000
Less accumulated depreciation (92,000) (68,000)
-------------- --------------
Net property, plant, and equipment 104,000 90,000
-------------- --------------

OTHER ASSETS:
Loan costs, net 471,000 714,000
Certificates of deposit - escrow 26,000 47,000
Other 5,000 6,000
Accounts receivable - other 8,000 186,000
Note receivable 21,000 21,000
---------------- ---------------
Total other assets 531,000 974,000
--------------- --------------

TOTAL ASSETS $ 36,169,000 $29,095,000
============ ===========

The accompanying notes to financial statements are an integral
part of this statement.

F-3

LIABILITIES AND STOCKHOLDERS' EQUITY

December 31,
1995 1994

CURRENT LIABILITIES

Accounts payable $ 4,444,000 $ 1,528,000
Interest payable 161,000 185,000
Current portion of long-term debt -0- -0-
------------- -------------
Total current liabilities 4,605,000 1,713,000
------------- -------------

LONG-TERM DEBT 22,390,000 12,500,000
------------ ------------

STOCKHOLDERS' EQUITY

Preferred Share, $.01 par value,
1,000,000 shares authorized; no
shares issued and outstanding -0- -0-
Common Share, $.01 par value,
20,000,000 shares authorized;
11,504,615 and 10,220,138 shares
issued and outstanding, respectively 115,000 102,000
Additional paid in capital 21,155,000 17,586,000
Retained earnings (deficit) (12,096,000) (2,806,000)
------------- ------------
Total Stockholders' Equity 9,174,000 14,882,000
------------- ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,169,000 $ 29,095,000
============ ============

The accompanying notes to financial statements are an integral
part of this statement.

F-4

PANACO, INC.
STATEMENTS OF INCOME (OPERATIONS)

Year Ended December 31,
1995 1994 1993
REVENUES

Oil and gas sales $18,447,000 $17,338,000 $ 12,605,000

COSTS AND EXPENSES
Lease operating 8,055,000 5,231,000 5,297,000
Depreciation, depletion and amortization 8,064,000 6,038,000 4,288,000
General and administrative 690,000 587,000 542,000
Production and ad valorem taxes 1,078,000 1,006,000 754,000
Exploration expenses 8,112,000 -0- -0-
Provision for losses and (gains) on disposition
and write-down of assets 751,000 1,202,000 3,824,000
-------------- ------------- -------------
Total 26,750,000 14,064,000 14,705,000
------------ ------------ ------------

NET OPERATING INCOME (LOSS) (8,303,000) 3,274,000 (2,100,000)
------------ ------------- -------------

OTHER INCOME (EXPENSE)
Interest income 5,000 46,000 27,000
Interest expense (992,000) (1,669,000) (1,913,000)
------------- ------------ ------------
Total (987,000) (1,623,000) (1,886,000)
-------------- ------------ ------------
NET INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (9,290,000) 1,651,000 (3,986,000)
INCOME TAXES (BENEFIT) -0- -0- -0-
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (9,290,000) 1,651,000 (3,986,000)
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT -0- (536,000) -0-
-------------------- -------------- --------------------

NET INCOME (LOSS) $ (9,290,000) $ 1,115,000 $ (3,986,000)
============ ============= ============

EARNINGS (LOSS) PER COMMON SHARE
Primary:
Earnings (loss) before extraordinary item $ (.81) $ .16 $ (.53)
Extraordinary loss -0- (.05) -0-
------------------- ----------------- --------------------
Net earnings (loss) $ (.81) $ .11 $ (.53)
================= ================== =================
Assuming full dilution:
Earnings (loss) before extraordinary item $ (.81) $ .16 $ (.53)
Extraordinary loss -0- (.05) -0-
------------------- ---------------- -------------------
Net earnings (loss) $ (.81) $ .11 $ (.53)
================== ================== ==================
Weighted average shares outstanding:
Primary 11,504,615 9,952,870 7,583,761
============ ============= =============
Assuming full dilution 11,504,615 10,039,042 7,583,761
============ ============ =============

The accompanying notes to financial statements are an integral
part of this statement.

F-5

PANACO, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Common Additional Retained
Share Paid-In Earnings
Shares Par Value Capital (Deficit)

Balances, December 31, 1992 $ 7,534,496 $ 75,000 $ 11,298,000 $ 65,000
Net loss -0- -0- -0- (3,986,000)
Exercises of stock options and warrants 620,759 7,000 1,285,000 -0-
----------- ------------ ------------------------------
Balances, December 31, 1993 $ 8,155,255 $ 82,000 $12,583,000 $(3,921,000)

Net income -0- -0- -0- 1,115,000
Exercises of stock options and warrants and
shares issued under Employee Stock
Ownership Plan 2,064,883 20,000 5,003,000 -0-
---------- ----------- -----------------------------
Balances, December 31, 1994 $ 10,220,138 $102,000 $17,586,000 $(2,806,000)

Net Loss -0- -0- -0- (9,290,000)
Exercise of stock options and warrants 1,181,602 12,000 3,137,000 -0-
Issuance of new shares 102,875 1,000 432,000 -0-
----------- ------------ -----------------------------
Balances, December 31, 1995 $ 11,504,615 $ 115,000 $21,155,000 $(12,096,000)
============ ========= =========== =============

The accompanying notes to financial statements are an integral
part of this statement.

F-6

PANACO, INC.
STATEMENTS OF CASH FLOWS

Year Ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) before extraordinary item $(9,290,000) $1,651,000 $ (3,986,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion, and amortization 8,065,000 6,038,000 4,288,000
Amortization of loan discount -0- 340,000 512,000
Exploration expenses 8,112,000 -0- -0-
Provision for losses and (gains) on disposition
and write-down of assets 751,000 1,202,000 3,824,000
Changes in operating assets and liabilities:
Accounts receivable (2,155,000) (1,202,000) 1,261,000
Prepaid expenses (193,000) (113,000) (20,000)
Other assets 200,000 (388,000) (11,000)
Accounts payable 2,916,000 (79,000) (896,000)
Interest payable (24,000) 26,000 (40,000)
Extraordinary loss -0- (536,000) -0-
-------------- ------------- -------------
Net cash provided by operating activities 8,382,000 6,939,000 4,932,000
-------------- ------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of oil and gas properties 11,000 300,000 41,000
Capital expenditures and acquisitions (21,803,000) (12,101,000) (790,000)
Purchase of other property and equipment (38,000) (37,000) (52,000)
Sale of other property and equipment -0- 10,000 -0-
Purchase of certificate of deposit -0- -0- (26,000)
-------------- ------------ ---------------
Net cash used by investing activities (21,830,000) (11,828,000) (827,000)
-------------- ------------ --------------

CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds 16,890,000 5,564,000 -0-
Repayment of long-term debt (7,000,000) (7,326,000) (3,535,000)
Issuance of common shares - exercise of
warrants and options 3,173,000 5,023,000 1,163,000
------------- ------------- -------------
Net cash provided (used) by financing activities 13,063,000 3,261,000 (2,372,000)
------------- ------------- -------------

NET INCREASE (DECREASE) IN CASH (385,000) (1,628,000) 1,733,000

CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,583,000 3,211,000 1,478,000
------------- ------------ -------------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,198,000 $ 1,583,000 $ 3,211,000
============ ============ ============

The accompanying notes to financial statements are an integral
part of this statement.

F-7

PANACO, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of PANACO, Inc. (the Company) is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
who are responsible for the integrity and objectivity of the financial
statements. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.

Revenue Recognition
The Company recognizes its ownership interest in oil and gas sales as revenue.
It records revenues on an accrual basis, estimating volumes and prices for any
months for which actual information is not available. If actual production sold
differs from its allocable share of production in a given period, such
differences would be recognized as deferred or accounts receivable.

Hedging Transactions
The Company engages in natural gas futures contracts within the normal course of
its business. The Company uses futures and floor contracts to reduce the effects
of fluctuations in natural gas prices. Changes in the market value of these
contracts are deferred and subsequent gains and losses are recognized monthly in
the same period as the hedged item based on the difference between the First
Nearby Contract for Natural Gas - NYMEX and the contract price. The Company
entered into a hedge agreement beginning in January, 1996, for the delivery of
15,000 MMBTU of gas for each day in 1996 with contract prices ranging from
$1.7511/MMBTU to $2.253/MMBTU. Prior to this agreement, the Company had entered
into a floor contract that expired December, 1994, and a hedge contract which
expired September, 1993.

Income Taxes
In 1993, the Company adopted Statement of Financial Accounting Standards (FAS)
No. 109 - "Accounting for Income Taxes", which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Generally, FAS 109 allows for at least the
partial recognition of deferred tax assets in the current period for the future
benefit of net operating loss carry forwards.

Income (Loss) per share
The computation of earnings or loss per share in each year is based on the
weighted average number of common shares outstanding. When dilutive, stock
options and warrants are included as share equivalents using the treasury share
method. Stock options and warrants were not included in the calculation for 1993
and 1995, as the effects were not dilutive. Shares to be contributed to the ESOP
plan are treated as common share equivalents.

Property, Plant & Equipment
Other property and equipment is recorded at cost. Depreciation is provided using
the straight-line method based on estimated useful lives which range from 5 to 7
years.

Oil and Gas Producing Activities and Depreciation, Depletion and Amortization
Effective December 31, 1995, PANACO changed its method of accounting for
oil and gas operations from the
F-8

full cost method to the successful efforts method. Management concluded that the
successful efforts method will more appropriately reflect PANACO's oil and gas
operations and will enable investors and others to better compare PANACO to
similar oil and gas companies, the majority of which follow the successful
efforts method. All prior period financial statements have been restated to
reflect the change.

Under the successful efforts method, lease acquisition costs are capitalized.
Exploratory drilling costs are also capitalized pending determination of proved
reserves. If proved reserves are not discovered, the exploratory costs are
expensed. All development costs are capitalized. Provision for depreciation and
depletion is determined on a field-by-field basis using the unit-of-production
method. The carrying amounts of proven and unproven properties are reviewed
periodically on a property-by-property basis, based on future net cash flows
determined by an independent engineering firm, and an impairment reserve is
provided as conditions warrant. The provision for write down of assets was
$751,000 for 1995, $1,202,000 for 1994, and $3,824,000 for 1993.

The change in the Company's accounting method increased 1995 net income by
$2,054,000 or $0.18 per share from previously reported results under the full
cost method. The change decreased 1994 and 1993 net income by $1,298,000, or
$0.13 per share and $3,800,000, or $0.51 per share, respectively, from
previously reported results under the full cost method. As of December 31, 1995,
retained earnings was decreased by $2,797,000 as a result of the accounting
change and additional paid in capital was reduced by $1,264,000.

Amortization of Note Discount
The note discount was being amortized utilizing the interest method, which
applies a constant rate of interest to the book value of the note. Additional
interest expense of $0, $234,000, and $512,000, was recorded in 1995, 1994 and
1993, respectively, from the amortization of the discount. Effective July 1,
1994 the debt related to the note discount was extinguished, and the balance of
the note discount totaling $106,000 was recorded as an extraordinary item.

