BENZ ENERGY LTD /CAN/, 424A, 1998-09-28

BENZ ENERGY LTD /CAN/
424A, 1998-09-28
OIL & GAS FIELD EXPLORATION SERVICES

Previous: CONOCO INC /DE, 8-A12B, 1998-09-28

Next: UNITED RENTALS INC /DE, S-1, 1998-09-28

<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
PROSPECTUS 36,849,575 SHARES

BENZ ENERGY LTD.

COMMON STOCK
------------------

Of the 36,849,575 shares of common stock, without par value (the "Common
Stock"), of Benz Energy Ltd., a Yukon Territory, Canada company (the "Company"),
offered hereby (the "Offering"), 36,041,859 shares are being offered for sale
upon conversion of $36.512 million principal amount of the Company's 9%
Convertible Debentures, Series 1, and 9% Special Notes exchangeable for Series 2
and Series 3 9% Debentures (collectively, the "Debentures") by the holders of
the Debentures (the "Debenture Holders"), and 807,716 shares are being offered
for sale upon exercise of warrants by certain warrant holders (the "Warrant
Holders") (the Debenture Holders and the Warrant Holders collectively, the
"Selling Shareholders"). The Company will not receive any of the proceeds from
the sale of the Common Stock offered hereby. See "Principal and Selling
Shareholders."

The Common Stock is traded on the Vancouver Stock Exchange (the "VSE") under
the symbol "BZG." On September 3, 1998, the last reported sale price of the
Common Stock, as reported on the VSE, was CDN $0.65 per share ($.42 per share
based on the exchange rate of Canadian to U.S. dollars as reported by the
Federal Reserve Bank of New York). Before the Offering, there has been no market
for the Common Stock in the United States.
------------------------
THESE SECURITIES ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 12."
---------------------
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.

The Common Stock may be offered and sold from time to time by the Selling
Shareholders through brokers, dealers or agents or directly to one or more
purchasers in fixed price offerings, in negotiated transactions, at market
prices prevailing at the time of sale or at prices related to such market
prices. The terms of the offering and sale of Common Stock in respect of which
this Prospectus is being delivered, including any discounts, commissions or
concessions allowed, reallowed or paid to brokers, dealers or agents, the
purchase price of the Common Stock and the proceeds to the Selling Shareholders,
and any other material terms shall be as set forth in a Prospectus Supplement.
See "Plan of Distribution" for indemnification arrangements, including
indemnification of brokers, dealers and agents.

THE DATE OF THIS PROSPECTUS IS OCTOBER , 1998.
<PAGE>
[BENZ ENERGY LTD.
LOGO]

[PICTURE OF EMPLOYEE PREPARING
TO PERFORM 3-D SEISMIC SURVEY
ON A PROSPECT.]

[GRAPHICAL DEPICTION OF
THE RESULTS FROM A 3-D
SEISMIC SURVEY]

[PICTURE OF DRILLING SITE
INCLUDING AT A PROSPECT]
<PAGE>
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration and development that have geological trends with
demonstrated histories of prolific natural gas production from high porosity
reservoir rocks with profiles suitable for seismic evaluation. The Company
believes that by obtaining substantial working interests, related three
dimensional ("3-D") seismic data and significant acreage positions within its
core areas, it will be able to achieve a dominant position in focused portions
of those areas. With a dominant position, the Company believes it can better
control the core areas' exploration opportunities and future production, and can
attempt to minimize costs through economies of scale and other efficiencies
inherent in its focused approach. Such cost savings and efficiencies include the
ability to use the Company's 3-D seismic data to reduce exploration risks and
lower its leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes exploratory
drilling is most likely to be successful.

[GRAPHICAL OVERHEAD PRESENTATION
OF THE UNITED STATES GULF COAST AREAS
OF TEXAS, LOUISIANA AND MISSISSIPPI DEPICTING
HISTORICAL AREAS OF PRODUCTION AND TARGETED
EXPLORATION AREA. (CAPTION - "HIGH IMPACT PROSPECT PROGRAM")]

[THREE DIMENSIONAL TABLE-GRAPH DESCRIBING
THE DISTANCE IN MILES TO DEMONSTRATE THE SURFACE
SIZE OF A PROSPECT AND DEPTH IN FEET OF WELLS
DRILLED ON A PROSPECT. (CAPTIONS "INTERNALLY-GENERATED
PROSPECTS" AND "SIGNIFICANT PROSPECT PARTICIPATION).]

[GRAPHICAL PRESENTATION OF RESULTS FROM
3-D SEISMIC SURVEY.]

i
<PAGE>
FOCUSED CORE AREAS

[OVERHEAD GRAPHICAL PRESENTATION [OVERHEAD GRAPHICAL PRESENTATION
OF OAKVALE DOME, REEDY CREEK AND OF OLD OCEAN AND EAST BUFFALO
WAUSAU PROSPECTS IN MISSISSIPPI.] PROSPECTS IN TEXAS AND VARIOUS
TRENDS IN THE PROSPECTS AND
SURROUNDING AREAS.]

MISSISSIPPI TEXAS

USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its prospects through the use of 3-D seismic data and CAEX
technologies, with an emphasis on direct hydrocarbon detection technologies.
These technologies create computer generated three-dimensional displays of
subsurface geological formations that enable the Company's explorationists to
detect seismic anomalies in structural features that are not apparent in two
dimensional ("2-D") seismic surveys. The Company believes that 3-D seismic data,
when properly used, will reduce drilling risks and costs by reducing the number
of dry holes, optimizing well locations and reducing the number of wells
required to exploit a discovery.

[SCREEN FROM THE COMPANY'S
COMPUTER AIDED LEASE MANAGEMENT
SYSTEM. (CAPTION "COMPUTER AIDED
LEASE MANAGEMENT SYSTEMS INCREASE
EFFICIENCY AND REDUCE LAND
ADMINISTRATION COSTS").]

3-D seismic view of Wausau Prospect
showing previous wells and current test.

ii
<PAGE>
EXPERIENCED TEAM. The Company maintains an experienced staff, including
engineers, geologists, geophysicists, landmen and other technical personnel.
(Shown left to right: Todd Grabois, Vice President, Finance; Ernest J. LaFlure,
President and Chief Operating Officer; Prentis B. Tomlinson, Chairman and Chief
Executive Officer; and Robert S. Herlin, Senior Vice President and Chief
Financial Officer.

[PHOTOGRAPH (FROM LEFT TO RIGHT) OF TODD GRABOIS, VICE PRESIDENT, FINANCE;
ERNEST J. LAFLURE, PRESIDENT AND CHIEF OPERATING OFFICER; PRENTIS B. TOMLINSON,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER; AND ROBERT S. HERLIN, SENIOR VICE
PRESIDENT AND CHIEF FINANCIAL OFFICER.]

Ernest J. LaFlure................... Pres. & COO......................... Shell Oil Company

Robert S. Herlin.................... Sr. VP & CFO........................ Enron

Todd E. Grabois..................... VP Finance.......................... Price Waterhouse

William G. Foster................... Land Mgr............................ Shell Oil Company

James A. Honert..................... Mgr. of New Ventures................ Shell Oil Company

John Lambuth........................ Mgr. of Geophysics.................. Shell Oil Company; Meridian
Resources

Ken Weisenburger.................... Explor. Project Mgr................. Shell Oil Company

David N. Witter..................... Mgr. of Geology..................... Shell Oil Company

Frank Falbo......................... Mgr. of Engineering................. Shell Oil Company

John A. Brooks...................... Operations Mgr...................... AA Production; Ranger Oil

Hiram Lucius........................ Contract Negotiation................ Output Exploration
</TABLE>

- --PROFESSIONAL STAFF ABOVE HAS AN AVERAGE OF 18 YEARS' EXPERIENCE IN THE OIL AND
GAS INDUSTRY.

iii
<PAGE>
USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING TECHNOLOGY. In
addition to applying 3-D seismic and CAEX technology, the Company uses the
latest in industry reservoir stimulation and directional drilling techniques.
For example, many of the Company's development and exploitation opportunities
are "tight" reservoirs in which modern stimulation practices may significantly
increase production. The Company is fostering alliances with service companies
that are leaders in these areas.

[GRAPHICAL PRESENTATION OF A TABLE [GRAPHICAL PRESENTATION OF WELL
DEPICTING A STRESS PROFILE AND THE BORE. (CAPTION "DRILLING - BY
CONCENTRATION OF PROPPANT IN THE UTILIZING WELL PLANS, THE LATEST
FRACTURE. (CAPTION "RESERVIOR DRILLING FLUID TECHNOLOGY, AND
STIMULATION - HYDRAULIC FRACTURING CUSTOM DESIGNED DRILL BITS,
HAS ALLOWED BENZ TO INCREASE BENZ REDUCES COSTS.")]
PRODUCTION IN COMPLEX RESERVOIRS
BYPASSED BY OTHERS.")]

CONTROL OF EXPLORATION FUNCTIONS. The Company believes that controlling the
most critical functions in the exploration process will enhance its ability to
successfully develop its prospects. The Company has acquired a majority interest
in many of its prospects, including interests in most of the 3-D seismic data
relating to those prospects. In many cases where the Company does not own a
majority of interest in a prospect, the Company still owns a greater interest
than that of any other working interest owner. As a result, in most of its
prospects, the Company is able to influence the selection of areas to explore,
manage the land permitting and option process, determine seismic survey areas,
oversee data acquisition and processing, prepare, integrate and interpret the
data and identify each prospect drillsite. In addition, the Company will be the
operator of many of the wells drilled within its prospects. See "Business and
Properties--Prospects."

<TABLE>
<S> <C>
[THREE DIMENSIONAL TABLE-GRAPH OF THE OLD OCEAN Old Ocean Prospect
PROSPECT DESCRIBING THE DISTANCE IN MILES Matagorda and Brazoria
TO DEMONSTRATE THE SURFACE SIZE OF A PROSPECT Counties, TX
AND DEPTH IN FEET OF WELLS DRILLED ON A
PROSPECT.]
The Company is the
operator for seismic data
acquisition and deeper
exploration production for
the prospect.
</TABLE>

iv
<PAGE>
[TABLE DESCRIBING THE COMPANY'S 1998 DRILLING PLAN. THE TABLE COVERS THE FISCAL
YEARS FOR 1998, 1999 AND 2000 AND COVERS THE OAKVALE DOME, WAUSAU, EAST BUFFALO,
LAHINCH, RAYBURN, PLUM GROVE, GLANCY AND OLD OCEAN PROSPECTS.]

v
<PAGE>
SELECT CORE PROSPECTS

OAKVALE DOME. The Oakvale Dome Prospect, located in Jefferson Davis County,
Mississippi, is the Company's most significant producing property. The Company
owns approximately 4,706 gross (2,613 net) acres in the Prospect. The Company is
the operator.

SEISMIC PICTURE

[TWO DIMENSION SEISMIC PICTURE PRESENTING THE KS BYRD 31-1 #1 WELL, IDENTIFYING
THE HARPER SAND AS THE CURRENT LEVEL OF COMPLETION AND AN EUR OF 9.3 BCF.]

vi
<PAGE>
OLD OCEAN. The Company owns options for oil and gas leases and has
contractual rights to earn working interests in approximately 81,082 gross
(35,873 net) acres in the Old Ocean Prospect in Brazoria and Matagorda Counties,
Texas. A 3-D seismic survey is underway. The Company is the operator of the
seismic survey. The Old Ocean Field is the largest Frio field in the Gulf Coast,
having produced more than five TCFGE since its discovery in 1934. In excess of
200 wells have been drilled in the Old Ocean Field. These reserves have been
produced from four normally pressured reservoirs between 9,500 and 11,000 feet.
The Old Ocean Prospect actually consists of numerous prospects.

OLD OCEAN FIELD
BRAZORIA AND MATAGORDA CO., TEXAS
CUMULATIVE PRODUCTION: 4,477 BCFG + 450 MMBO

[GRAPHICAL PRESENTATION OF THE OLD OCEAN FIELD AND A 3-D OUTLINE.]

vii
<PAGE>
PLUM GROVE. The Company owns approximately 10,362 gross (3,056 net) acres
and owns options for oil and gas leases on an additional 50,757 gross (36,459
net) acres in the Plum Grove Prospect in Liberty and Montgomery Counties, Texas.
The Belco Operating Corporation is the operator. This area has been technically
evaluated with a reprocessed grid of 2-D seismic data. Multiple prospects and
prospect leads have been identified ranging in depth from 4,000 feet to 16,000
feet. Because of the complex faulting of the subsurface in this area, 3-D
seismic data will be necessary to appropriately understand structural risks. The
Company is planning a 3-D seismic shoot of at least 100 square miles to properly
image this area. Recently, the Company entered into an agreement with Belco
Operating Company to combine acreage blocks and share in the costs of the 3-D
shoot and subsequent drilling. The Plum Grove area has had cumulative production
of 200 BCFG and 20 MMBO from stratigraphic intervals ranging from 4,000 to
14,000 feet. Most of the production for the area is from the Yegua and Upper
Wilcox formations. Other productive intervals include the Cockfield, Jackson,
Cook Mountain and Lower Wilcox formations. In addition to the Lower Wilcox
potential, both the Upper Wilcox and Yegua stratigraphic intervals provide
exploration opportunity.

[GRAPHICAL DEPICTION OF VARIOUS EXISTING FIELDS AND EXPLORATION SITES. LEGEND
DISCLOSING THAT A SEISMIC SURVEY COVERING 130+ SQUARE MILES HAS BEEN PERFORMED
AND THE VARIOUS FORMATIONS AT WHICH THE COMPANY IS CURRENTLY DRILLING PROSPECTS
IN THE PLUM GROVE PROSPECT.]

viii
<PAGE>
SUMMARY

THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL INFORMATION,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. INVESTORS
SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK
FACTORS." UNLESS OTHERWISE INDICATED HEREIN, ALL DOLLAR AMOUNTS ARE IN UNITED
STATES DOLLARS. CERTAIN TERMS USED HEREIN RELATING TO THE OIL AND GAS INDUSTRY
ARE DEFINED IN A "GLOSSARY" INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE NOTED HEREIN, REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" MEANS
BENZ ENERGY LTD. AND ITS WHOLLY OWNED SUBSIDIARIES.

GENERAL

The Company is an independent energy company engaged in the exploration for
and development of oil and natural gas. The Company has interests in over 25 oil
and gas prospects primarily in the United States Gulf Coast areas of
Mississippi, Texas and Louisiana. Most of the Company's prospects have been,
are being, or are expected to be enhanced with 3-D seismic data and computer
aided exploration ("CAEX") technologies. The 3-D seismic data, when complete for
the existing prospects, will cover over 950 square miles. The Company has
drilled three wells that are in the process of being completed and three
additional wells are currently being drilled. The Company's 1998 capital budget
provides for a total of $27.4 million for drilling, prospect development,
leasehold acquisitions and seismic data acquisitions. Of such amount,
approximately $5.0 million is budgeted for development drilling, approximately
$12.2 million is budgeted for exploratory drilling, testing and subsequent
completions, $8.4 million is budgeted for seismic data acquisitions and the
remainder is budgeted for leasehold purchases. The Company believes that its
prospects represent a diverse array of technology enhanced, 3-D seismic
confirmed oil and gas exploration prospects.

STRATEGY

The Company's strategy is to expand its reserves, production and cash flows
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in targeted areas on the United States Gulf Coast
in or adjacent to fields and trends that have historically produced hydrocarbons
in significant quantities; (ii) enhancing the value of its prospects and
reducing exploration risks through the use of 3-D seismic data and CAEX
technologies; (iii) maintaining an experienced technical staff with the
expertise necessary to take advantage of the Company's 3-D seismic data and CAEX
technologies; (iv) adding reserves and production using modern reservoir
stimulation methods and new drilling technology; and (v) retaining control over
critical exploration decisions.

OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration and development that have geological trends with
demonstrated histories of prolific natural gas production from high porosity
reservoir rocks with profiles suitable for seismic evaluation. The Company
believes that by obtaining substantial working interests, related 3-D seismic
data and significant acreage positions within its core areas, it will be able to
achieve a dominant position in focused portions of those areas. With a dominant
position, the Company believes it can better control the core areas' exploration
opportunities and future production, and can attempt to minimize costs through
economies of scale and other efficiencies inherent in its focused approach. Such
cost savings and efficiencies include the ability to use the Company's 3-D
seismic data to reduce exploration risks and lower its leasehold acquisition
costs by identifying and purchasing leasehold interests only in those focused
areas in which the Company believes exploratory drilling is most likely to be
successful.

1
<PAGE>
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery.

EXPERIENCED TEAM. The Company maintains an experienced staff, including
engineers, geologists, geophysicists, landmen and other technical personnel.
(Shown left to right: Todd Grabois, Vice President, Finance; Ernest J. LaFlure,
President and Chief Operating Officer; Prentis B. Tomlinson, Chairman and Chief
Executive Officer; and Robert S. Herlin, Senior Vice President and Chief
Financial Officer.

<TABLE>
<CAPTION>
MANAGEMENT AND TECHNICAL STAFF PREVIOUS EXPERIENCE
- -------------------------------------------------------------------------- ------------------------------------
<S> <C> <C>
Prentis B. Tomlinson................ Chrm. & CEO......................... TGS Geophysical; Tomlinson Interests
Ernest J. LaFlure................... Pres. & COO......................... Shell Oil Company
Robert S. Herlin.................... Sr. VP & CFO........................ Enron
Todd E. Grabois..................... VP Finance.......................... Price Waterhouse
William G. Foster................... Land Mgr............................ Shell Oil Company
James A. Honert..................... Mgr. of New Ventures................ Shell Oil Company
John Lambuth........................ Mgr. of Geophysics.................. Shell Oil Company; Meridian
Resources
Ken Weisenburger.................... Explor. Project Mgr................. Shell Oil Company
David N. Witter..................... Mgr. of Geology..................... Shell Oil Company
Frank Falbo......................... Mgr. of Engineering................. Shell Oil Company
John A. Brooks...................... Operations Mgr...................... AA Production; Ranger Oil
Hiram Lucius........................ Contract Negotiation................ Output Exploration
</TABLE>

- --PROFESSIONAL STAFF ABOVE HAS AN AVERAGE OF 18 YEARS' EXPERIENCE IN THE OIL AND
GAS INDUSTRY.

USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING TECHNOLOGY. In
addition to applying 3-D seismic and CAEX technology, the Company uses the
latest in industry reservoir stimulation and directional drilling techniques.
For example, many of the Company's development and exploitation opportunities
are "tight" reservoirs in which modern stimulation practices may significantly
increase production. The Company is fostering alliances with service companies
that are leaders in these areas.

RECENT DEVELOPMENTS

In April, 1998, the Company completed the private placement of $37.5 million
principal amount of the Debentures. The Debentures mature between March 31, 2003
and August 31, 2003, bear interest at 9% per annum, and are convertible into
Common Stock at a conversion rate of CDN $1.70 per share, subject to adjustment
in certain circumstances.

A substantial portion of the Company's growth has been through acquisitions,
including (i) in January 1998 the acquisition of certain oil and gas prospects
from Lasco Energy Partners, L.P. ("Lasco") (the "Lasco Acquisition"); (ii) the
acquisition on April 22, 1998 of certain oil and gas property interests of
Calibre Energy, LLC ("Calibre") (the "Calibre Acquisition"); (iii) the
acquisition on May 1, 1998 of certain oil and gas properties from Southern Gas
Corporation (the "Southern Gas Acquisition"); and (iv) the acquisition effective
June 30, 1998 of certain oil and gas property interests from Starbucks Trust
(the "Starbucks Acquisition"); (the Lasco Acquisition, the Calibre Acquisition,
Southern Gas Acquisition

2
<PAGE>
and Starbucks Acquisition are referred to collectively herein as the
"Acquisitions"). The Calibre Acquisition, Southern Gas Acquisition and Starbucks
Acquisition are awaiting approval from the VSE.

The Company's principal executive offices are located at 1000 Louisiana
Street, Houston, Texas 77002, and its telephone number at such address is (713)
739-0351.

THE PROSPECTS

The Company's prospects are located primarily in the Gulf Coast areas of
Mississippi, Louisiana, and Texas. Each of the prospects differs in scope and
character and consists of one or more types of assets, such as 3-D seismic data,
working interest in oil and gas leases, oil and gas lease options, contractual
rights to earn a working interest in oil and gas leases, royalty interests or
other mineral interests. Most of the Company's prospects have been, are being,
or are expected to be enhanced with 3-D seismic data and CAEX technologies. The
3-D seismic data acquired will, when complete for the existing prospects, cover
over 950 square miles (gross). The table below gives certain information
regarding the location, objectives, and present status of the Company's most
significant prospects as of June 30, 1998.

<TABLE>
<CAPTION>
ADDITIONAL ACREAGE(4) GROSS
LEASED ACREAGE SQUARE
------------------------ ------------------------ MILES OF
GROSS NET GROSS NET 3-D SEISMIC FORMATION APPROX.
*PROSPECT ACRES(2) ACRES(1) ACRES(2) ACRES(1) DATA(5) OBJECTIVE TOTAL DEPTH
- ----------------------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- APPROX.
DRILLING
COSTS(4)
-------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MISSISSIPPI
Oakvale Dome(3)(7)..... 4,706 2,613 N/A N/A 33 Hosston 16,700' $ 2,200
Glancy(3)(9)........... 3,726 2,477 N/A N/A N/A Hosston; 21,000' $ 2,000
Cotton
Valley
Wausau(3)(10).......... 5,377 1,626 N/A N/A 55 Cotton Valley 19,000' $ 2,200
Sardis Church
Dome(3)(11).......... 4,000 2,835 N/A N/A N/A Hosston 16,500' $ 800
TEXAS
East Buffalo(7)........ 1,482 427 N/A N/A 30 Cotton Valley 17,000' $ 6,000
LaHinch(3)(12)......... 2,028 1,358 N/A N/A 20 Wilcox 16,000' $ 2,500
Old Ocean(3)(13)....... N/A N/A 81,082 35,873 120 Frio 16,000' $ 2,400
Oak Hill Field(3)(8)... 1,012 791 N/A N/A N/A Cotton Valley 9,500' $ 2,000
Plum Grove(13)......... 10,362 3,056 50,757 36,459 100 Yegua; Wilcox 15,000' $ 1,100
Rayburn(3)(11)(13)..... 3,048 1,256 4,542 3,603 30 Yegua; Wilcox 15,000' $ 1,100
OTHER
Louisiana.............. 13,163 2,222 N/A N/A 478
Mississippi............ 32,269 10,435 N/A N/A 73
Texas.................. 9,549 2,820 N/A N/A 30
----------- ----------- ----------- ----------- ---
Total................ 90,722 31,916 136,381 75,935 969
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
</TABLE>

- ------------------------------

(1) "Net Acres" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.

(2) "Gross Acres" means an acre in which the Company owns a working interest.
When used in conjunction with acreage under options, it means an acre in
which the Company will acquire a working interest if and when the option is
exercised.

(3) Operated by the Company.

(4) "Additional Acreage" refers to the number of acres in which the Company
owns options for oil and gas leases from mineral owners and, with respect
to part of the acreage reported for the Old Ocean Prospect, has contractual
rights to earn a working interest from an oil and gas lease owner.

(5) Represents 3-D seismic data acquired, being acquired or expected to be
acquired.

(6) Refers to the gross cost to drill and test a well to casing point, but does
not include completion costs. The Company's share of drilling costs will be
based on the Company's working interest in each well.

(7) Drilling.

(8) Reworking.

(9) Preparing to drill.

(10) Completing.

(11) Soliciting industry participant.

(12) Evaluating 3-D seismic data.

(13) Shooting 3-D seismic survey.

- ------------------------------

*The foregoing table gives effect to the Acquisitions excluding the Starbucks
Acquisition.

3
<PAGE>
ESTIMATED PROVED RESERVES

The following table sets forth information regarding the Company's estimated
proved oil and gas reserve quantities, reserve values and discounted future net
revenues. The information is based (i) with regard to some prospects, on
estimates by independent petroleum engineers at January 1, 1998, as revised and
adjusted in part by the Company's internal engineers as of July 1, 1998, (ii) in
part on estimates by independent petroleum engineers at June 30, 1998 and (iii)
with regard to some prospects, solely on estimates by the Company's internal
engineers. No adjustments have been made to account for the intervening decrease
in the market prices of oil and gas since January 1, 1998.

<TABLE>
<CAPTION>
PRESENT VALUE OF
ESTIMATED FUTURE
NET REVENUE
BEFORE INCOME
GAS ESTIMATED TAXES
EQUIVALENT FUTURE NET (DISCOUNTED AT
GAS (MMCF) OIL (BBL) (MMCFE) REVENUE 10 PERCENT)
----------- --------- ----------- ----------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
AS OF JANUARY 1, 1998(1):
Proved developed reserves...................... 14,627 182,828 15,724 $ 25,691 $ 15,979
Proved undeveloped reserves.................... 19,012 231,512 20,401 23,515 9,913
----------- --------- ----------- ----------- -------
33,639 414,340 36,125 $ 49,206 $ 25,892
----------- --------- ----------- ----------- -------
REVISIONS AND ADDITIONS(2):
Proved developed reserves...................... 22,069 325,140 24,020 $ 40,710 $ 24,190
Proved undeveloped reserves.................... (3,668) (15,609) (3,762) (7,066) (4,626)
----------- --------- ----------- ----------- -------
18,401 309,531 20,258 $ 33,644 $ 19,564
----------- --------- ----------- ----------- -------
ESTIMATED AS OF JULY 1, 1998:
Proved developed reserves...................... 36,696 507,968 39,744 $ 66,401 $ 40,169
Proved undeveloped reserves.................... 15,344 215,903 16,639 16,449 5,287
----------- --------- ----------- ----------- -------
52,040 723,871 56,383 $ 82,850 $ 45,456
----------- --------- ----------- ----------- -------
----------- --------- ----------- ----------- -------
</TABLE>

- ------------------------

(1) Estimated by Ryder Scott Company ("Ryder Scott") and T.J. Smith & Company,
Inc. ("T.J. Smith"), each as of January 1, 1998.

(2) Based on (i) additions to the Company's reserves for the Glancy Prospect as
estimated by Crocker Company ("Crocker") as of June 30, 1998, (ii)
internally generated additions for the Company's increased interest in the
Glancy Prospect as a result of the Starbucks Acquisition (developed from the
Crocker estimate, referred to in (i) above, of the Company's reserves before
the Starbucks Acquisition), (iii) internally generated additions for the
recently completed East Morgantown Prospect, (iv) internally generated
revisions of reserves in the Oakvale Dome Prospect based on recent reservoir
pressure and production data, (v) internally generated additions for the
Company's increased interest in the Oakvale Dome Prospect as a result of the
Southern Gas Acquisition (based on the Ryder Scott estimates of January 1,
1998 referred to in note 1 above and revisions as noted in (iv) above), (vi)
conversion of the proved undeveloped reserves at the White Castle Prospect
to proved developed reserves (based on the State Lease 14720 #2 well) and
(vii) less estimated production from all included prospects for the
six-month period ended June 30, 1998.