Statement of Cash Flows
For purposes of reporting cash flows, the Company considers all cash investments
with original maturities of three months or less to be cash equivalents.

Use of Estimates
Management relies on the use of estimates for oil and gas reserve information
and the valuation allowance for deferred income taxes in preparing financial
statements in accordance with generally accepted accounting principles.
Estimates related to oil and gas reserve information and the standardized
measure are based on estimates provided by third parties. Changes in prices
could significantly affect these estimates from year to year.

Reclassification
Certain financial statement items have been reclassified to conform to the
current year's presentation.

Note 2 - LOAN COSTS

Loan costs in the amount of $602,000 and $255,000 are being amortized over the
lives of the loans, three years and six years, respectively. Additional loan
costs of $402,000 were incurred during 1994.

Note 3 - MAJOR CUSTOMERS

One purchaser accounted for 69% and 83% of revenues in 1995 and 1994,
respectively, and two purchasers accounted for 65% and 17% of revenues in 1993.

Note 4 - CERTIFICATE OF DEPOSITS - ESCROW

The Company has CD's to satisfy plugging obligations with certain government
entities.

F-9

Note 5- LONG-TERM DEBT
1995 1994
------------- ------------
Note payable (a) $ 5,000,000 $ 5,000,000
Note payable (b) 17,390,000 7,500,000
------------- ------------
22,390,000 12,500,000

Less current portion - -
------------ ------------
Long-term debt $ 22,390,000 $ 12,500,000
============ ============

(a) Note payable dated December 31, 1993 due to a group of six lenders in
the amount of $5,000,000 bearing interest at 12%. The lenders at their
discretion can loan an additional $5,000,000 to the Company. Payments for
interest only are required quarterly. The Company may deliver up to $1,000,000
in PIK (payment in kind) notes, bearing interest at 12%, in satisfaction of all
or part of any interest payment. The loan agreement limited the use of the first
$5,000,000 to capital expenditures and the next $5,000,000 (assuming the lenders
approve additional borrowings) to acquisitions. The loan agreement contains
certain financial covenants including future indebtedness and payment of
dividends. The note matures on December 31, 1999 and is collateralized by a
second mortgage on a substantial portion of offshore oil and gas properties,
production proceeds and receivables. The lenders were issued 816,526 warrants,
at an exercise price of $2.25, expiring December 31, 1998 in connection with the
financing (see Note 8).
(b) Reducing Revolving Line of Credit dated July 1, 1994 with a maximum
debt incurred equal to the lesser of thirty million dollars or the Borrowing
Base ($21,000,000 at December 31, 1995). The Borrowing Base reduces on a monthly
basis at a rate of $500,000 and is reviewed on a semi-annual basis as of June 30
and December 31. The note is due July 1, 1998 and bears interest at either prime
or Libor plus 1.0% to 1.75% depending on the percentage of the borrowing base
used (8% and 7.625% at December 31, 1995, respectively). At December 31, 1995,
the Company had $3,025,000 borrowed at 7.625%, $10,500,000 borrowed at 7.5625%,
and $3,865,000 borrowed at 7.6875%. Interest is due on the last day of the month
for prime notes and is due on the last day of the interest period or every three
months on Libor notes. A commitment fee of .375% to .5% of the average unused
portion of the Borrowing Base is due on a quarterly basis. The revolving line of
credit is collateralized by a substantial portion of the oil and gas properties,
receivables, inventory and general intangibles. The loan agreement contains
certain covenants including maintaining a positive indebtedness to cash flow
ratio, a positive working capital ratio, a certain tangible net worth,
limitations on future debt, guarantees, liens, dividends, mergers, material
change in ownership by management, and sale of assets. In addition, the Lender
has issued the Company a letter of credit for $3,000,000 to collateralize a
plugging bond which reduces the available Borrowing Base.

Maturities of long-term debt are as follows:

December 31, 1997 $17,390,000

December 31, 1999 $ 5,000,000
------------
$22,390,000

Note 6 - STOCKHOLDERS' EQUITY

During 1995, 1,181,602 shares were issued related to the exercise of warrants
and options, 97,680 shares were issued related to property acquisition costs and
5,195 shares were issued for board of directors fees.

During 1994, 2,034,033 shares were issued related to the exercise of warrants
and options, and 30,850 shares were issued related to the Company's ESOP.

During 1993, 12,294 shares were awarded to three new directors, 1,200 shares
were issued in exchange for oil and gas properties, 36,363 shares were issued
for payment of a finders fee on new financing (see Note 5) and 575,000 shares
were issued related to the exercise of warrants and options.

F-10

During 1993, 4,098 shares were relinquished to the Company under the terms of
the Long-Term Incentive Plan by a director upon his resignation. These shares
were reissued in the above transactions during 1993.

Shares outstanding are as follows:
Year Ending December 31,
Common Preferred
Shares Shares
1993 8,155,255 -
1994 10,220,138 -
1995 11,504,615 -

Note 7- WARRANTS

Warrants outstanding at December 31, 1995 to acquire common shares are as
follows:

Number of Price per
Shares Share Expiration Date
-------- ---------- ------------------
160,000 $2.375 June 1, 1996
90,000 $2.000 June 1, 1996
39,365 $2.000 December 31, 1997
289,365

During 1995, warrants with exercise prices ranging from $2.00 to $4.00 per share
were exercised for a total of 495,735 shares.

Note 8 - LENDER WARRANTS

In connection with the note payable dated December 31, 1993 (See Note 4)
warrants were issued to a group of six lenders. These warrants differ from those
described in Note 5; they have stronger antidilution provisions, effective
January 1, 1996 the holders can demand registering the warrant shares either
issuable upon exercise or held by the holder, and the holder may also, if the
Company files a Registration Statement, have an opportunity to include the
warrant shares in such Registration Statement. Warrants to acquire Common Shares
were as follows:

Number of Price per
Shares Share Expiration Date
816,526 $2.25 December 31, 1998

Early in 1996, the warrants were exercised.

Note 9 - STOCK OPTIONS AND LONG-TERM INCENTIVE PLAN

On August 26, 1992, the shareholders approved a long-term incentive plan
allowing the Company to grant incentive and nonstatutory stock options,
performance units, restricted stock awards and stock appreciation rights to key
employees, directors, and certain consultants and advisors of the Company up to
a maximum of 20% of the total number of shares outstanding.

At December 31, 1995, there were no stock options outstanding.

During 1995, options with exercise prices ranging from $2.00 to $3.975 per share
were exercised for a total of 759,712 shares.

Under the terms of the Long-Term Incentive Plan, three directors
surrendered 73,845 shares to exercise
F-11

124,400 options. New options were issued equal to the number of shares
surrendered at a price of $2.0313 per share, which would have expired December
31, 1995, but were exercised by that date.

Note 10 - RELATED PARTY TRANSACTIONS

During 1995, 25,000 warrants at a price of $2.50 per share were issued to and
exercised by a director.

During 1994, 650,000 warrants at a price of $2.75 per share were issued to the
Board of Directors. All warrants were exercised during 1994.

The Company entered into a triple net lease agreement with a partnership owned
by two directors for the lease of an office building. The lease, which expires
November, 2003, has monthly rental payments of $4,000. During 1995 and 1994,
$48,000 per year in rent was paid under the lease agreement. During 1993, no
rent was due under the lease agreement. A deposit of $4,000 was due and included
in accounts payable at December 31, 1993.

Stock options (see Note 7) originally issued to three directors to acquire
250,000 shares each, were exercisable through December 31, 1995 at $2.00 per
share. During 1995, 1994 and 1993, 150,000, 275,000 and 300,000 options were
exercised at $2.00 per share. In 1994 and 1993, an additional 275,000 and
300,000 options respectively were issued at prices ranging from $2.32 per share
to $3.9375 per share, and all options were exercised in 1995.

Under the terms of the Long-Term Incentive Plan, three directors were issued
73,845 options at $2.0313 per share and 68,567 options at $2.1875 per share in
1995 and 1994, respectively. These options were exercised in 1995.

Warrants were issued to a director in 1991 to acquire 250,000 shares. Of these,
160,000 shares were exercised in 1993 at $2.00 per share and 90,000 warrants are
exercisable through June 1, 1996 at $2.00 per share. In addition, 160,000
warrants at $2.375 issued December 10, 1993, are exercisable through June 1,
1996.

Consulting fees of $80,000 were paid in 1993 to an entity of which a director is
a 100% owner. At December 31, 1993, no such fees were payable to this entity.

In 1993, three new directors were awarded 4,098 shares each (valued at a total
of $30,000) pursuant to the Company's Long-Term Incentive Plan. These shares
become vested over a thirty month period.

During 1993, a director relinquished 4,098 shares upon his resignation.

Note 11 - LEASES

The following is a schedule of future rental payments required under an office
building lease described in Note 10 as of December 31, 1995.

Year ending December 31,

1996 $ 48,000
1997 48,000
1998 48,000
1999 48,000
2000 48,000
2001-2003 140,000
$ 380,000

F-12

Rental expense incurred on a former office lease for the year ended December 31,
1993, was $26,180.

Note 12 - INCOME TAXES

At December 31, 1995, the Company had net operating loss carry forwards for
federal income tax purposes of $15,765,000 which are available to offset future
federal taxable income through 2010.

Significant components of the Company's deferred tax liabilities and assets as
of December 31 are as follows:

1995 1994
------------ ----------
Deferred tax assets
Fixed asset basis differences $1,408,000 $ 557,000
Net operating loss carry forwards 6,306,000 3,504,000
--------- ------------
Total deferred tax assets 7,714,000 4,061,000
--------- ------------

Valuation allowance for deferred
tax assets (7,714,000) (4,061,000)
---------- ----------
Total deferred tax assets $ - $ -
========== ===========

A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized.

The valuation allowance for deferred tax assets as of December 31, 1993 was
$3,704,000. The net change in the total valuation allowance for the years ended
December 31, 1995 and 1994 was an increase of $3,653,000 and $357,000,
respectively.

Note 13 - COMMITMENT AND CONTINGENCIES

A $3,000,000 letter of credit, collateralizing a plugging bond, expires on
December 14, 1996. The contract amount of the letter of credit approximates its
fair value.

In January 1996 the Company has had a suit filed against it related to a gas
gathering system in Oklahoma seeking $700,000. The Company has filed a counter
claim against the plaintiff seeking damages for fraud. Management feels the
plaintiffs suit is without merit and any outcome would be immaterial to results
of operations or financial position.

Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of bank account balances in excess of federally
insured limits and trade receivables. The Company's receivables consist of oil
and gas sales to third parties primarily from offshore production in the Gulf of
Mexico and onshore oil production in the central part of the United States. This
concentration may impact the Company's overall credit risk, either positively or
negatively, in that these entities may be similarly affected by changes in
economic or other conditions. Receivables are generally not collateralized.
Historical credit losses incurred by the Company on receivables have not been
significant.

Note 14 - EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

In August, 1994, the Company established an Employee Stock Ownership Plan (ESOP)
and Trust that covers substantially all employees. The Board of Directors can
approve contributions, up to a maximum of 15% of eligible employees' gross
wages. The Company incurred $132,000 and $123,000 in costs for the years ended
December 31, 1995 and 1994, respectively.

Note 15 - IMPAIRMENT OF LONG-LIVED ASSETS

F-13

In 1995 the company adopted the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of", which requires that long-lived assets and identifiable
intangibles be reviewed for impairment when the assets carrying amount may not
be recoverable based on the fair market value of the asset. SFAS 121 requires
assets to be reviewed for impairment at the lowest level for which there are
independent, identifiable cash flows. The adoption of SFAS 121 had no effect on
1995 financial statements and the Company expects no future impact, as the
Company periodically evaluates its oil and gas properties for impairment under
the successful efforts method of accounting on a field by field basis as
prescribed by FAS No. 121.

Note 16 - FINANCIAL INSTRUMENTS

Effective December 31, 1995, the Company adopted the requirements of Statement
of Financial Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments" requires disclosure of an estimate of the fair value of
certain financial instruments. The carrying amount and fair values of the
Company's financial instruments at December 31, 1995, are as follows:

Assets (Liabilities)
--------------------------------------
Carrying Amount Fair Value
Cash and cash equivalents $ 1,198,000 $ 1,198,000
Receivables 4,415,000 4,415,000
Payables (4,605,000) (4,605,000)
Long-term variable rate debt (17,390,000) (17,390,000)
Long-term fixed rate debt (5,000,000) (3,675,150)
Off balance sheet financial instruments
Letter of credit 0 0
Hedge contracts 0 (2,000,000)

Cash and cash equivalents, receivables, payables, and long-term variable rate
debt
The carrying amount reported on the consolidated balance sheet approximates its
fair value because of the short maturities of these instruments.

Long-term, fixed rate debt
The Company estimates the fair value of its long-term, fixed rate debt generally
using discounted cash flow analysis based on the Corporation's current borrowing
rates for debt with similar maturities.

Letter of credit
A $3,000,000 letter of credit collateralizes a plugging bond. Fair value
estimated on the basis of fees paid to obtain the obligation is not material at
December 31, 1995.

Hedge contract
The fair values of the Company's futures contracts are estimated based on
current settlement values.

Note 17 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES

F-14

(UNAUDITED)

The following table reflects the costs incurred in oil and gas property
activities for each of the three years ended December 31:

1995 1994 1993
------------- ------------- --------------

Property acquisition costs, proved $ 12,603,000 $ 352,000 $ -

Property acquisition costs, unproved $ - $ - $ -

Exploration costs $ 8,112,000 $ - $ -

Development costs $ 1,497,000 $ 11,749,000 $ 801,000

Quantities of Oil and Gas Reserves

The estimates of proved developed and proved undeveloped reserve quantities at
December 31, 1995 are based upon reports of petroleum engineers and do not
purport to reflect realizable values or fair market values of PANACO's reserves.
It should be emphasized that reserve estimates are inherently imprecise and
accordingly, these estimates are expected to change as future information
becomes available. These are estimates only and should not be construed as exact
amounts. All reserves are located in the United States.

Proved reserves are estimated reserves of natural gas and crude oil and
condensate that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are those expected
to be recovered through existing wells, equipment, and operating methods.

Proved developed and undeveloped reserves Oil Gas

Estimated reserves as of December 31, 1992 1,121,000 46,595,000

Production (180,000) (5,586,000)
Sale of minerals in-place (12,000) (155,000)
Revisions of previous estimates (184,000) 2,842,000
---------- ----------
Estimated reserves as of December 31, 1993 745,000 43,696,000

Production (137,000) (8,139,000)
Extensions and discoveries 183,000 16,930,000
Sale of minerals in-place (24,000) (45,000)
Revisions of previous estimates 176,000 (10,860,000)
----------- -----------
Estimated reserves as of December 31, 1994 943,000 41,582,000

Production (170,000) (9,850,000)
Sale of minerals in-place (1,000) (22,000)
Purchase of minerals in-place 1,140,000 20,094,000
Revisions of previous estimates (12,000) (5,093,000)
---------- -----------
Estimated reserves as of December 31, 1995 1,900,000 46,711,000
=========== ============

F-15

Proved developed reserves:

Oil Gas
(BBLS) (MCF)
------------- ----------

December 31, 1992 1,053,000 36,208,000
============== ==========

December 31, 1993 745,000 24,665,000
=============== ==========

December 31, 1994 907,000 36,282,000
=============== ==========

December 31, 1995 1,794,000 40,323,000
============== ==========

Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) to the year-end estimated future production of proved oil and gas
reserves. Estimates of future development and production costs are based on
year-end costs and assume continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 per cent
per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the computed discount.

The accompanying table reflects the standardized measure of discounted
future cash flows relating to proved oil and gas reserves as of the three years
ended December 31:

1995 1994 1993
-------------- ------------ ---------------

Future cash inflows $140,247,000 $88,893,000 $113,419,000
Future development and production costs 50,723,000 32,197,000 38,375,000
-------------- ------------ --------------
Future net cash flows 89,524,000 56,696,000 75,044,000
Future income taxes 11,755,000 6,304,000 13,937,000
-------------- ------------- --------------
Future net cash flows after income taxes 77,769,000 50,392,000 61,107,000
10% annual discount (14,848,000) (8,477,000) (13,728,000)
-------------- ------------ --------------
Standardized measure after income taxes $ 62,921,000 $41,915,000 $ 47,379,000
============= ============= =============

Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The accompanying table reflects the principal changes in the standardized
measure of discounted future net cash flows attributable to proved oil and gas
reserves for each of the three years ended December 31:

1995 1994 1993
------------------ ---------------- --------------

Beginning balance $ 41,915,000 $47,379,000 $ 48,163,000
Sales of oil and gas, net of production costs (9,314,000) (11,047,000) (9,426,000)
Net change in income taxes (4,267,000) 5,562,000 (2,130,000)
Changes in price and production costs 11,498,000 (10,781,000) 2,199,000
Purchase of minerals in-place 34,415,000 - -
Revision of previous estimates, extensions,
discoveries, & sales of minerals in place-net (11,326,000) 10,802,000 8,573,000
-------------- ------------ -------------
Ending balance $ 62,921,000 $41,915,000 $ 47,379,000
============== ============ ============

Price per MCF $ 2.24 $ 1.75 $ 2.40
================ ============== ===============
Price per BBL $ 17.75 $ 16.00 $ 12.75
================ ============== ===============

F-16

Note 18 - ACQUISITIONS

On July 12, 1995, the Company entered into a Purchase and Sale Agreement with
Zapata Exploration Company ("Zapata") to acquire all of Zapata's offshore oil
and gas properties in the Gulf of Mexico. The properties consist of East Breaks
Blocks 109 and 110, East Cameron Block 359, Eugene Island Block 372, South
Timbalier Block 185 and West Cameron Block 538, totaling 31,134 gross acres. The
transaction closed July 26, 1995.

The purchase price for the assets acquired in this transaction was $2,748,000 in
cash and the obligation to pay a production payment to Zapata based upon future
production. The production payment is based upon production from the East Breaks
109 Field after production of 12 Bcfe gross (10 Bcfe net) measured from October
1, 1994. The Company will pay to Zapata $.4167 per Mcfe on the next 27 Bcfe
produced. Payments to Zapata on this production payment are to be made by the
Company when it is paid for the oil or gas. Oil and gas reserves attributable to
this production payment are not included in the reserves for the properties set
forth herein.

As of November 30, 1995, the Company entered into a Purchase and Sale Agreement
with Shell Western E&P Inc. ("Shell") to acquire all of Shell's interest in the
Bayou Sorrel Field in Iberville Parish, Louisiana. The transaction closed
December 27, 1995, and PANACO took over as operator from Shell. Proved reserves
attributable to the field at December 31, 1995, were 898,000 barrels and 3.1 Bcf
of natural gas. In addition to the proved reserves management has identified
significant probable and possible reserves attributable to this field. The
purchase price of the field was $10,455,000 which included a $204,000 brokers'
fee and a related receivable of $600,000.

Both of the acquisitions made in 1995 were accounted for using the purchase
method. The results of the Zapata properties acquisition are included in the
Company's statement of income (operations) from July 27 to December 31, 1995.
The results of the Bayou Sorrel acquisition are included in the Company's
statement of income (operations) from December 28 to December 31, 1995.

The unaudited pro forma statements of income (operations) for the year ended
December 31, 1995 assumes the Zapata and Bayou Sorrel acquisitions had been
consummated January 1, 1995. The unaudited pro forma statement of income
(operations) includes certain adjustments to give effect to the acquisitions of
the oil and gas properties.

The pro forma statements are presented in order to comply with the disclosure
requirements of Accounting Principles Board ("APB") pronouncement number 16.
This information is not the same as the pro forma statements presented elsewhere
in this Prospectus. The pro forma statements do not purport to be indicative of
the results of the Company had these acquisitions occurred on the date assumed,
nor is the pro forma statement necessarily indicative of the future results of
the Company. The pro forma statement should be read together with the Financial
Statements of the Company, including the notes thereto and included elsewhere in
this Statement.

F-17

PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1995

Zapata Bayou PANACO, Inc.
PANACO, Inc. Properties Sorrel Field Pro Forma Pro Forma
(As Restated) 1/1-7/26/95 1/1-12/26/95 Adjustments Combined
REVENUES

Oil and gas sales $ 18,447,000 $ 3,623,000 $ 3,326,000 $ -- $ 25,396,000

COSTS AND EXPENSES
Lease operating 8,055,000 1,460,000 867,000 280,000 (a) 10,662,000
Depreciation, depletion and
amortization 8,064,000 -- -- 1,812,000 (b) 9,876,000
Exploration expenses 8,112,000 -- -- -- 8,112,000
Provision for losses and
(gains) on disposition
& write-down of assets 751,000 -- -- -- 751,000
General and administrative 690,000 -- -- -- 690,000
Production and ad valorem
taxes 1,078,000 -- 297,000 -- 1,375,000
------------------------------ -----------------------------------------------
Total 26,750,000 1,460,000 1,164,000 2,092,000 31,466,000

NET OPERATING INCOME
(LOSS) (8,303,000) 2,163,000 2,162,000 (2,092,000) (6,070,000)
------------ ------------ ------------ ------------ --------------

OTHER INCOME (EXPENSE)
Interest income 5,000 -- -- -- 5,000
Interest expense (992,000) -- -- (651,000) (c) (1,643,000)
------------------------------------------------------------ --------------
Total (987,000) -- -- (651,000) (1,638,000)
---------------------------------------------------------------- --------------

NET INCOME (LOSS) BEFORE
INCOME TAXES (9,290,000) 2,163,000 2,162,000 (2,743,000) (7,708,000)
INCOME TAXES (BENEFIT) -- -- -- -- --
-------------------------------------------------------------------------------------

NET INCOME (LOSS) $(9,290,000) $2,163,000 $2,162,000 $(2,743,000) $(7,708,000)
============ ========== ========== ============ ============

EARNINGS (LOSS) PER COMMON SHARE
Primary
Net earnings (loss) $ (0.81) $ (0.67)
================ =================

Assuming full dilution
Net earnings (loss) $ (0.81) $ (0.67)
================ =================

Weighted average shares outstanding:
Primary 11,504,615 11,504,615
============== =============

Assuming full dilution 11,504,615 11,504,615
============== =============

The accompanying notes to pro forma financial statements are an
integral part of this statement.