4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The summary financial data below sets forth (i) the historical financial
data as of and for the four months ended December 31, 1997 and the ten months
ended August 31, 1997; (ii) unaudited historical financial data as of and for
the six months ended June 30, 1998 and 1997; and (iii) pro forma statements of
income giving effect to the Lasco Acquisition as if such transaction had been
consummated at the inception of the Company on October 31, 1996. The historical
financial data for the four months ended December 31, 1997 and the ten months
ended August 31, 1997 are derived from the Company's audited financial
statements. The financial data as of and for the six-month periods ended June
30, 1998 and 1997 are derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements include,
in the opinion of the Company's management, all adjustments necessary for a fair
presentation of the Company's financial position and results of operations and
cash flows for such periods. Operating results for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. The statement of operations and balance
sheet data are provided for comparative purposes only and should be read in
conjunction with the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma information presents the
revenues, direct costs and estimated depletion, depreciation and amortization
related to the Lasco Acquisition as if such transaction occurred at the
inception of the Company. The pro forma information is not necessarily
indicative of the combined financial results as they may be in the future or as
they might have been for the periods indicated had the Lasco Acquisition been
consummated at the inception of the Company on October 31, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, SIX MONTHS FOUR MONTHS FOUR MONTHS TEN MONTHS
ENDED JUNE ENDED ENDED DECEMBER ENDED
------------------------- 30, 1997 PRO DECEMBER 31, 31, 1997 PRO AUGUST 31,
1998 1997 FORMA(1) 1997(2)(3) FORMA(1)(2) 1997(2)(3)
------------ ----------- ------------- ------------- ---------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Oil and gas production
revenues................... $1,740,939 $ 268,779 $ 1,846,076 $ 707,987 $ 1,579,950 $ 444,203
------------ ----------- ------------- ------------- ---------------- -----------
Operating Expenses:
Depletion, depreciation and
amortization............... 989,531 152,673 750,271 634,493 1,053,338 240,403
Operating costs.............. 337,558 52,732 559,205 49,762 256,904 68,511
General and administrative... 3,142,945 1,411,619 1,411,619 2,087,087 2,087,087 2,026,399
Financing Costs:
Interest expense........... 1,418,281 33,839 33,839 178,522 178,522 49,314
Amortization of NPI........ 920,267 -- -- 427,506 427,506 --
Amortization of deferred
loan costs............... 356,445 -- -- 42,857 42,857 --
Interest income............ (307,824) (23,558) (23,558) (23,825) (23,825) (59,200)
------------ ----------- ------------- ------------- ---------------- -----------
6,857,203 1,627,305 2,731,376 3,396,402 4,022,389 2,325,427
------------ ----------- ------------- ------------- ---------------- -----------
Loss from operations before
other income (expense) and
provision for income taxes... (5,116,264) (1,358,526) (885,300) (2,688,415) (2,442,439) (1,881,224)
Other income (expense)......... -- 107,126 107,126 (50,907) (50,907) (35,917)
------------ ----------- ------------- ------------- ---------------- -----------
Loss from operations before
provision for income taxes... (5,116,264) (1,251,400) (778,174) (2,739,322) (2,493,346) (1,917,141)
Provision for income taxes..... -- -- -- -- -- --
------------ ----------- ------------- ------------- ---------------- -----------
Net loss....................... $(5,116,264) $(1,251,400) $ (778,174) $(2,739,322) $ (2,493,346) $(1,917,141)
------------ ----------- ------------- ------------- ---------------- -----------
------------ ----------- ------------- ------------- ---------------- -----------
Net loss per common
share, basic................. $ (0.16) $ (0.06) $ (0.03) $ (0.10) $ (0.08) $ (0.09)
------------ ----------- ------------- ------------- ---------------- -----------
------------ ----------- ------------- ------------- ---------------- -----------
Weighted average number of
common shares outstanding.... 31,688,218 22,365,815 24,908,187 27,926,016 31,318,756 21,921,985
------------ ----------- ------------- ------------- ---------------- -----------
------------ ----------- ------------- ------------- ---------------- -----------

TEN MONTHS ENDED
AUGUST 31, 1997
PRO FORMA(1)(2)
----------------

<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Oil and gas production
revenues................... $ 2,914,227
----------------
Operating Expenses:
Depletion, depreciation and
amortization............... 1,213,131
Operating costs.............. 796,493
General and administrative... 2,026,399
Financing Costs:
Interest expense........... 49,314
Amortization of NPI........ --
Amortization of deferred
loan costs............... --
Interest income............ (59,200)
----------------
4,026,137
----------------
Loss from operations before
other income (expense) and
provision for income taxes... (1,111,910)
Other income (expense)......... (35,917)
----------------
Loss from operations before
provision for income taxes... (1,147,827)
Provision for income taxes..... --
----------------
Net loss....................... $ (1,147,827)
----------------
----------------
Net loss per common
share, basic................. $ (0.05)
----------------
----------------
Weighted average number of
common shares outstanding.... 24,470,015
----------------
----------------
</TABLE>

5
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
1998(2)
------------
(UNAUDITED)

<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital deficit.............. $(2,932,554)
Properties and equipment, net........ $62,325,530
Total assets......................... $87,974,566
Long-term debt, including current
maturities......................... $51,611,186
Stockholders' equity................. $23,314,482

<CAPTION>
<S> <C>
BALANCE SHEET DATA:
Working capital deficit..............
Properties and equipment, net........
Total assets.........................
Long-term debt, including current
maturities.........................
Stockholders' equity.................
</TABLE>

- ----------------------------------

(1) Adjusted to show the effect on the Company's consolidated results of
operations as if the Lasco Acquisition occurred at the inception of the
Company on October 31, 1996.

(2) Does not include the Starbucks Acquisition.

(3) In 1997, the Company changed its fiscal year-end from August 31 to December
31.

6
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements." All statements other
than statements of historical facts included in this Prospectus, including
without limitation statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties" regarding planned capital expenditures, the
availability of capital resources to fund capital expenditures, estimates of
proved reserves, the number of anticipated wells to be drilled in the future,
the Company's financial position, business strategy and other plans and
objectives for future operations, are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to be correct. There are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves and in projecting future rates
of production and timing of development expenditures, including many factors
beyond the Company's control. Reserve engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot be
measured in an exact way, and the accuracy of any reserve estimate is a function
of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary from one another. In addition, results of drilling, testing and
production after the date of an estimate may justify revisions of such estimate
and such revisions, if significant, would change the schedule of any further
production and development drilling. Accordingly, reserve estimates are
generally different from quantities of oil and natural gas that ultimately are
recovered. Additional important factors that could cause actual results to
differ materially from the Company's expectations are disclosed elsewhere in
this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.

RISK FACTORS

AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
MAKING AN INVESTMENT IN THE COMMON STOCK.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL
DEFICITS

The Company commenced its operations in October 1996 and has only a limited
operating history. Potential investors, therefore, have limited historical
financial and operating information upon which to base an evaluation of the
Company's performance and an investment in the Common Stock. As a result of
operating expenses and costs associated with establishing the infrastructure
necessary to sustain the planned expansion of oil and gas operations and the
Company's desired position as operator of many of its prospects, the Company has
incurred significant operating and net losses to date. For the six month period
ended June 30, 1998, the four month period ended December 31, 1997 and the ten
month period ended August 31, 1997, the Company had net losses of $5.1 million,
$2.7 million and $1.9 million, respectively. At June 30, 1998, the Company had
an accumulated deficit of $10.1 million. The Company had a working-capital
deficit of $2.9 million at June 30, 1998, a working capital deficit of $15.3
million at December 31, 1997 and a working capital surplus of $1.8 million at
August 31, 1997. The Company will continue to require substantial expenditures
to develop and expand its business. The Company's future financial results will
depend primarily on its ability to economically locate hydrocarbons in
commercial quantities, to reduce drilling risks and costs through the use of 3-D
seismic data and CAEX technologies in selecting site and depth of wells, and
externally, on oil and gas prices. There can be no assurance that the Company
will achieve or sustain profitability or positive cash flows from operating
activities in the future. See "--Substantial Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

7
<PAGE>
SUBSTANTIAL CAPITAL REQUIREMENTS

The Company has experienced and expects to continue to experience
substantial working capital needs, particularly as a result of its active 3-D
seismic data acquisition and drilling program. In addition to cash generated
from operations and proceeds from the sale of the Debentures, additional
financing will be required in the future to fund the Company's growth. No
assurance can be given as to the availability or terms of additional financing
that may be required or that financing will continue to be available under
existing or new credit facilities. If such capital resources are not available
to the Company, its drilling, development and other activities will be
curtailed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

VOLATILITY OF OIL AND GAS MARKETS; FLUCTUATION IN PRICES; MARKETABILITY OF
PRODUCTION

The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms also is
substantially dependent upon oil and gas prices. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
are beyond the Company's control. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies.
Market prices for oil have generally declined since December 1997. There can be
no assurance that the prices used in the Company's estimates of the present
value of its future net revenue from its proved reserves will be obtained.
Furthermore, there can be no assurance that current price levels for oil and gas
will be sustained or that oil and gas prices will not decline further.
Predicting future oil and natural gas price movements with any certainty is not
possible. Declines in oil and natural gas prices may adversely affect the
Company's financial condition, liquidity and results of operations and may
reduce the amount of the Company's oil and natural gas that can be produced
economically. Additionally, substantially all of the Company's sales of oil and
natural gas are made in the spot market or pursuant to contracts based on spot
market prices and not pursuant to long-term fixed price contracts. With the
objective of reducing price risk, the Company from time to time enters into
hedging and forward sale transactions with respect to a portion of its expected
future production. To the extent that the Company may enter into any hedging or
forward sale transactions in the future, there can be no assurance that such
hedging transactions will reduce risk or mitigate the effect of any substantial
or extended additional decline in oil or natural gas prices.

In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If marketability factors were to change dramatically, the financial
impact on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the Company's control and represent a
significant risk. See "--Uncertainty of Estimates of Oil and Gas Reserves;"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview;" and "Business and Properties--Marketing."

UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES

This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon various
assumptions, including assumptions required by the Commission as to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant

8
<PAGE>
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result, such
estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from the
Company's estimates. Any significant variance in these assumptions could
materially affect the estimated quantity and value of reserves set forth in this
Prospectus. In addition, the Company's estimates of proved reserves may be
subject to downward or upward revision based upon production history, results of
future exploration and development, prevailing oil and gas prices and other
factors, many of which are beyond the Company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used, and such
variances may be material.

Information concerning the Company's proved reserves contained in this
Prospectus is based in part on estimates by independent petroleum engineers at
January 1, 1998 as revised and adjusted in part by the Company's internal
engineers as of July 1, 1998; in part on estimates by independent petroleum
engineers at June 30, 1998; and in part solely on estimates by the Company's
internal engineers. While the reserve estimates at June 30, 1998 and some of the
internal reserve estimates use the average of spot market price for oil and gas
during May 1998, no adjustments have been made to the reserves estimated at
January 1, 1998 by independent petroleum engineers to account for the decrease
from the historical price of oil since January 1, 1998. Although the Company
believes the revisions and adjustments to its estimates of its proved reserves
are based on sound judgments and analysis, there can be no assurance that the
Company's revised estimates will be as accurate as those that might have been
prepared by an independent petroleum engineer.

Approximately 30%, on a gas equivalent basis, of the Company's total proved
reserves were undeveloped at June 30, 1998. Proved undeveloped reserves by their
nature are less certain than proved developed reserves. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. Although cost and reserve estimates attributable to the Company's
oil and gas reserves have been prepared in accordance with Commission rules and
industry standards, no assurance can be given that the estimated costs are
accurate, that development will occur as scheduled or that the results will be
as estimated. See "Business and Properties--Oil and Gas Reserves."

In accordance with applicable Commission requirements, the estimated future
net cash flows from proved reserves are based on prices and costs as of the date
of the estimate, whereas actual future prices and costs may be materially higher
or lower. Actual future net cash flows also will be affected by increases in
consumption by gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with the development and
production of the Company's oil and gas properties. In addition, the 10%
discount factor, which the Commission requires to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor.

EXPLORATION RISKS; RELIANCE ON 3-D SEISMIC DATA AND CAEX TECHNOLOGY

The Company's strategy is to enhance the value of its prospects through the
use of 3-D seismic data and CAEX technology, with an emphasis on direct
hydrocarbon detection technologies. These technologies create computer generated
3-D displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies and structural features that are not
apparent in 2-D seismic surveys; however, these technologies require greater
pre-drilling expenditures than traditional drilling strategies. Even when fully
used and properly interpreted, 3-D seismic data and CAEX visualization
techniques only assist geoscientists in identifying subsurface structures and
hydrocarbon indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present and commercially recoverable in such
structures. Exploratory drilling and, to a lesser extent, development drilling
involve a high degree of risk that no commercial production will be obtained or
that the production

9
<PAGE>
will be insufficient to recover drilling and completion costs. The costs of
drilling, completing and operating wells are uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
Furthermore, completion of a well does not assure a profit on the investment or
a recovery of drilling, completion and operating costs.

RESERVE REPLACEMENT

The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Unless the Company replaces its estimated proved reserves (through development,
exploration or acquisition), the Company's proved reserves generally will
decline as they are produced.

The Company's current strategy includes increasing its reserve base through
acquisitions of leaseholds with drilling potential and by continuing to exploit
its existing properties. There can be no assurance, however, that the Company's
exploration and development projects will result in significant additional
reserves or that the Company will have success drilling productive wells at
economically viable costs. Furthermore, while the Company's revenues may
increase if prevailing oil and gas prices increase significantly, the Company's
finding costs for additional reserves could also increase. For a discussion of
the Company's reserves, see "Business and Properties--Oil and Gas Reserves."

OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS

Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to market its production. There can be
no assurance that new wells drilled by the Company will be productive or that
the Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells but
also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. In addition, the
Company's properties may be susceptible to hydrocarbon drainage from production
by other operators on adjacent properties.

Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, many of the Company's oil and gas operations are located in an
area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damage to facilities and possibly interrupt
production. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of these risks. There can be no
assurance that the Company's insurance coverage will be adequate to cover losses
or liabilities. The Company cannot guarantee that it will be able to maintain
the type and amount of insurance coverage that it considers adequate at
commercially reasonable rates. Losses and liabilities arising from uninsured or
under-insured events could have a material adverse effect on the Company's
financial condition and results of operations.

From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
may be subject to production curtailments. The curtailments may vary from a few
days to several months. In most cases, the Company will be provided only limited
notice as to when production will be curtailed and the duration of such
curtailments. Currently the Company has not curtailed production on any of its
oil and gas wells.

10
<PAGE>
GOVERNMENTAL REGULATION

Oil and gas operations are subject to various United States federal, state
and local governmental regulations that change from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and unitization and pooling
of properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. In addition, the production, handling, storage, transportation
and disposal of oil and gas, by-products thereof and other substances and
materials produced or used in connection with oil and gas operations are subject
to regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. The Company also may
be subject to substantial clean-up costs for any toxic or hazardous substance
that may exist under any of its current properties or properties that it has
operated in the past. To date, expenditures related to complying with these laws
and for remediation of existing environmental contamination have not been
significant in relation to the Company's results of operations.

Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed (sometimes retroactively) and are subject to
interpretation. In addition, the recent trend toward stricter standards in
environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain crude oil and natural gas exploration and production wastes
as "hazardous wastes," which would make the reclassified wastes subject to much
more stringent handling, disposal and clean-up requirements. Such legislation
could have a significant impact on the Company's operating costs, as well as on
the oil and gas industry in general. The Company could incur substantial costs
to comply with environmental laws and regulations, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their effect
on its production. See "Business and Properties-- Regulation."

TITLE DEFECTS

Title to the Company's oil and gas leases will not be examined until drill
sites are selected. As is customary in the industry in the case of undeveloped
properties, little investigation of record title is made at the time of
acquisition other than a preliminary review of local records. However, title to
the drillsite will be examined before drilling on a site commences. The Company
does not intend to purchase title insurance and there can be no assurance that
losses relating to any lease will not result from title defects, defects in the
assignment of leasehold rights or prior encumbrances. See "Business and
Properties--Title to Properties."

COMPETITION FOR OIL AND GAS LEASES AND SEISMIC PERMITS

Substantial competition exists for oil and gas leases and there can be no
assurance the Company will be able to acquire the oil and gas leases it seeks.
Similar competition exists for seismic permits without which 2-D and 3-D seismic
surveys cannot be conducted. There can be no assurance the Company can obtain
the permits necessary to conduct seismic surveys it may desire to conduct. The
seismic permitting risk can be greater in the State of Louisiana, where current
law requires permits from owners of at least an undivided 80% interest in each
tract over which a seismic survey is proposed to be conducted. See "Business and
Properties--Competition."

COMPETITION

The Company operates in a highly competitive environment. The Company
competes with major integrated and independent oil and gas companies for the
acquisition of desirable oil and gas properties

11
<PAGE>
and leases, and for the equipment and labor required to develop and operate such
properties. Many of these competitors have financial and other resources
substantially greater than those of the Company. In addition, many of the
Company's larger competitors may be better able to respond to factors that
affect the demand for oil and natural gas production, such as changes in
worldwide oil and natural gas prices and levels of production, the cost and
availability of alternative fuels and the application of government regulations.
The Company also competes in attracting and retaining technical personnel,
including geologists, geophysicists and other specialists. There can be no
assurance the Company will be able to attract or retain technical personnel in
the future. See "Business and Properties--Competition."

DEPENDENCE ON THE K.S. BYRD 31-1 #1 WELL

The K.S. Byrd 31-1 #1 (hereinafter the "K.S. Byrd Well") accounted for
$878,100 and $546,600 of the Company's revenues for the six month period ended
June 30, 1998 and the four month period ended December 31, 1997, respectively.
During these periods, the Company's portion of the K.S. Byrd Well's production
was 2,104 MCFGD, representing 56% of the Company's natural gas production, and
1,605 MCFGD, representing 88.0% of the Company's natural gas production,
respectively. A significant decrease in revenues generated by, or production
from, the K.S. Byrd Well would have a material adverse effect on the Company.
See "Business and Properties--The Prospects--Oakvale Dome."

CONFLICTS OF INTEREST WITH RESPECT TO CERTAIN ACQUISITIONS

The Calibre Acquisition and Starbucks Acquisition each involved the
acquisitions of oil and gas prospects from entities that are owned in part by
certain of the Company's officers, directors and affiliates. Although the
Acquisitions were approved by the Company's outside directors, and independent
petroleum engineers estimated oil and gas reserve quantities, reserve values and
discounted future net revenues of the acquired prospects, these acquisitions did
not result from arms-length negotiations. The Company believes that the purchase
prices for these Acquisitions were fair to the Company; however, the Company did
not obtain an independent third party to estimate the fair market value of the
acquired oil and gas prospects. There can be no assurance that the terms of such
acquisitions are comparable to those that would have been obtained between
unrelated parties. The Calibre Acquisition, Starbucks Acquisition and Southern
Gas Acquisition are awaiting VSE approval. The acquisition agreements relating
to these transactions have been executed and delivered to the parties thereto,
but the actual conveyance of the oil and gas interest will not be executed and
delivered until VSE approval has been obtained. Pending such approval, the oil
and gas properties are being operated for the Company's account. The VSE has
informed the Company that it is conducting a heightened review of the Calibre
Acquisition and Starbucks Acquisition because they were not arms-length
transactions. Although the Company believes that VSE approval will be obtained,
if such approval is not obtained, the Calibre Acquisition and Starbucks
Acquisition would be revoked. Such an event would have a material adverse effect
on the Company. See "Certain Transactions."

CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS

Prentis B. Tomlinson, Jr., the Company's Chairman and Chief Executive
Officer, and Heather Tomlinson, his wife, beneficially own approximately 35.5%
and 6.8%, respectively, of the outstanding shares of Common Stock. Mr. and Mrs.
Tomlinson, are able to exercise significant influence over the Company's
affairs, including election of the Board of Directors and other matters
submitted to a vote of stockholders. Assuming full conversion of the Debentures,
Mr. Tomlinson and Mrs. Tomlinson will beneficially own approximately 17.6% and
3.3%, respectively, of the then outstanding shares of Common Stock. See
"Principal and Selling Shareholders."

DEPENDENCE ON KEY PERSONNEL

The Company's business is dependent upon the performance of certain of its
executive officers and members of its technical staff. The Company has entered
into employment agreements with certain of its executive officers and other key
personnel. Certain of such employment agreements contain noncompetition
provisions that prohibit such executive officers from competing with the Company
after the term of

12
<PAGE>
their employment has expired. There can be no assurance, however, that such
noncompetition agreements will be enforceable or that the Company will be able
to enter into employment agreements with its existing executive officers to
extend the terms of their employment. The Company does not have an employment
agreement with Mr. Tomlinson. There can be no assurance that the Company will be
able to enter into an employment agreement with Mr. Tomlinson or that Mr.
Tomlinson will remain employed by the Company. See "Management--Employment
Agreements."

SHARES ELIGIBLE FOR FUTURE SALE

As of August 31, 1998, the Company had a total of 34,130,683 shares of
Common Stock outstanding. The Selling Shareholders will own approximately
36,849,575 shares of Common Stock, assuming conversion of all outstanding
Debentures and exercise of the Warrants, which represents approximately 108% of
the issued and outstanding shares of Common Stock. Of the outstanding shares of
Common Stock 13,817,460 shares of Common Stock are owned by affiliates, as
defined in regulations under the Securities Act, and will be considered
"Restricted Securities" within the meaning of Rule 144 under the Securities Act.
Shares of Common Stock held by affiliates may not be sold in the United States
in the absence of registration under the Securities Act, unless an exemption
from registration is available. The remaining outstanding shares of Common Stock
are freely transferable by persons other than affiliates without restriction or
further registration under the Securities Act. Although the Company cannot
predict the timing or amount of future sales, if any, by Selling Shareholders or
affiliates of the Company of Common Stock or the effect that the availability of
such shares for sale will have on the market price from time to time, sales of
substantial amounts of Common Stock could adversely affect the market price of
the Common Stock. See "Principal and Selling Shareholders" and "Description of
Securities."

ABSENCE OF UNITED STATES TRADING MARKET; POSSIBLE PRICE VOLATILITY

The Common Stock is currently traded on the VSE. In the United States the
Common Stock will constitute a new issue of securities with no established
domestic trading market. The future value of the Common Stock will depend on
many factors, including, among other, prevailing foreign currency exchange
rates, the Company's operating results, and the market for similar domestic
securities. Furthermore, there can be no assurance that an active United States
public trading market will develop or that a purchaser of Common Stock will be
able to resell such securities within the United States.

ABSENCE OF DIVIDENDS ON COMMON STOCK

To date, the Company has not paid any dividends on its Common Stock. The
Company intends to retain its earnings, if any, to provide funds for
reinvestment in the Company's exploration, development and production
activities, and, therefore, does not anticipate declaring or paying dividends in
the foreseeable future. Furthermore, payment of dividends, if any, in the future
is within the discretion of the Board of Directors and will depend on the
Company's earnings, if any, its capital requirements and financial condition and
other relevant factors. Presently, the payment of dividends by the Company is
restricted under the terms of certain of the Company's credit facilities. See
"Management's Discussion and Analysis--Liquidity and Capital Resources."

CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of holders of the Common Stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company, which could have the effect of discouraging bids for the Company and,
thereby, prevent shareholders from receiving the maximum value for their shares.

13
<PAGE>
DIVIDEND POLICY

PRICE RANGE OF SECURITIES

The Common Stock is listed on the VSE under the symbol "BZG." At September
3, 1998, there were approximately 162 shareholders of record of Common Stock and
266 beneficial owners.

The following table sets forth, for the periods indicated, the high and low
sales prices per share, in Canadian Dollars and in U.S. Dollar equivalents, for
the Company's Common Stock as reported on Canada Stockwatch. The Company
commenced operations on October 31, 1996.

<TABLE>
<CAPTION>
COMMON STOCK PRICE
COMMON STOCK PRICE
RANGE (CDN$) RANGE(1)
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
TEN MONTHS ENDED AUGUST 31, 1997
Month ended Nov. 30, 1996..................................................... $ 2.50 $ 1.90 $ 1.88 $ 1.41
Second Quarter ended Feb. 1997................................................ $ 4.30 $ 2.00 $ 3.15 $ 1.48
Third Quarter ended May 1997.................................................. $ 4.40 $ 3.00 $ 3.23 $ 2.19
Fourth Quarter ended August 1997.............................................. $ 3.35 $ 2.50 $ 2.44 $ 1.82

FOUR MONTHS ENDED DECEMBER 31, 1997(2).......................................... $ 3.50 $ 1.55 $ 2.53 $ 1.08

1998
First Quarter ended March 31, 1998............................................ $ 2.10 $ 1.10 $ 1.49 $ 0.77
Second Quarter ended June 30, 1998............................................ $ 2.04 $ 1.30 $ 1.43 $ 0.89
Third Quarter (through September 1, 1998)..................................... $ 1.50 $ 0.50 $ 1.01 $ 0.32
</TABLE>

- ------------------------

(1) Share price was converted from Canadian dollars to U.S. dollars using the
average of high and low exchange rate in effect during the respective
periods.

(2) In 1997, the Company changed its fiscal year-end from August 31 to December
31.

14
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at June 30,
1998.

<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
(UNAUDITED)
<S> <C>
Bank indebtedness.............................................................. $ 3,233,474
Long-term debt, net of unamortized discount of $1,122,288...................... 10,877,712
Convertible Debentures......................................................... 37,500,000
Stockholders' Equity:
Class A Preferred Shares; no par unlimited shares authorized; 12,000,000
shares issued and outstanding.............................................. 12,000,000
Common Stock; no par value unlimited shares authorized; 34,130,683 shares
issued and outstanding(1).................................................. 21,326,895
Accumulated deficit.......................................................... (10,071,902)
-------------
Total Capitalization......................................................... $ 74,866,179
-------------
-------------
</TABLE>

- ------------------------

(1) Includes 1,927,426 shares of Common Stock reserved issuance upon regulatory
approval of Calibre Acquisition. Does not include 36,041,859 shares of
Common Stock issuable upon conversion of the Debentures, 807,716 shares of
Common Stock issuable upon the exercise of Warrants and 8,670,705 shares
issuable upon the exercise of other outstanding options and warrants.

15
<PAGE>
PRO FORMA FINANCIAL STATEMENTS

The summary financial data below sets forth (i) the historical statement of
operations data as of and for the four months ended December 31, 1997 and the
ten months ended August 31, 1997; (ii) unaudited historical statement of
operations as of and for the six months ended June 30, 1998 and 1997; and (iii)
pro forma statements of income giving effect to the Lasco Acquisition as if such
transaction was consummated at the inception of the Company on October 31, 1996.
The historical statement of operations for the four months ended December 31,
1997 and the ten months ended August 31, 1997 are derived from the Company's
audited financial statements. The financial data as of and for the six-month
periods ended June 30, 1998 and 1997 are derived from the Company's unaudited
consolidated financial statements. The unaudited consolidated financial
statements include, in the opinion of the Company's management, all adjustments
necessary for a fair presentation of the Company's financial position and
results of operations and cash flows for such periods. Operating results for the
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1998. The pro forma
information presents the revenues, direct costs and estimated depletion,
depreciation and amortization related to the Lasco Acquisition as if such
transaction occurred at the inception of the Company.

The pro forma results of operations are not necessarily indicative of the
combined financial results as they may be in the future or as they might have
been for the periods indicated had the Lasco Acquisition been consummated at the
inception of the Company on October 31, 1996. The pro forma information does not
purport to represent what the Company's results of operations would actually
have been had the Lasco Acquisition in fact occurred on such date. Furthermore,
the pro forma results do not give effect to all cost savings or incremental
costs that may occur as a result of the integration and consolidation of the
Lasco Acquisition.

The unaudited pro forma consolidated results of operations should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, 1998 ENDED JUNE 30, 1997
------------------------------------- ------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:(1)
Oil and gas production revenues.................. $ 1,740,939 -- $ 1,740,939 $ 268,779 $1,577,297 $1,846,076
----------- ----------- ----------- ----------- ----------- ----------
Costs and expenses:
Depletion, depreciation and amortization(2)...... 989,531 -- 989,531 152,673 597,598 750,271
Operating costs(1)............................... 337,558 -- 337,558 52,732 506,473 559,205
General and administrative....................... 3,142,945 3,142,945 1,411,619 -- 1,411,619
Financing costs:
Interest expense............................... 1,418,281 -- 1,418,281 33,839 -- 33,839
Amortization of NPI............................ 920,267 -- 920,267 -- -- --
Amortization of deferred loan costs............ 356,445 -- 356,445 -- -- --
Interest income................................ (307,824) -- (307,824) (23,558) -- (23,558)
----------- ----------- ----------- ----------- ----------- ----------
6,857,203 -- 6,857,203 1,627,305 1,104,071 2,731,376
----------- ----------- ----------- ----------- ----------- ----------
Loss from operations before other income (expense)
and provision for income taxes................... (5,116,264) (5,116,264) (1,358,526) 473,226 (885,300)
Other income (expenses)............................ -- -- -- 107,126 -- 107,126
----------- ----------- ----------- ----------- ----------- ----------
Loss from operations before provision for income
taxes............................................ (5,116,264) -- (5,116,264) (1,251,400) 473,226 (778,174)
Provision for income taxes......................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------
Net loss........................................... $(5,116,264) $ -- $(5,116,264) $(1,251,400) $ 473,226 $ (778,174)
----------- ----------- ----------- ----------- ----------- ----------
----------- ----------- ----------- ----------- ----------- ----------
Basic and diluted loss per common share............ $ (0.16) $ (0.16) $ (0.06) $ (0.03)
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Weighted average number of common shares
outstanding(3)................................... 31,688,218 32,587,179 22,365,815 24,908,187
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
FOUR MONTHS TEN MONTHS
ENDED DECEMBER 31, 1997 ENDED AUGUST 31, 1997
---------------------------------------- ----------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Oil and gas production revenues(1)........ $ 707,987 $ 871,963 $ 1,579,950 $ 444,203 $ 2,470,024 $ 2,914,227
------------ ------------ ------------ ------------ ------------ ------------
Costs and expenses:
Depletion, depreciation and
amortization(2)......................... 634,493 418,845 1,053,338 240,403 972,728 1,213,131
Operating costs(1)........................ 49,762 207,142 256,904 68,511 727,982 796,493
General and administrative................ 2,087,087 -- 2,087,087 2,026,399 -- 2,026,399
Financing costs:
Interest expense........................ 178,522 -- 178,522 49,314 -- 49,314
Amortization of NPI..................... 427,506 -- 427,506 -- -- --
Amortization of deferred loan costs..... 42,857 42,857 -- -- --
Interest income......................... (23,825) -- (23,825) (59,200) -- (59,200)
------------ ------------ ------------ ------------ ------------ ------------
3,396,402 625,987 4,022,389 2,325,427 1,700,710 4,026,137
------------ ------------ ------------ ------------ ------------ ------------
Loss for operations before other income
(expense) and provision for income
taxes..................................... (2,688,415) 245,976 (2,442,439) (1,881,224) 769,314 (1,111,910)
Other income (expense)...................... (50,907) -- (50,907) $ (35,917) -- $ (35,917)
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations before provision for
income taxes.............................. (2,739,322) 245,976 (2,493,346) (1,917,141) 769,314 (1,147,827)
Provision for income taxes.................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net loss.................................... $ (2,739,322) $ 245,976 $ (2,493,346) $ (1,917,141) $ 769,314 $ (1,147,827)
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Basic and diluted loss per common
share(3).................................. $ (0.10) $ (0.08) $ (0.09) $ (0.05)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding............................... 27,926,016 31,318,756 21,921,985 24,470,015
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

17
<PAGE>
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS

(UNAUDITED)

BASIS OF PRESENTATION

The Lasco Acquisition is included in the Company's results of operations
beginning January 1, 1998. The pro forma adjustments to the Company's
consolidated results of operations were prepared to reflect the Company's
combined results of operations for the six month period ended June 30, 1997, for
comparative purposes, the four month period ended December 31, 1997 and the ten
month period ended August 31, 1997. The adjustments give effect to the Lasco
Acquisition as if it took place as of October 31, 1996. The adjustments were
based upon currently available information and certain estimates and
assumptions, and therefore, the actual adjustments made to effect the Lasco
Acquisition may differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for presenting the
significant effect of the transaction as contemplated and that the pro forma
adjustments give appropriate effect to these assumptions and are properly
applied in the pro forma results of operations.