F-18

PANACO, INC.
Unaudited Pro Forma Combined Statement of Income (Operations)
For the Year Ended December 31, 1994

Zapata Bayou PANACO, Inc.
PANACO, Inc. Properties Sorrel Field Pro Forma Pro Forma
(As Restated) 1/1-12/31/94 1/1-12/31/94 Adjustments Combined
REVENUES

Oil and gas sales $ 17,338,000 $ 7,540,000 $ 2,888,000 -- $ 27,766,000

COSTS AND EXPENSES
Lease operating 5,231,000 3,317,000 1,942,000 480,000 (a) 10,970,000
Depreciation, depletion and
amortization 6,038,000 -- -- 1,447,000 (b) 7,485,000
Exploration expenses -- -- -- -- --
Provision for losses and (gains)
on disposition and write-down
of assets 1,202,000 -- -- -- 1,202,000
General and administrative 587,000 -- 310,000 -- 897,000
Production and ad valorem taxes 1,006,000 -- -- -- 1,006,000
-----------------------------------------------------------------------------
Total 14,064,000 3,317,000 2,252,000 1,927,000 21,560,000
------------- -------------- ------------- ------------- -------------

NET OPERATING INCOME (LOSS) 3,274,000 4,223,000 636,000 (1,927,000) 6,206,000
-------------- ------------- -------------- -------------- -------------

OTHER INCOME (EXPENSE)
Interest income 46,000 -- -- -- 46,000
Interest expense (1,669,000) -- -- (788,000)(c) (2,457,000)
-----------------------------------------------------------------------------
Total (1,623,000) -- -- (788,000) (2,411,000)
-----------------------------------------------------------------------------

NET INCOME (LOSS) BEFORE
INCOME TAXES AND
EXTRAORDINARY ITEM 1,651,000 4,223,000 636,000 (2,715,000) 3,795,000

INCOME TAXES (BENEFIT) -- -- -- -- --
-------------------------------------------------------------------------------------------

NET INCOME (LOSS) $ 1,651,000 $ 4,223,000 $ 636,000 $(2,715,000) $ 3,795,000
------------ ----------- ------------ ------------ ------------

EARNINGS (LOSS) PER COMMON SHARE
Primary

Net earnings (loss) $ 0.16 $ 0.37
============= =============

Assuming full dilution

Net earnings (loss) $ 0.16 $ 0.38
============= =============

Weighted average shares outstanding:
Primary 9,952,870 9,952,870
============== =============
Assuming full dilution 10,039,042 10,039,042
============= ============

The accompanying notes to pro forma financial statements are an
integral part of this statement.

F-19

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (OPERATIONS)

1. Basis of Presentation

The Unaudited Pro Forma Statement of Income (Operations) of PANACO, Inc.
presents the combined effects of the acquisition of the Zapata properties and
Bayou Sorrel Field as if the acquisitions had been consummated January 1st of
each year. The pro forma statements are presented in order to comply with the
disclosure requirements of Accounting Principles Board ("APB") pronouncement
number 16. This information is not the same as the pro forma statements
presented elsewhere in this Prospectus.

2. Pro Forma Entries

(a) To record the estimated additional insurance expense.
(b) To record the additional depletion and depreciation expense for the
increased property costs and production volumes (see Note 4 below).
(c) To record the additional interest expense for increased term of
borrowing (see Note 5 below).

3. Taxes

No additional operating taxes are included for the Zapata properties as the
production from these properties is from federal offshore waters and is not
subject to severance taxes.

4. Depletion, depreciation & amortization

Additional depletion and depreciation expense is included to reflect the
additional property costs and production volumes assuming the transaction was
consummated January 1. The original purchase prices are used for the cost of the
properties. The actual purchase prices of the properties were reduced by the net
income of the properties from the effective dates of the purchases until the
closing dates.

5. Interest

Additional interest expense is included as if the transactions had taken place
January 1. It is assumed that the Zapata acquisition price was paid in cash and
the Bayou Sorrel acquisition price was paid for using the Company's Primary
Credit Facility. Interest is computed on the additional borrowings at the
estimated rates in effect at January 1.

F-20

Independent Auditors' Report

To the Board of Directors
PANACO, Inc.

We have audited the accompanying schedules of Revenues, Direct Operating
Expenses and Production Taxes of the Zapata properties (which were acquired by
PANACO, Inc., on July 26, 1995) and the Bayou Sorrel Field (which was acquired
by PANACO on December 27, 1995) for each of the two years in the period ended
December 31, 1994. These schedules are the responsibility of PANACO, Inc.'s
management. Our responsibility is to express an opinion on the schedules based
on our audits.

We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Schedules of Revenues, Direct Operating Expenses and
Production Taxes are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
schedule presentation. We believe that our audit provides a reasonable basis for
our opinion.

The accompanying Schedules of Revenues, Selected Direct Operating Expenses and
Production Taxes were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
current report on Form 10-K) and is not intended to be a complete presentation
of the Zapata properties and Bayou Sorrel Field's revenues and expenses.

In our opinion, the Schedules of Revenues, Direct Operating Expenses and
Production Taxes referred to above present fairly, in all material respects, the
revenues, selected direct operating expenses and production taxes of the Zapata
properties and the Bayou Sorrel Field for each of the two years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.

BARRETT & ASSOCIATES
Overland Park, Kansas

December 15, 1995

F-21

ZAPATA PROPERTIES AND BAYOU SORREL FIELD

SCHEDULES OF REVENUES, SELECTED DIRECT OPERATING EXPENSES
AND PRODUCTION TAXES

Zapata Bayou Sorrel
Properties Field Total

Year Ended December 31, 1994

Oil and gas revenues $ 7,540,000 $ 2,888,000 $ 10,428,000
============ ============ =============

Selected direct operating expenses $ 3,317,000 $ 1,942,000 $ 5,259,000
============ ============ ==============

Production taxes $ 0 $ 310,000 $ 310,000
============ ============= ===============

Year Ended December 31, 1993

Oil and gas revenues $ 11,823,000 $ 2,908,000 $ 14,731,000
============ ============ ============

Selected direct operating expenses $ 3,696,000 $ 1,806,000 $ 5,502,000
============= ============ =============

Production taxes $ 0 $ 352,000 $ 352,000
============= ============= ==============

See accompanying notes to this schedule.

F-22

ZAPATA PROPERTIES AND BAYOU SORREL FIELD

NOTES TO THE SCHEDULES OF REVENUES,
SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES

FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies related to the Schedules of
Revenues, Selected Direct Operating Expenses and Production Taxes of the Zapata
properties and the Bayou Sorrel Field is presented to assist in understanding
the schedules. The schedules and notes are representations of the Company's
management, which is responsible for the integrity and objectivity of the
schedules. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
statement.

Acquisitions
The Zapata properties were acquired on July 26, 1995, from Zapata Exploration
Co. The Bayou Sorrel Field was acquired on December 27, 1995, from Shell-Western
E&P, Inc.

Revenue Recognition
Revenues are recorded on the accrual basis, with volumes and prices being
estimated for properties during periods when actual production information is
not available.

Selected Direct Operating Expenses
Selected direct operating expenses include necessary and ordinary expenses to
maintain production. Insurance expense is not included since sufficient
information is not available from the Seller. Management estimates insurance
costs to be $280,000 per annum.

Depreciation, depletion and amortization
Depreciation, depletion and amortization is not presented as sufficient
information is not available from the Seller.

Operating Taxes
No additional tax expense is included for the Zapata properties, as the
production from federal offshore waters is not subject to state severance taxes.

General, Administrative, and Overhead Expenses
General, administrative, and overhead expenses are not presented as sufficient
information is not available from the Seller.

Note 2 - 1995 REVENUES, SELECTED DIRECT OPERATING EXPENSES AND PRODUCTION TAXES
- -----------------------------------------------------------------------
(UNAUDITED)

The following is a schedule of revenues, selected direct operating expenses and
production taxes for the periods in 1995 that the Company did not own the Zapata
properties and the Bayou Sorrel Field. The schedule is not intended to be a
complete presentation of the Zapata properties and Bayou Sorrel Field's revenues
and expenses.

F-23

Oil and Gas Selected Direct Production
Revenues Operating Expenses Taxes
Zapata Properties

January 1, 1995 to July 25, 1995 $ 3,623,000 $ 1,460,000 $ 0

Bayou Sorrel
January 1, 1995 to December 26, 1995 3,326,000 867,000 297,000
------------ -------------- ------------

TOTAL $ 6,949,000 $ 2,327,000 $ 297,000
=========== =========== ===========

Note 3 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
--------------------------------------------------------------------
(UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities of
the Zapata properties and the Bayou Sorrel Field at December 31, 1994 are based
upon management's computation from the report of PANACO's independent petroleum
engineers as of December 31, 1995, and do not purport to reflect realizable
values or fair market values of the properties' reserves. It should be
emphasized that reserve estimates are inherently imprecise and accordingly,
these estimates are expected to change as future information becomes available.
These are estimates only and should not be construed as exact amounts. All
reserves are located in the United States. Reserve quantities for the Zapata
properties and the Bayou Sorrel Field were not available at December 31, 1992,
1993, and 1994, and the balances at those dates were derived from production
activity during 1993 and 1994.

Proved reserves are estimated reserves of natural gas and crude oil that
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.

Proved developed and OIL (BBLS) GAS (MCF)
undeveloped reserves Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total
Estimated reserves as of

December 31, 1992 391,000 1,323,000 1,714,000 27,647,000 4,039,000 31,686,000

Production (54,000) (143,000) (197,000) (4,924,000) (228,000) (5,152,000)
-------- --------- ---------- ----------- ---------- -----------

Estimated reserves as of
December 31, 1993 337,000 1,180,000 1,517,000 22,723,000 3,811,000 26,534,000

Production (67,000) (127,000) (194,000) (3,419,000) (368,000) (3,787,000)
-------- --------- --------- ----------- ---------- -----------

Estimated reserves as of
December 31, 1994 270,000 1,053,000 1,323,000 19,304,000 3,443,000 22,747,000
======= ========= ========= =========== ========= ==========

Proved, developed reserves:

December 31, 1993 337,000 1,180,000 1,517,000 22,723,000 3,811,000 26,534,000
======= ========= ========= ========== ========= ==========
December 31, 1994 270,000 1,053,000 1,323,000 19,304,000 3,443,000 22,747,000
======= ========= ========= ========== ========= ==========

F-24

Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) to the year-end estimated future production of proved oil and gas
reserves. Estimates of future development and production costs are based on
year-end costs and assume continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent
per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the computed discount.