(1) Reflects the increase in revenues and direct costs as a result of
properties acquired in the Lasco Acquisition for the periods presented.

(2) Reflects the increase in the depreciation, depletion and amortization
rate as a result of increased production and an increased reserve base applied
to a higher property base to be amortized.

(3) Pro forma basic net loss per common share was computed assuming the
2,542,372 shares of Common Stock issued in connection with the Lasco Acquisition
were outstanding since October 31, 1996.

18
<PAGE>
SELECTED FINANCIAL DATA

The following tables set forth selected financial data of the Company and
its consolidated subsidiaries for each of the periods indicated. The financial
information set forth below for the six month periods ended June 30, 1998 and
1997 is derived from unaudited financial statements of the Company which, in the
opinion of management, include all adjustments necessary for the fair
presentation of the financial condition and results of operations of the Company
for such periods. The results of operations for interim periods are not
necessarily indicative of a full year's operations. The information for the four
month period ended December 31, 1997 and the ten month period ended August 31,
1997 has been derived from the Company' s audited financial statements. This
information should be read in conjunction with and is qualified in its entirety
by the more detailed information in the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED FOUR MONTHS TEN MONTHS
JUNE 30, ENDED ENDED
-------------------------- DECEMBER 31, AUGUST 31,
1998 1997 1997(1) 1997(2)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues......................................... $ 1,740,939 $ 268,779 $ 707,987 $ 444,203
Net loss............................................... $ (5,116,264) $ (1,251,400) $ (2,739,322) $ (1,917,141)
Basic loss per common share............................ $ (0.16) $ (0.06) $ (0.10) $ (0.09)
Shares used to compute basic loss per share............ 31,688,218 22,365,815 27,926,016 21,921,985
OTHER SELECTED INFORMATION:
Depreciation, depletion and amortization............... $ 989,531 $ 152,673 $ 634,493 $ 240,403
Capital expenditures................................... $ 38,003,851 $ 4,592,092 $ 16,330,052 $ 512,345
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, AUGUST 31,
1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......................................................... $ 87,974,566 $ 36,216,129 $ 21,520,880
Long-term debt, including current maturities......................... $ 51,611,186 $ 12,708,303 $ 781,326
Stockholders' equity................................................. $ 23,314,482 $ 11,806,496 $ 14,089,948
Common stock outstanding, end of period.............................. 34,130,683 29,878,985 22,714,821
Working capital (deficit)............................................ $ (2,932,554) $ (15,290,406) $ 1,784,075
</TABLE>

- ------------------------

(1) In 1997, the Company's fiscal year-end was changed from August 31 to
December 31 in 1997.

(2) The Company's inception was October 31, 1996.

19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with information
provided above under "Cautionary Statement Regarding Forward-Looking Statements"
and "Risk Factors," and with the Company's Consolidated Financial Statements and
notes thereto included elsewhere in this Prospectus.

OVERVIEW

The following matters had a significant impact on the Company's results of
operations and financial position for the six months ended June 30, 1998:

CAPITALIZATION. The Company completed the private placements of $37.5
million principal amount of Debentures. After expenses and escrow of $1.056
million for the satisfaction of certain put rights of Debenture Holders (of
which approximately $988,000 has been put), $32.5 million of the proceeds
remained available to the Company. The Debentures are convertible into an
aggregate of 36,849,575 shares of Common Stock, all of which have been
registered for resale pursuant to the Registration Statement of which this
Prospectus is a part.

DISCOVERY WELL. The K.S. Byrd Well, which began producing in September of
1997, contributed an average of 1,859 MCF per day during the first half of 1998.
The Company's interest in this well increased with the Calibre Acquisition and
the Southern Gas Acquisition. Both of these Acquisitions are pending regulatory
approval.

ACQUISITIONS. The Company acquired certain producing properties from Lasco
Energy Partners in January 1998, Calibre Energy, L.L.C. in April 1998 and
Southern Gas Company in May 1998. The assets acquired in these transactions
contributed an average of 1,822 MCF per day during the first half of 1998, of
which 245 MCF per day was additional production to the Company related to the
K.S. Byrd Well not included in the discussion above.

VOLUME AND PRICE INFORMATION. The Company's average realized price for
natural gas decreased $0.64 per MCF from $2.90 per MCF in the first six months
of 1997 to $2.26 per MCF in 1998. The average realized oil price decreased $6.53
per barrel from $17.85 per barrel in the first half of 1997 to $11.32 per barrel
in 1998.

The following table summarizes volume and price information with respect to
the Company's oil and gas production for the six months ended June 30, 1998 and
1997, the four month period ended December 31, 1997 and the ten month period
ended August 31, 1997:

<TABLE>
<CAPTION>
SIX MONTHS FOUR MONTHS TEN MONTHS
ENDED ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
-------------------- INCREASE ------------ ------------
1998 1997 (DECREASE) 1997 1998
--------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gas Volume--MCFGD................................... 3,782.1 288.0 3,494.1 1,833.5 275.7

Average Gas Price--per MCF.......................... $2.26 $2.90 $(0.64) $2.79 $3.05

Oil Volume--BOD..................................... 95.1 36.5 58.6 36.9 30.5

Average Oil Price--per barrel....................... $11.32 $17.85 $(6.53) $18.54 $20.28
</TABLE>

OUTSTANDING DEBT. At June 30, 1998, the Company had outstanding debt of
$51.6 million compared to $12.7 million at December 31, 1997. The increase
reflects the issuance of $37.5 million of Debentures, proceeds from which were
used to fund planned and ongoing oil and gas prospect drilling, leasing and
seismic data acquisition activities in the onshore Texas and Mississippi Gulf of
Mexico region, repayment of a portion of the Company's outstanding debt and
other working capital uses. The Company's debt-to-

20
<PAGE>
capitalization ratio at June 30, 1998 was 72.0%. The Company can force the
conversion of the Series 1 Debentures in 1999 subject to maintaining a certain
stock price.

SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997

For the first six months of 1998, revenue from crude oil and natural gas
production increased 548.0% over the same period in 1997. Natural gas
contributed 89.0% and crude oil contributed 11.0% of total oil and gas
production revenue.

Natural gas sales increased over 900%, from $151,000 in the first six months
of 1997 to over $1.5 million for the same period in 1998, as the impact of
increased production more than offset the impact of the decline in natural gas
prices. Production in the first half of 1998 increased significantly over the
comparable prior year period due primarily to production from the assets
purchased in the Acquisitions and production from the K.S. Byrd Well. This
increase in production improved revenue for the first half of 1998 by $1.8
million. The average realized price for natural gas sales declined from $2.90
per MCF in the first half of 1997 to $2.26 per MCF in the comparable 1998
period.

For the first half of 1998, oil sales increased 65% to $195,000, compared to
$117,800 for the same period in 1997, due primarily to sales of production for
properties acquired in the Acquisitions and production from the Reedy Creek
properties. This increase in production improved revenue for the first half of
1998 by approximately $189,500. The Company's average realized price for sales
of crude oil in the first half of 1998 decreased $6.53 per barrel, or 37%,
decreasing revenue by $112,300 compared to the same period in 1997.

The Company's depreciation, depletion and amortization ("DD&A") expense for
the first six months of 1998 totaled $989,500 compared to $152,700 in the
comparable period for 1997. Full cost DD&A totaled $858,800 for the first half
of 1998 compared to $97,800 for the same period in 1997. The increase in DD&A is
consistent with the increased production for the first six months of 1998
compared to the prior year period. On an equivalent MCF basis, full cost DD&A
increased $0.02 per MCFE, from $1.07 per MCFE for the first half of 1997 to
$1.09 per MCFE in the first half of 1998. DD&A of other assets for the first
half of 1998 totaled $130,700, an increase of $75,900 over the comparable period
in 1997 due primarily to an increase in the related asset base.

Operating costs, including lease operating expense ("LOE") and production
taxes, increased 540% from $52,700 in the first half of 1997, to $337,600 for
the same period in 1998. The increase was due primarily to increased production
from wells drilled or acquired since the prior year period. For the first six
months of 1998, LOE, excluding severance taxes, totaled $297,100 compared to
$37,500 for the comparable period in 1997. On an equivalent MCF basis, LOE for
the first half of 1998 declined from $0.41 per MCFE in 1997 to $0.38 per MCFE in
1998.

General and administrative expense in the first half of 1998 increased over
$1.7 million, or 123%, compared to the same period in 1997. On an equivalent MCF
basis, general and administrative costs declined 74% to $3.99 per MCFE for the
first six months of 1998 compared to $15.39 per MCFE for the same period in
1997. The increase was due primarily to higher compensation expense. At June 30,
1998, the Company had 36 employees compared to 19 employees at June 30, 1997.
The high level of general and administrative expenses is due to the initial
costs associated with creating and managing the Company's extensive capital
program.

Net financing costs for the six months ended June 30, 1998 totaled $2.4
million compared to $10,300 in the comparable prior year period. The increase is
due primarily to the financing arrangements under the EnCap Credit Agreement
(defined below) entered into in December 1997 and interest on the $37.5 million
principal amount Debentures issued in March and April of 1998. Average debt was
approximately $39.1 million for the first half of 1998, resulting in gross
interest costs of $2.1 million. Other financing costs include the amortization
of the original issue discount for the EnCap NPI (defined below) of $920,300 and

21
<PAGE>
the amortization of deferred loan and issuance costs of $356,400. Partially
offsetting these costs were capitalized interest of $705,100, which is based on
the carrying value of unproved properties, and interest income of $307,800.

For the first half of 1998, the Company reported a net loss of $5,116,300,
or $0.16 per share, compared to a net loss of $1,251,400, or $0.06 per share, in
the comparable 1997 period. Weighted average shares outstanding increased from
approximately 22.4 million in the first half of 1997 to over 31.6 million in
1998 as a result of the conversion and exercise of warrants in late 1997 and the
issuance of Common Stock to acquire certain properties in 1998.

FOUR MONTHS ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED AUGUST 31, 1997

The Company reported a net loss of $2,739,300, or $0.10 per share, for the
four months ended December 31, 1997 and $1,917,100 or $0.09 per share, for the
ten months ended August 31, 1997. Weighted average shares outstanding were 27.9
million for the four months ended December 31, 1997 and 21.9 million for the ten
months ended August 31, 1997.

Natural gas sales for the four months ended December 31, 1997 and the ten
months ended August 31, 1997 totaled $624,400 and $256,000, respectively.
Production averaged 1,833 MCFD per day for the four-month period ended December
31, 1997 at an average price of $2.79 per MCF and 276 MCFD for the ten-month
period ended August 31, 1997 at an average price of $3.05 per MCF. The K.S. Byrd
Well began production in September 1997 and averaged 1,605 MCFD for the four
months ended December 31, 1997.

The Company's crude oil sales for the four months ended December 31, 1997
and the ten months ended August 31, 1997 totaled $83,500 and $188,200,
respectively. Production averaged 36.9 barrels per day and 30.5 barrels per day,
respectively, for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997. The Company's average realized price for
sales of crude oil for the four month period ended December 31, 1997 and the
ten-month period ended August 31, 1997 were $18.54 per barrel and $20.28 per
barrel, respectively.

For the four months ended December 31, 1997, DD&A expense totaled $634,500
and for the ten months ended August 31, 1997, DD&A expense was $240,400. Full
cost DD&A averaged $2.32 per MCFE for the four months ended December 31, 197 and
$1.07 per MCFE for the ten months ended August 31, 1997, due primarily to a
ceiling test write-down of $221,000 at December 31, 1997.

Operating costs totaled $49,800 and $68,500, respectively for the four month
period ended December 31, 1997 and the ten-month period ended August 31, 1997.
LOE, excluding severance taxes, totaled $42,700 and $45,600 for the same
periods. On an equivalent barrel basis, LOE for the four months ended December
31, 1997 averaged $0.17 per MCFE and for the ten months ended August 31, 1997,
averaged $0.33 per MCFE.

General and administrative costs totaled $2,087,100 for the four months
ended December 31, 1997 and $2,026,400 for the ten months ended August 31, 1997.
On an equivalent MCF basis, general and administrative expenses were $8.32 per
MCFE for the four months ended December 31, 1997 and $14.53 per MCFE for the ten
months ended August 31, 1997. General and administrative costs were significant
during these periods and reflected establishment of the infrastructure necessary
to sustain the planned expansion of oil and gas operations and the Company's
desired position as operator of many of its prospects. Costs included signing
bonuses paid to professional and senior management staff as inducements to leave
their previous employments and join the Company, legal and accounting fees, and
the settlement of a lawsuit filed by a former employee.

Net Financing costs for the four months ended December 31, 1997 were
$625,100, and consisted of gross interest expense of $178,500, the amortization
of the original issue discount for the EnCap NPI of $427,500 and amortization of
deferred loan costs of $42,900. Partially offsetting these costs was interest
income of $23,800. For the ten months ended August 31, 1997, gross interest
expense of $49,300 was more

22
<PAGE>
than offset by interest income of $59,200. The higher financing costs in the
four month period ended December 31, 1997 reflects the Company's increase in
long-term debt from $759,300 at August 31, 1997 to $14.7 million at December 31,
1997. This increase in debt relates to the EnCap Credit Agreement, entered into
in late 1997, that was used to finance the Oakvale Dome Field and Old Ocean
acquisitions and related development.

Other revenue for the four-month period ended December 31, 1997 and the
ten-month period ended August 31, 1997 represents losses on the sale of
marketable securities of $50,900 and $35,900, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary cash needs are for exploration, development and
acquisition of oil and gas properties and repayment of principal and interest on
outstanding debt. The Company has budgeted $24.0 million to fund the drilling of
wells on its prospects over the next 12 months. The Company's sources of
financing include remaining proceeds from the offering of the Debentures,
expanded borrowing capacity under the Bank One Credit Facility described below
and revenue generated from operations. Based on the foregoing, the Company may
require additional sources of capital to fund its exploration budget over the
next 12 months. If the Company is unable to obtain such additional capital, the
Company will either have to sell interests in its prospects to fund its
exploration program or curtail its exploration activities. Such curtailing of
exploration activities could include reducing the number of wells drilled,
slowing exploratory activities on projects that the Company operates, selling
interest in the Company's prospect inventory or a combination of the foregoing.

Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of Common
Stock or other equity securities, the issuance of net profits interests, sales
of promoted interests in its prospects, and various forms of joint venture
financing. In addition, the prices the Company receives for its future oil and
natural gas production and the level of the Company's production will have a
significant impact on future operating cash flows.

LIQUIDITY. At June 30, 1998, the Company had cash and cash equivalents on
hand of $11.0 million and working capital deficit of $2.9 million, as compared
to a cash balance of $3.2 million and a working capital deficit of $15.3 million
at December 31, 1997. The Company's ratio of current assets to current
liabilities was .88:1 at June 30, 1998 compared to .37:1 at December 31, 1997.
The increase in cash was primarily attributable to the proceeds received from
the Debentures. The working capital deficit and low current ratio is primarily
due to the EnCap Credit Agreement discussed below, which is due in December
1998. The Company is currently negotiating a new facility to replace the EnCap
Credit Agreement.

CASH FLOWS. Cash flows used in operations totaled $8.3 million for the six
months ended June 30, 1998 due primarily to the operating loss for the first
half of 1998 and changes in working capital. Cash used in investing activities
for the six months ended June 30, 1998 was $17.2 million. Cash outlays for
exploration and development expenditures totaled approximately $15.6 million and
capital expenditures for furniture and equipment totaled $645,400. In addition,
the Company had cash outlays of $1.3 million in connection with a property swap
agreement with Southern Gas.

Cash provided by financing activities totaled approximately $33.3 million
and consisted primarily of proceeds from the issuance of Debentures. The Company
also borrowed $3.0 million under the EnCap Credit Agreement and repaid $5.0
million thereunder during the first quarter of 1998. In addition, the Company
had net borrowings from its other credit facilities of $2.5 million.

23
<PAGE>
Set forth below is a description of the Company's credit facilities:

ENCAP CREDIT AGREEMENT. The Company entered into a $20 million credit
agreement (the "EnCap Credit Agreement") with EnCap Capital Fund III, L.P.
("EnCap") consisting of a promissory note for $12,000,000 (the "Original Note")
and a promissory note for $8,000,000 (the "Supplemental Note"; collectively, the
"Notes"). The Original Note bears interest at 10% per annum and is due, with
accrued interest, on December 31, 1998. The Supplemental Note, which has been
repaid in full, bore interest at 10% per annum until July 1, 1998 and at 18% per
annum thereafter, and was due, with accrued interest, on December 24, 2003.
Under the terms of the Debentures, the Company has agreed to limit borrowings
under the EnCap Credit Agreement to $12,000,000, all of which is outstanding.
The proceeds from the facility were applied to the acquisition of Oakvale Dome
($8,000,000), and Old Ocean properties and the drilling and completion of
certain development wells ($4,000,000). The Original Note is secured by a first
lien on certain properties and a second lien on certain other properties. The
Original Note is guaranteed by Mr. Tomlinson, Calibre and certain affiliates of
Calibre.

Under the terms of the Original Note, the Company agreed to convey to EnCap,
on January 1, 1999, a 25% net profit interest (the "EnCap NPI") from the
properties acquired with the proceeds of the borrowing. EnCap also required
Slattery Trust, a private trust, of which Mr. Tomlinson is the beneficiary, and
Texstar Holdings, L.L.C., a private limited liability company owned by certain
directors and officers of the Company (collectively the "Benz Shareholders"), to
enter into a put/call agreement (the "Put/Call Agreement"), pursuant to which
the Benz Shareholders, under certain conditions, have the right to obtain or
"call" the EnCap NPI in exchange for 1.5 million shares of Common Stock. The
Put/Call Agreement also gives EnCap the right, under certain conditions, to
sell, or put, portions of the EnCap NPI to the Benz Shareholders for an
aggregate of 1.5 million shares of Common Stock as of December 31, 1998,
increasing to 3.5 million shares after March 31, 1999. The Benz Shareholders
have transferred the rights and obligations of the Put/Call Agreement to the
Company. In connection with the original granting of the EnCap NPI, the Company
recorded a discount on the Original Note of $2,102,180 as of December 31, 1997.
The discount is being amortized over the term of the Original Note. The carrying
amount of the oil and gas interests has been reduced by the same amount.

Under the terms of the Supplemental Note, EnCap was issued warrants to
purchase up to 1.5 million shares of Common Stock at an exercise price of $1.28
per share. In connection with the issuance of these warrants, the Company
recorded a discount on the Supplemental Note of $367,881 as of December 31,
1997. This discount will be amortized over the term of the Supplemental Note.

BANK ONE CREDIT FACILITY. The Company has a credit facility with Bank One,
Texas NA ("Bank One") with a line of credit established by reference to proved
producing oil and gas reserves, to a maximum of $10,000,000 (borrowing base of
$3,375,000 at June 30, 1998). Interest accrues at prime plus 2.0% payable
monthly, is secured by certain oil and gas properties and matures June 30, 2000.
The Company obtained waivers as of December 31, 1997 and March 31, 1998 for
violations of certain financial and administrative covenants. The Company has
negotiated new covenants with Bank One and is currently in compliance with such
covenants.

The Company believes that cash from operations and expanded credit
facilities will be sufficient to meet its planned capital expenditures for the
next 12 months. The planned expenditures will extensively develop the Company's
Oakvale Dome discovery and test most of the Company's high potential prospects.
There can be no assurance that such additional financing, if undertaken, can be
completed on terms acceptable to the Company or, in the event of a downturn in
industry conditions, that the capital resources discussed above will be adequate
to meet the foregoing capital needs.

24
<PAGE>
ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which established standards for reporting and display of
comprehensive income and its components. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. The Company adopted SFAS NO. 130 in 1998.
Comprehensive income as determined under this standard was approximately a loss
of $4,929,700 and a loss of $1,790,464 for the six months ended June 30, 1998
and 1997, respectively.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes new requirements on
the reporting of information about operating segments, products and services,
geographic areas and major customers. In February 1998, SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," was
issued, which revises required disclosures about pensions and postretirement
benefit plans.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities.

The Company does not expect the application of these statements to have a
material effect on its financial position, liquidity or results of operations.

YEAR 2000

The Company operates on an internally designed software package that is
compliant with the year 2000. The year 2000 problem is the result of software
that uses two digits (rather than four) to define the applicable year. Any
software or hardware that uses time-sensitive coding may recognize a day using
"00" as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures. The Company is attempting to identify other
potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. Based on preliminary information, costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations, or
cash flows in future periods. If, however, the Company, its customers, or
vendors are unable to adequately resolve such processing issues in a timely
manner, the Company's operations and financial results may be adversely
affected.

BUSINESS AND PROPERTIES

GENERAL

25
<PAGE>
Of such amount, approximately $5.0 million is budgeted for development drilling,
approximately $12.2 million is budgeted for exploratory drilling, testing, and
subsequent completions, $8.4 million is budgeted for seismic data acquisitions
and the remainder is budgeted for leasehold purchases. The Company believes that
its prospects represent a diverse array of technology enhanced, 3-D seismic
confirmed oil and gas exploration prospects.

STRATEGY

The Company's strategy is to expand its reserves, production and cash flow
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration and development in
unexplored areas in or adjacent to fields and trends that have historically
produced hydrocarbons in significant quantities; (ii) enhancing the value of its
prospects and reducing exploration risks through the use of 3-D seismic data and
CAEX technologies; (iii) maintaining an experienced technical staff with the
expertise necessary to take advantage of the Company's proprietary 3-D seismic
data and CAEX technologies; (iv) adding reserves and production using modern
reservoir stimulation methods and new drilling technology; and (v) retaining
control over critical exploration decisions.

OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration and development in geological trends with demonstrated
histories of prolific natural gas production from high porosity reservoir rocks
with profiles suitable for seismic evaluation. The Company believes that by
obtaining substantial working interests, related 3-D seismic data and
significant acreage positions within its core areas, it will be able to achieve
a dominant position in focused portions of those areas. With a dominant
leasehold position, the Company believes it can better control the core areas'
exploration opportunities and future production, and can attempt to minimize
costs through economies of scale and other efficiencies inherent in its focused
approach. Such cost savings and efficiencies include the ability to use the
Company's 3-D seismic data to reduce exploration risks and lower its leasehold
acquisition costs by identifying and purchasing leasehold interests only in
those focused areas in which the Company believes exploratory drilling is most
likely to be successful.

USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its prospects through the use of 3-D seismic data and CAEX
technologies, with an emphasis on direct hydrocarbon detection technologies.
These technologies create computer generated 3-dimensional displays of
subsurface geological formations that enable the Company's explorationists to
detect seismic anomalies in structural features that are not apparent in 2-D
seismic surveys. The Company believes that 3-D seismic data, if properly used,
will reduce drilling risks and costs by reducing the number of dry holes,
optimizing well locations and reducing the number of wells required to exploit a
discovery.

USE OF MODERN RESERVOIR STIMULATION METHODS AND NEW DRILLING TECHNOLOGY. In
addition to applying the latest in 3-D seismic and CAEX technology, the Company
uses the latest in industry reservoir stimulation and directional drilling
techniques. For example, many of the Company's development and exploitation
opportunities are "tight" reservoirs in which modern stimulation practices may
significantly increase production. The Company is fostering alliances with
leading service companies in these areas.

CONTROL OF EXPLORATION FUNCTIONS. The Company believes that controlling the
most critical functions in the exploration process will enhance its ability to
successfully develop its prospects. The Company has acquired a majority interest
in many of its prospects, including interests in most of the 3-D seismic data
relating to those prospects. In many cases where the Company does not own a
majority of interest in a prospect the Company still owns a greater interest
than that of any other working interest owner. As a result, in many of its
prospects, the Company will be able to influence the areas to explore, manage
the land permitting and option process, determine seismic survey areas, oversee
data acquisition and processing, prepare, integrate and interpret the data and
identify each prospect drillsite. In addition, the Company will be the operator
of many of the wells drilled on these prospects.

26
<PAGE>
RECENT ACQUISITIONS

In the fall of 1997, the Company acquired an additional interest in a major
discovery in Mississippi at the Oakvale Dome Prospect and acquired a large
undivided interest in the deep exploration rights underneath the Old Ocean Field
in Texas. In January 1998, the Company completed the Lasco Acquisition, pursuant
to which the Company acquired proved reserves in east Texas and northwest
Louisiana in exchange for a $15.0 million note that subsequently was exchanged
for approximately 2.57 million shares of Common Stock and 12 million
nonconvertible, Class A Preferred Shares, Series 1 (the "Series 1 Preferred
Shares"). The Lasco Acquisition is subject to certain post-closing adjustments.
The Company anticipates that certain properties acquired in the Lasco
Acquisition may be transferred in exchange for a reduction in the shares of
Common Stock and Series 1 Preferred Stock paid by the Company. The transfer of
such properties would cause a decrease in the Company's reserves.

In April 1998, the Company completed the Calibre Acquisition pursuant to
which the Company acquired most of the assets of Calibre through the issuance of
up to 1,927,426 shares of Common Stock. In connection with the Calibre
Acquisition, the Company assumed $.45 million of bank debt and $1.45 million of
Calibre's accounts payable and issued promissory notes payable to Calibre
shareholders of $2.0 million. Additionally, the Company acquired interests in 12
exploration prospects in the same U.S. Gulf Coast area of its existing
exploration program. Five of these prospects increased the Company's working
interest or other rights in some of its existing prospects, such as Old Ocean,
LaHinch, and Runge in Texas and Wausau and North Thompson's Creek in Mississippi
and Laurel Ridge and White Castle Prospect in Louisiana. The balance of the
prospect working interests to be acquired are Glancy, Pachuta Creek, Big Creek,
and Greens Creek in Mississippi; San Salvadore and Elsa in Texas; as well as
certain producing properties in Louisiana that are not operated by the Company.
The Calibre Acquisition is subject to VSE approval. See "Risk Factors--Conflicts
of Interest with Respect to Certain Acquisitions" and "Certain Transactions."

In May 1998, the Company completed the Southern Gas Acquisition, pursuant to
which the Company acquired additional working interests in the Oakvale Dome and
Wausau Prospects in exchange for $1.25 million and a 5.5% working interest in a
Louisiana prospect.

In July 1998, the Company completed the Starbucks Acquisition, pursuant to
which the Company acquired certain proved non-producing oil and gas properties
in Mississippi, Texas and Louisiana for $2.33 million and 600,000 shares of
Common Stock. The purchase is subject to approval by the VSE and is subject to
certain post-closing adjustments. The purchase price is secured by 2.1 million
shares of Common Stock owned by the Starbucks Trust. See "Risk
Factors--Conflicts of Interest with Respect to Certain Acquisitions" and
"Certain Transactions."

BACKGROUND

The Company was originally formed on February 9, 1981 for the purpose of
conducting mineral exploration in Canada. In 1989, the Company changed its focus
and concentrated on investment and merchant banking activities. At that time,
the Company wrote off its mineral property costs and ceased all mineral
exploration activities. From 1991 to 1993, the Company diversified into the
acquisition and development of oil and gas properties. During 1996, the Company
sold substantially all of its investments outside of oil and gas and refocused
operations on oil and gas exploration and development in the United States.
Effective on October 31, 1996, the Company acquired Texstar Petroleum, Inc., a
Texas corporation ("Texstar") and as a result, the Company focused its
operations on oil and gas exploration and development in the United States,
specifically the Gulf Coast areas of Mississippi, Texas and Louisiana. Former
shareholders of Texstar acquired control of the Company and Texstar became a
wholly-owned subsidiary of the Company. In July 1997, the Company changed its
name from Benz Equities Ltd. to Benz Energy Ltd.

27
<PAGE>
THE PROSPECTS

TEXAS
East Buffalo(7)........ 1,482 427 N/A N/A 30 Cotton Valley 17,000' $ 6,000
LaHinch(3)(12)......... 2,028 1,358 N/A N/A 20 Wilcox 16,000' $ 2,500
Old Ocean(3)(13)....... N/A N/A 81,082 35,873 120 Frio 16,000' $ 2,400
Oak Hill Field(3)(8)... 1,012 791 N/A N/A N/A Cotton Valley 9,500' $ 2,000
Plum Grove(13)......... 10,362 3,056 50,757 36,459 100 Yegua; Wilcox 15,000' $ 1,100
Rayburn(3)(11)(13)..... 3,048 1,256 4,542 3,603 30 Yegua; Wilcox 15,000' $ 1,100

OTHER
Louisiana.............. 13,163 2,222 N/A N/A 478
Mississippi............ 32,269 10,435 N/A N/A 73
Texas.................. 9,549 2,820 N/A N/A 30
----------- ----------- ----------- ----------- ---
Total................ 90,722 31,916 136,381 75,935 969
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
</TABLE>

- ------------------------------

(1) "Net Acres" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.

(2) "Gross Acres" means an acre in which the Company owns a working interest.
When used in conjunction with acreage under options it means an acre in
which the Company will acquire a working interest if and when the option is
exercised.

(3) Operated by the Company.