The accompanying table reflects the standardized measure of discounted future
cash flows relating to the proved oil and gas reserves of the Zapata properties
as of the two years ended December 31:

1994 1993
--------------------------------------------------------------------------------------
Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total

Future cash inflows $ 45,181,000 $27,233,000 $72,414,000 $52,721,000 $30,121,000 $ 82,842,000
Future development
and production costs 15,341,000 9,021,000 24,362,000 18,658,000 11,273,000 29,931,000
------------- ------------- ------------ ------------- ------------ -------------
Future net cash flows 29,840,000 18,212,000 48,052,000 34,063,000 18,848,000 52,911,000
10% annual discount
to reflect timing of
cash flows 1,821,000 5,532,000 7,353,000 1,821,000 5,532,000 7,353,000
-------------- ------------- ------------- -------------- ------------- --------------
Standardized measure
before income taxes $ 28,019,000 $12,680,000 $40,699,000 $32,242,000 $ 13,316,000 $ 45,558,000
============ =========== =========== ============ =========== ============

1994 1993
--------------------------------------------------------------------------------------
Bayou Bayou
Zapata Sorrel Total Zapata Sorrel Total

Beginning balance $ 32,242,000 $13,316,000 $45,558,000 $40,369,000 $14,066,000 $ 54,435,000
Sales of oil and gas,
net of production
costs 4,223,000 636,000 4,859,000 8,127,000 750,000 8,877,000
------------ ----------- ------------ ------------ ----------- --------------

Ending balance $ 28,019,000 $12,680,000 $40,699,000 $ 32,242,000 $13,316,000 $ 45,558,000
============ =========== =========== ============ =========== =============

F-25

PANACO, Inc.

September 30, 1996

Financial Statements

(Unaudited)

F-26

PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)

ASSETS As of As of
September 30, 1996 December 31, 1995
CURRENT ASSETS:

Cash and cash equivalents $766,000 $1,198,000
Accounts receivable 4,435,000 4,386,000
Accounts receivable - sale of Bayou Sorrel 11,152,000 0
Prepaid expenses 359,000 465,000
------------------------ ------------------------
Total Current Assets 16,712,000 6,049,000
OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING:
Oil and gas properties 98,015,000 103,105,000
Less: accumulated depreciation,
depletion and amortization (77,526,000) (73,620,000)
------------------------ ------------------------
Net Oil and Gas Properties 20,489,000 29,485,000
PROPERTY, PLANT AND EQUIPMENT:
Equipment 248,000 196,000
Less: accumulated depreciation (122,000) (92,000)
------------------------ ------------------------
Net Property, Plant and Equipment 126,000 104,000

OTHER ASSETS:
Earnest deposit - Amoco acquisition 5,000,000 0
Restricted deposits 1,733,000 0
Loan costs, net 323,000 471,000
Certificate of deposit 27,000 26,000
Note receivable 21,000 21,000
Other 13,000 13,000
------------------------ ------------------------
Total Other Assets 7,117,000 531,000

TOTAL ASSETS $44,444,000 $36,169,000
======================== ========================
The accompanying notes to financial statements are an integral part of this statement.

F-27

PANACO, INC.
Condensed Balance Sheets (Successful Efforts Method)
(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY As of As of
September 30, 1996 December 31, 1995
CURRENT LIABILITIES:

Accounts payable $8,569,000 $4,444,000
Interest payable 240,000 161,000
Current portion of long-term debt 0 0
Total Current Liabilities 8,809,000 4,605,000

LONG-TERM DEBT 25,137,000 22,390,000

STOCKHOLDERS' EQUITY:
Preferred stock, ($.01 par value,
5,000,000 shares authorized; no
shares issued and outstanding) 0 0
Common stock, ($.01 par value,
40,000,000 shares authorized and
12,350,255 and 11,504,615 shares
issued and outstanding, respectively) 123,000 115,000
Additional paid-in capital 23,090,000 21,155,000
Retained earnings (deficit) (12,715,000) (12,096,000)
Total Stockholders' Equity 10,498,000 9,174,000

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,444,000 $36,169,000

The accompanying notes to financial statements are an integral part of this statement.

F-28

PANACO, INC.

Statements of Income (Successful Efforts Method)
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)

1996 1995
REVENUES

Oil and natural gas sales $13,257,000 $13,660,000
COSTS AND EXPENSES
General & administrative 573,000 442,000
Depletion, depreciation & amortization 4,981,000 6,277,000
Exploration expenses 0 2,174,000
Provision for losses and (gains) on
disposition and write-downs of assets (4,000) 0
Lease operating 6,049,000 5,729,000
Production and ad valorem taxes 429,000 810,000
West Delta fire loss 500,000 0
------------------- ------------------
Total 12,528,000 15,432,000

NET OPERATING INCOME (LOSS) 729,000 (1,772,000)

OTHER INCOME (EXPENSE)
Interest expense (net) (1,347,000) (720,000)

NET INCOME (LOSS) BEFORE INCOME TAXES (618,000) (2,492,000)

INCOME TAXES 0 0

NET INCOME (LOSS) ($618,000) ($2,492,000)

Net income (loss) per share ($0.05) ($0.21)

The accompanying notes to financial statements are an integral part of this statement.

F-29

PANACO, INC.
Statement of Changes in Stockholders' Equity and Retained Earnings (Deficit)
For the nine months ended September 30, 1996
(Unaudited)

Amount ($)
Number of Additional Retained
Common Common Paid-in Earnings
Shares Stock Capital (Deficit)

Balance, December 31, 1995 11,504,615 $115,000 $21,155,000 ($12,096,000)

Net income 0 0 0 (618,000)

Common shares issued - warrants
exercised and ESOP contribution 840,746 8,000 1,935,000 0

Balance, September 30, 1996 12,345,361 $123,000 $23,090,000 ($12,714,000)

The accompanying notes to financial statements are an integral part of this statement.

F-30

PANACO, INC.
Statement of Cash Flows
Nine Months Ended September 30,
(Unaudited)

1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) ($618,000) ($2,492,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depletion, depreciation and amortization 4,824,000 6,052,000
Exploration expenses 0 2,174,000
Amortization of loan costs 157,000 225,000
Changes in operating assets and liabilities:
Certificates of Deposits - escrow (1,000) 21,000
Accounts receivable (49,000) (110,000)
Prepaid expenses 106,000 (405,000)
Other assets 0 44,000
Accounts payable 4,231,000 916,000
Interest payable 79,000 (34,000)
Net cash provided by operating activities 8,729,000 6,391,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Accounts receivable - sale of Bayou Sorrel (11,152,000) 0
Sale of oil and gas properties 11,158,000 9,000
Capital expenditures and acquisitions (11,804,000) (5,396,000)
Purchase of other property and equipment (52,000) (33,000)
Increase in restricted deposits (1,886,000) 0
Net cash used by investing activities (13,736,000) (5,420,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds 7,500,000 3,365,000
Repayment of long-term debt (4,753,000) (7,000,000)
Issuance of common stock-exercise of warrants 1,837,000 2,554,000
Additional loan costs (9,000) 0
Net cash provided (used) by financing activities 4,575,000 (1,081,000)

NET INCREASE (DECREASE) IN CASH (432,000) (110,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,198,000 1,583,000

CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, $766,000 $1,473,000

Supplemental disclosures of cash flow information:
Cash paid for nine months ended September 30:
Interest $1,180,000 $757,000

Disclosure of accounting policies:
1. For purposes of the statement of cash flows, the Company considers all cash investments
with original maturities of three months or less to be cash equivalents.
2. 24,220 Common Shares were issued related to the Company's ESOP in a non-cash
transaction.

The accompanying notes to financial statements are an integral part of this statement.

F-31

PANACO, INC.
NOTES TO FINANCIAL STATEMENTS

For the nine months ended September 30, 1996 and 1995

Note 1. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the financial
position as of September 30, 1996 and December 31, 1995 and the results of
operations and changes in Stockholders' Equity and cash flows for the periods
ended September 30, 1996 and 1995. Most adjustments made to the financial
statements are of a normal, recurring nature. Other adjustments, if any, are
discussed in later notes.

Note 2. Effective December 31, 1995, the Company changed its method of
accounting for oil and gas operations from the full cost to the successful
efforts method. In connection with the change to the successful efforts method
of accounting, all prior periods have been restated, including the nine months
ended September 30, 1995. Net income for the nine months ended September 30,
1995 was reduced by $3,963,000, or $.36 per share from previously reported
amounts. Management concluded that the successful efforts method will better
enable investors and others to compare the Company to similar oil and gas
companies, the majority of which follow the successful efforts method.

Under the successful efforts method, lease acquisition costs are
capitalized. Exploratory drilling costs are also capitalized pending
determination of proved reserves. If proved reserves are not discovered, the
exploratory costs are expensed. All development costs are capitalized. Provision
for depreciation and depletion is determined on a field-by-field basis using the
unit-of-production method. The carrying amounts of proved and unproved
properties are reviewed periodically on a property-by-property basis, based on
future net cash flows determined by an independent engineering firm, with an
impairment reserve provided if conditions warrant.

The Company recognizes its ownership interest in oil and gas sales as
revenue and records revenues on an accrual basis.

Capital costs of oil and gas properties include the estimated costs
to develop proved reserves and the costs of plugging offshore wells and removing
structures. The capital costs are amortized on the units of production method,
using the ratio of current production to the calculated future production from
the remaining proved oil and gas reserves.

Reserve determinations are subject to revision due to inherent
imprecisions in estimating reserves and are revised as additional information
becomes available.

Note 3. The results of operations for the nine months ended September 30, 1996
are not indicative of the results to be expected for the full year. On April 24,
1996 the Company experienced an explosion and fire at Tank Battery #3 in West
Delta. The fields were shut-in through October 7th the facilities were being
repaired and rebuilt . No revenues for the 67 remaining days in the second
quarter and the full third quarter of 1996 were recorded, while at the same
time, a large part of lease operating expenses associated with West Delta are
fixed costs, and have stayed at relatively the same level as before the fire.
Production taxes decreased as a result of the lost production from West Delta ,
a large part of which is in Louisiana State waters and is subject to severance
taxes. Interest expense is also up as a result of the fire due to reduced cash
flows, coupled with increased spending to repair and rebuild Tank Battery #3.
The Company began producing oil and natural gas from the West Delta fields on
October 7th, 1996.

Note 4. The net income per share for the nine months ended September 30, 1996
and 1995 has been calculated based on 12,253,382 and 11,649,091 weighted average
shares outstanding, respectively and 12,345,361 and 11,661,540 weighted average
shares for the three months ended September 30, 1996 and 1995, respectively.

Note 5. For purposes of reporting cash flows, the Company considers all cash
investments with original

F-32

maturities of three months or less to be cash equivalents. "Cash flows from
operations" and "Cash flows from financing activities" do not include the
effects of the Company's contributions to the ESOP, as these contributions are
made only in shares of stock, and are non-cash transactions.