(5) Represents 3-D seismic data acquired, being acquired or expected to be
acquired.

(7) Drilling.

(8) Reworking.

(9) Preparing to drill.

(10) Completing.

(11) Soliciting industry participant.

(12) Evaluating 3-D seismic data.

(13) Shooting 3-D seismic survey.

- ------------------------------

*The foregoing table gives effect to the Acquisitions excluding the Starbucks
Acquisition.

28
<PAGE>
Set forth below are descriptions of certain of the Company's most
significant Prospects.

A 2-D seismic survey shot and processed originally in 1979 was reprocessed
in 1996 and confirmed the discovery well, which was the K.S. Byrd Well. The K.S.
Byrd Well was completed in June 1997 in the Harper formation from 15,964 feet to
15,988 feet, flowing 5.708 MMCFGD. Initial reserve estimates as of August 1,
1997 conducted by an independent petroleum engineer gave the well proved
producing reserves of 8.7 BCFG and 34,800 barrels of condensate. Later reserve
estimates as of January 1, 1998 conducted by the same independent petroleum
engineer revised the well's proved producing reserves to 9.3 BCFG and 33,500
barrels of condensate. The well began sales of production in September 1997 and,
as of June 30, 1998, was flowing at the rate of 7.4 MMCFGD and 34 BOD. The
Company has spent $2.2 million in acquiring a 3-D seismic survey for this
prospect and anticipates additional expenditures in 1998 of approximately $3.6
million relating to participation in three additional wells, two of which are
currently being drilled as development wells.

GLANCY. The Company owns approximately 3,726 gross (2,477 net) acres in the
Glancy Prospect in Copiah County, Mississippi. The Company is the operator.
Glancy Field has produced gas and condensate from the Lower Cretaceous Rodessa
formation on acreage not owned by the Company. The Glancy Prospect is
characterized as a simple anticline structure that formed as a result of a deep
seated salt pillow. The presence of reservoir quality sandstones at both the
deeper Hosston and Cotton Valley levels has been demonstrated by two well
penetrations, both of which have produced gas and had multiple shows of
hydrocarbons. Early attempts (in 1971) to fracture stimulate one of the test
wells, having an initial production of 3.1 MMCFGD on an extended test from the
Cotton Valley, damaged the formation in the near-wellbore area. The Company
intends to re-enter and sidetrack one or both of the deep tests and to apply
modern fracture stimulation.

WAUSAU. The Company owns approximately 5,377 gross (1,626 net) acres in the
Wausau Prospect in Wayne County, Mississippi. The Company is the operator. The
Company has rights in a 3-D survey acquired by Compagnie Generale de Geophysique
over this prospect area. The Company's drilling objectives are the deeper Cotton
Valley, Smackover and Norphlet formations. This Prospect is located on two
flanks of a large salt ridge trending northwest to southeast. Based upon 3-D
seismic data, the Cotton Valley appears to be trapped in both a simple closure
and an updip pinchout along the salt ridge flank. The Smackover and Norphlet
formations are interpreted to be trapped in a pinchout configuration against the
lateral salt wall. The Company commenced drilling a test well in May 1998 and
expects to complete the well in September 1998 as a discovery.

SARDIS CHURCH DOME. The Company owns approximately 4,000 gross (2,835 net)
acres in the Sardis Church Dome Prospect in Copiah County, Mississippi. The
Company is the operator. The Company's drilling objectives are the Paluxy,
Hosston and Cotton Valley sands. The Company anticipates it will sell at least
50% of the working interest to an industry participant before spudding the test
well. This prospect is an analog to the Oakvale Dome discovery.

EAST BUFFALO. The Company owns 1,482 gross (427 net) acres in the East
Buffalo Prospect in Leon County, Texas. This Prospect has been delineated by a
3-D seismic survey. The first well was spudded in March 1998 with results
expected in September 1998.

29
<PAGE>
LAHINCH. The Company owns approximately 2,028 gross (1,358 net) acres in
the LaHinch Prospect in Duval County, Texas. The Company is the operator. The
LaHinch Prospect contains two wells, which were not owned by the Company when
drilled, that are gas productive. This prospect is broken into multiple fault
blocks. The gas production in these two productive wells, the Mobil (Santa Fe)
#1 G. B. Hamilton well and the Dantex #1 Buck Hamilton well, is supportive of
gas saturation in the untested portion of the structure. The Mobil (Santa Fe) #1
G. B. Hamilton well, now owned by the Company, is expected to be re-entered and
cleaned out to 14,900 feet, and completed with multiple fracture stimulation
treatments in intervals from 14,140 feet to 14,710 feet. Company owned 3-D
seismic data is being reprocessed to confirm proposed drill sites. A Wilcox well
is anticipated to be drilled in 1998 with additional development wells possible
in 1999.

OLD OCEAN. The Company owns options for oil and gas leases and has
contractual rights to earn working interests in approximately 81,082 gross
(35,873 net) acres in the Old Ocean Prospect in Brazoria and Matagorda Counties,
Texas. A 3-D seismic survey is underway. The Company is the operator of the
seismic survey. The Old Ocean Field is the largest Frio field in the Gulf Coast,
having produced more than five TCFGE since its discovery in 1934. In excess of
200 wells have been drilled in the Old Ocean Field. These reserves have been
produced from four normally pressured reservoirs between 9,500 and 11,000 feet.
The Old Ocean Prospect actually consists of numerous prospects.

OAK HILL FIELD. The Company owns approximately 1,012 gross (791 net) acres
in the Oak Hill Field Prospect in Gregg and Rusk Counties, Texas. The Company is
the operator. This prospect produces from the Lower Cotton Valley sands at
depths of approximately 10,150 to 10,500 feet and from the Upper Cotton Valley
sands at depths of approximately 9,000 to 10,000 feet. The Company has initiated
a recompletion program covering six wells and involving up to eleven distinct
zones. Six recompleted zones have been fracture stimulated and appear favorable
in increasing the Company's net production. There are currently six producing
wells in Oak Hill Field Prospect owned by the Company.

PLUM GROVE. The Company owns approximately 10,362 gross (3,056 net) acres
and owns options for oil and gas leases on an additional 50,757 gross (36,459
net) acres in the Plum Grove Prospect in Liberty and Montgomery Counties, Texas.
The Belco Operating Corporation is the operator. This area has been technically
evaluated with a reprocessed grid of 2-D seismic data. Multiple prospects and
prospect leads have been identified ranging in depth from 4,000 feet to 16,000
feet. Because of the complex faulting of the subsurface in this area, 3-D
seismic data will be necessary to appropriately understand structural risks. The
Company is planning a 3-D seismic shoot of at least 100 square miles to properly
image this area. Recently, the Company entered into an agreement with Belco
Operating Company to combine acreage blocks and share in the costs of the 3-D
shoot and subsequent drilling. The Plum Grove area has had cumulative production
of 200 BCFG and 20 MMBO from stratigraphic intervals ranging from 4,000 to
14,000 feet. Most of the production for the area is from the Yegua and Upper
Wilcox formations. Other productive intervals include the Cockfield, Jackson,
Cook Mountain and Lower Wilcox formations. In addition to the Lower Wilcox
potential, both the Upper Wilcox and Yegua stratigraphic intervals provide
exploration opportunity.

RAYBURN. The Company owns approximately 3,048 gross (1,256 net) acres and
owns options for oil and gas leases on an additional 4,542 gross (3,603 net)
acres in the Rayburn Prospect in Liberty Co., Texas. The Company is the
operator. This prospect is contiguous with the Plum Grove Prospect and is
currently being shot in conjunction with the Plum Grove 3-D seismic survey. The
Rayburn Prospect offers similar potential as the Plum Grove Prospect.

PRINCIPAL AREAS OF OPERATIONS

The Company owns and operates producing properties with proved reserves
located primarily in Louisiana, Mississippi and Texas. The Company currently
owns interests in 21 producing wells it operates and also owns non-operated
interests in approximately 14 producing wells in Louisiana, Mississippi, and
Texas. Daily production from both operated and non-operated wells net to the
Company's interest averaged 3,782 MCFGD and 95.1 BOPD for the six months ended
June 30, 1998.

30
<PAGE>
OIL AND GAS RESERVES

The following table sets forth information regarding estimated oil and gas
reserve quantities, reserve values and discounted future net revenues as
estimated by the Company at July 1, 1998. The information is based (i) in part
on estimates by independent petroleum engineers, at January 1, 1998 as revised
and adjusted in part by the Company's internal engineers as of July 1, 1998,
(ii) in part on estimates by independent petroleum engineers at June 30, 1998
and (iii) in part solely on estimates by the Company's internal engineers.

The Company's reserves were estimated at January 1, 1998 by Ryder Scott.
Additionally, proved reserves for certain properties acquired in the Lasco
Acquisition were estimated by T.J. Smith at January 1, 1998. Further, proved
reserves for the Glancy Prospect acquired in the Calibre Acquisition were
estimated by Crocker at June 30, 1998. Internally generated additions were made
for the Company's increased interest in the Glancy Prospect as a result of the
Starbucks Acquisition. These internally generated additions were developed from
Crocker's estimate of the Company's proved reserves prepared before the
Starbucks Acquisition. Further internally generated additions were made to
account for the recently completed East Morgantown Prospect. These additions
were based on production test and bottom hole pressure survey of the BOE 16-14
#1 well and volumetric determination of gas originally-in-place. Internally
generated revisions of reserves in the Oakvale Dome Prospect were made based on
an engineering analysis of recent pressure data of and production from the
reservoir. From the engineering analysis of pressure and production, using the
production history of the K.S. Byrd Well and the average reservoir pressure
measured over time, a determination of gas originally-in-place was made and an
expected ultimate recovery from the well was then made assuming an abandonment
pressure of 1,500 psi. Further internally generated additions were made for the
Company's increased interest in the Oakvale Dome Prospect as a result of the
Southern Gas Acquisition. These internally generated additions were based on the
Ryder Scott estimates of January 1, 1998, referenced above, and the Company's
internal revision of the reserves as discussed above. The Company also converted
proved undeveloped reserves at the White Castle Prospect to proved developed
reserves based on the State Lease 14720 #2 well. Finally, an internally
generated downward reduction was made to the reserve estimates based on
estimated production from all included prospects for the six-month period ended
June 30, 1998.

Of the proved reserves set forth below, 87%, on a gas equivalent basis, are
covered by or derived from reserve reports prepared by independent petroleum
engineers. There are numerous uncertainties inherent in estimating quantities of
proved reserves and projecting future rates of production and timing of

31
<PAGE>
development expenditures. The following reserve information represents estimates
only and should not be construed as being exact.

<TABLE>
<CAPTION>
PRESENT VALUE OF
ESTIMATED FUTURE
NET REVENUES
GAS ESTIMATED BEFORE INCOME
EQUIVALENT FUTURE NET TAXES (DISCOUNTED
GAS (MMCF) OIL (BBL) (MMCFE)(1) REVENUE(2) AT 10 PERCENT)
----------- --------- ----------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proved developed reserves(4)

Louisiana..................... 2,479 25,967 2,635 $ 5,069 $ 2,956
Mississippi................... 25,517 466,623 28,317 49,666 31,092
Texas......................... 8,700 15,378 8,792 11,666 6,121
----------- --------- ----------- ----------- -------
36,696 507,968 39,744 66,401 40,169
----------- --------- ----------- ----------- -------
Proved undeveloped reserves:(5)
Louisiana..................... 5,016 84,100 5,520 4,962 1,909
Mississippi................... 336 101,825 947 1,654 999
Texas......................... 9,992 29,978 10,172 9,833 2,379
----------- --------- ----------- ----------- -------
15,344 215,903 16,639 16,449 5,287
----------- --------- ----------- ----------- -------
Total proved reserves(3)...... 52,040 723,871 56,383 $ 82,850 $ 45,456
----------- --------- ----------- ----------- -------
----------- --------- ----------- ----------- -------
</TABLE>

- ------------------------

(1) Oil production is converted to MCFE at the rate of six MCF of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas and
oil.

(2) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect as
of the date of the estimate. The amounts shown do not give effect to non-
property related expenses, such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization.

(3) Does not reflect potential reductions based on certain post-closing
adjustments to the Lasco Acquisition.

(4) "Proved Developed Reserves" means those reserves estimated as recoverable
under current technology and projected economic conditions, from that
portion of a reservoir that can reasonably be evaluated as economically
productive on the basis of analysis of drilling, geological, geophysical and
engineering data, including the reserves to be obtained by enhanced recovery
processes demonstrated to be economic and technically successful in the
subject reservoir.

(5) "Proved Undeveloped Reserves" mean those reserves estimated as recoverable
under current technology and projected economic conditions from that portion
of a reservoir that can reasonably be evaluated as technologically
productive, but which requires the drilling and completion of a well to
initiate production.

ACREAGE

The following table sets forth as of June 30, 1998, the gross and net acres
of developed and undeveloped oil and gas acreage that the Company holds after
giving effect to the Acquisitions, with the exception of the Starbucks
Acquisition, which was consummated after June 30, 1998. Additionally, the data
set forth below are based on the Company's before payout working interests. In
certain cases, the Company has a greater after payout working interest. In
certain other cases, the Company has only an after

32
<PAGE>
payout working interest. As such, the amount of gross and net, developed and
undeveloped acreage will increase when and if certain wells pay out.

<TABLE>
<CAPTION>
DEVELOPED(1) UNDEVELOPED(2)
------------------------ ------------------------
GROSS NET GROSS NET
ACRES(3) ACRES(4) ACRES(3) ACRES(4)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATE
Louisiana................................................................ 5,671 1,810 7,491 412
Mississippi.............................................................. 1,440 462 48,640 19,524
New Mexico............................................................... 160 12 -- --
Texas.................................................................... 1,769 730 25,713 8,978
----- ----- ----------- -----------
Total................................................................ 9,040 3,014 81,844 28,914
----- ----- ----------- -----------
----- ----- ----------- -----------
</TABLE>

- ------------------------

(1) "Developed acreage" is that acreage which is spaced or assignable to
productive wells.

(2) "Undeveloped acreage" is leased acreage on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and gas regardless of whether or not such acreage contains
proved reserves.

(3) "Gross acres" means an acre in which the Company owns a working interest.

(4) "Net acres" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.

PRODUCTIVE OIL AND GAS WELLS

The following table sets forth certain information regarding the Company's
ownership as of June 30, 1998 of productive oil and gas wells, operated and
non-operated, in the areas indicated after giving effect to the Acquisitions,
with the exception of the Starbucks Acquisition, which was consummated after
June 30, 1998. Additionally, the data set forth below are based on the Company's
before payout working interest. In some cases the Company has a greater working
interest after payout. In certain other cases the Company has only an after
payout working interest. As such, the number of gross and net wells will
increase when and if certain wells pay out.

<TABLE>
<CAPTION>
GAS OIL
----------------------- ----------------------
GROSS NET GROSS NET
WELLS(1) WELLS(2) WELLS(1) WELLS(2)
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
STATE
Louisiana............................................................. 16 7.00220 1 0.04770
Mississippi........................................................... 2 0.72854 5 0.62630
New Mexico............................................................ 1 0.07500 -- --
Texas................................................................. 10 6.09930 -- --
--- ---------- --- ---------
Total............................................................. 29 13.90504 6 0.67400
--- ---------- --- ---------
--- ---------- --- ---------
</TABLE>

- ------------------------

(1) "Gross wells" means a well in which the Company owns a working interest. The
number of gross wells is the total number of wells in which a working
interest is owned.

(2) "Net wells" means the sum of the fractional working interest owned in gross
wells expressed as whole numbers and fractions thereof.

DRILLING ACTIVITY

The Company participated in two gross (0.20054 net) productive development
wells during the six months ended June 30, 1998. For the four month period ended
December 31, 1997, the Company drilled one gross (0.48500 net) productive
exploratory well, two gross (1.3575 net) dry exploratory wells and three gross
(0.34220 net) productive development wells. For the 10 months ended August 31,
1997, the Company drilled one gross (0.14725 net) productive exploratory well
and one gross (0.20110 net) dry exploratory well. The Company is entitled to a
working interest in certain additional wells completed during these time

33
<PAGE>
periods when and if those wells payout. Furthermore, the number of net wells was
calculated based on the Company's before payout working interest and in some
cases, the Company will have a greater working interest or is entitled to a
working interest in certain wells completed during these time periods when and
if those wells payout.

On June 30, 1998, the Company was drilling 3 gross (1.77698 net) exploratory
wells and 2 gross (0.61525 net) development wells.

VOLUMES, PRICES AND PRODUCTION COSTS

The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of oil and gas for the periods including the Acquisitions,
other than the Starbucks Acquisition, which was completed after June 30, 1998.

<TABLE>
<CAPTION>
SIX MONTHS ENDED FOUR MONTHS ENDED TEN MONTHS ENDED
JUNE 30, 1998 DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Net Production:
Oil (Bbl)............................................ 17,219 4,506 9,281
Gas (MCF)............................................ 684,562 223,683 83,810
Gas equivalent (MCFE)................................ 787,875 250,719 139,493
Average sales price:
Oil ($ per Bbl)...................................... $ 11.32 $ 18.54 $ 20.28
Gas ($ per MCF)...................................... $ 2.26 $ 2.79 $ 3.05
Average production expenses
($ per MCFE)(1)...................................... $ 0.38 $ 0.17 $ 0.33
</TABLE>

- ------------------------

(1) Average production costs, excluding severance taxes.

CAEX AND 3-D SEISMIC TECHNOLOGY

The Company, either directly or through other prospect participants, uses
3-D seismic data and CAEX technology to collect and analyze geological,
geophysical, engineering, production and other data obtained about potential gas
or oil prospects. The Company uses this technology to correlate density and
sonic characteristics of subsurface formations obtained from 2-D seismic surveys
with like data from similar properties, and uses computer programs and modeling
techniques to determine the likely geological composition of a prospect and
potential locations of hydrocarbons.

Once all available data has been analyzed to determine the areas with the
highest potential within a prospect area, the Company may conduct 3-D seismic
surveys to enhance and verify the geological interpretation of the structure,
including its location and potential size. The 3-D seismic process produces a
three-dimensional image based upon seismic data obtained from multiple
horizontal and vertical points within a geological formation. The calculations
needed to process such data are made possible by computer programs and advanced
computer hardware.

While large oil companies have used 3-D seismic data and CAEX technologies
for approximately 20 years, these methods were not affordable by smaller,
independent oil and gas companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. The Company believes that its use of 3-D seismic data and CAEX
technology may provide it with certain advantages in the exploration process
over those companies that do not use this technology. These advantages include
better delineation of the subsurface, which can reduce exploration risks and
help optimize well locations in productive reservoirs. The Company believes
these advantages can be readily validated based upon general industry
experience. Because computer modeling generally provides clearer and more
accurate projected images of geological formations, the Company believes it is
better able to identify potential locations of hydrocarbon accumulations and the
desirable locations for wellbores. However, the Company has not used the
technology extensively enough to arrive at any

34
<PAGE>
conclusion regarding the Company's ability to interpret and use the information
developed from the technology.

CUSTOMERS

During the six months ended June 30, 1998, H&N Gas Ltd. "H&N Gas" and Tejas
Gas Marketing Co. accounted for approximately 49% and 22%, respectively of the
Company's total revenue. For the four month period ended December 31, 1997, H&N
Gas and KCS Resources, Inc. ("KCS") accounted for 75% and 10%, respectively, of
the Company's total revenue. For the ten months ended August 31, 1997, KCS,
Samaden Oil Corporation and Energy Operating Limited Partnership accounted for
50%, 30% and 15%, respectively, of the Company's total revenue. No other
purchasers accounted for more than 10% of the Company's total revenue in the
periods indicated above. The Company does not believe the loss of any existing
purchaser would have a material adverse effect on the Company.

MARKETING

The Company markets its natural gas and oil through monthly spot sales.
Because sales made under spot sales contracts result in fluctuating revenues to
the Company depending upon the market price of oil and gas, the Company has
entered into various forward contracts covering approximately 37% of the
Company's production through October of 1998 to minimize the fluctuations and
the effect of price declines.

COMPETITION

The oil and gas industry is highly competitive in all of its phases. The
Company encounters strong competition from other oil and gas companies in all
areas of its operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the marketing
of oil and gas. Many of these competitors possess greater financial, technical
and other resources than the Company. Competition for the acquisition of
producing properties is affected by the amount of funds available to the
Company, information about producing properties available to the Company and any
standards the Company establishes from time to time for the minimum projected
return on investment. Competition also may be presented by alternative fuel
sources, including heating oil and other fossil fuels. There has been increased
competition for lower risk development opportunities and for available sources
of financing. In addition, the marketing and sale of natural gas and processed
gas are competitive. Because the primary markets for natural gas liquids are
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.

REGULATION

GENERAL. The oil and gas industry is extensively regulated by federal,
state and local authorities. In particular, oil and gas production operations
and economics are affected by price controls, environmental protection statutes,
tax statutes and other laws, rules and regulations relating to the petroleum
industry, as well as changes in such laws, changing rules and regulations and
the interpretations and applications of such laws, rules and regulations. Oil
and gas industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other reasons.
Numerous regulatory authorities, and federal, state and local governments issue
rules and regulations binding on the oil and gas industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the oil
and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. The Company believes it is in
compliance with all federal, state and local laws, regulations and orders
applicable to the Company and its properties and operations, the violation of
which would have a material adverse effect on the Company or its financial
condition.

35
<PAGE>
SEISMIC PERMITS. Current law in the State of Louisiana requires permits
from owners of at least an undivided 80% interest in each tract over which the
Company intends to conduct seismic surveys. As a result, the Company may not be
able to conduct seismic surveys covering its entire area of interest. Moreover,
3-D seismic surveys typically are conducted from various locations both inside
and outside the area of interest to obtain the most detailed data of the
geological features within the area. To the extent that the Company is unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available.

EXPLORATION AND PRODUCTION. The Company's operations are subject to various
regulations at the federal, state and local levels. Such regulations include (i)
requiring permits for the drilling of wells; (ii) maintaining bonding
requirements to drill or operate wells; and (iii) regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with well operations. The
Company's operations also are subject to various conservation regulations. These
include the regulation of the size of drilling and spacing units, the density of
wells that may be drilled, and the unitization or pooling of oil and gas
properties. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibiting the venting or flaring
of gas, and impose certain requirements regarding the ratability of production.
The effect of these regulations is to limit the amount of oil and gas the
Company can produce from its wells and to limit the number of wells or the
locations at which the Company can drill. Recently enacted legislation and
regulatory action in Texas is intended to reduce the total production of natural
gas in that state. Although such restrictions have not had a material impact on
the Company's operations to date, the extent of any future impact therefrom
cannot be predicted.

NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal legislation
and regulatory controls in the United States have historically affected the
price of the natural gas produced by the Company and the manner in which such
production is marketed. The transportation and resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
(the "FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act of
1978 (the "NGPA"). The maximum selling prices of natural gas were formerly
established pursuant to regulation. However, on July 26, 1989, the Natural Gas
Wellhead Decontrol Act of 1989 (the "Decontrol Act") was enacted, which
terminated wellhead price controls on all domestic natural gas on January 1,
1993 and amended the NGPA to remove completely by January 1, 1993 price and
nonprice controls for all "first sales" of natural gas, which include all sales
by the Company of its own production. Consequently, sales of the Company's
natural gas currently are made at market prices, subject to applicable contract
provisions. The FERC's jurisdiction over natural gas transportation was
unaffected by the Decontrol Act.

The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, required interstate pipelines to
"restructure" their services to provide transportation separate or "unbundled"
from the pipelines' sales of gas. Also, Order No. 636 requires interstate
pipelines to provide open-access transportation on a nondiscriminatory basis
that is equal for all natural gas shippers. Order No. 636 has been implemented
through decisions and negotiated settlements in individual pipeline services
restructuring proceedings. In many instances, the result of Order No. 636 and
related initiatives has been to substantially reduce or eliminate the interstate
pipelines' traditional role as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets. The FERC has issued
final orders in virtually all Order No. 636 pipeline restructuring proceedings.
In July 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636 and remanded certain issues for further
explanation or clarification. Numerous

36
<PAGE>
petitions for review of the individual pipeline restructuring orders are
currently pending in that court. The issues remanded for further action do not
appear to materially affect the Company. Proceedings on the remanded issues are
currently ongoing before the FERC following its issuance of Order No. 636-C in
February 1997. Although it is difficult to predict when all appeals of pipeline
restructuring orders will be completed or their impact on the Company, the
Company does not believe that it will be affected by the restructuring rule and
orders any differently than other natural gas producers and marketers with which
it competes.

Although Order No. 636 does not regulate natural gas production operations,
the FERC has stated that Order No. 636 is intended 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 and its natural gas marketing efforts.
Although Order No. 636 could provide the Company with additional market access
and more fairly applied transportation service rates, terms and conditions, it
could also subject the Company to more restrictive pipeline imbalance tolerances
and greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.

The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction, the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market, the price that shippers can charge for their
released capacity, and the use of negotiated and market-based rates and terms
and conditions for interstate gas transmission. Several pipelines have obtained
FERC authorization to charge negotiated rates as an alternative to traditional
cost-of-service rate making methodology. In February 1997, the FERC announced a
broad inquiry into issues facing the natural gas industry to assist the FERC in
establishing regulatory goals and priorities in the post-Order No. 636
environment. In December 1997, the FERC requested comments on the financial
outlook of the natural gas pipeline industry, including among other matters,
whether the FERC's current rate making policies are suitable in the current
industry environment. In April 1998, the FERC issued a new rule to further
standardize pipeline transaction tariffs that, as the result of newly
standardized provisions regarding firm intra day transportation nominations,
could adversely affect the reliability of scheduled interruptible transportation
service on some pipelines. While any resulting FERC action would affect the
Company only indirectly, any new rules and policy statements may have the effect
of enhancing competition in natural gas markets.

Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC and state
regulatory bodies. The Company cannot predict when or if any such proposals
might become effective, or their effect, if any, on the operations of the
Company. The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue indefinitely. The
regulatory burden on the oil and natural gas industry increases the Company's
cost of doing business and, consequently, affects its profitability and cash
flow. In as much as such laws and regulations are frequently expanded, amended
or reinterpreted, the Company is unable to predict the future cost or impact of
complying with such regulations.

LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute, the
party transferring the oil field site may not thereafter be held liable by the
state for any site restoration costs or actions associated with the transferred
oil field site. The parties to a transfer may elect not to establish a
site-specific trust account, however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restoration
of the site. If the parties to a transfer elect to establish a site-specific
trust account pursuant to the statute, the Louisiana Department of Natural
Resources (the "DNR") requires an oil field site restoration assessment to be
made at the time of the transfer or within one year thereafter, to

37
<PAGE>
determine the site restoration requirements existing at the time of transfer.
Based upon the site restoration assessment, the parties to the transfer must
propose to the DNR a funding schedule for the site-specific trust account,
providing for some contribution to the account at the time of transfer and at
least quarterly payment thereafter. If the DNR approves the establishment and
funding of the site-specific trust account, the purchaser will thereafter be the
responsible party to the state, except that the failure of a transferring party
to make a good faith disclosure of all oil field site conditions existing at the
time of the transfer will render that party liable for the costs of restoration
of such undisclosed conditions in excess of the balance of the site-specific
trust fund.

OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates and
service conditions for interstate transportation of crude oil, liquids and
condensate, which can affect the amount the Company receives from the sale of
these products. Rates for such transportation are generally subject to an
indexing system under which rates may be increased as long as they do not exceed
an index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. 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.

ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental agencies,
such as the Environmental Protection Agency (the "EPA"), issue regulations to
implement and enforce such laws, which often require difficult and costly
compliance measures that carry substantial civil and criminal penalties for
failure to comply. These laws and regulations may require the acquisition of a
permit before drilling commences, restrict the types, quantities and
concentrations of various substances that can be released into the environment
in connection with drilling and production activities, limit or prohibit
drilling activities on certain lands lying within wilderness, wetlands,
ecologically sensitive and other protected areas, require some form of remedial
action to prevent pollution from former operations, such as plugging abandoning
wells, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist. The regulatory burden on the oil and gas industry increases the
cost of doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal or cleanup requirements
could adversely affect the Company's operations and financial position, as well
as those of the oil and gas industry in general. While management believes that
the Company is in substantial compliance with current applicable environmental
laws and regulations and the Company has not experienced any material adverse
effect from compliance with these environmental requirements, there is no
assurance that this will continue in the future.

The primary environmental statutory and regulatory programs that affect the
Company's operations include the following:

The Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), also known as "Superfund," imposes liability without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to be responsible for the release of a "hazardous substance"
into the environment. These persons include (i) the current owner and operator
of a facility from which hazardous substances are released, (ii) owners and
operators of the facility at the time the disposal of hazardous substances took
place, (iii) generators of hazardous substances who arranged for the disposal or
treatment at or transportation to such facility of hazardous substances and (iv)
transporters of hazardous substances to disposal or treatment facilities
selected by them.

Under CERCLA, such persons may be subject to joint and several liability for
the costs of cleaning up the hazardous substances that have been released into
the environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other

38
<PAGE>
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other pollutants into the
environment. Furthermore, although petroleum, including crude oil and natural
gas, is exempt from CERCLA, at least two courts have ruled that certain wastes
associated with the production of crude oil may be classified as "hazardous
substances" under CERCLA, and thus such wastes may become subject to liability
and regulation under CERCLA. Regulatory programs aimed at remediation of
environmental releases could have a similar impact on the Company.

The Federal Water Pollution Control Act of 1972 ("FWPCA") as amended, also
known as the Clean Water Act (the "CWA"), imposes restrictions and strict
controls regarding the discharge of pollutants, including produced waters and
other oil and gas wastes, into waters of the United States (as defined in the
CWA). The discharge of pollutants into regulated waters is prohibited, except in
accordance with the terms of a permit issued by the EPA or the state. These
proscriptions also prohibit certain activities in wetlands unless authorized by
a permit issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.

The Oil Pollution Act of 1990 (the "OPA") amends certain provisions of the
CWA, and other statutes as they pertain to the prevention of and response to
spills or discharges of hazardous substances or oil into navigable waters. Under
the OPA, a person owning or operating a facility or equipment (including land
drilling equipment) from which there is a discharge or threat of a discharge of
oil into or upon navigable waters or adjoining shorelines is liable, regardless
of fault, as a "responsible party" for removal costs and damages. Federal law
imposes strict, joint and several liability on facility owners for containment
and clean-up costs and certain other damages, including natural resource
damages, arising from a spill.

The EPA is also authorized to seek preliminary and permanent injunctive
relief and, in certain cases, criminal penalties and fines. State laws governing
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. If a discharge occurs at a well site at which
the Company is conducting production operations, the Company may be exposed to
claims that it is liable under the OPA, the CWA or similar state laws.

The Resource Conservation and Recovery Act ("RCRA"), as amended, generally
does not regulate most wastes generated by the exploration and production of oil
and gas. RCRA specifically excludes from the definition of hazardous waste
"drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." However, these wastes may be regulated by the EPA or state agencies as
solid waste. Moreover, ordinary industrial wastes, such as paint wastes, waste
solvents, laboratory wastes, and waste compressor oils, may be regulated as
hazardous waste. Pipelines used to transfer oil and gas may also generate some
hazardous wastes. Although the costs of managing solid and hazardous waste may
be significant, the Company does not expect to experience more burdensome costs
than similarly situated companies involved in oil and gas exploration and
production.

TITLE TO PROPERTIES

Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the oil and gas industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations, including a title opinion covering the drillsite by local
counsel, generally are made before commencement of drilling operations.

OPERATING HAZARDS AND INSURANCE

The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses

39
<PAGE>
to the Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, cleanup responsibilities, regulatory investigation and penalties and
suspension of operations.

The Company maintains an oil and gas lease operator insurance policy that
insures the Company against certain sudden and accidental risks associated with
drilling, completing and operating its wells. There can be no assurance that
this insurance will be adequate to cover any losses or exposure to liability.
The Company also carries comprehensive general liability policies and an
umbrella policy. Although the Company believes that the amount of coverage it
maintains is customary in the industry, it does not provide complete coverage
against all operating risks. An uninsured or partially insured claim, if
successful and of sufficient magnitude, could have a material adverse effect on
the Company and its financial condition. If the Company experiences significant
claims or losses, the Company's insurance premiums could be increased, which may
adversely affect the Company and its financial condition, or limit the ability
of the Company to obtain coverage. Any difficulty in obtaining coverage may
impair the Company's ability to engage in its business activities.

FACILITIES

The Company maintains approximately 25,100 square feet of office space in
Houston, Texas, which is leased at an annual rent of $396,187. The lease expires
January 31, 2003. The Company believes it will be able to renew the lease on
acceptable terms.

EMPLOYEES

The Company has 37 full-time employees in its Houston, Texas office as of
August 31, 1998. Their functions include management, production, engineering,
geology, geophysics, land, legal, gas marketing, accounting, financial planning
and administration. Certain operations of the Company's field activities are
accomplished through independent contractors who are supervised by the Company.
The Company believes its relations with its employees and contractors are good.
No employees of the Company are represented by a union.

LEGAL PROCEEDINGS

The Company is involved in routine litigation arising in the ordinary course
of business. Management believes that the results of such proceedings,
individually and in the aggregate, will not have a material adverse effect on
the Company's financial position or results of operations.

The Company filed a lawsuit in April 1998 in the United States District
Court of the Southern District of Texas, Houston Division against Hilton
Petroleum, Inc. ("Hilton"). This lawsuit alleges that Hilton breached a
Participation Agreement and an Operating Agreement between the Company and
Hilton covering a prospect in Hidalgo County, Texas by failing to pay its share
of exploration, promotion and operation costs. In May of 1998, Hilton answered
and counterclaimed against Texstar alleging breach of contract, intentional
misrepresentation and concealment, and negligent misrepresentation, seeking
relief in the form of damages, exemplary damages, interest and attorney's fees.
The lawsuit is presently in the preliminary discovery stages and is the subject
of settlement negotiations. Although the outcome of this lawsuit cannot be
predicted with certainty, management will vigorously defend the counterclaims
and believes that such counterclaims will not have a material adverse effect on
the financial position or results of operations of the Company.

The Company filed a lawsuit in April 1998 in the 281st Judicial District
Court of Harris County, Texas against STB Energy, Inc. ("STB"). This lawsuit (i)
alleges that STB breached certain Participation Agreements and Operating
Agreements covering prospects in Hidalgo County, Texas and Jefferson Davis
Parish, Louisiana by failing to pay its share of exploration, promotion,
development and operation costs and (ii) seeks judicial foreclosure of the
Company's liens covering the interests of STB in those prospects. In May of
1998, STB answered by general denial. Although no counterclaims were filed by
STB, state court

40
<PAGE>
procedures permit them to be filed later. The lawsuit is presently in the
preliminary discovery stages and is the subject of settlement negotiations.
Although the outcome of this lawsuit cannot be predicted with certainty,
management will vigorously defend any counterclaims that might be filed in the
future and does not anticipate that any such counterclaim would have a material
adverse effect on the financial position or results of operations of the
Company.

The Company filed a lawsuit in April 1998 in the United States District
Court for the Southern District of Texas, Houston Division, against Rainbow Oil
& Gas, Inc. ("Rainbow"). This lawsuit (i) alleges breaches of Participation,
Operating and Letter Agreements covering propects in Hidalgo and Duval Counties,
Texas, Jefferson Davis Parish, Louisiana and Green and Wayne Counties,
Mississippi, by Rainbow in failing to pay its share of exploration, promotion,
development and operating costs and (ii) seeks declaratory judgment regarding
the meaning of such agreements and the parties' obligations thereunder. In May
1998, Rainbow answered and counterclaimed against the Company, naming L.E.
Walker, Calibre Energy, L.L.C., Prentis B. Tomlinson, Jr., and Texstar
Petroleum, L.L.C., as third-party defendants, and alleging breach of contract,
fraud, and violations of Colorado Securities Act and Section 10(c) of the
Securities Act of 1934. Rainbow seeks relief in the form of damages of $145,000
for breach of contract, $115,000 for fraud, $200,000 in punitive damages and
attorneys' fees and interest. The lawsuit is presently in the initial stages of
discovery. Although the outcome of this lawsuit cannot be predicted with
certainty, management will vigorously defend the counterclaims and believes that
such counterclaims will not have a material adverse effect on the financial
position or results of operations of the Company.

41
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the Company's
directors and executive officers. Officers of the Company are elected by the
Board of Directors and serve at the discretion of the Board. All of the current
Directors serve until the next annual shareholders' meeting or until their
successors have been duly elected and qualified.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Prentis B. Tomlinson, Jr.(1).............. 55 Chairman of the Board and Chief Executive Officer
Ernest J. LaFlure(1)...................... 44 Director, President and Chief Operating Officer
Robert L. Zorich(1)....................... 48 Director
L.E. Walker(2)............................ 53 Director
Yale Fisher(2)............................ 53 Director
Robert Despres............................ 70 Director
Robert S. Herlin(1)(2).................... 43 Director, Senior Vice President and Chief Financial Officer
Todd Grabois.............................. 39 Vice President, Treasurer and Secretary
</TABLE>

- ------------------------

(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

PRENTIS B. TOMLINSON, JR. has been involved in the oil and gas industry for
the past 30 years and has been involved with the Company as its President and
Chief Executive Officer since its inception in October 1996. Mr. Tomlinson
served as Chairman of Texstar North America, Inc. from 1984 to 1995, founded and
served as Chairman of TGS Geophysical Company, Inc. from 1983 to 1993 and served
as Chairman and President of Tomlinson Interests, Inc. from 1973 to 1983. Mr.
Tomlinson commenced his career in the oil and gas industry as a geophysicist
with Western Geophysical Inc. in 1969.

ERNEST J. LAFLURE has been President, Chief Operating Officer and Director
of the Company since November 1997, when he joined the Company. Mr. LaFlure has
20 years of experience in the oil and gas industry with Shell Oil Company, and
before joining the Company was manager of New Oil & Gas Ventures for the
continental United States for Shell. He also served as the Manager of Reservoir
Management and Infield Exploration for Shell.

ROBERT L. ZORICH has been a Director of the Company since November 1997. He
is the Managing Director and co-founder of EnCap Investments, L.C., a
Houston-based venture capital and mezzanine fund for the energy industry. Before
founding EnCap, Mr. Zorich was a senior officer in the energy group of Republic
Bank.

L. E. WALKER has been a Director of the Company since October 1997. He was
President of Calibre Energy from October 1997 until March 31, 1998. He is a
former Senior Vice President of J. Ray McDermott Inc., an international energy
services and construction company.

YALE FISHER has been a Director of the Company since January 1997. He is,
and has been, an independent investment banker based in California since July
1994. Before that he was head of trading at Bank of America in Los Angeles and
San Francisco, California and New York, New York.

ROBERT DESPRES was elected as a Director of the Company in May 1998. Mr.
Despres is the current Chairman of the Board of Alliance Forest Products, Inc.
and a director of several other companies. Mr. Despres previously served as
President and CEO of Netcom Inc, National Cablevision Limited and Chairman of
the Board of Atomic Energy of Canada Limited. He has also served as controller
and member of the Executive Committee of Quebec Power Company. He was a member
of the Quebec

42
<PAGE>
Commission of Inquiry on Financial Institutions and the Royal Commission of
Inquiry on Financial Management and Accountability, and President of the
University of Quebec.

ROBERT S. HERLIN has been Senior Vice President, Chief Financial Officer and
Director of the Company since November 1997, when he joined the Company. Mr.
Herlin has 17 years experience in finance, planning and corporate development in
the oil and gas industry with several companies, including his own management
consulting firm. Most recently, he was vice president of Enron Liquids Services,
a subsidiary of Enron Corporation, and Manager of Planning and Investor
Relations for Kelley Oil & Gas Corporation.

TODD GRABOIS has been Vice President, Treasurer and Secretary of the Company
since November 1997. Prior thereto, Mr. Grabois served as Chief Financial
Officer of the Company from September 1997 until November 1997 and Director of
the Company from inception in October 1996 until November 1997. He has served in
various other positions with the Company or its predecessors since 1984.

EXECUTIVE COMPENSATION

The following table sets forth the compensation, including bonuses, paid by
the Company during the years ended December 31, 1997 and 1996 to the Chief
Executive Officer and to those executive officers whose aggregate cash
compensation exceeded $100,000 during the last fiscal year other than the Chief
Executive Officer of the Company (collectively the "Named Executive Officers").

<TABLE>
<CAPTION>
NUMBER OF
ANNUAL COMPENSATION SECURITIES
YEAR ENDED ---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DECEMBER 31(1) SALARY(2) BONUS OPTIONS COMPENSATION(3)
- ---------------------------------------- ----------------- ---------- ---------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr................ 1997 $ 150,000 $ 210,000 1,621,000 $ 4,750
Chairman & Chief 1996 25,000(4) -- -- --
Executive Officer

Ernest J. LaFlure....................... 1997 46,282 100,000 300,000 --
Director, President and 1996 -- -- -- --
Chief Operating Officer

Robert S. Herlin........................ 1997 14,884 110,000 300,000 --
Senior Vice President & 1996 -- -- -- --
Chief Financial Officer
</TABLE>

- ------------------------

(1) In 1997, the Company changed its fiscal year end from August 31 to December
31.

(2) Salary for Messrs. LaFlure and Herlin represent amounts paid from date of
hire to the end of the year. Annualized salaries for the current executive
officers of the Company are estimated to total the following for the fiscal
year ended December 31, 1998: Mr. Tomlinson, $275,000; Mr. LaFlure,
$200,000; Mr. Herlin, $175,000; and Mr. Grabois, $105,000.

(3) Other compensation includes Company contributions made to the account of Mr.
Tomlinson under the Company's 401(k) plan.

(4) Total compensation to Mr. Tomlinson for the year ended December 31, 1996 was
$150,000, including amounts paid before the inception of the Company.

43
<PAGE>
OPTION GRANTS

The following table sets forth certain information relating to option grants
made in 1997 to the Named Executive Officers. The Company changed its fiscal
year end from August 31 to December 31 in 1997. Information set forth below is
for the year ended December 31, 1997. See "Management--Executive Compensation."

<TABLE>
<CAPTION>
MARKET
% OF TOTAL VALUE OF
NUMBER OF OPTIONS SECURITIES
SECURITIES GRANTED TO UNDERLYING
UNDERLYING EMPLOYEES OPTIONS
OPTIONS IN FISCAL EXERCISE ON THE DATE EXPIRATION
NAME GRANTED YEAR PRICE OF GRANT DATE
- ----------------------------------------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr....................... 586,000 16.26% CDN $ 2.60 CDN $ 2.60 1/2000
710,000(2) 19.70% CDN $ 3.45 CDN $ 3.45 4/2000
325,000 9.02% CDN $ 1.95 CDN $ 1.95 12/2002
Ernest J. LaFlure.............................. 300,000 8.32% CDN $ 1.95 CDN $ 1.95 12/2002
Robert S. Herlin............................... 300,000 8.32% CDN $ 1.95 CDN $ 1.95 12/2002
</TABLE>

- ------------------------

(1) All options granted to the Named Executive Officers were granted at an
exercise price equal to the mean of the highest and lowest sales prices of
the Common Stock on the VSE on the date of grant.

(2) Granted to First Capital Corporation, a private company owned by Mr.
Tomlinson. After the end of the fiscal year, 200,000 of such options were
canceled.

OPTION EXERCISE AND YEAR-END VALUES

The following table provides information with respect to options to purchase
Common Stock exercised by the Named Executive Officers during 1997 and with
respect to the number and value of unexercised options held by the Named
Executive Officers at December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT AT DECEMBER 31, 1997
ACQUIRED VALUE DECEMBER 31, 1997 $CDN
ON REALIZED ------------------------------ ----------------------------------
EXERCISE CDN EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------- ---------- ----------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr........... 437,300 $ 262,380 983,700 -- -- --
Ernest J. LaFlure.................. -- -- 300,000 -- -- --
Robert S. Herlin................... -- -- 300,000 -- -- --
</TABLE>

OPTION PLANS

The Company adopted the Stock Option Plan at its annual shareholders meeting
held on February 19, 1998. It covers all options to be issued from that date
forward, as well as the 2,967,464 options granted before January 14, 1998. The
plan provides for the granting of options of Common Stock at the discretion of
the Board of Directors (or a committee so designated by the Board). The exercise
price shall be determined by the Board at the time the option is granted, but
cannot be less than the closing price of the Common Stock on the VSE on the last
trading day before the grant of such options. The term of the options shall be
determined by the board and may not exceed ten years. Options outstanding under
this plan as of June 30, 1998 were 3,127,464 expiring on various dates through
the year 2003.

DIRECTOR COMPENSATION

Certain non-employee Directors are individually awarded stock options and
receive cash compensation at the Board's discretion.

44
<PAGE>
EMPLOYMENT AGREEMENTS

The Company entered into a three year employment agreement with Mr. LaFlure
on September 30, 1997 pursuant to which Mr. LaFlure serves as the Company's
President and Chief Operating Officer. Under the employment agreement, Mr.
LaFlure receives a monthly salary of $16,666.67 and an initial bonus of
$100,000. Mr. LaFlure is entitled to participate in all other employee
compensation and welfare benefit plans and programs available to the Company's
other employees and executive officers, including, but not limited to, health,
dental and 401(k) plans. If the Company terminates the employment agreement
other than for cause or for disability or death (as each such term is defined in
the agreement) at any time before the expiration thereof, then the Company must
pay Mr. LaFlure $1,500,000 minus (i) the amount of monthly salary for each month
Mr. LaFlure was paid; (ii) all cash bonuses received by Mr. LaFlure before the
termination; and (iii) the value of his stock options, such value being the
difference between the option price and the value of the options shares as of
the date of termination.

The Company entered into a two year employment agreement with Mr. Herlin on
November 15, 1997. Under the employment agreement, Mr. Herlin receives an
initial monthly salary of $11,250 and an initial bonus of $110,000. Mr. Herlin
is entitled to participate in all other employee compensation and welfare
benefit plans and programs available to the Company's other employees and
executive officers, including, but not limited to, health, dental and 401(k)
plans. If the Company terminates the employment agreement other than for cause,
disability or death at any time before the expiration thereof, then the Company
must pay to Mr. Herlin the remaining amount of salary accrued or otherwise to be
paid throughout the remainder of the term of the agreement; provided that the
remaining amount may be no less than 12 months of Mr. Herlin's salary. If such
termination is due to a change of control of the Company, the minimum remaining
amount must be equal to 24 months of Mr. Herlin's salary.

In the event of termination of either Mr. LaFlure or Mr. Herlin for death or
disability or for cause, such agreements terminate immediately and the Company's
sole remaining obligation is to pay any amounts accrued thereunder through the
date of termination.

45
<PAGE>
CERTAIN TRANSACTIONS

The Company has entered into agreements with entities that are owned or
managed by certain of the Company's Directors, officers or other affiliates, or
in which certain of the Company's Directors, officers or affiliates of the
Company have an interest. These entities include (i) EnCap Capital Fund III L.P.
("EnCap"), a partnership whose general partner is EnCap Investments, L.C., which
is managed by Robert L. Zorich, a director of the Company; (ii) Slattery Trust,
a private trust of which Mr. Tomlinson is the beneficiary; (iii) Starbucks
Trust, a private trust of which Heather Tomlinson, is the beneficiary; (iv)
Calibre Energy, LLC ("Calibre"), a limited liability company owned by Slattery
Trust, Starbucks Trust, Mr. Grabois and Mr. Novak and which is managed by
Heather Tomlinson; (v) Lasco, an affiliate of EnCap; and Stanford Energy, Inc.
("Stanford"), a company affiliated with Donald W. Busby, the former Chairman of
the Company's Board of Directors. In addition, the Company has entered into
agreements with certain of its former Directors and officers. Although some of
these transactions were approved by the Company's outside Directors, there can
be no assurance that these transactions were negotiated at arms-length or on
terms that would have been negotiated with unaffiliated third parties.

The Company entered into the Original Note and the Supplemental Note with
EnCap. The Original Note's principal amount of $12.0 million, bears interest at
10% per annum, and is due, with accrued interest, in December 1998. The
Supplemental Note, which has been repaid in full was in the principal amount of
$8.0 million, bore interest at 10% per annum until July 1, 1998 and at 18% per
annum thereafter. Under the terms of the Supplemental Note, EnCap was issued
warrants for the purchase of 1.5 million shares of Common Stock, at an exercise
price of $1.28 per share. The Note is secured by a first lien on the properties
acquired and a second lien on certain other properties. The Original Note has
been guaranteed by Mr. Tomlinson, Calibre and certain affiliates of Calibre.

Under the terms of the Original Note, the Company agreed to convey the EnCap
NPI to EnCap, on January 1, 1999. EnCap also required Slattery Trust, and
Texstar Holdings, L.L.C., a private limited liability company owned by certain
Shareholders of Benz, to enter into the Put/Call Agreement whereby certain Benz
Shareholders, under certain conditions, have the right to obtain or "call" the
NPI in exchange for 1.5 million shares of Common Stock. The Put/Call Agreement
also gives EnCap the right, under certain conditions, to sell, or put, portions
of the NPI to certain Benz Shareholders for 1.5 million or 3.5 million shares of
Common Stock as of December 31, 1998 or March 31, 1999, respectively. The
Company has entered into an agreement with certain Benz Shareholders that
transfers the rights and obligations of the Put/Call Agreement to the Company.

In August 1997, Stanford issued the Company an unsecured convertible
debenture in the principal amount of CDN $200,000 (the "Stanford Debenture").
The Stanford Debenture bore interest at a rate of 8% per annum, payable
quarterly. The Stanford Debenture was repaid on August 6, 1997.

As of December 31, 1997 the Company had written off advances totaling
$402,192 made to Calibre Ecuador, Inc., which was owned 50% by the Slattery
Trust, the Starbucks Trust, Mr. Grabois, Mr. Novak and James Alexander. Calibre
Ecuador had no means with which to repay the advances. The advances were
non-interest bearing and due upon demand. Due to the write-off, the Company
obtained rights to substantially all of the shares of common stock of Calibre
Equador.

The Company also advanced funds to Calibre. Net advances to Calibre totaled
$1,768,772 at December 31, 1997. The advances bore no interest and were due upon
demand. In connection with acquisition of certain properties from Calibre
discussed below, $1.45 million of the advances to Calibre were reclassified as
an assumption of payables relating to the Calibre Acquisition and the remaining
$318,772 was written off as a bad debt.

In the second quarter of 1998, the Company agreed, subject to regulatory
approval, to acquire certain petroleum interests and assume certain liabilities
from Calibre. The Company paid $261,000 in cash, assumed $1.45 million of
advances, assumed $.45 million of debt, issued promissory notes totaling

46
<PAGE>
$2.0 million and issued 1,927,426 shares of Common Stock at an ascribed price of
CDN $2.80 per share in connection with this transaction.

In the Lasco Acquisition, the Company acquired proved reserves in Texas and
Louisiana from Lasco for 2.57 million shares of Common Stock and 12 million
Series 1 Preferred Shares.

In the first quarter of 1998, the Company executed a secured short-term
interest-bearing note in the amount of up to $2.5 million with Starbucks Trust.
The note is due December 31, 1998 and bears interest at 9% per annum. At June
30, 1998 the full amount was outstanding and carried as an account receivable by
the Company. Starbucks Trust invested the funds with brokerage firms that used a
portion of the funds to purchase Common Stock.

In July 1998 the Company entered into the Starbucks Acquisition, pursuant to
which the Company acquired certain proved non-producing oil and gas properties
in Mississippi, Texas and Louisiana from Starbucks Trust for $2.33 million and
600,000 shares of Common Stock. The purchase is subject to approval by the VSE
and is subject to certain post-closing adjustments relating to purchase value.
The purchase value is secured by 2.1 million shares of Common Stock owned by the
Starbucks Trust.

The Company had an agreement with DWB Management Ltd. ("DWB") to provide
management, professional and office services. DWB is a private company owned by
Donald W. Busby, former Chairman and Director of the Company. During the four
months ended December 31, 1997, the Company paid DWB CDN $8,000. In addition, as
of June 30, 1998, Boone Petroleum, a private corporation wholly owned by Mr.
Busby, beneficially owns 4,649,574 shares, or 13.67%, of the Company's Common
Stock or the right to acquire such shares through the exercise of warrants and
options. Mr. Busby resigned as Chairman of the Company on October 2, 1997 and as
a Director of the Company on October 8, 1997. Under the agreement, the Company
paid DWB for services rendered a fee of Canadian $8,000 per month. The agreement
with DWB was terminated in September 1997.

The Company entered into an agreement with Chase Management Ltd. ("Chase")
to provide management, professional and office services to the Company including
daily accounting services as required and general legal assistance for routine
Canadian securities filings. Chase is a private company owned by Nick DeMare,
former officer and director of the Company. The agreement is for one year
commencing on the first day of October 1997 and terminating on the last day of
September 1998. Thereafter, the agreement will continue in effect from year to
year unless terminated by either party upon 60 days' written notice. During the
last fiscal year the Company paid Chase CDN $60,000 and for the remaining term
of the agreement, the Company will pay Chase CDN $5,000 per month for services
rendered.

47
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information as of August 31, 1998,
with respect to the Common Stock owned, directly or indirectly, by (i) each
Director; (ii) each of the Company's Named Executive Officers; (iii) each person
known by management to own beneficially more than 5% of the Company's
outstanding Common Stock; (iv) the Selling Shareholders; and (v) all directors
and executive officers of the Company as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
--------------------------- ---------------------------
PERCENT OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER(1) CLASS(2) OFFERED(3) NUMBER(1) CLASS(2)
- ------------------------------------------------- ------------ ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Prentis B. Tomlinson, Jr.(4)..................... 12,829,408 35.5% -- 12,829,408 17.6%
Ernest J. LaFlure(5)............................. 300,000 -- -- 300,000 *
Robert S. Herlin(6).............................. 340,000 -- -- 340,000 *
Robert Despres(7)................................ 97,500 -- -- 97,500 *
Yale E. Fisher(8)................................ 282,500 -- -- 282,500 *
L.E. Walker(9)................................... 141,454 -- -- 141,454 *
Robert L. Zorich(10)............................. 1,500,000 4.2 -- 1,500,000 2.1
Boone Petroleum(11).............................. 4,649,574 13.2 -- 4,649,574 6.4
Lasco Energy Partners............................ 2,542,372 7.4 -- 2,542,372 3.6
Heather Tomlinson................................ 2,330,000 6.8 -- 2,330,000 3.3
Aarfauische Kantonalbank......................... 47,970 * 47,970 -- *
ABN Amro Bank (Schweiz).......................... 287,817 * 287,817 -- *
Affida Bank...................................... 959,391 * 959,391 -- *
Banca del Gottardo............................... 2,830,204 * 2,830,204 -- *
Bank Austria..................................... 1,256,802 * 1,256,802 -- *
Bank Hoffmann.................................... 115,127 * 115,127 -- *
Bank Julius Bar.................................. 3,194,773 * 3,194,773 -- *
Ban Leu.......................................... 95,939 * 95,939 -- *
Bank vonGraffenreid AG........................... 239,848 * 239,848 -- *
Centrum Bank..................................... 143,909 * 143,909 -- *
Cook & Co........................................ 95,939 * 95,939 -- *
Coop Bank........................................ 335,787 * 335,787 -- *
Coutts & Co. AG, Zurich.......................... 2,197,006 * 2,197,006 -- *
Credit Suisse.................................... 2,417,666 * 2,417,666 -- *
Dominick & Dominick.............................. 143,909 * 143,909 -- *
EFG Private Bank................................. 1,127,285 * 1,127,285 -- *
Experta BIL Bank and Trust Co. Ltd............... 47,970 * 47,970 -- *
Evan Lansohot Bankiers (Schweiz)................. 239,848 * 239,848 -- *
Helaba (Schweiz)................................. 143,909 * 143,909 -- *
Hyposwiss........................................ 143,909 * 143,909 -- *
Jefferies (Switzerland) Ltd...................... 4,892,895 * 4,892,895 -- *
La Roche Banquiers AG............................ 38,376 * 38,376 -- *
LGT Bank in Liechtenstein........................ 335,787 * 335,787 -- *
Liechtensteinische Landesbank.................... 143,909 * 143,909 -- *
Lombard Odier & Co............................... 316,599 * 316,599 -- *
Migros Bank...................................... 47,970 * 47,970 -- *
MM Warburg Bank (Schweiz) AG..................... 95,939 * 95,939 -- *
NCL Investments Ltd.............................. 143,909 * 143,909 -- *
Nordfinanz Bank Zurich........................... 383,756 * 383,756 -- *
</TABLE>

48
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE OFFERING AFTER OFFERING
--------------------------- ---------------------------
PERCENT OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER(1) CLASS(2) OFFERED(3) NUMBER(1) CLASS(2)
- ------------------------------------------------- ------------ ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Northern International Banking Corp.............. 479,696 * 479,696 -- *
Paribas (London)................................. 95,939 * 95,939 -- *
Renaissance U.S. Growth and Income Trust......... 959,391 * 959,391 -- *
Rothschild Bank AG............................... 47,970 * 47,970 -- *
Royal Bank of Scotland........................... 95,939 * 95,939 -- *
St. Gallische Creditanstalt...................... 47,970 * 47,970 -- *
Swiss Bank Corp.................................. 863,452 * 863,452 -- *
UBS.............................................. 959,391 * 959,391 -- *
ZKB Filiale Neumenster........................... 105,533 * 105,533 -- *
ZKB Wintethur.................................... 19,188 * 19,188 -- *
Zurcher Kantonalbank............................. 95,939 * 95,939 -- *
Midland Bank plc................................. 148,706 * 148,706 -- *
Midland Walwyn Capital Inc....................... 443,239 * 443,239 -- *
Debbie Harper.................................... 163,097 * 163,097 -- *
Jayvee & Co...................................... 431,726 * 431,726 -- *
Canada Trust..................................... 143,909 * 143,909 -- *
Roytor & Co...................................... 575,635 * 575,635 -- *
Colony Investments Limited....................... 143,909 * 143,909 -- *
San Juan Investments Ltd......................... 287,817 * 287,817 -- *
Kane & Co........................................ 575,635 * 575,635 -- *
Tapp & Co........................................ 287,817 * 287,817 -- *
Pitt & Co........................................ 479,696 * 479,696 -- *
Hammerhead and Co................................ 383,756 * 383,756 -- *
Blockisland & Co................................. 2,590,356 * 2,590,356 -- *
Whirl & Co....................................... 959,391 * 959,391 -- *
Postage & Co..................................... 1,199,239 * 1,199,239 -- *
Midland Walwyn Capital Inc....................... 153,503 * 153,503 -- *
All Directors and executive officers (8
persons)....................................... 15,955,122 41.3% -- 15,955,122 21.1%
</TABLE>

- ------------------------

* Less than one percent

(1) Includes all shares with respect to which each person, executive officer or
Director who, directly or through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or direct the
voting of such shares, to dispose or direct the disposition of such shares
or that may be purchased upon the exercise of stock options or warrants
exercisable within 60 days. Assumes conversion of 100% of all Debentures or
Warrants held.