Note 6. The reserves presented in the following table were prepared solely by
the Company and are estimates only and should not be construed as being exact
amounts. All reserves presented are proved reserves that are defined as
estimated quantities which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Sale of minerals-in-place
reflects the sale of the Bayou Sorrel Field, effective September 1, 1996.
Reserves attributable to the Amoco Acquisition, closed on October 8th, are not
included.

Proved developed and undeveloped reserves Oil Gas
(Bbls) (Mcf)

December 31, 1995 reported reserves 1,900,000 46,711,000
Purchase of minerals-in-place -0- -0-
Extensions and discoveries -0- -0-
Production (203,000) (4,590,000)
Sale of minerals-in-place (805,000) (3,102,000)
Revisions of previous estimates -0- -0-
------------ ----------
Estimated reserves at September 30, 1996 892,000 39,019,000
============ ==========

No major discovery or other favorable or adverse event has caused a significant
change in the estimated proved reserves since September 30, 1996. The Company
does not have proved reserves applicable to long-term supply agreements with
governments or authorities. All proved reserves are located in the United
States.

Note 7. The Company's Common Shares are quoted on the National Market of NASDAQ.
The last trade on September 30 was at $5.375 per share.

Note 8. The Company is party to various escrow agreements which provide for
monthly deposits into escrow accounts to satisfy future plugging and abandonment
obligations. The terms of the agreements vary as to deposit amounts, based upon
fixed monthly amounts or percentages of the properties' net income. With respect
to plugging and abandonment operations, funds are partially or completely
released upon the presentation by the Company to the escrow agent of evidence
that the operation was or is being conducted in compliance with applicable laws
and regulations. These escrow amounts are included on the financial statements
as Restricted Deposits. See "The Company - Plugging and Abandonment Escrows".

Note 9. The Company experienced an explosion and fire on April 24, 1996 at Tank
Battery #3 in West Delta resulting in the fields being shut-in from April 24th,
until being returned to production on October 7, 1996. The loss of 67 days of
production in the second quarter and the entire third quarter resulted in lost
revenues of approximately $6 million. The fire was the principal contributor to
the losses of $.08 per share for the second quarter of 1996 and $.11 per share
for the third quarter. During the second quarter the Company expensed $500,000
for its loss as a result of this explosion. No further losses have been
recognized or are anticipated. This $500,000 amount included $225,000 in
deductables under the Company's insurance.

The Company has spent $8.5 million on Tank Battery #3 inclusive of
the $500,000 expensed during second quarter and has received reimbursement from
its insurance company of $3.9 million, after satisfaction of the $225,000 in
deductibles. The excess of expenditures over insurance reimbursement will be
capitalized. No additional expenditures have been made or are anticipated. The
Company is considering filing suits against the employers of the persons who
caused the incidents for recovery of these costs and its lost profits. No
assurance can be given that the Company will successfully recover any amounts
sought in any such suits.

F-33

Note 10. On October 8,1996, the Company completed the acquisition of interests
in thirteen offshore blocks comprising six fields in the Gulf of Mexico from
Amoco Production Company. Proved reserves, net to the interests acquired, as of
September 1, 1996, the effective date of the Amoco Acquisition, were1,953,000
barrels of oil and condensate and 28.6 Bcf of natural gas, based upon internal
reserve reports prepared by the Company. The purchase price for the assets
acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares and by payment to Amoco of $32 million in cash.
Concurrently with this transaction the Company entered into a new Bank Facility
with First Union National Bank of North Carolina and Banque Paribas under which
its reducing revolving loan was increased to $40 million, with an initial
borrowing base (credit limit) of $35 million. The principal amount of the loan
is due July 1, 1999. Interest on the loan is computed at the bank's prime rate
or at 1 to 1 3/4% (depending upon the percentage of the facility being used)
over the applicable London Interbank Offered Rate ("LIBOR") on Eurodollar loans.
Eurodollar loans can be for terms of one, two, three or six months and interest
on such loans is due at the expiration of the terms of such loans, but no less
frequently than every three months. Beginning April 1, 1997, the interest rate
will increase by an additional .5% at the beginning of each quarter to a maximum
of 3 3/4% over LIBOR as long as the Company has in excess of $13,500,000 in
Subordinated Notes outstanding, specifically the 1993 Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes. In addition to that facility, the
Company borrowed $17 million pursuant to the Tranche A Convertible and the
Tranche B Bridge Loan Subordinated Notes, provided by lenders advised by Kayne,
Anderson Investment Management, Inc. Both Tranche A Convertible and Tranche B
Bridge Loan bear interst at 12% per annum and are due October 8, 2003. After the
expiration of 180 days following the conclusion of this offering, the Tranche A
Notes are convertible into 2,060,606 Common Shares on the basis of $4.125 per
share. The Company may deliver up to $2,000,000 in PIK notes in satisfaction of
interest payment obligations. Should the Tranche B Notes not be prepaid by
August 8, 1997 the interest rate will increase from 12% to 14% per annum. The
Company may deliver PIK notes in satisfaction of this additional interest.

Note 11. Effective September 1, 1996, the Company sold its Bayou Sorrel Field
to National Energy Group, Inc. for $11,000,000, $9,000,000 in cash and 477,612
shares of National Energy Group, Inc. common stock, which were valued at
$2,000,000 on September 30, 1996. National Energy Group, Inc. will also
reimburse the Company for deposits it has made into an escrow agreement for the
plugging and abandonment obligation. Through September 30, this amount was
$152,000. The Company will also retain a 3% overriding royalty interest in the
deep rights of the field. The results of the Bayou Sorrel Field are included in
the Company's Statement of Income only through August 31, 1996.

Note 12. At December 31, 1995, the Company had net operating loss carry forwards
for federal income tax purposes of $15,765,000 which are available to offset
future federal taxable income through the year 2010.

F-34

PRO FORMA FINANCIAL INFORMATION

On October 8,1996, the Company completed the acquisition of interests
in thirteen offshore blocks comprising six fields in the Gulf of Mexico from
Amoco Production Company. Proved reserves, net to the interests acquired, as of
September 1, 1996 , the effective date of the Amoco Acquisition, were 1,953,000
barrels of oil and condensate and 28.6 Bcf of natural gas, based upon internal
reserve reports prepared by the Company. The purchase price for the assets
acquired in this transaction was $40.4 million, paid by the issuance of
2,000,000 Common Shares and by payment to Amoco of $32 million in cash.
Concurrently with this transaction the Company entered into a new Bank Facility
with First Union National Bank of North Carolina and Banque Paribas under which
its reducing revolving loan was increased to $40 million, with an initial
borrowing base (credit limit) of $35 million. In addition to that facility, the
Company borrowed $17 million pursuant to the Tranche A Convertible and the
Tranche B Bridge Loan Subordinated Notes, provided by lenders advised by Kayne,
Anderson Investment Management, Inc.

On July 26, 1995, the Company completed the acquisition of all of the
offshore oil and gas properties in the Gulf of Mexico owned by Zapata
Exploration Company, the "Zapata Properties." Proved reserves at December 31,
1994 attributable to the oil and gas interests acquired, net to the Company's
interest, were 308,000 barrels of oil and 27.8 Bcf of natural gas, based upon a
rolling forward of reserve reports of Zapata's independent petroleum engineers
as of October 1, 1994. The purchase price for the Zapata Properties and a
related receivable of $174,000 ($84,000 at December 31, 1995) was $2,748,000 in
cash and an obligation to pay a production payment to Zapata based on future
production. See "Properties - Zapata Properties."

On November 22, 1996, the Company closed its sale of the Bayou Sorrel
Field to National Energy Group, Inc. for a sales price of $11 million,
consisting of $9 million in cash and 477,612 shares of National Energy Group,
Inc. common stock, which were valued at $2 million as of the closing date.
Because the sale was effective September 1, September revenues and expenses of
the Bayou Sorrel Field are not inlcuded in the Statement of Income for the Nine
Months Ended September 30, 1996.

F-35

PANACO, INC.
Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1996
(Amounts in thousands except per share data)
(Unaudited)

Amoco Bayou
Properties Sorrel
Pro Forma PANACO, Inc.Pro Forma PANACO, Inc.
Amoco Adjustments Pro Forma Adjustments Pro Forma
PANACO, Inc.Properties (Note 2) Combined (Note 3) Combined

REVENUES

Oil and gas sales $13,257 $10,697 $0 $23,954 ($2,010) $21,944

COSTS AND EXPENSES
Lease operating 6,049 2,484 108 8,641 (733) 7,908
Depreciation, depletion and amortization 4,981 0 5,655 10,636 (888) 9,748
Exploration expenses 0 0 0 0 0 0
Provision for losses and (gains) on
disposition and write-down of assets (4) 0 0 (4) 0 (4)
General and administrative 573 0 0 573 0 573
Production and ad valorem taxes 429 0 0 429 (239) 190
West Delta fire loss 500 0 0 500 0 500
Total 12,528 2,484 5,763 20,775 (1,860) 18,915

NET OPERATING INCOME (LOSS) 729 8,213 (5,763) 3,179 (150) 3,029

OTHER INCOME (EXPENSE)
Interest expense (net) (1,347) 0 (1,611) (2,958) 588 (2,370)

NET INCOME (LOSS) BEFORE INCOME TAXES (618) 8,213 (7,374) 221 438 659

INCOME TAXES (BENEFIT) 0 0 0 0 0 0

NET INCOME (LOSS) ($618) $8,213 ($7,374) 221 $438 $659

EARNINGS (LOSS) PER COMMON SHARE ($0.05) $0.02 $0.05

Weighted average shares outstanding 12,253 2,000 14,253 14,253

The accompanying notes to financial statements are an integral part of this
statement

F-36

PANACO, Inc.

Pro Forma Combined Statement of Income (Operations)
For the Nine Months Ended September 30, 1995
(Amounts in thousands except per share data)
(Unaudited)

Pro Forma PANACO, Inc.
Zapata Amoco Adjustments Pro Forma
PANACO, Inc. Properties Properties (Note 2) Combined

REVENUES

Oil and gas sales $13,660 $3,623 $9,525 $0 $26,808

COSTS AND EXPENSES
Lease operating 5,729 1,460 1,906 314 9,409
Depreciation, depletion and amortization 6,277 0 0 8,179 14,456
Exploration expenses 2,174 0 0 0 2,174
Provision for losses and (gains) on
disposition and write-down of assets 0 0 0 0 0
General and administrative 442 0 0 0 442
Production and ad valorem taxes 810 0 0 0 810
Total 15,432 1,460 1,906 8,493 27,291

NET OPERATING INCOME (LOSS) (1,772) 2,163 7,619 (8,493) (483)

OTHER INCOME (EXPENSE)
Interest expense (net) (720) 0 0 (2,311) (3,031)

NET INCOME (LOSS) BEFORE INCOME TAXES (2,492) 2,163 7,619 (10,804) (3,514)

INCOME TAXES (BENEFIT) 0 0 0 0 0

NET INCOME (LOSS) ($2,492) $2,163 $7,619 ($10,804) ($3,514)

EARNINGS (LOSS) PER COMMON SHARE ($0.21) ($0.26)

Weighted average shares outstanding 11,649 2,000 13,649

The accompanying notes to financial statements are an integral part of this
statement

F-37

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF
INCOME (OPERATIONS) For the nine months ended
September 30, 1996 and 1995

1. Basis of Presentation

The Unaudited Pro Forma Statement of Income (Operations) for the nine
months ended September 30, 1996 and 1995 present the combined effects of the
acquisition of the Amoco Properties, which closed on October 8, 1996, the Zapata
Properties, closed on July 26, 1995 and the sale of the Bayou Sorrel Field,
closed on November 22, 1996, as if all of these transactions had been
consummated on January 1, 1995.