(2) Based on 34,130,683 shares of Common Stock outstanding at August 31, 1998
plus for each executive officer or Director those number of shares
underlying exercisable options held by such executive officer or Director
or, in the case of Debenture Holders and Warrant Holders the number of
shares of Common Stock underlying their Debentures and Warrants.

(3) Assumes that 100% of all Debentures or Warrants held by the Selling
Shareholder have been converted into Common Stock.

(4) Includes the following: (i) 983,700 shares issuable upon the exercise of
stock options; (ii) 5,525,000 shares in the name of Slattery Trust, a trust
which Mr. Tomlinson is the beneficiary; (iii) 2,043,000 shares held in
trusts, of which Mr. Tomlinson is the trustee and exercises voting and
dispositive power

49
<PAGE>
over such shares; (iv) 1,352,774 shares in the name of Texstar Holding LLC,
a private company, (v) 1,927,426 shares issued to Calibre, controlled by
Mr. Tomlinson; (vi) 675,289 shares held in escrow in the name of Slattery
Trust to be automatically released on September 15, 1998; and (vii) 20,000
shares owned by Mr. Tomlinson's wife as to which Mr. Tomlinson disclaims
beneficial ownership.

(5) Includes 300,000 shares issuable upon the exercise of stock options.

(6) Includes 300,000 shares issuable upon the exercise of stock options.

(7) Includes 25,000 shares issuable upon exercise of stock options.

(8) Includes 150,000 shares issuable upon the exercise of stock options.

(9) Includes 393,673 shares issuable upon exercise of warrants.

(10) Includes 1,500,000 shares issuable upon the exercise of warrants issued to
EnCap.

(11) Includes 3,441,681 shares held through Boone Petroleum, Inc., a private
corporation wholly owned by Mr. Donald W. Busby. Mr. Busby resigned as
chairman of the Company on October 2, 1997, and as Director of the Company
on October 8, 1997. Also includes 200,000 shares issuable upon exercise of
stock options, 422,504 shares issuable upon exercise of warrants and
675,289 shares held in escrow in the name of Boone Petroleum to be
automatically released on September 15, 1998.

50
<PAGE>
PLAN OF DISTRIBUTION

This Prospectus relates to the resale of up to 36,849,575 shares of Common
Stock that are being offered by the Selling Shareholders (the "Shares"). All of
such Shares are issuable upon the conversion of the Debentures or exercise of
the Warrants. The Company will not receive any of the proceeds from the offering
of the Shares of Common Stock offered hereby.

The Company has been advised by the Selling Shareholders that the Shares may
be sold or distributed from time to time by the Selling Shareholders directly to
one or more purchasers or through brokers, or dealers who may act solely as
agents or who may acquire Shares as principals, at market prices prevailing at
the time of sale, at prices related to such prevailing market prices, negotiated
prices, or at fixed prices, which may be changed. The distribution of the Shares
may be effected in one or more of the following methods: (i) ordinary brokers'
transactions; (ii) transactions involving cross or block trades or otherwise in
any market or markets where the Company's Common Stock is traded; (iii)
purchases by brokers, dealers or underwriters as principal and resale by such
purchasers for their own accounts; (iv) "at the market" to or through market
makers or into an existing market for the Common Stock; (v) in other ways not
involving market makers or established trading markets, including direct sales
to purchasers or sales effected through agents; (vi) through transactions in
options, swaps or other derivatives (whether exchange-listed or otherwise) or
(vii) any combination of the foregoing, or by any other legally available means.

To the extent not described herein and as otherwise required by law, the
Company will file, during any period in which offers or sales are being made, a
supplement to this Prospectus or a post-effective amendment to the Registration
Statement of which this Prospectus is a part, which sets forth, with respect to
a particular offering, the specific number of Shares to be sold, the name of the
Selling Shareholder, the sale price, the name of any participating broker,
dealer, underwriter or agent, any applicable commission or discount and any
other material information with respect to the distribution.

In order to comply with the securities laws of certain states, if
applicable, the Common Stock offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states the shares of Common Stock offered hereby may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and
compliance therewith is effected.

The Selling Shareholders and any brokers, dealers, agents or underwriters
that participate with the Selling Shareholders in the distribution of the Common
Stock offered hereby may be deemed to be "underwriters" within the meaning of
the Securities Act, in which event any commissions or discounts received by such
brokers, dealers, agents or underwriters and any profit on the resale of the
Common Stock offered hereby and purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.

The Common Stock is listed for trading on the Vancouver Stock Exchange.

51
<PAGE>
DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of an unlimited number
of shares of Common Stock without par value and an unlimited number of Class A
Preferred Shares. As of August 31, 1998, 34,130,683 shares of Common Stock and
12,000,000 shares of Class A Preferred Shares were issued and outstanding.

COMMON STOCK

The rights of the holders of the Common Stock are equal in all respects and
include the right to vote at any meeting of the shareholders of the Company, to
receive any dividend declared by the Company and to receive the remaining
property of the Company on dissolution. The terms and conditions of the Common
Stock do not include any restrictions on the transferability thereof. The
outstanding shares of Common Stock are not subject to any calls or assessments.
There are no preemptive or conversion rights and no provision for redemption,
purchase for cancellation, surrender or sinking or purchase funds in respect of
the Common Stock. Dividends payable on the Common Stock are subject to the
deduction of Canadian withholding tax.

Montreal Trust Company of Canada, at its principal offices in the cities of
Vancouver, British Columbia and Toronto, Ontario, is the registrar and transfer
agent of the Common Stock and provides the financial services related thereto.

PREFERRED STOCK

GENERAL. At the annual general meeting of its shareholders held on February
19, 1998, the Company's capital structure was amended to add an unlimited number
of Class A Preferred Shares. The Board of Directors of the Company may issue the
Class A Preferred shares at any time and from time to time in one or more
series. Before the first shares of a particular series are issued, the Board of
Directors shall fix the number of shares in such series and shall determine,
subject to the limitations set out in the articles, the designation, rights,
privileges, restrictions and conditions to be attached to the shares of such
series including, without limitation, the rate or rates, amount or method or
methods of calculation of dividends thereon, the time and place of payment of
dividends, whether cumulative or non-cumulative or partially cumulative and
whether such rate, amount or method of calculation shall be subject to change or
adjustment in the future, the currency or currencies of payment of dividends,
the consideration and the terms and conditions of any purchase for cancellation,
retraction or redemption (if any), the conversion, exchange or reclassification
rights attached thereto (if any), the rights attached thereto (if any), the
terms and conditions of any share purchase plan or sinking fund with respect
thereto, and any other terms not inconsistent with these provisions. Before the
issue of the first shares of a series, the Board of Directors is required to
send to the Registrar (as defined in the Business Corporations Act (Yukon
Territory)) articles of amendment containing a description of such series
including the designation, rights, privileges, restrictions and conditions
determined by the board of directors of the Company. The Class A Preferred
shares will be entitled to priority over the Common Stock of the Company and
over any other shares of the Company ranking junior to the Class A Preferred
shares with respect to priority in the payment of dividends and the distribution
of assets in the event of the liquidation, dissolution or winding-up of the
Company, whether voluntary or involuntary, or any other distribution of the
assets of the Company among its shareholders for the purpose of winding-up its
affairs.

DIVIDENDS. The Series I Preferred Shares were authorized by the Board on
March 6, 1998. The Board of Directors fixed 12,000,000 shares with the following
the designation, rights, privileges, restrictions and conditions. The Series I
shares are entitled to dividends at the Designated Rate (as defined below), to
be paid in cash quarterly on March 31, June 30, September 30, and December 31 of
each year and are cumulative whether or not declared or whether or not there are
funds legally available to pay the dividend on the aggregate price paid or
deemed to be paid (the "Purchase Price") for the shares. The Designated Rate is
10% per annum, but upon the occurrence or continuance of a Voting Event (as
defined below), the

52
<PAGE>
rate shall be 14% per annum. For the first eight quarters dividends are due on
the Class I Shares, the Board of Directors may elect to make payment in Common
Stock equal in number to the aggregate cash dividend payable divided by $1.18.

LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution, or
winding up of the Company, voluntary or involuntary, the Series I shares are
entitled to preference to the Common Stock of a cash amount equal to the
Purchase Price plus dividends accumulated but not paid (the "Liquidation
Amount"). A consolidation or merger (other than an Exempted Merger, as defined
below) of the Company with or into any other entity or a sale or transfer in a
single transaction or a series of related transactions of all or substantially
all of the assets of the Company shall be deemed to be a liquidation for
purposes hereof. An Exempted Merger shall be a merger of the Company with a
United States corporation that is effected for the primary purpose of enabling
the Company to migrate to the United States to be able to list its Common Stock
on a generally recognized United States securities exchange or on the NASDAQ or
similar system, provided a majority of the holders of Series I shares then
outstanding give their prior written approval to such a merger, which approval
shall not be unreasonably withheld.

OPTIONAL REDEMPTION. The Company, upon five business days advance notice,
shall have the option to redeem any or all of the Series I shares at any time at
a cash redemption price per share equal to the Liquidated Amount divided by the
number of Series I shares originally issued.

PUT REDEMPTION. If the Company does not consummate a Qualified Public
Offering (as defined below) of the Company's Common Stock within three years
from January 23, 1998, the holders of a majority of Series I shares then
outstanding may, upon notice to the Company no later than 90 days after the
expiration of the three year period, elect to cause the Company to redeem all of
the Series I shares at a cash redemption amount per share equal to the
Liquidation Amount divided by the number of Series I shares originally issued. A
Qualified Public Offering is one or more public offerings of the Company's
Common Stock from which the Company received net proceeds of not less than $25.0
million.

MANDATORY REDEMPTION. If the Series I shares have not been redeemed within
five years of being issued, the Company shall be required to redeem the shares
at a cash redemption price per share equal to the Liquidation Amount divided by
the number of Series I shares originally issued.

VOTING RIGHTS. The Series I shares have no voting rights, except as set
forth below. Upon the occurrence of a Voting Event, the Series I shareholders
shall be, voting as a single class, entitled to elect (i) two Directors at any
time there are more than 1,200,000 Series I shares, or (ii) one director if
there are 1,200,000 Series I shares or less. Any Director so elected shall serve
until all Voting Events have ceased to be continuing. Voting Events include: (i)
the failure of the Company to pay at least two dividends on the Series I shares
as they become due and payable; (ii) the failure of the Company to redeem the
Series I shares when required for the put redemption, (iii) the failure of the
Company to redeem the Series I shares when required for the mandatory
redemption, (iv) bankruptcy, insolvency, appointment of a receiver, liquidator
or similar official, monetary judgments in excess of $500,000 not covered by
insurance, or writs or warrants of attachment or similar process against all or
a substantial part of the Company's assets.

LEGAL MATTERS

Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Porter & Hedges, L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements at December 31, 1997 and August 31,
1997, included in this Registration Statement have been audited by Merdinger,
Fruchler, Rosen & Corso, P.C., independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon such reports given
upon the authority of that firm as experts in accounting and auditing.

53
<PAGE>
The Statement of Revenues and Direct Operating Expenses of the Oak Hill and
Lisbon Properties for the period from acquisition by Lasco Energy Partners, L.P.
(August 14, 1996) to December 31, 1996 and for the year ended December 31, 1997
acquired by Benz Energy, Ltd. included in this Prospectus has been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

Certain information set forth herein relating to the Company's estimated
proved oil and gas reserves at January 1, 1998, the related calculations of
future net revenues and the discounted future net income thereof have been
derived from independent petroleum engineering reports prepared by Ryder Scott
Company, petroleum engineers. Such information has been included herein in
reliance on such firm as an expert in petroleum engineering.

Certain information set forth herein relating to the Company's estimated
proved oil and gas reserves at January 1, 1998, the related calculations of
future net revenues and the net present value thereof have been derived from
independent petroleum engineering reports prepared by T.J. Smith & Company, Inc.
petroleum engineers. Such information has been included herein in reliance on
such firm as an expert in petroleum engineering.

Certain information set forth herein relating to the Company's estimated
proved oil and gas reserves at June 30, 1998, the related calculations of future
net revenues and the net present value thereof have been derived from
independent petroleum engineering reports prepared by Crocker Company, petroleum
engineers. Such information has been included herein in reliance on such firm as
an expert in petroleum engineering.

AVAILABLE INFORMATION

As a result of this offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"), and in accordance therewith will file reports and other
information with the Commission. The reports and other information filed by the
Company with the Commission can be inspected and copies can be obtained at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at 7 World Trade Center, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a site on the
World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.

The reports and other information filed by the Company with the VSE can be
inspected and copies can be obtained by contacting Warren H. Funt, Vice
President, Corporate Finance Services, at P.O. Box 10999, 600 Cranville Street,
Vancouver, BC Canada V7Y 1H1 or by telephone at (888) 547-8873. In addition, the
VSE maintains a site on the World Wide Web at http://www.vse.ca that contains
reports, proxy and information statements and other information regarding
registrants that file with the VSE.

This Prospectus constitutes a part of a Registration Statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission 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 Common Stock 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 Commission 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.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements and an opinion expressed by independent
auditors and with quarterly reports for the first three quarters of each fiscal
year containing unaudited summary financial information.

54
<PAGE>
GLOSSARY

The terms used in this Prospectus are defined as set forth below. All
volumes of natural gas referred to herein are stated at the legal pressure base
of the state or area where the reserves exist and at 60 degrees Fahrenheit and,
in most instances, are rounded to the nearest major multiple.

In this Offering Memorandum (including the Summary), the following words and
phrases shall have the meaning set forth below, unless the context otherwise
requires:

"BBL" means barrel.

"BCFE" means billion cubic feet equivalent.

"BCFG" means billion cubic feet of gas.

"BCPD" means barrels of condensate per day.

"BO" means barrels of oil.

"BPD" means barrels per day.

"BOPD" or "BOD" means barrels of oil per day.

"COMPANY" means Benz Energy, Ltd. and its subsidiaries.

"GROSS ACRE" means an acre in which the Company owns a working interest.
When used in conjunction with acreage under options, it means an acre in which
the Company will acquire a working interest if and when the option is executed.

"GROSS WELL" means a well in which the Company owns a working interest. The
number of gross wells is the total number of wells in which a working interest
is owned.

"LOE" means lease operating expenses.

"MB"or "MBBLS" means thousand barrels.

"MBO" means thousand barrels of oil.

"MCF" means thousand cubic feet.

"MCFE" means thousand cubic feet equivalent.

"MCFGPD" or "MCFGD" means a thousand cubic feet of gas per day.

"MCFPD" means a thousand cubic feet per day.

"MMBO" means a million barrels of oil.

"MMCFE" means a million cubic feet equivalent.

"MMCFG" means a million cubic feet of gas.

"MMCFGD" or "MMCFGPD" means a million cubic feet of gas per day.

"NET ACRES" means the sum of the fractional working interest owned in gross
acres expressed as whole numbers and fractions thereof.

"NET WELLS" means the sum of the fractional working interest owned in gross
wells expressed as whole numbers and fractions thereof.

"PAYOUT" means a point in time or the cause of events when the working
interests of the applicable parties change, some upwards and others downwards
based upon the terms of a contract among such parties. To "pay out" means to
achieve Payout.

55
<PAGE>
"PROSPECT" means a geographic area indicated by geological or geophysical
information potentially to have geological structure conducive to the
accumulation of oil or gas. A prospect can be an area with limited or no prior
exploratory activity if there is geological or geophysical information for
nearby or analogous areas that makes it prospective. A prospect can also be an
area containing a known geological structure which may provide a potential for
further development.

"PROVED PRODUCING RESERVES" means those reserves estimated as recoverable
under current technology and projected economic conditions, from that portion of
a reservoir that can reasonably be evaluated as economically productive on the
basis of analysis of drilling, geological, geophysical and engineering data,
including the reserves to be obtained by enhanced recovery processes
demonstrated to be economic and technically successful in the subject reservoir.

"PROVED UNDEVELOPED RESERVES" means those reserves estimated as recoverable
under current technology and projected economic conditions from that portion of
a reservoir that can reasonably be evaluated as economically productive, but
which requires the drilling and completion of a well to initiate production.

"PSI" means pounds of pressure per square inch.

"TCFE" means a trillion cubic feet equivalent.

"TOTAL PROVED RESERVES" means the sum of both proved producing reserves and
proved undeveloped reserves.

"VSE" means the Vancouver Stock Exchange.

"WI" or "WORKING INTEREST" means working, or cost bearing, interest in oil
and gas leases.

56
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2

Audited Balance Sheets as of December 31, 1997 and August 31, 1997......................................... F-3

Audited Statements of Operations for the periods from September 1, 1997 to December 31, 1997 and October
31, 1996 (inception) to August 31, 1997.................................................................. F-4

Statement of Stockholders' Equity for the period October 31, 1996 (inception) to August 31, 1997........... F-5

Statement of Stockholders' Equity for the period from September 1, 1997 to December 31, 1997............... F-6

Audited Consolidated Statements of Cash Flows for the periods from September 1, 1997 to December 31, 1997
and October 31, 1996 (inception) to August 31, 1997...................................................... F-7

Notes to Consolidated Financial Statements................................................................. F-8

OAKHILL AND LISBON PROPERTIES

Independent Accountants Report............................................................................. F-30

Statement of Revenues and Direct Operating Expenses........................................................ F-31

Notes to Financial Statements.............................................................................. F-32
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
BENZ ENERGY LTD.

We have audited the accompanying consolidated balance sheets of BENZ ENERGY
LTD. as of December 31, 1997 and August 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the periods
from September 1, 1997 to December 31, 1997 and from October 31, 1996
(inception) to August 31, 1997. 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 audits 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BENZ ENERGY
LTD. as of December 31, 1997 and August 31, 1997, and the consolidated results
of its operations and its cash flows for the periods from September 1, 1997 to
December 31, 1997 and from October 31, 1996 (inception) to August 31, 1997 in
conformity with generally accepted accounting principles.

MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.

Certified Public Accountants

New York, New York

July 1, 1998

F-2
<PAGE>
BENZ ENERGY LTD.

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents........................................................ $ 3,162,320 $ 694,306
Funds Held in Trust.............................................................. -- 1,793,413
Receivables...................................................................... 4,552,053 4,069,042
Advances to Related Parties...................................................... -- 453,132
Available for Sale Marketable Securities......................................... 1,289,781 1,859,533
Prepaid Expenses................................................................. 109,016 323,598
------------- -------------
Total Current Assets........................................................... 9,113,170 9,193,024
------------- -------------
OIL AND GAS PROPERTIES, Using Full Cost Accounting
Costs Being Amortized............................................................ 13,341,497 6,046,082
Costs Not Being Amortized........................................................ 12,361,515 5,723,471
------------- -------------
25,703,012 11,769,553
Less: Accumulated Amortization..................................................... (993,778) (413,552)
------------- -------------
Net Oil and Gas Properties..................................................... 24,709,234 11,356,001
------------- -------------
PROPERTY AND EQUIPMENT, Less Accumulated Depreciation of $171,819 and $118,194..... 610,537 560,816
Available for Sale Marketable Securities........................................... 22,872 37,239
Other Assets....................................................................... 1,760,316 373,800
------------- -------------
TOTAL ASSETS................................................................... $ 36,216,129 $ 21,520,880
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses............................................ $ 11,311,982 $ 5,838,268
Drilling Advances................................................................ 389,348 811,338
Current Portion of Long-Term Debt, Net of Unamortized Discount of $2,042,555 and
$-0-............................................................................. 12,702,246 759,343
------------- -------------
Total Current Liabilities...................................................... 24,403,576 7,408,949
Long-Term Debt..................................................................... 6,057 21,983
------------- -------------
Total Liabilities.............................................................. 24,409,633 7,430,932
------------- -------------
Commitments and Contingencies...................................................... -- --

STOCKHOLDERS' EQUITY
Common Stock, no par value; unlimited shares authorized, 29,878,985 and
22,714,821 shares issued and outstanding....................................... 16,222,198 7,924,329
Special Warrants................................................................. -- 7,753,008
Additional Paid-in Capital....................................................... 367,881 --
Accumulated Deficit.............................................................. (4,656,463) (1,917,141)
Unrealized Gains (Losses) on Available for Sale Marketable Securities............ (90,048) 392,183
Cumulative Foreign Currency Translation Adjustment............................... (37,072) (62,431)
------------- -------------
Total Stockholders' Equity..................................................... 11,806,496 14,089,948
------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 36,216,129 $ 21,520,880
------------- -------------
------------- -------------
</TABLE>

The Accompanying Notes are an Integral Part of the Financial Statements.

F-3
<PAGE>
BENZ ENERGY LTD.

STATEMENT OF OPERATIONS

FOR THE PERIODS FROM

<TABLE>
<CAPTION>
OCTOBER 31,
1996
SEPTEMBER 1, 1997 (INCEPTION)
TO TO
DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ---------------
<S> <C> <C>
REVENUES
Oil and Gas Sales.......................................................... $ 707,987 $ 444,203
----------------- ---------------
EXPENSES
Lease Operating............................................................ 42,698 45,550
Production Taxes........................................................... 7,064 22,961
Depreciation, Depletion and Amortization................................... 634,493 240,403
Interest Expense........................................................... 648,885 49,314
General and Administrative................................................. 2,087,087 2,026,399
----------------- ---------------
Total Expense............................................................ 3,420,227 2,384,627
----------------- ---------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE) AND PROVISION FOR INCOME
TAXES...................................................................... (2,712,240) (1,940,424)
----------------- ---------------
OTHER INCOME (EXPENSE)
Interest and Other Income.................................................. 23,825 59,200
Loss on Sale of Investments................................................ (50,907) (35,917)
----------------- ---------------
Total Other Income (Expense)............................................. (27,082) 23,283
----------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES....................................... (2,739,322) (1,917,141)
PROVISION FOR INCOME TAXES................................................... -- --
----------------- ---------------
NET LOSS..................................................................... $ (2,739,322) $ (1,917,141)
----------------- ---------------
----------------- ---------------
BASIC LOSS PER SHARE......................................................... $ (.10) $ (.09)
----------------- ---------------
----------------- ---------------
DILUTED LOSS PER SHARE....................................................... $ (.10) $ (.09)
----------------- ---------------
----------------- ---------------
WEIGHTED AVERAGE SHARES OUTSTANDING.......................................... 27,926,016 21,921,985
----------------- ---------------
----------------- ---------------
</TABLE>

The Accompanying Notes are an Integral Part of the Financial Statements.

F-4
<PAGE>
BENZ ENERGY LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 1, 1997 TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK SPECIAL WARRANTS ADDITIONAL
--------------------- --------------------- PAID IN ACCUMULATED
SHARES AMOUNT NUMBER AMOUNT SUBSCRIPTIONS CAPITAL DEFICIT
--------- ---------- --------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1997........... 22,714,821 $7,924,329 4,935,800 $7,753,008 $ -- $ -- $(1,917,141)

Conversion of Warrants............. 4,935,800 7,753,008 (4,935,800) (7,753,008) -- -- --

Exercise of Warrants............... 136,500 108,374 -- -- -- -- --

Exercise of Warrants............... 2,000,000 415,205 -- -- -- -- --

Exercise of Warrants............... 91,864 141,396 -- -- -- -- --

Costs of Issuances................. -- (120,114) -- -- -- -- --

Issuance of Warrants in Connection
with Debt........................ -- -- -- -- -- 367,881 --

Foreign Currency Translation
Adjustment....................... -- -- -- -- -- -- --

Unrealized Gains (Losses).......... -- -- -- -- -- -- --

Net Loss........................... -- -- -- -- -- -- (2,739,322)
--------- ---------- --------- ---------- ------------ ----------- ------------

Balance, December 31, 1997......... 29,878,985 $16,222,198 -- $ -- $ -- $ 367,881 $(4,656,463)
--------- ---------- --------- ---------- ------------ ----------- ------------
--------- ---------- --------- ---------- ------------ ----------- ------------

<CAPTION>
UNREALIZED FOREIGN
GAIN OR CURRENCY TOTAL
(LOSS) ON TRANSLATION STOCKHOLDERS'
SECURITIES ADJUSTMENTS EQUITY
----------- ----------- ------------
<S> <C> <C> <C>
Balance, August 31, 1997........... $ 392,183 $ (62,431) $14,089,948
Conversion of Warrants............. -- -- --
Exercise of Warrants............... -- -- 108,374
Exercise of Warrants............... -- -- 415,205
Exercise of Warrants............... -- -- 141,396
Costs of Issuances................. -- -- ( 120,114)
Issuance of Warrants in Connection
with Debt........................ -- -- 367,881
Foreign Currency Translation
Adjustment....................... -- 25,359 25,359
Unrealized Gains (Losses).......... (482,231) -- ( 482,231)
Net Loss........................... -- -- (2,739,322)
----------- ----------- ------------
Balance, December 31, 1997......... $ (90,048) $ (37,072) $11,806,496
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

The Accompanying Notes are an Integral Part of the Financial Statements.

F-5
<PAGE>
BENZ ENERGY LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 31, 1996 (INCEPTION) TO AUGUST 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK SPECIAL WARRANTS ADDITIONAL
-------------------- --------------------- PAID IN ACCUMULATED
SHARES AMOUNT NUMBER AMOUNT SUBSCRIPTIONS CAPITAL DEFICIT
--------- --------- --------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996, 20,201,858 $5,065,277 -- $ -- $1,043,846 $ -- $ --
Adjustment to Reflect Outstanding
Shares of Legal Parent at October
31, 1996 and Net Assets of Parent
at Fair Values and Texstar at
Historical Cost

Issuances Pursuant to Private 910,800 881,296 -- -- (296,032) -- --
Placements........................

Issued Upon the Exercise of 1,004,300 961,241 -- -- -- -- --
Options...........................

Issued for Properties............... 343,000 442,923 -- -- -- -- --

Issued for Properties............... 254,863 573,592 -- -- -- -- --

Sale of Stock Purchase Warrants..... -- -- 4,885,800 8,750,447 (747,814) -- --

Issuance of Stock Warrants for -- -- 50,000 116,571 -- -- --
Services..........................

Costs of Issuances.................. -- -- -- (1,114,010) -- -- --

Foreign Currency Translation -- -- -- -- -- -- --
Adjustment........................

Unrealized Gains.................... -- -- -- -- -- -- --

Net Loss............................ -- -- -- -- -- -- (1,917,141)
--------- --------- --------- ---------- ------------ ----------- ------------

Balance, August 31, 1997............ 22,714,821 $7,924,329 4,935,800 $7,753,008 $ -- $ -- $(1,917,141)
--------- --------- --------- ---------- ------------ ----------- ------------
--------- --------- --------- ---------- ------------ ----------- ------------

<CAPTION>
UNREALIZED FOREIGN
GAIN OR CURRENCY TOTAL
(LOSS) ON TRANSLATION STOCKHOLDERS'
SECURITIES ADJUSTMENTS EQUITY
----------- ----------- ------------
<S> <C> <C> <C>
Balance, October 31, 1996, $ -- $ -- $6,109,123
Adjustment to Reflect Outstanding
Shares of Legal Parent at October
31, 1996 and Net Assets of Parent
at Fair Values and Texstar at
Historical Cost
Issuances Pursuant to Private -- -- 585,264
Placements........................
Issued Upon the Exercise of -- -- 961,241
Options...........................
Issued for Properties............... -- -- 442,923
Issued for Properties............... -- -- 573,592
Sale of Stock Purchase Warrants..... -- -- 8,002,633
Issuance of Stock Warrants for -- -- 116,571
Services..........................
Costs of Issuances.................. -- -- (1,114,010)
Foreign Currency Translation -- (62,431) (62,431)
Adjustment........................
Unrealized Gains.................... 392,183 -- 392,183
Net Loss............................ -- -- (1,917,141)
----------- ----------- ------------
Balance, August 31, 1997............ $ 392,183 $ (62,431) $14,089,948
----------- ----------- ------------
----------- ----------- ------------
</TABLE>

The Accompanying Notes are an Integral Part of the Financial Statements.

F-6
<PAGE>
BENZ ENERGY LTD.