The results of the Zapata properties are included in the Company's
1995 results of operations after the closing date, July 26, 1995. The pro forma
adjustments for the Zapata Properties are only for the period of January 1 to
July 25, 1995. There are no pro forma adjustments in 1996 for the Zapata
Properties as the results from these properties are included in the Company's
results of operations in 1996.

Each period presented includes the issuance of 2,000,000 Common
Shares to Amoco Production Company in connection with the Amoco Acquisition.

There are also no pro forma entries for General and Administrative
expenses because the Company anticipates no increases in this category based on
the nature of the assets acquired.

2. Amoco and Zapata Properties Pro Forma Adjustments

Additional lease operating expenses of $108,000 in 1996 and $314,000
in 1995 represent the estimated additional insurance costs of owning the Amoco
Properties and the Zapata Properties. These amounts are estimated using the
Company's current insurance rates for owning the properties acquired or similar
properties.

Additional depletion and depreciation expense of $5,629,000 in 1996
and $8,179,000 in 1995 represents the estimated depletion and depreciation for
assets acquired in the respective acquisitions assuming the purchase prices and
proved reserve amounts were identical to those that existed at the time of the
actual acquisitions.

Additional interest expense of $2,154,000 in 1996 and $2,311,000 in
1995 represents the increased borrowings at January 1, 1995. The purchase price
assumed for each acquisition is the same as at the actual date of acquisition.
It is assumed that cash on hand at the beginning of 1995 was used for the
acquisitions, with the balance of any cash required being funded with the
Company's Bank Facility and the 1996 Subordinated Notes, using the rates in
effect at the time of the acquisition for the Bank Facility and 12% for the 1996
Subordinated Notes, also the same rate received at the time of the acquisition.
These assumptions would have required the Company to borrow $32 million for the
cash portion of the Amoco Acquisition, $17 million under the 1996 Subordinated
Notes and $15 million under the Company's Bank Facility, with an assumed
interest rate of 7.25%, the actual weighted average rate the Company incurred at
the time of the acquisition.

3. Bayou Sorrel Pro Forma Adjustments

F-38

The Company borrowed $10.5 million for the purchase which closed on December 28,
1995, and had reduced this amount throughout 1996. The interest rate averaged
approximately 7.5%. The purchase price for the Field was $10,455,000 which
included a related receivable of $600,000 and a brokers fee of $205,000.

Although the sale of the Bayou Sorrel field closed on November 22,
1996, the buyer assumed all benefits and liabilities of the field after the
effective date of the sale, September 1, 1996.

F-39

Report of Independent Public Accountants

To the Board of Directors
PANACO, Inc.

We have audited the accompanying Statement of Revenues and Direct Operating
Expenses of the Amoco Properties (to be acquired by PANACO, Inc.) for each of
the three years in the period ended December 31, 1995. This statement and the
notes thereto are the responsibility of PANACO, Inc.'s management. Our
responsibility is to express an opinion on the statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Statement of Revenues and Direct Operating Expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the Statement of Revenues and Direct Operating Expenses referred
to above presents fairly, in all material respects, the revenues and direct
operating expenses of the Amoco Properties for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Kansas City, Missouri
September 6, 1996

F-40

AMOCO PROPERTIES

STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

Year Ended December 31 Nine Months Ended September 30
---------------------- ------------------------------
(Unaudited)

1995 1994 1993 1996 1995
---- ---- ---- ---- ----

Revenues:

Gas $ 8,769,000 $ 7,346,000 $ 8,459,000 $ 7,485,000 $ 6,669,000

Oil & Condensate 3,759,000 3,789,000 3,620,000 3,212,000 2,856,000
------------ ------------ ------------ ------------ -----------

Total Revenues $12,528,000 $11,135,000 $12,079,000 $ 10,697,000 $ 9,525,000
=========== =========== =========== ============ ===========

Direct Operating Expenses $ 2,991,000 $ 3,158,000 $ 2,798,000 $ 2,484,000 $ 1,906,000
=========== =========== =========== ============ ===========

See accompanying notes to this statement.

F-41

AMOCO PROPERTIES
NOTES TO THE STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements require the use of estimates, and when applicable,
specific information regarding significant estimates embodied in the financial
statements have been disclosed. The Statement of Revenues and Direct Operating
Expenses was prepared for purposes of complying with the rules and regulations
of the Securities and Exchange Commission and is not intended to be a complete
presentation of the financial position or results of operations of the Amoco
Properties.

Acquisition
The Amoco Properties are to be acquired by the Company on October 8, 1996 from
Amoco Production Company (seller) pursuant to the purchase and sale agreement
dated August 26, 1996. The properties to be acquired are Amoco Production
Company's existing interests in the following offshore blocks: East Breaks 160,
East Breaks 161, High Island (HI) 302, HI 309, HI 310, HI 330, HI 349, HI 474,
HI 489, HI 499, a portion of the HI 475 Block, West Cameron (WC) 613, and WC
144.

Revenue Recognition
Revenues are recorded on an accrual basis, with volumes and prices being
estimated for properties during periods when actual production information is
not available. Revenues are recognized based on volumes of production taken and
sold by Amoco which is not materially different from the entitlement method for
the three year period ending December 31, 1995. For each of the periods
presented, Amoco sold substantially all of their production to a related party
at market based prices.

Direct Operating Expenses
Direct operating expenses include necessary and ordinary expenses to maintain
production. Insurance expense is not included since sufficient information is
not available from the Seller. Depreciation, depletion and amortization is not
included. No severance tax expense is included for the Amoco Properties, since
the production from federal offshore waters are not subject to state severance
taxes.

General, Administrative, and Overhead Expenses
General, administrative, and overhead expenses are not presented as sufficient
information is not available from the Seller.

Note 2 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
--------------------------------------------------------------------
(UNAUDITED)

Quantities of Oil and Gas Reserves
The estimates of proved developed and proved undeveloped reserve quantities of
the Amoco Properties at December 31, 1995 are based upon PANACO's computation at
December 31, 1996 from a report of independent petroleum engineers, retained by
Amoco, and do not purport to reflect realizable values or fair market values of
the properties' reserves. It should be emphasized that reserve estimates are
inherently imprecise and accordingly, these estimates are expected to change as
future information becomes available. These are estimates only and should not be
construed as exact amounts. All reserves are located in the United States.
Reserve quantities for the Amoco Properties were not available at December 31,
1992, 1993, 1994, and 1995, and the balances at those dates were derived from
production activity during 1993, 1994, 1995 and 1996.

F-42

economic and operating conditions. Proved developed reserves are those expected
to be recovered through existing wells, equipment, and operating methods.

Proved developed and OIL (BBLS) GAS (MCF)
undeveloped reserves

Estimated reserves as of
December 31, 1992 2,020,000 34,041,000

Production (216,000) (3,874,000)
--------- -----------

Estimated reserves as of
December 31, 1993 1,804,000 30,167,000

Production (236,000) (4,057,000)
--------- -----------

Estimated reserves as of
December 31, 1994 1,568,000 26,110,000

Production (216,000) (5,704,000)
------------ ------------

Estimated reserves as of
December 31,1995 1,352,000 20,406,000
========= ===========

Proved developed reserves:
OIL (BBLS) GAS (MCF)

December 31, 1993 1,648,000 26,543,000
========= ==========

December 31, 1994 1,412,000 22,486,000
========= ==========

December 31, 1995 1,196,000 16,782,000
========= ==========

Standardized Measure of Discounted Future Net Cash Flows
Future cash inflows are computed by applying December 31, 1996 prices of oil and
gas (with consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of proved oil and
gas reserves. Estimates of future development and production costs are based on
December 31, 1996 costs and assume continuation of existing economic conditions.
The estimated future net cash flows are then discounted using a rate of 10
percent per year to reflect the estimated timing of the future cash flows. The
standardized measure of discounted cash flows is the future net cash flows less
the discount at December 31, 1996.

F-43

The accompanying table reflects the standardized measure of discounted future
cash flows relating to the proved oil and gas reserves of the Amoco properties
as of the three years ended December 31:

1995 1994 1993
---- ---- ----

Future cash inflows $105,443,000 $117,971,000 $129,106,000
Future development
and production costs 34,309,000 37,300,000 40,458,000
------------ ------------ --------------
Future net cash flows 71,134,000 80,671,000 88,648,000
10% annual discount
to reflect timing of
cash flows 17,984,000 17,984,000 17,984,000
------------- -------------- --------------
Standardized measure
before income taxes $ 53,150,000 $ 62,687,000 $ 70,664,000
============ ============= =============

Changes Relating to the Standardized Measure of Discounted Future Net Cash Flows
The accompanying table reflects the changes in the standardized measure of
discounted future net cash flows from the sales of oil and gas, net of
production costs attributable to proved oil and gas reserves of the Amoco
properties for each of the three years ended December 31:

1995 1994 1993
---- ---- ----

Beginning balance $ 62,687,000 $ 70,664,000 $ 79,945,000
Sales of oil and gas,
net of production
costs 9,537,000 7,977,000 9,281,000
--------------- -------------- --------------

Ending balance $ 53,150,000 $ 62,687,000 $ 70,664,000
============= ============ ============

F-44

No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus, and
if given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriter. Neither the delivery
of this Prospectus nor any sale hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities to any person in any jurisdiction
in which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such an offer or solicitation.

TABLE OF CONTENTS

Prospectus Summary............................. 2 8,403,305
Risk Factors................................... 5 Common Shares
Use of Proceeds................................ 9
Capitalization................................. 10
Price Range of Common Shares................... 11
Dividend Policy................................ 11
Pro Forma Financial Information................ 11 [GRAPHIC OMITTED]
Selected Financial Data........................ 18
Management's Discussion and Analysis........... 19
The Company.................................... 26
Properties..................................... 36
Management..................................... 44
Principal Shareholders......................... 52 PROSPECTUS
Certain Relationships and Related Transactions 53 , 1997
Selling Shareholders........................... 54
Description of Capital Shares and Other
Securities................................ 55
Underwriting................................... 60
Shares Eligible for Future Sale................ 62
Other Matters.................................. 63
Legal Matters.................................. 63
Experts........................................ 64 Nolan Securities
Glossary of Selected Oil and Gas Terms......... 65 Corporation
Index to Financial Statements.................. F 1

Until ,all dealers effecting transactions in the Common Shares, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriter and with respect to their unsold allotments or
subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The estimated expenses in connection with the Offering are as set forth
in the following table. All amounts except the SEC registration fee and the NASD
filing fee are estimates.