STATEMENT OF CASH FLOWS

FOR THE PERIODS FROM

<TABLE>
<CAPTION>
OCTOBER 31,
1996
SEPTEMBER 1, 1997 (INCEPTION) TO
TO AUGUST 31,
DECEMBER 31, 1997 1997
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss.................................................................... $ (2,739,322) $ (1,917,141)

Adjustments to Reconcile Net Loss to Net Cash Provided by Operating
Activities:
Loss on Sale of Investments................................................. 50,907 35,917
Depreciation, Depletion and Amortization.................................... 634,493 240,403
Amortization of Debt Issuance Cost.......................................... 470,363 --
Funds Held in Trust......................................................... 1,773,364 (1,819,637)
(Increase) in Receivables................................................... (483,011) (3,606,624)
(Increase) Decrease in Advances to Related Parties.......................... 453,132 ( 453,132)
Decrease in Advances to Stanford............................................ -- 311,699
Decrease in Prepaid Expenses................................................ 214,361 10,718
(Increase) in Other Assets.................................................. (1,647,237) ( 360,933)
Increase in Accounts Payable and Accrued Expenses........................... 5,475,762 5,486,338
Increase (Decrease) in Drilling Advances.................................... (421,990) 163,188
----------------- --------------
Net Cash Provided (Used) by Operating Activities............................ 3,780,822 (1,909,204)
----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on Sale of Investments............................................. 9,308 74,224
Sale of Properties.......................................................... 408,931 416,060
Cost of Oil and Gas Properties.............................................. (16,226,706) (7,136,665)
Purchase of Property and Equipment.......................................... (103,346) (375,680)
----------------- --------------
Net Cash (Used) by Investing Activities..................................... (15,911,813) (7,022,061)
----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Stock and Warrants--Net............................................. 544,861 8,551,699
Proceeds from Borrowings.................................................... 14,115,000 375,500
Repayment of debt........................................................... (145,468) (80,128)
----------------- --------------
Net Cash Provided by Financing Activities................................... 14,514,393 8,847,071
----------------- --------------
Effect of Exchange Rate Changes on Cash..................................... 84,612 28,484
----------------- --------------
Net Increase (Decrease) in Cash and Cash Equivalents........................ 2,468,014 ( 55,710)

CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD................................ 694,306 750,016
----------------- --------------
CASH AND CASH EQUIVALENTS--END OF PERIOD...................................... $ 3,162,320 $ 694,306
----------------- --------------
----------------- --------------
CASH PAID DURING THE PERIOD FOR:..............................................
Interest Expense $ 84,752 $ 41,200
----------------- --------------
----------------- --------------
Income Taxes................................................................ $ -- $ --
----------------- --------------
----------------- --------------
</TABLE>

The Accompanying Notes are an Integral Part of the Financial Statements.

F-7
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

Benz Energy LTD. ("Benz" or the "Company") was incorporated on February 9,
1981 under the Company Act (British Columbia) and has been continued under the
Business Corporations Act of the Yukon Territory. Benz was originally
incorporated as Benz Equities Ltd. and changed its name on July 2, 1997.

Texstar Petroleum, Inc. ("Texstar"), a wholly owned subsidiary of Benz,
formerly Texstar Gas and Oil, Inc., was incorporated on October 31, 1996 under
laws of the State of Texas.

Benz Properties Ltd. ("Benz Properties"), a wholly owned subsidiary of Benz,
was incorporated on October 18, 1989 under the laws of the State of Colorado.

Benz, together with Texstar and Benz Properties (collectively the "Company")
is engaged primarily in the acquisition, development, production, exploration
for and the sale of oil, gas and natural gas liquids. The Company sells its oil
and gas products primarily to domestic pipelines and refineries. The Company
conducts its operations primarily from facilities located in Houston, Texas. It
also maintains offices in Vancouver, British Columbia. Its oil and gas
properties are located in the gulf coast areas of Texas, Mississippi and
Louisiana.

CHANGE IN ACCOUNTING PRINCIPLE

The Company has changed its method of accounting from the successful efforts
method to the full cost method of accounting for oil and gas properties. The
periods presented have been restated to reflect the change in accounting.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Benz and its
wholly owned subsidiaries Texstar and Benz Properties. Accordingly, all
references herein to Benz or the Company include the consolidated results of its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.

BASIS OF PRESENTATION

Effective October 31, 1996, Benz acquired 100% of the outstanding capital
stock of Texstar (See Note 2). As a result, Texstar's former shareholders
obtained control of Benz. For accounting purposes, this acquisition has been
treated as a recapitalization of Texstar.

The financial statements presented included only the accounts of the Company
since Texstar's inception (October 31, 1996).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the

F-8
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and Cash Equivalents include cash in banks and other cash equivalents
which mature within three months of the date of purchase.

OIL AND GAS PROPERTIES

The Company follows the full cost method of accounting for oil and gas
property acquisition, exploration, development, and production.

Capitalization Policies: All oil and gas property acquisition, exploration,
and development costs are capitalized as incurred including internal costs
directly attributable to such activities. Capitalized internal costs were
$335,626 and $412,752 for the periods ended December 31, 1997 and August 31,
1997, respectively. Related interest expense incurred during property
exploration and development activities is capitalized as a cost of such
activity. Net capitalized costs of unproved property and exploration well costs
are reclassified as proved property and well costs when related proved reserves
are found. Costs to operate and maintain wells and field equipment are expensed
as incurred.

Amortization Policies: Except for cost of (1) unevaluated, unproved
properties and (2) major development projects in progress, all capitalized oil
and gas property costs, net of prior accumulated amortization, are amortized by
country using the unit-of-production method based on proved reserves. The
amortization base includes estimated future costs to develop proved reserves and
estimated future dismantlement, reclamation, and abandonment costs, net of
equipment salvage values.

Impairment Policies: Costs not being amortized are periodically assessed
for impairment. Any impairment is added to the amortization base. Net
capitalized costs of oil and gas properties, less related deferred income taxes
are limited, by country, to the sum of (1) future net revenues (using prices and
cost rates as of the balance sheet date) from proved reserves and discounted at
ten percent per annum, plus (2) costs not being amortized, less (3) related
income tax effects. Excess costs are charged to proved property impairment
expense.

Sales and Retirements Policies: No gain or loss is recognized on the sale
of oil and gas properties unless nonrecognition would significantly alter the
relationship between capitalized costs and remaining proved reserves for the
affected amortization base. When gain or loss is not recognized, the
amortization base is reduced by the amount of sales proceeds.

REVENUE RECOGNITION

Revenues from the sale of oil and gas production are recognized when title
passes, net of royalties. Natural gas revenues are generally recognized under
the entitlements method of accounting for gas imbalances, i.e., monthly sales
quantities that do not match the Company's entitled share of joint production.
Entitled quantities in excess of sales quantities are recorded as a receivable
from joint venture partners. The receivable is carried at the lower of current
market price or the market price at the time the

F-9
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
imbalance occurred. Sales quantities in excess of entitled quantities are
recorded as deferred revenue carried at the gas market price received at the
time the imbalance occurred.

HEDGING

The Company may enter into derivative contracts to hedge the risk of future
oil and gas price fluctuations. Such contracts may either fix or support oil or
gas prices or limit the impact of price fluctuations with respect to the
Company's sales of oil and gas. Gains and losses on such hedging activities are
recognized in oil and gas revenues when the hedged production is sold. Hedged
oil and gas prices used in computing the year-end standardized measure of
discounted future net cash flows relating to proved oil and gas reserves reflect
the estimated effects of hedging contracts existing at year end.

DEPRECIATION AND AMORTIZATION

Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives.

The costs of maintenance and repairs are charged to expense when incurred;
costs of renewals and betterments are capitalized. Upon the sales or retirement
of property and equipment, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain or loss is
included in operations.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term debt. The carrying amounts of cash, accounts
receivable and accounts payable approximate fair value due to the highly liquid
nature of these short term instruments. The fair value of long-term borrowings
was determined based upon interest rates currently available to the Company for
borrowings with similar terms. The fair value of long-term debt approximates the
carrying amounts as of December 31, and August 31, 1997.

LONG-LIVED ASSETS

Long-Lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. When required, impairment losses on assets to be held and
used are recognized based on the fair value of the assets and long-lived assets
to be disposed of are reported at the lower of carrying amount or fair value
less cost to sell.

INCOME TAXES

Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred
tax assets and liabilities are included in the financial statements at currently
enacted income tax rates applicable to the period in which the deferred tax
assets and liabilities are expected to be realized or settled as prescribed in
FASB Statement No. 109, Accounting for Income Taxes. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.

F-10
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK

The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances may exceed FDIC insured levels at
various times during the year.

STOCK BASED COMPENSATION

The Company uses the intrinsic value method of accounting for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25. See
Note 14 for proforma disclosure of net income and earnings per share under the
fair value method of accounting for stock-based compensation as proscribed by
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 123.

TRANSLATION OF FOREIGN CURRENCY

The Company translates the foreign currency financial statements of its
foreign parent in accordance with the requirements of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation". Assets and
liabilities are translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during the period.
Resulting translation adjustments are recorded as a separate component in
stockholders' equity. Foreign currency transaction gains and losses are included
in determining net income.

PER SHARE OF COMMON STOCK

Per share amounts have been computed based on the average number of common
shares outstanding during the period.

In February 1997, the Financial Accounting Standards Board issued a new
statement titled "Earnings Per Share" (SFAS No. 128). This statement is
effective for both interim and annual periods ending after December 15, 1997 and
specifies the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock or potential
common stock. All prior-period EPS data presented has been restated to conform
with the provisions for SFAS No. 128.

Potential common stock has been excluded from the computation of earnings
per share since the inclusion of options and warrants would be antidilutive.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued a new
statement titled "Reporting Comprehensive Income" (SFAS No. 130). This statement
is effective for both interim and annual periods beginning after December 15,
1997. This statement uses the term "comprehensive income" to describe the total
of all components of comprehensive income, including net income. This statement
uses the term "other comprehensive net income" to refer to revenues, expenses,
gains or losses that under generally accepted accounting principles are included
in comprehensive income, but excluded from net income.

The impact of SFAS No. 130 in the financial statements, had it been adopted
as of December 31, 1997 and August 31, 1997, is shown in Note 18.

F-11
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 2--CORPORATE REORGANIZATION

(a) During the period ended August 31, 1997, Benz issued 8,500,000 common
shares to acquire all of the issued and outstanding shares of Texstar (the
"Texstar Acquisition").

As a result of this transaction the former shareholders of Texstar acquired
or exercised control over a majority of shares of Benz. Accordingly, the
transaction has been treated for accounting purposes as a recapitalization of
Texstar and, therefore, these financial statements represent a continuation of
the legal subsidiary, Texstar, not Benz, the legal parent. In accounting for
this transaction:

(i) Texstar is deemed to be the purchaser and parent company for
accounting purposes. Accordingly, its net assets are included in the
consolidated balance sheet at their historical book values;

(ii) Control of the net assets and business of Benz was acquired
effective October 31, 1996 (the "Effective Date"). This transaction has been
accounted for as a purchase of the assets and liabilities of Benz by Texstar
at the fair value of $5,342,158. The historical cost of the net assets
acquired was $4,712,162. A summary of the assigned values of the net assets
acquired is as follows:

<TABLE>
<S> <C>
Net working capital............................................. $ 723,924
Advances to Texstar as at Effective Date, eliminated on
consolidation................................................. 256,123
Long Term investments........................................... 1,821,596
Petroleum interests............................................. 2,540,515
------------
Net assets acquired............................................. $ 5,342,158
------------
------------
</TABLE>

(iii) The consolidated statements of operations and cash flows include
Texstar's results of operations and cash flows from October 31, 1996 (date
of inception) and Benz's results of operations from the Effective Date.

Prior to Benz acquiring Texstar, Texstar acquired certain assets and assumed
certain liabilities from Texstar Petroleum L.L.C. ("Texstar L.L.C."), a private
company of which certain of Texstar LLC's members, directors and officers are
also shareholders, directors and officers of the Company. As a result of the
Texstar Acquisition, Texstar LLC's members are also shareholders of the Company.
Due to the fact that Texstar and Texstar LLC were under common control, the
assets and liabilities assigned have been recorded at their historical costs.

(b) Prior to the Effective Date, Benz completed a number of agreements with
Texstar LLC whereby Benz acquired:

(i) various working interests in five oil and gas Prospects located in
Mississippi and Texas, paid through the issuance of 2,850,000 common shares
of Benz, at a deemed price of $1,935,800;

(ii) an exclusive right of first refusal, at a cost of $300,000, to
purchase 50% interests in new oil and gas properties located in the United
States Gulf Coast areas of Texas, Louisiana and Mississippi; and

F-12
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 2--CORPORATE REORGANIZATION (CONTINUED)
(iii) a 32% working interest in the shallow rights and 40% working
interest in the deep rights in the LaHinch field (the "LaHinch Prospect"),
covering approximately 2,303 acres, located in Duval County, Texas, at a
price of $193,506.

NOTE 3--RESTRICTED CASH

Included in cash and cash equivalents at December 31, 1997 and August 31,
1997 is $721,304 and $421,740, respectively, which is restricted to expenditures
on certain petroleum interests.

NOTE 4--PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ -----------
<S> <C> <C>
3-D Workstations.................................................. $ 313,117 $ 313,117
Furniture and Fixtures............................................ 180,139 156,394
Telephone and Computer Equipment.................................. 274,133 190,692
Leasehold Improvements............................................ 14,967 18,807
------------ -----------
782,356 679,010
Less: Accumulated Depreciation.................................... (171,819) (118,194)
------------ -----------
Net Property and Equipment........................................ $ 610,537 $ 560,816
------------ -----------
------------ -----------
Depreciation Expense recorded in the statement of operations...... $ 53,625 $ 91,254
------------ -----------
------------ -----------
</TABLE>

NOTE 5--OIL AND GAS PROPERTIES

All of the Company's oil and gas properties are located in the United
States. Amortization expense was $2.32 and $1.07 per Mcf production during the
four month period ended December 31, 1997 and the initial 10 month period ended
August 31, 1997, respectively. Amortization expense for the period ended
December 31, 1997 includes a ceiling test write-down of $221,028.

The $9,389,316 and $4,514,379 cost of unproved oil and gas leases held at
December 31, 1997 and August 31, 1997, respectively, have been excluded in
computing amortization of the full cost pool.

Costs excluded from amortization consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- ------------
<S> <C> <C>
Acquisition Costs................................................ $ 9,389,316 $ 4,514,379
Exploration costs................................................ 2,972,199 1,209,092
------------- ------------
$ 12,361,515 $ 5,723,471
------------- ------------
------------- ------------
</TABLE>

F-13
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 6--SALES OF INTERESTS IN OIL AND GAS PROPERTIES

During the periods ended December 31, 1997 and August 31, 1997, the Company
sold partial interests in various unproved prospects for net proceeds of
$408,931 and $416,060, respectively. No gain has been recognized; capitalized
oil and gas property costs have been reduced by the amount of sales proceeds.

NOTE 7--INVESTMENTS IN EQUITY SECURITIES

The Company accounts for its investments in equity securities under the
provisions of SFAS No. 115. This standard provides that available-for-sale
investments in securities that have readily determinable fair values be measured
at fair value in the balance sheet and that unrealized holding gains and losses
for these investments be reported in a separate component of stockholders'
equity until realized. At December 31, 1997 and August 31, 1997, $(90,048) and
$392,183, respectively was reported as a separate component of stockholders'
equity representing the unrealized holding gains or losses, net of deferred
income taxes.

At December 31, 1997 and August 31, 1997, marketable investments classified
as available for sale was comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ ------------
<S> <C> <C>
Common Stocks:
Market Value................................................... $1,312,653 $ 1,896,772
Cost........................................................... 1,402,701 1,504,589
------------ ------------
Gross Unrealized Holding Gains (Losses).......................... $ (90,048) $ 392,183
------------ ------------
------------ ------------
</TABLE>

NOTE 8--DRILLING ADVANCES

As of December 31, 1997 and August 31, 1997, the Company has received
drilling advances from joint interest owners in the amounts of $389,348 and
$811,338, respectively. These advances will be applied toward the payment of
drilling costs to be incurred in the future.

NOTE 9--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- ----------
<S> <C> <C>
EnCap Credit Agreement............................................. $ 11,957,445 $ --
(Face Value $14,000,000)
Bank One--Credit Facility.......................................... 702,000 720,000
Cogniseis Development.............................................. 48,858 61,326
------------- ----------
Total............................................................ 12,708,303 781,326
Current Portion.................................................... 12,702,246 759,343
------------- ----------
Total Long-Term Debt............................................. $ 6,057 $ 21,983
------------- ----------
------------- ----------
Maturities of long-term debt are as follows:

Year Ended December 31, 1999....................................... $ 6,057 $ 21,983
------------- ----------
------------- ----------
</TABLE>

F-14
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 9--LONG-TERM DEBT (CONTINUED)
ENCAP CREDIT AGREEMENT

The Company has entered into a $20 million credit agreement with EnCap
Capital Fund III, L.P. ("EnCap") consisting of a promissory note for $12,000,000
(the "Original Note") and a promissory note for $8,000,000 (the "Supplemental
Note") (collectively the "Notes"). The Original Note bears interest at 10% per
annum and is due, with accrued interest, on December 31, 1998. The Supplemental
Note bears interest at 10% per annum until July 1, 1998 and at 18% per annum
thereafter, and is due, with accrued interest, on December 24, 2003.

Under the terms of the Supplemental Note, EnCap was issued 1.5 million
warrants for the purchase of common shares of the Company, at a price of $1.28
per share. In connection with the issuance of the warrants associated with the
Supplemental Note, the Company recorded a discount on the Supplemental Note of
$367,881 as of December 31, 1997. This discount will be amortized over the term
of the Supplemental Note. The Company has borrowed the full $12,000,000 under
the Original Note. The proceeds were applied towards the acquisition of the
Oakvale Dome Prospect ($8,000,000), and applied to the acquisition of the Old
Ocean Prospect and the drilling and completion of certain development wells
($4,000,000).

An additional $2,000,000 has been borrowed under the Supplemental Note and
the proceeds were used for the drilling of certain development and exploratory
wells and the purchase of certain leases and seismic data. All amounts borrowed
under the Supplemental Note were repaid in 1998. (See Note 20(10). The Notes are
secured by a first lien on the properties acquired and a second lien on certain
other properties. The Notes have been guaranteed by the CEO/Chairman of the
Company and by Calibre Energy, LLC., a private limited liability company owned
by certain directors and officers of the Company.

Under the terms of the Original Note, the Company agreed to convey to EnCap,
on January 1, 1999, a 25% net profit interest from the properties acquired (the
"NPI"). EnCap also required Slattery Trust, a private trust, with the
CEO/Chairman of the Company as the beneficiary, and Texstar Holdings, L.L.C., a
private limited liability company owned by certain directors and officers of the
Company (collectively the "Benz Shareholders"), to enter into a put/call
agreement (the "Put/Call Agreement"), whereby the Benz Shareholders, under
certain conditions, have the right to obtain or "call" the NPI in exchange for
1.5 million shares of their holdings in the Company. The Put/Call agreement also
gives EnCap the right, under certain conditions, to sell, or put, portions of
the NPI to the Benz Shareholders for amounts of Company shares aggregating 1.5
million shares as of December 31, 1998, or 3.5 million shares as of March 31,
1999 if not exercised earlier. The Company has entered into an agreement with
the Benz Shareholders which transfers the rights and obligations of the Put/Call
Agreement to the Company. In connection with the granting of the NPI to EnCap,
the Company recorded a discount on the Original Note of $2,102,180 as of
December 31, 1997. This discount is being amortized over the term of the
Original Note. The carrying amount of the petroleum interests has been reduced
by the same amount.

Violations of the terms and conditions of the Bank One Credit Facility
constitute an event of default under the terms of the Notes (see Bank One Credit
Facility below). The Company obtained a waiver as of December 31, 1997 of this
event of default from EnCap. However, the Company is in default under the terms
of the Notes as the Company violated certain covenants in the Bank One Credit
Facility subsequent to December 31, 1997 and the Company violated a covenant
regarding limitations of credit extensions under the Notes. Consequently, the
borrowings under the Notes have been classified as current. The

F-15
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 9--LONG-TERM DEBT (CONTINUED)
Company has requested a waiver of these violations. The Notes also contain a
provision which provides for the accelerations of the maturity of all amounts
outstanding in the event of a material and adverse change in the Company's
financial condition, operations or properties, or the ability of the Company or
the guarantors to repay the amounts outstanding.

BANK ONE CREDIT FACILITY

The Company has a credit facility with Bank One, Texas NA. The line of
credit is established by reference to proven producing oil and gas reserves, to
a maximum of $10,000,000 (borrowing base of $771,000, as of December 31, 1997).
The loan is repayable in monthly installments of $29,000. Interest accrues at
prime plus 2.0% and is payable monthly. The loan is secured by certain oil and
gas properties and has been guaranteed by the CEO/Chairman of the Company. Under
the terms of the credit facility, the loan matures June 30, 2000. The Company
obtained a waiver as of December 31, 1997 for violations of certain financial
and administrative covenants and Bank One has informed the Company that it
intends to amend the credit facility; however, the borrowings under this
facility have been classified as current as the Company was in violation of
certain covenants subsequent to December 31, 1997. The Company intends to
negotiate new covenants with Bank One. The credit facility also contains a
provision which provides for the acceleration of the maturity of all amounts
outstanding in the event of a material and adverse change in the Company's
financial condition, operations or properties, or the ability of the Company or
the guarantors to repay the amounts outstanding.

COGNISEIS DEVELOPMENT

On May 1, 1996, Texstar LLC purchased equipment and financed the purchase
through the vendor. The amount financed was $110,365. As of October 31, 1996,
$100,395 was assigned to the Company and was outstanding. The equipment has also
been assigned to the Company. The amount financed is collaterized by the
equipment. Under the terms, monthly payments of principal and interest are due.
The interest rate is 15% per annum.

F-16
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 10--INCOME TAXES

The components of the provision for income taxes is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ ------------
<S> <C> <C>
Current Tax Expense
U.S. Federal................................................... $ -- $ --
State and Local................................................ -- --
------------ ------------
Total Current.................................................... -- --
------------ ------------

Deferred Tax Expense
U.S. Federal................................................... -- --
State and Local................................................ -- --
------------ ------------
Total Deferred................................................. -- --
------------ ------------
Total Tax Provision from Continuing Operations................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>

The reconciliation of the effective income tax rate to the Federal statutory
rate is as follows:

<TABLE>
<S> <C> <C>
Federal Income Tax Rate...................................... (34.0)% (34.0)%
Deferred Tax Charge (Credit)................................. -- --
Effect of Valuation Allowance................................ 34.0% 34.0%
State Income Tax, Net of Federal Benefit..................... -- --
--------- ---------
Effective Income Tax Rate.................................... 0.0% 0.0%
--------- ---------
--------- ---------
</TABLE>

At December 31, 1997 and August 31, 1997 the Company had net carryforward
losses of approximately $11,029,000 and $4,535,000, respectively. A valuation
allowance equal to the tax benefit for deferred taxes has been established due
to the uncertainty of realizing the benefit of the tax carryforward.

F-17
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 10--INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- ------------
<S> <C> <C>
Non-Current Deferred Tax Assets (Liabilities).................... 193,062 86,614
Exploration and development costs capitalized for financial
purposes, expensed for tax purposes.......................... $ (2,436,117) $ (968,546)
Depreciation Expense...........................................
Impairment Expense............................................. 3,749,860 1,541,900
------------- ------------
Loss Carryforwards............................................. 1,506,805 659,968
Less: Valuation Allowance...................................... (1,506,805) (659,968)
------------- ------------
Net Deferred Tax Assets (Liabilities).......................... $ -- $ --
------------- ------------
------------- ------------
Net operating loss carryforwards expire as follows:

2011........................................................... $ 4,535,000
2012........................................................... 6,494,000
</TABLE>

NOTE 11--EMPLOYEE BENEFIT PLAN

The Company sponsors a 401(k) Profit Sharing Plan (the "401(k) Plan") under
Section 401(k) of the Internal Revenue Code. This plan covers all employees of
the Company. The Company matches $.50 for each $1.00 of employee deferral,
subject to limitations imposed by the Internal Revenue Service. Company
contributions to the 401(k) Plan during the periods ended December 31, 1997 and
August 31, 1997 totaled $12,024 and $23,452, respectively.

NOTE 12--SEGMENTED INFORMATION

The Company's principal activity is the exploration and development of
petroleum properties in the United States. The principal assets in Canada
consist primarily of cash, funds held in trust, amounts receivable, prepaid
expenses and investments. The allocation of the total assets of the Company
between the two segments are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- -------------
<S> <C> <C>
Canada......................................................... $ 1,337,237 $ 3,345,347
United States.................................................. 34,878,892 18,175,533
------------- -------------
$ 36,216,129 $ 21,520,880
------------- -------------
------------- -------------
</TABLE>

F-18
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 13--WARRANTS

During the period ended December 31, 1997, the Company issued 4,885,800
common shares on the exercise of the following special warrants:

(i) CLASS A SPECIAL WARRANTS

556,000 common shares and 139,000 non-transferable share purchase
warrants (the "Class A Warrants") on the exercise of 556,000 Class A Special
Warrants. Each Class A Warrant entitles the holder to purchase an additional
common share at CDN $1.80 per share on or before February 11, 1998 and at
CDN $2.07 on or before February 11, 1999. As at December 31, 1997, the Class
A Warrants remained unexercised.

(ii) CLASS B SPECIAL WARRANTS

1,540,000 common shares and 1,540,000 non-transferable share purchase
warrants (the "Class B Warrants") on the exercise of 1,400,000 Class B
Special Warrants. Two Class B Warrants entitle the holder to purchase an
additional common share at CDN $2.15 per share on or before March 17, 1998
and at CDN $2.47 per share on or before March 17, 1999. The Company has also
granted the agent special options to acquire, without additional
consideration, 400,000 Class B Warrants. During the period ended December
31, 1997, an additional 91,864 common shares were issued for proceeds of
$141,396 on the exercise of 183,728 Class B Warrants. As at December 31,
1997, 1,756,272 Class B Warrants remained unexercised.

(iii) CLASS C SPECIAL WARRANTS

432,300 common shares and 216,000 non-transferable share purchase
warrants (the "Class C Warrants") on the exercise of 393,000 Class C Special
Warrants. Each Class C Warrant entitles the holder to purchase an additional
common share at CDN $2.55 per share on or before April 13, 1998 and at CDN
$2.95 per share on or before April 12, 1999. The Company has also granted
the agent special options to acquire, without additional consideration,
40,000 Class C Warrants. As at December 31, 1997, the Class C Warrants
remained unexercised.

(iv) FIRST TRANCHE CLASS D SPECIAL WARRANTS

2,101,000 common shares and 1,050,000 non-transferable share purchase
warrants (the "First Tranche Class D Warrants") on the exercise of 1,910,000
First Tranche Class D Special Warrants. Each First Tranche Class D Warrant
entitles the holder to purchase an additional common share at a price of CDN
$3.50 per share on or before April 18, 1998 and at CDN $4.25 per share on or
before October 18, 1998. The Company has issued 50,000 common shares, at an
ascribed price of $116,571 to the agents and has also granted the agents
191,000 share purchase warrants (the "Agents' First Tranche Warrants"). Each
Agents' First Tranche Warrant is exercisable to purchase one common share at
a price of CDN $3.25 per share on or before April 18, 1998 and at CDN $3.75
per share thereafter until October 18, 1998, subject to certain exercise
restrictions. As at December 31, 1997, the First Tranche Class D Warrants
and the Agents' First Tranche Warrants remained unexercised; and

(v) SECOND TRANCHE CLASS D SPECIAL WARRANTS

256,500 common shares and 128,250 non-transferable share purchase
warrants (the "Second Tranche Class D Warrants") on the exercise of 256,500
Second Tranche Class D Special Warrants. Each Second Tranche Class D Warrant
entitles the holder to purchase an additional common share at

F-19
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 13--WARRANTS (CONTINUED)
a price of CDN $3.50 per share on or before June 26, 1998 and at CDN $4.25
per share on or before December 28, 1998. The Company has also granted the
agents 25,650 share purchase warrants (the "Agents' Second Tranche
Warrants"). Each Agents' Second Tranche Warrant is exercisable to purchase
one common share at CDN $3.25 per share until June 26, 1998 and at CDN $3.75
per share thereafter until December 28, 1998, subject to certain exercise
restrictions. As at December 31, 1997, the Second Tranche Class D Warrants
and the Agents' Second Tranche Warrants remained unexercised.

Proceeds from the issuance of the special warrants totaling $8,750,447
were received during the period ended August 31, 1997. No additional
consideration was received on the exercise of the special warrants. For the
periods ended December 31, 1997 and August 31, 1997, the Company incurred a
total of $120,114 and $1,114,010, respectively, for commissions and issue
and prospectus costs related to the special warrant offerings.

As of December 31, 1997, the Company had the following additional
warrants outstanding:

(i) 488,500 warrants to purchase common shares at CDN $1.30 per
share on or before December 5, 1998;

(ii) 142,900 warrants to purchase common shares at CDN $2.05 per
share on or before December 15, 1998.

NOTE 14--STOCK OPTIONS

Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
OUTSTANDING AND
OUTSTANDING AND EXERCISABLE AT
FISCAL YEAR PER SHARE $ EXERCISABLE AT OPTIONS OPTIONS/ DECEMBER 31, DATE OF
GRANTED CDN AUGUST 31, 1997 GRANTED CANCELED 1997 EXPIRATION
- ---------------- ----------- --------------- ---------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995............ 0.21 45,000 -- -- 45,000 01/30/98
1996............ 0.33 42,000 -- -- 42,000 07/17/99
1997............ 2.30 40,000 -- -- 40,000 11/21/98
1997............ 2.60 298,700 -- -- 298,700 01/16/00
1997............ 3.45 750,000 -- (200,000) 550,000 04/25/00
1997............ 1.95 -- 1,738,764 -- 1,738,764 12/19/02
1997............ 2.98 -- 300,000 -- 300,000 10/17/00
--------------- ---------- ---------- ---------------
1,175,700 2,038,764 (200,000) 3,014,464
--------------- ---------- ---------- ---------------
--------------- ---------- ---------- ---------------
</TABLE>

F-20
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 14--STOCK OPTIONS (CONTINUED)

<TABLE>
<CAPTION>
OUTSTANDING AND
EXERCISABLE AT OPTIONS OUTSTANDING AND
FISCAL YEAR PER SHARE $ OCTOBER 31, OPTIONS OPTIONS/ EXERCISABLE AT DATE OF
GRANTED CDN 1996 GRANTED CANCELED AUGUST 31, 1997 EXPIRATION
- -------------- ----------- --------------- ---------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1995.......... 0.21 85,000 -- (40,000) 45,000 01/30/98
1996.......... 0.33 527,000 -- (485,000) 42,000 07/17/99
1996.......... 0.50 42,000 -- (42,000) -- --
1997.......... 2.30 -- 80,000 (40,000) 40,000 11/21/98
1997.......... 2.60 -- 736,000 (437,300) 298,700 01/16/00
1997.......... 3.45 -- 750,000 -- 750,000 04/25/00
------- ---------- ----------- ---------------
654,000 1,566,000 (1,044,300) 1,175,700
------- ---------- ----------- ---------------
------- ---------- ----------- ---------------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ ------------
CDN CDN
<S> <C> <C>
Weighted Average Option Price Per Share:
Granted........................................................ $2.10 $2.99
Exercised...................................................... -- 1.32
Canceled....................................................... 3.45 2.30
Outstanding at End of Period................................... 2.35 2.96
Exercisable at End of Period................................... 2.35 2.96
Weighted Average Remaining Life of Options
Outstanding.................................................... 32 Months 29 Months
</TABLE>

The Company accounts for its stock option transactions under the provisions
of APB No. 25. The following proforma information is based on estimating the
fair value of grants based upon the provisions of SFAS No. 123. The fair value
of each option granted during the periods ending December 31, 1997 and August
31, 1997 has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk free interest rate of
5.57%, life of options of 2-3 years, expected dividend yield of 0%, and expected
volatility of 30%. Under these assumptions, the weighted average fair value of
options granted during the periods ending December 31, 1997 and August 31, 1997
was $0.40 and $0.60, respectively. Accordingly, the Company's proforma net loss
and net loss per share assuming compensation cost was determined under SFAS No.
123 would have been the following:

<TABLE>
<CAPTION>
OCTOBER 31,
SEPTEMBER 1, 1997 1996
TO TO
DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ---------------
<S> <C> <C>
Net Loss................................................. $ (2,864,698) $ (2,059,798)
Net Loss Per Share....................................... (0.10) (0.09)
</TABLE>

F-21
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 15--RELATED PARTY TRANSACTIONS

At August 31, 1997, the Company had advanced funds to Calibre Energy, L.L.C.
("Calibre") ($453,132) and Calibre Ecuador, Inc. ($213,187). Calibre is owned by
Benz' controlling shareholders and Calibre Equador, Inc. is owned 50% by Benz.
The advances to Calibre Ecuador in the amount of $213,187 have been written off
as of August 31, 1997, as Calibre Ecuador has no assets or other means with
which to repay the advances. The Calibre advances bear no interest and are due
upon demand. Included in this amount is an overhead reimbursement charge to
Calibre of $66,276. This amount has been reflected in the financial statements
as a reduction of general and administrative expense.

During the four month period ended December 31, 1997, the Company made
additional advances to Calibre Ecuador of $189,005. These advances have been
written off as of December 31, 1997.

Additionally, during the four month period ended December 31, 1997, the
Company's net advances to Calibre increased to $1,768,772. At December 31, 1997,
$1,450,000 of this amount has been reclassified as a prepayment relating to an
acquisition of properties from Calibre, scheduled to be completed in 1998. The
balance of $318,772 has been written off as a bad debt.

The Company participates in various oil and gas activities with related
parties. All transactions related to such activities are in the normal course of
business. As of December 31, 1997 and August 31, 1997, balances with related
parties were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ ----------
<S> <C> <C>
Joint Interest Billing Receivable.................................. $ 418,679 $ 391,478
Other Receivables.................................................. 95,000 --
Drilling Advances Payable.......................................... 214,776 715,907
</TABLE>

During the periods ended December 31, 1997 and August 31, 1997, the Company
was charged $14,250 and $106,113, respectively for management, professional and
office services provided by companies under significant influence of former
directors of the Company.

During the period ended August 31, 1997, the Company acquired CDN $200,000
unsecured convertible debenture (the "Stanford Debenture") issued by Stanford.
The Stanford Debenture bore interest at a rate of 8% per annum, payable
quarterly, maturing in April 2000, and was convertible, at the option of the
Company, into 340,000 common shares of Stanford and 170,000 non-transferrable
share purchase warrants. Each warrant entitled the Company to purchase an
additional flow-through common share of Stanford at CD $0.60 per share, expiring
one year after issue. On August 6, 1997, the Stanford Debenture was retired and
the Company was repaid CDN $222,937.

During the period ended August 31, 1997, the Company completed certain
agreements with Calibre whereby the Company:

(i) acquired 20% working interests in each of four oil and gas Prospects
located in Mississippi, paid through the issuance of 254,863 common shares
of the Company; at a deemed price of $573,592. In addition, the Company
reimbursed Calibre $80,000 for data costs, and

(ii) acquired a 5.5% working interest in and to lease options, seismic
permits and contracts relating to the White Castle field located in
Iberville Parish, Louisiana through the issuance of 343,000

F-22
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 15--RELATED PARTY TRANSACTIONS (CONTINUED)
common shares of the Company, at a deemed price of $442,925, plus $425,000
cash, for a total of $867,925.

NOTE 16--EARNINGS PER SHARE

Securities that could potentially dilute basic earnings per share in the
future that were not included in the computation of diluted earnings per share
because their effect would have been antidilutive are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------ ------------
<S> <C> <C>
Warrants......................................................... 3,407,572 9,896,350
Options.......................................................... 3,014,464 1,175,700
------------ ------------
Total Shares................................................... 6,422,036 11,072,050
------------ ------------
------------ ------------
</TABLE>

NOTE 17--COMMITMENTS AND CONTINGENCIES

(i) The Company has entered into a certain noncancelable operating lease
agreement for office space in Houston, Texas. The lease term expires on January
31, 2003. The lease terms are subject to certain operating expense escalations.

Rent expense recorded in the statement of operations is $49,977 and $105,158
for the periods ended December 31, 1997 and August 31, 1997, respectively.

Future minimum lease payments under the lease agreement for each of the
years ended December 31, are as follows:

<TABLE>
<S> <C>
1998........................................................ $ 396,187
1999........................................................ 396,187
2000........................................................ 396,187
2001........................................................ 396,187
2002........................................................ 396,187
2003........................................................ 33,016
------------
Total Minimum Lease Payments.................................... $ 2,013,951
------------
------------
</TABLE>

(ii) A former officer of the Company has initiated a lawsuit seeking
specific performance or, alternatively, damages for breach of contract regarding
the issuance of 200,000 shares pursuant to an option agreement. The former
officer has also initiated a claim for wrongful dismissal.

On April 22, 1998, the Company and a representative of the former officer
reached a settlement to dismiss all claims wherein the representative of the
former officer was paid $200,000 and the Company recognized the option
agreement. At that time, the former officer used the proceeds of the settlement
to exercise the option and purchased 200,000 shares of the Company's common
stock under the terms of the original option agreement.

F-23
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 17--COMMITMENTS AND CONTINGENCIES (CONTINUED)
As had been previously agreed to, the Chairman/CEO indemnified the Company
for the amount of the settlement. This was accomplished by the Chairman
foregoing a bonus accrued to him at December 31, 1997 in the amount of $200,000.
The funds allocated for the payment of the bonus were used to pay the
settlement.

NOTE 18--COMPREHENSIVE INCOME

Comprehensive income is comprised of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
SEPTEMBER 1, 1997 1996
TO TO
DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ---------------
<S> <C> <C>
Net Loss................................................. $ (2,739,322) $ (1,917,141)
Other Comprehensive Income, net of tax:
Foreign currency translation adjustments............... 25,359 (62,431)
Unrealized gains (losses) on marketable securities..... (482,231) 392,183
----------------- ---------------
Comprehensive Income..................................... $ (3,196,194) $ (1,587,389)
----------------- ---------------
----------------- ---------------
</TABLE>

NOTE 19--SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES

At October 31, 1996, the following assets and liabilities were assigned to
Texstar in exchange for the issuance of 100% of Texstar's common stock.

<TABLE>
<S> <C>
Cash............................................................ $ 559,386
Receivables..................................................... 94,914
Prepaid Expenses................................................ 321,542
Oil and Gas..................................................... 1,225,909
Property and Equipment, Net..................................... 276,390
Organization Costs, Net......................................... 8,447
Other Assets.................................................... 6,025
---------
Total Assets Assigned......................................... 2,492,613
---------
Accounts Payable and Accrued Expenses........................... 335,421
Drilling Advances............................................... 648,150
Debt............................................................ 485,954
Due to Related Parties.......................................... 256,123
---------
Total Liabilities Assigned.................................... 1,725,648
---------
Net Assets Assigned............................................. $ 766,965
---------
---------
</TABLE>

During the initial period ended August 31, 1997, the Company:

1) Acquired properties in exchange for stock valued at $1,016,516.

F-24
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 19--SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCIAL ACTIVITIES (CONTINUED)
2) Issued options to acquire common stock, for no additional
consideration, for services valued at $116,571.

NOTE 20--SUBSEQUENT EVENTS

1) Pursuant to the terms of an agreement dated September 15, 1997 (the
"Escrow Agreement"), a total of 12,155,202 common shares were placed in
escrow to comply with the requirements of the Ontario Securities Commission
(the "OSC"). Of this amount, 5,402,312 common shares subject to the Escrow
Agreement will be released over a period of three years, subject to earlier
release from escrow in certain circumstances. The remaining 6,752,890 common
shares will be released from escrow in certain circumstances.

Subsequent to December 31, 1997, the Company:

2) agreed, subject to regulatory approval, to acquire certain assets
and assume certain liabilities from Calibre Energy, L.L.C., a private
limited liability company owned by certain directors and officers of the
Company and to acquire certain petroleum interests owned by certain
directors and officers of the Company. The Company paid 261,000 in cash,
forgave $1,450,000 of Calibre accounts payable to the Company, assumed
$2,300,000 of debt, issued promissory notes totaling $2,000,000 and issued
1,927,426 shares of the Company at an ascribed price of CDN $2.80 per share;

3) sold $27.5 million of 9% Convertible Debentures, Series 1 general
obligation notes and $10 million of 9% Special Notes, Series A and Series B
exercisable into $10,000,000 principal amount of 9% Convertible Debentures,
Series 2 and Series 3. The Special Notes entitle the holder to acquire the
same principal amount of 9% convertible debentures, Series 2 and Series 3.
The Series 1, 2 and 3 Convertible Debentures bear interest at a rate of 9%
per annum payable in arrears in equal semi-annual installments on March 31st
and September 30th of each year with the first semi-annual installment to be
paid on September 30, 1998. The Series 1 Convertible Debentures have a
maturity date of March 31, 2003 and the Series 2 and 3 Convertible
Debentures have a maturity date of August 31, 2003.

The Convertible Debentures are convertible at a conversion price of CDN
$1.70 per Common Share subject to adjustment in certain circumstances. If
any holder elects to convert the Series 1, 2 or 3 Debentures prior to the
date of the third semi-annual coupon, the holder will receive a 5% premium
on the number of common shares issued upon conversion. The holders of the
Special Notes are entitled to receive an additional 10% of the common shares
issuable upon conversion if the Company fails to complete an effective
registration statement covering the shares in the United States by September
21, 1998. Under the terms of the debentures, the Company has agreed to limit
borrowings under the EnCap Credit Agreement to $12,000,000;

4) executed a secured short-term interest-bearing note with Starbucks
Trust ("Starbucks"), a trust controlled by the wife of the Chairman & CEO,
in an amount of up to $2,500,000. The Chairman & CEO disclaims beneficial
ownership or control of the trust. Starbucks Trust invested the funds with
brokerage accounts which used a portion of the funds to purchase the
Company's stock. All outstanding advances and accrued interest are due on
December 31, 1998. Interest accrues at the rate of 9% per annum on
outstanding advances.

F-25
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 20--SUBSEQUENT EVENTS (CONTINUED)
5) agreed to acquire certain producing properties from LASCO Energy
Partners for a purchase price of $15,000,000. The Company issued a note
payable which, subsequent to shareholder approval, was converted to
$12,000,000 of an issue of newly authorized preferred stock and $3,000,000
of common stock. The purchase price is subject to adjustment through
September 1998. The common stock was priced at $1.185;

6) entered into natural gas forward sales contracts beginning in
January 1998 and ending in October 1998 covering approximately 1,036,000
MMBtu's of natural gas at a price of $2.52 per MMBtu. These natural gas
contracts are covered by the Company's existing production of natural gas
volumes;

7) entered into a property swap agreement with Southern Gas Company.
The Company will convey to Southern Gas the Company's entire interest in
White Castle Dome (5.5%) and $1,250,000 in cash. In exchange, Southern Gas
will convey to the Company Southern Gas's entire interest in the Oakvale
Dome, Wausau and Moselle Dome Prospects;

8) the borrowing base under the Bank One Credit Facility was increased
to $3,600,000 effective March 1, 1998. Advances were made to pay down
Calibre debt assumed ($450,000) and to retire the $2,000,000 demand note
from Bank One. The borrowing base will be reduced by $75,000 per month,
commencing April 1998, continuing until the next borrowing base review.
Monthly principal repayments remain at $29,000. Additional covenants have
also been added to the facility.

9) sold approximately 1.6 million shares of Stanford at prices ranging
from CDN $0.40 to $0.83 per share. These shares had a fair value of
approximately CDN $0.73 (US $0.51) per share at December 31, 1997;

10) in January 1998, an additional $1,000,000 was funded under the
Supplemental Note with EnCap. In March 1998, an additional $2,000,000 was
funded under the Supplemental Note with EnCap. In March 1998, $5,000,000 was
repaid to EnCap, extinguishing the Supplemental Note;

11) instituted a stock option plan (the "Plan") covering eligible
directors and employees, as defined in the Plan. The maximum aggregate
number of common shares which may be made subject to options under the Plan
shall be 3,020,988.

12) authorized a new issue of Class A Preferred Shares, Series I.
Dividends are payable at 10% per annum of the amount paid or deemed to have
been paid for the shares, payable quarterly. Dividends are cumulative. For
the first eight quarterly dividends, the Company may elect to pay the
dividends in common shares, at a price of $1.18 per common share. The
Company has the option to redeem the Preferred Shares at any time. If a
qualified public offering of the Company's common stock is not consummated
within the three year period commencing January 23, 1998, the holders of a
majority of the Preferred Shares may elect to cause the Company to redeem
all of the Preferred Shares. On the fifth anniversary of the sale of the
Preferred Shares, the Company is required to redeem all of the Preferred
Shares.

13) entered into a purchase and sale agreement with Starbucks to acquire
all of Starbucks' interest in certain oil and gas leases and properties,
along with associated other assets. The purchase price is $2,882,547,
payable $2,332,537 in cash and 600,000 common shares of the Company, such
price subject to adjustments. Starbucks has guaranteed that the assets
acquired, on January 1, 2000 or

F-26
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 20--SUBSEQUENT EVENTS (CONTINUED)
such earlier date as Starbucks may request, will have a value of not less
than $3,032,537, such valuation defined in the agreement. In the event that
the valuation is less than the amount guaranteed, Starbucks will pay the
difference to the Company.

NOTE 21--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATION

The following supplemental unaudited information regarding the Company's oil
and gas activities is presented pursuant to the disclosure requirements of
Statement of Financial Accounting Standards No. 69.

Capitalized costs Relating to Oil and Gas Producing Activities at:

<TABLE>
<CAPTION>
AUGUST 31,
DECEMBER 31, 1997 1997
----------------- --------------
<S> <C> <C>
Unproved Oil and Gas Properties........................... $ 12,361,515 $ 5,723,471
Proved Oil and Gas Properties............................. 13,341,497 6,046,082
----------------- --------------
25,703,012 11,769,553
Less: Accumulated Amortization............................ (993,778) (413,552)
----------------- --------------
Net Capitalized Costs..................................... $ 24,709,234 $ 11,356,001
----------------- --------------
----------------- --------------
</TABLE>

Costs Incurred in Oil and Gas Producing Activities for the Periods:

<TABLE>
<CAPTION>
OCTOBER 31,
SEPTEMBER 1, 1997 1996
TO TO
DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ---------------
<S> <C> <C>
Property Acquisition Costs:
Proved................................................... $ 3,193,197 $ 1,533,047
Unproved................................................. 4,874,937 3,852,226
Exploration Costs........................................ 1,680,446 2,311,404
Development Costs........................................ 4,184,879 1,604,343
----------------- ---------------
$ 13,933,459 $ 9,301,020
----------------- ---------------
----------------- ---------------
</TABLE>

RESERVE INFORMATION AND RELATED STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET
CASH FLOWS

The following supplemental unaudited presentation of proved and proved
developed reserve quantities and related standardized measure of discounted
future net cash flow provides estimates only and does not purport to reflect
realizable values or fair market values of the Company's reserves. Volumes
reported for proved reserves are based on reasonable estimates. These estimates
are consistent with current knowledge of the characteristics and production
history of the reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, significant changes
to these estimates are expected as future information becomes available. All of
the Company's reserves are located in the United States.

Proved reserves are those estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.

F-27
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 21--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATION (CONTINUED)
Proved developed reserves are those expected to be recovered through existing
wells, equipment, and operating methods.

The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated related future income tax expenses (based on year-end
statutory tax rates, with consideration of future tax rates already legislated),
and assuming continuation of existing economic conditions. Future income tax
expenses give effect to permanent differences and tax credits but do not reflect
the impact of continuing operations including property acquisitions and
exploration. The estimated future cash flows are then discounted using a rate of
ten percent a year to reflect the estimated timing of the future cash flows.

<TABLE>
<CAPTION>
DECEMBER 31, 1997 AUGUST 31, 1997
------------------------ -------------------------
OIL (BBLS) GAS (MCF) OIL (BBLS) GAS (MCF)
---------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Proved Developed and Undeveloped
Reserves:
Beginning of period................... 470,940 3,239,867 229,185 10,953,770
Revisions of previous estimates....... (226,887) 60,966 244,749 (9,122,960)
Improved recovery..................... -- -- -- --
Purchases of minerals in place........ 18,500 4,536,528 -- --
Extensions and discoveries............ -- -- 6,287 1,492,867
Production............................ (4,506) (223,683) (9,281) (83,810)
Sales of mineral in place............. -- -- -- --
---------- ------------ ---------- -------------
End of period......................... 258,047 7,613,678 470,940 3,239,867
---------- ------------ ---------- -------------
---------- ------------ ---------- -------------

Proved developed reserves:
Beginning of period................... 157,240 2,462,000 34,372 857,000
End of period......................... 141,940 3,922,000 157,240 2,462,000
</TABLE>

F-28
<PAGE>
BENZ ENERGY LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997

NOTE 21--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATION (CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows at:

<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1997
------------- -------------
<S> <C> <C>
Future cash inflows............................................ $ 23,483,000 $ 16,197,000
Future production costs........................................ (3,368,000) (2,749,000)
Future development costs....................................... (2,648,000) (2,003,000)
Future income taxes expenses................................... (5,938,800) (3,891,300)
------------- -------------
Future net cash flows.......................................... 11,528,200 7,553,700
10% annual discount for estimated timing of cash flows......... (3,321,800) (2,393,160)
------------- -------------
Standardized measure of discounted future net cash flows
relating to proved oil and gas reserves...................... $ 8,206,400 $ 5,160,540
------------- -------------
------------- -------------
</TABLE>

The following reconciles the change in the standardized measure of
discounted future net cash flows from proved reserves:

<TABLE>
<CAPTION>
SEPTEMBER 1, 1997 OCTOBER 31, 1996
TO TO
DECEMBER 31, 1997 AUGUST 31, 1997
----------------- ----------------
<S> <C> <C>
Beginning of period...................................... $ 5,160,540 $ 9,092,160
----------------- ----------------
Increase (decrease) due to:
Sales oil and gas produced, net of production costs.... (658,000) (376,000)
Net changes in prices and production costs............. (195,000) (36,000)
Extensions, discoveries, and improved recovery, less
related costs........................................ -- 1,979,000
Development costs incurred during the year which were
previously estimated................................. -- --
Net change in estimated future development costs....... (559,000) (741,000)
Revisions of previous quantity estimates............... (1,635,000) (8,532,000)
Net change from purchases and sales of minerals in
place................................................ 6,676,000 --
Accretion of discount.................................. 782,000 1,378,000
Net change in income taxes............................. (1,569,140) 2,025,380
Other.................................................. 204,000 371,000
----------------- ----------------
Net increase (decrease)................................ 3,045,860 (3,931,620)
----------------- ----------------
End of period.......................................... $ 8,206,400 $ 5,160,540
----------------- ----------------
----------------- ----------------
</TABLE>

F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Partners of Lasco Energy Partners, L.P., and
The Board of Directors and Stockholders of Benz Energy Ltd.

We have audited the accompanying Statement of Revenues and Direct Operating
Expenses of the Oak Hill and Lisbon Properties for the period from acquisition
by Lasco Energy Partners, L.P. (August 14, 1996) to December 31, 1996 and for
the year ended December 31, 1997. This statement is the responsibility of the
management of the owners of the properties. Our responsibility is to express an
opinion on the statement based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statement 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 presentation of the statement. We believe that
our audits provide a reasonable basis for our opinion.

The accompanying statement as described in Notes 1 and 2 was prepared for
the purpose of complying with certain rules and regulations of the Securities
and Exchange Commission for inclusion in a registration statement on Form SB-2
to be issued in connection with an offering by Benz Energy Ltd. under the
Securities Act of 1933. It is not intended to be a complete presentation of the
financial condition, operations and cash flows of the properties.

In our opinion, the statement audited by us presents fairly, in all material
respects, the revenues and direct operating expenses of the Oak Hill and Lisbon
Properties as described in Notes 1 and 2 for the period from inception to
December 31, 1996 and for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

July 31, 1998

F-30
<PAGE>
OAKHILL AND LISBON PROPERTIES
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES

<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
(AUGUST 14, 1996)
YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1997 1996
----------------- ------------------
<S> <C> <C>
Revenues:
Oil and gas revenues.................................................... $ 2,728,390 $ 971,107
----------------- --------
Direct operating expenses:
Lease operating expenses................................................ 742,962 170,095
Severance taxes......................................................... 93,805 42,396
----------------- --------
Total direct operating expenses....................................... 836,767 212,491
----------------- --------
Excess of revenues over direct operating expenses......................... $ 1,891,623 $ 758,616
----------------- --------
----------------- --------
</TABLE>

The accompanying notes are an integral part of this statement

F-31
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES

NOTE 1--THE PROPERTIES

On January 23, 1998, and effective December 1, 1997, Benz Energy Ltd.
("Benz") purchased interests in Oakhill and Lisbon oil and gas properties
located in Texas and Louisiana, respectively (the Properties) from Lasco Energy
Partners, L.P. (Lasco or the Partnership). Only the Partnership's net interests
in these properties are presented herein and are referred to as the Properties.

NOTE 2--BASIS OF PRESENTATION

During the periods presented, the Properties were not accounted for as a
separate entity. Certain costs were not allocated to the Properties by Lasco.
Accordingly, full separate financial statements prepared in accordance with
generally accepted accounting principles do not exist and are not practicable to
obtain in these circumstances.

The Statement of Revenues and Direct Operating Expenses (the "Statement")
was derived from the historical accounting records of the Partnership and
represents only the net interests in the Properties acquired by Benz.
Depreciation, depletion and amortization, general and administrative expenses
and other non-operating expenses are not included. Accordingly, the Statement is
not intended to present financial position and results of operations in
accordance with generally accepted accounting principles.

Revenues in the Statement are recognized on the entitlement method.

The accompanying Statement has been prepared on the accrual basis in
accordance with generally accepted accounting principles. Preparation of the
Statement in conformity with generally accepted accounting principles and
estimation of oil and gas reserves require management to make estimates and
assumptions that affect the amounts reported in the Statement and accompanying
notes. Actual results could differ from those estimates.

NOTE 3--RELATED PARTY TRANSACTIONS

Willow Springs Production Services, L.L.C. ("WSPS") had been the general
partner and operator of the Partnership from acquisition (August 14, 1996) to
August 31, 1997 when it was removed from this capacity. From September 1, 1997
to December 31, 1997, Riverhill Energy Corporation has been the general partner
and Coastal Management Corporation ("Coastal"), an affiliate of Riverhill Energy
Corporation, has been the operator. In their capacity as the operators for the
related periods, as stated above, WSPS and Coastal receive certain revenues and
pay expenses associated with the Lasco's properties and then allocate such
activity as appropriate to the respective working interest and royalty owners.
The two limited partners in the Partnership were EnCap Equity 1996 Limited
Partnership and Energy Capital Investment Company PLC. EnCap Investments L.C.
("EnCap") is the general partner of EnCap Equity 1996 Limited Partnership.

NOTE 4--COMMITMENT AND CONTINGENCIES

In the course of their operations, the properties are subject to possible
contingencies arising from federal, state and local environmental, health and
safety laws and regulations. Additionally, the Properties were subject to
possible title issues which could affect the legal title of Benz to the
Properties. There are no such matters which, in the opinion of Encap management,
will have a material adverse impact on the revenues and direct operating
expenses in the Statement.

F-32
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES (CONTINUED)

NOTE 4--COMMITMENT AND CONTINGENCIES (CONTINUED)
While there are certain claims related to the Properties and operations of
the Partnership, none of these matters, in the opinion of EnCap management,
could have a material adverse effect on the revenues and direct operating
expenses in the Statement.

NOTE 5--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

OIL AND GAS RESERVE INFORMATION--Proved oil and gas reserve quantities are
based on estimates prepared by the Company's engineers in accordance with
guidelines established by the Securities and Exchange Commission ("SEC"). There
are numerous uncertainties inherent in estimating quantities of proved reserves
and projecting future rates of production and timing of development
expenditures. The following reserve data represent estimates only and should not
be construed as being exact.

<TABLE>
<CAPTION>
CRUDE OIL,
CONDENSATE NATURAL GAS
AND NATURAL (MILLIONS
GAS LIQUIDS OF CUBIC
(BARRELS) FEET)
----------- -----------
<S> <C> <C>
Total proved reserves:
Balance August 14, 1996.................................................... 46,881 11,157
Production............................................................... (2,552) (250)
----------- -----------
Balance December 31, 1996.................................................. 44,329 10,907
Production............................................................... (5,550) (767)
----------- -----------
Balance December 31, 1997.................................................. 38,779 10,140
----------- -----------
----------- -----------
Proved developed reserves:
August 14, 1996............................................................ 46,881 11,157
December 31, 1996.......................................................... 44,329 10,907
December 31, 1997.......................................................... 38,779 10,140
</TABLE>

FUTURE NET CASH FLOWS--Future cash inflows are based on period-end prices.
Operating costs, production and ad valorem taxes and future development costs
are based on current costs with no escalation.

The following table sets forth unaudited information concerning future net
cash flows for oil and gas reserves. This information does not purport to
present fair market value of the Company's oil and gas

F-33
<PAGE>
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING
EXPENSES OF THE OAKHILL AND LISBON PROPERTIES (CONTINUED)

NOTE 5--SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
assets, but does present a standardized disclosure concerning possible future
net cash flows that would result under the assumptions used.

<TABLE>
<CAPTION>
TOTAL
-----------
(UNAUDITED)
<S> <C>
December 31, 1997
Cash inflows............................................................................. $ 30,159
Production and development costs......................................................... (14,543)
-----------
Net cash flows........................................................................... 15,616
10 percent annual discount rate.......................................................... (7,474)
-----------
Discounted future net cash flows......................................................... $ 8,142
-----------
-----------
December 31, 1996
Cash inflows............................................................................. $ 33,129
Production and development costs......................................................... (16,389)
-----------
Net cash flows........................................................................... 16,740
10 percent annual discount rate.......................................................... (7,434)
-----------
Discounted future net cash flows......................................................... $ 9,006
-----------
-----------
August 14, 1996
Cash inflows............................................................................. $ 28,299
Production and development............................................................... (16,098)
-----------
Net cash flows........................................................................... 12,201
10 percent annual discount rate.......................................................... (5,907)
-----------
Discounted future net cash flows......................................................... $ 6,294
-----------
-----------
</TABLE>

The following table sets forth the principal sources of change in the
discounted future net cash flows:

<TABLE>
<CAPTION>
PERIOD FROM
ACQUISITION
FOR THE YEAR (AUGUST 14,
ENDED 1996) TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Sales, net of production costs............................................. $ (1,892) $ (759)
Net change in prices and production costs.................................. 390 2,949
Change in future development costs......................................... (25) -0-
Accretion of discount...................................................... 941 629
Other...................................................................... (278) (107)
------------ ------
$ (864) $ 2,712
------------ ------
------------ ------
</TABLE>

F-34
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, SUCH
SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 1
Cautionary Statement Regarding Forward-looking Statements................. 7
Risk Factors.............................................................. 7
Dividend Policy........................................................... 14
Price Range of Securities................................................. 14
Capitalization............................................................ 15
Pro Forma Financial Statements............................................ 16
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business and Properties................................................... 25
Management................................................................ 42
Certain Transactions...................................................... 46
Description of Securities................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 53
Available Information..................................................... 54
Glossary.................................................................. 55
Index to Financial Statements............................................. F-1
</TABLE>

------------------------

UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK MAY BE REQUIRED TO DELIVER A
PROSPECTUS.

36,849,575 SHARES
COMMON STOCK

[LOGO]

BENZ ENERGY LTD.

---------------------

PROSPECTUS

---------------------

OCTOBER , 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------