SEC Registration Fee $ 16,106.00
NASD Filing Fee and legal clearance fee 5,815.00
Blue Sky Legal Fees and Filing and Qualification Fees 11,000.00
Printing and Engraving Expenses 35,000.00
Legal Fees and Expenses 200,000.00
Accounting Fees and Expenses 50,000.00
Transfer Agent's Fees 2,000.00
Miscellaneous Expenses (including travel and promotion expenses) 30,000.00
-----------

TOTAL $ 349,921.00

Item 14. Indemnification of Directors and Officers.

Article Twelve of the Certificate of Incorporation of PANACO, INC. (the
"Company") provides that the Company must indemnify its officers and directors
to the extent allowed by the Delaware General Corporation Law. Pursuant to
Section 145 of the Delaware General Corporation Law, the Company generally has
the power to indemnify its present and former directors and officers against
expenses and liabilities incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
those positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal action, they had no reasonable cause
to believe their conduct was unlawful. With respect to suits by or in the right
of the Company, however, indemnification is generally limited to attorney's fees
and other expenses and is not available if the person is adjudged to be liable
to the Company unless the court determines that indemnification is appropriate.
The statute expressly provides that the power to indemnify authorized thereby is
not exclusive of any rights granted under any by-law, agreement, vote of
shareholders or disinterest directors, or otherwise. The Company also has the
power to purchase and maintain insurance for its directors and officers.
Additionally, Article Twelve of the Certificate of Incorporation provides that,
in the event that an officer or director files suit against the Company seeking
indemnification of liabilities or expenses incurred, the burden will be on the
Company to prove that the indemnification would not be permitted under the
Delaware General Corporation Law.

The preceding discussion of the Company's Certificate of Incorporation
and Section 145 of the Delaware General Corporation Law is not intended to be
exhaustive and is qualified in its entirety by the Certificate of Incorporation
and Section 145 of the Delaware General Corporation Law.

Item 15. Recent Sales of Unregistered Securities.

During the three years preceding the filing of this Registration
Statement, the Company sold the following securities in transactions that were
not registered under the Securities Act of 1933, as amended, in reliance upon
the exemption provided by Section 4(2) thereof and the rules and regulations
promulgated thereunder.

II-1

1. Effective December 31, 1993, the Company concluded a private
placement in which it issued promissory notes in an aggregate amount of
$5,000,000, the 1993 Subordinated Notes, and warrants to purchase an
aggregate of 816,526 Common Shares to six investors for an aggregate
consideration of $5,000,000. Each investor executed a loan agreement
confirming that it was an accredited investor (as defined in Rule 501
under the Securities Act) and containing other representations and
agreements customary for private placement transactions.

2. Effective October 8, 1996, the Company concluded a private placement
in which it issued promissory notes in an aggregate amount of
$17,000,000, the 1996 Tranche A Convertible Subordinated Notes and the
1996 Tranche B Bridge Loan Subordinated Notes, and warrants to purchase
an aggregate of 2,060,606 Common Shares to seven investors for an
aggregate consideration of $17,000,000. Each investor executed a loan
agreement confirming that it was an accredited investor (as defined in
Rule 501 under the Securities Act) and containing other representations
and agreements customary for private placement transactions.

3. On October 8, 1996, the Company issued 2,000,000 Common Shares to
Amoco Production Company as part of the purchase price for certain oil
and gas properties, in a private placement. The purchase and sale
agreement confirmed that Amoco is an accredited investor and contained
the representations and agreements customary in private placement
transactions.

4. In the past three years various persons and entities have acquired
Common Shares upon the exercise of options and warrants. In 1993 seven
investors acquired 575,000 Common Shares. In 1994 eighteen investors
acquired 1,719,900 Common Shares. In 1995 twelve investors acquired
1,255,447 Common Shares. In each instance the person or entity was an
officer or former officer, director or former director, lenders or
investment bankers. In each instance the documentation contained
appropriate representations and agreements to establish the
availability of the exemption.

5. In the first quarter 1996 the six investors, described in paragraph
(1) above, exercised their warrants to acquire the 816,526 Common
Shares, which were issued in reliance upon the exemption and the facts
relied upon above.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

Exhibit
Number Description
1.0 Underwriting Agreement

1.1 Selling Stockholders' Custody Agreement

1.2 Selling Stockholders' Power of Attorney

3.1* Certificate of Incorporation of the Company.

3.2* Amendment to Certificate of Incorporation of the Company dated
November 19, 1991.

3.3* By-laws of the Company.

3.4 Amendment to Certificate of Incorporation of the Company dated
September 24, 1996 filed as an exhibit to the Amended Current Report on Form
8-K/A, filed with the Commission on November 18, 1996, and incorporated herein
by this reference.

II-2

4.1* Article Fifth of the Certificate of Incorporation of the Company in
Exhibit 3.1.

4.2* Form of Certificate of Common Shares par value $.01 per share, of the
Company.

4.3 Rights Agreement, dated as of August 3, 1995, between PANACO, Inc., and
American Stock Transfer and Trust Company, which includes as Exhibit A the Form
of Certificate of Designation of Series A Preferred Stock, Exhibit B the Form of
Rights Certificate and Exhibit C the Summary of Rights to Purchase Preferred
Stock was filed as Exhibit 1 to the Registration Statement on Form 8-A, filed
with the Commission on August 21, 1995, and incorporated herein by this
reference.

5 Form of Opinion of Shughart Thomson & Kilroy, P.C. regarding the legality
of the securities being registered.

10.1* PANACO, Inc. Long-Term Incentive Plan.

10.7* Senior Second Mortgage Term Loan Agreement as of December 31, 1993,
between PANACO, Inc., and seven lenders advised by Kayne Anderson Investment
Management, Inc.

10.9 Purchase and Sale Agreement, dated July 12, 1995, between Zapata
Exploration Company, Zapata Offshore Gathering Co., Inc., and PANACO, Inc.,
filed as an exhibit to the Current Report on Form 8-K filed with the Commission
on August 1, 1995, and incorporated herein by this reference.

10.11 Assignment/East Breaks 110, effective October 1, 1994, from Zapata
Exploration Company to PANACO, Inc. The Assignment/East Breaks 109 document is
identical, filed as an exhibit to the Current Report on Form 8-K filed with the
Commission on August 1, 1995, and incorporated herein by this reference.

10.12 Purchase and Sale Agreement dated November 30, 1995, between Shell
Western E&P, Inc. and PANACO, Inc., filed as an exhibit to the Current Report on
Form 8-K filed, with the Commission on January 31, 1996, and incorporated herein
by this reference.

10.13** PANACO, Inc. Employee Stock Ownership Plan & Trust.

10.14 Purchase and Sale Agreement, dated August 26, 1996, between Amoco
Production Company and PANACO, Inc., filed as an exhibit to the Current Report
on Form 8-K, filed with the Commission on October 28, 1996, and incorporated
herein by this reference.

10.15 Amended and Restated Credit Agreement, dated October 7, 1996, among
First Union National Bank of North Carolina, as agent, and the lenders signatory
thereto, and PANACO, Inc., filed as an exhibit to the Amended Current Report on
Form 8-K/A, filed with the Commission on November 18, 1996, and incorporated
herein by this reference.

10.16 Senior Subordinated Mortgage Master Loan Agreement dated October 8,
1996 between PANACO, Inc. and Offense Group Associates, L.P., Kayne, Anderson
Non-Traditional Investments, L.P., ARBCO Associates, L.P., Opportunity
Associates, L.P., Kayne, Anderson Offshore Limited, Foremost Insurance Company,
TOPA Insurance Company and EOS Partners, L.P. and Offense, as agent for the
Lenders, filed as an exhibit to the Amended Current Report on Form 8-K/A, filed
with the Commission on November 18, 1996, and incorporated herein by this
reference.

10.17 Purchase and Sale Agreement, dated November 11, 1996 between National
Energy Group, Inc. and PANACO, Inc., filed as an exhibit to the Current Report
on Form 8-K filed with the Commission on January 29, 1997, and incorporated
herein by this reference.
II-3

10.18 PANACO, Inc. Warrant agreement by and between PANACO, Inc. and
Nolan Securities Corporation, dated , 1997.

23.1*** Consent of Barrett and Associates.

23.2 Consent of Ryder Scott Company.

23.3 Consent of McCune Engineering, P.E.

23.4 Consent of Shughart Thomson & Kilroy P.C. (included in Exhibit 5 to
this Registration Statement.)

23.5*** Consent of Arthur Andersen LLP.

24 Power of Attorney (included on signature page).

27 Financial Data Schedule.

*Filed with the Registration Statement on Form S-4, Commission File No.
33-44486, initially filed December 13, 1991, and incorporated herein by this
reference.
** Filed with the Registration Statement on Form S-1, Commission file No.
33-81058, initially filed July 1, 1994, and incorporated herein by this
reference.

***Filed herewith.

All others filed with the original Registration Statement dated December
19, 1996 or Amendment Number 1 dated January 31, 1997, or incorporated herein by
reference to prior filings with the Commission.

(b) Financial Statement Schedules

None.

All other statements and schedules for which provision is made in the
applicable regulation of the Securities and Exchange Commission have been
omitted because they are not required under related instruction or are
inapplicable, or the information is shown in the financial statements and
related notes.

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

II-4

(2) For purposes of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has
duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri on February 13, 1997.

PANACO, INC.

By: /s/ H. James Maxwell
H. James Maxwell, President & CEO

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date

/s/ H. James Maxwell Chairman of the Board, Chief Executive Officer, Feb 13, 1997
H. James Maxwell, President, and Director (principal executive officer)

/s/ Bob F. Mallory Chief Operating Officer, Executive Vice President, Feb 13 , 1997
Bob F. Mallory and Director

/s/ Todd R. Bart Chief Financial Officer, Secretary, and Feb 13, 1997
Todd R. Bart Treasurer

/s/ H. James Maxwell, as agent Executive Vice President and Director Feb 13 , 1997
Larry M. Wright

/s/ H. James Maxwell, as agent Director Feb 13, 1997
N. Lynn Sieverling

/s/ H. James Maxwell, as agent Director Feb 13, 1997
A. Theodore Stautberg, Jr.

II-5

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, Barrett & Associates consents to the
use of our reports and to all references to our firm included in or made a part
of this Registration Statement on Form S-1 filed with the Securities and
Exchange Commission by PANACO, Inc. under the Securities Act of 1933, as
amended, including any references to our firm as experts.

BARRETT & ASSOCIATES

Overland Park, Kansas
February 13, 1997

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and all references to our Firm) included in or made a part of this
Registration Statement on Form S-1.

ARTHUR ANDERSEN LLP

Kansas City, Missouri
February 13, 1997