PENNACO ENERGY INC, 10SB12G/A, 1999-01-28

PENNACO ENERGY INC
10SB12G/A, 1999-01-28
DRILLING OIL & GAS WELLS

Previous: RGC RESOURCES INC, S-4/A, 1999-01-28

Next: AMERICAN TIGER FUNDS, 497, 1999-01-28

<PAGE>

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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

FORM 10-SB
AMENDMENT NO. 4

GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS

Under Section 12(b) or (g) of The Securities Exchange Act of 1934

PENNACO ENERGY, INC.
(Name of Small Business Issuer in its charter)

NEVADA 88-0384598
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)

1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265
(Address of Principal Executive Office) (Zip Code)

ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: 303-629-6700

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class Name of each exchange on
to be so registered which each class is to be registered
------------------- ------------------------------------
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.001

<PAGE>

INFORMATION REQUIRED IN REGISTRATION STATEMENT

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

FORWARD-LOOKING STATEMENTS

THIS REGISTRATION STATEMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS OF THE COMPANY
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF FACTORS INCLUDING THOSE SET FORTH IN "RISK FACTORS"
AND ELSEWHERE IN THIS REGISTRATION STATEMENT.

OVERVIEW

Pennaco Energy, Inc. (the "Company") is an independent energy company
primarily engaged in the acquisition, development and production of natural
gas from coal bed methane ("CBM") properties in the Rocky Mountain region of
the United States. As of January 25, 1999, the Company owned oil and gas
lease rights with respect to approximately 292,000 net acres in the Powder
River Basin in northeastern Wyoming and southeastern Montana. The Company
acquired this acreage for approximately $11 million during fiscal year 1998
and the first quarter of 1999. The Company also possesses a management team
that is experienced in the development of CBM properties.

The Company initiated its drilling program on November 15, 1998 and had
drilled approximately 64 net wells as of January 25, 1999. The Company plans
to drill approximately 100 net CBM wells in the first quarter of 1999, most
of which will be drilled on a 100% working interest basis. The wells the
Company has drilled to date have each taken an average of three days to drill
and are in various stages of completion awaiting construction of gathering
and compression systems and connection to a pipeline. The success of the
Company's drilling program (including the magnitude of any potential
reserves) cannot be determined until the wells are completed, connected to a
gathering system and flow tested for a significant period of time. The
Company estimates that its capital expenditures will total approximately $8.5
million for the first quarter of 1999, which will be allocated approximately
40% to drilling and 60% to lease acquisition.

As of the date hereof, the Company has not produced any oil or gas nor
does it have the ability to produce any oil or gas until construction of a
gathering and compression system is completed and pipeline capacity is
secured. The Company anticipates initial production and gas sales which will
generate revenues in the second quarter of 1999 but there can be no assurance
that third party service providers will be able to complete construction of
gathering and transportation systems in time or that the Company's existing
wells will produce economic quantities of CBM gas. Certain of the Company's
undeveloped oil and gas properties have reserves classified as proved
undeveloped; however, such amounts were not material as of September 30,
1998. While the Company believes that it has assembled an attractive acreage
position, there can be no assurance that such acreage contains significant
amounts of natural gas reserves nor that such reserves can or will be
economically developed.

Some of the largest coal seams in the United States are found in the
Powder River Basin. A coal seam is a layer of coal of variable thickness
which is found below the surface of the ground but which may also outcrop at
the surface. The CBM wells in the Powder River Basin are 350 to 1,200 feet in
depth and typically take only two to three days to drill and complete.
Because of the relatively shallow depth and short amount of time to drill a
well, CBM wells have relatively low drilling, completion and well connection
costs (approximately $50,000 to $60,000 per well). Approximately 50% of the
well cost is well connection cost comprised of gathering lines, power lines
and surface equipment. The Company plans to contract much of the well
connection cost to third party gatherers in return for payment of a per mcf
fee by Pennaco. The CBM gas recovered from the wells in the Powder River
Basin does not require processing but does require dehydration and
compression and will eventually require carbon dioxide treatment.

Drilling and production growth in the Powder River Basin is currently
impeded by two principal factors: (i) the completion of an environmental
impact statement ("EIS") by the Bureau of Land Management ("BLM") with
respect to a portion of the federal lands in the basin, and (ii) a natural
gas pipeline bottleneck which restricts the movement of natural gas out of
the Powder River Basin. The number of drilling permits allowed on federal
lands subject to the EIS are limited until the EIS is complete. This
limitation could adversely affect the Company's ability to drill on federal
lands. Further, the existence of a pipeline bottleneck could adversely impact
the Company's ability to produce and market natural gas. Operators are
currently drilling wells on an interim basis on federal lands with the
limited number of drilling permits allowed by the BLM until the EIS is
complete. The EIS was originally scheduled for completion in May 1999, but
has been delayed until July 1999.

Currently only two pipelines are available to transport CBM gas out of
the Powder River Basin. The MIGC line, which is operated by Western Gas
Resources Corporation, has recently undergone a 40 MMcf per day expansion to
130 MMcf per day. The MIGC line runs south through the eastern side of the
Powder River Basin to interconnect with two interstate pipelines near
Glenrock, Wyoming, but has little available capacity. Williston Basin
Interstate, a subsidiary of MDU Resources, operates a 42 MMcf per day
pipeline which runs northeast from Recluse, Wyoming to local markets
throughout eastern Montana and North Dakota as well as interconnects with
Northern Border pipeline, an interstate pipeline which travels southeast
towards Chicago markets. Williston Basin Interstate similarly has limited
additional capacity.

Three pipeline construction and expansion projects have recently been
announced, two of which are reportedly in the process of obtaining permits
and acquiring rights of way.

On December 23, 1998, CMS Gas Transmission and Storage, Enron Capital and
Trade Resources Corporation, Western Gas Resources Corporation and CIG
Resources Co., a subsidiary of Coastal Corporation, jointly announced the
formation of Fort Union Gas Gathering, LLC ("Fort Union"). Fort Union has
announced plans build a 106 mile, 24 inch gathering pipeline to gather CBM
gas in the Powder River Basin. The new gathering line is expected to have an
initial capacity of approximately 450 MMcf per day of natural gas and which
can be expanded to 700 MMcf per day. The Fort Union line is expected to
deliver CBM gas to a CO2 treating facility to be constructed near Glenrock,
Wyoming and to interstate pipeline interconnects also near Glenrock.
Construction is scheduled to begin in April 1999 with operations to commence
on or about September 1, 1999, although there can be no assurance that such
system will ultimately be constructed or in the time-frame currently
anticipated.

In September 1998, KN Energy, Inc. and Devon Energy Corporation announced
the formation of Thunder Creek Gas Services LLC. Thunder Creek has announced
its intention to build a 126 mile, 24 inch gathering line capable of
delivering up to 450 MMcf per day of natural gas to multiple interstate
pipelines near Douglas, Wyoming. The operations are scheduled to commence in
the third quarter of 1999, although there can be no assurance that such
system will ultimately be constructed or in the time-frame currently
anticipated.

Additionally, Wyoming Interstate Company has filed with the Federal
Energy Regulatory Commission ("FERC") to construct a new 143 mile, 24 inch
natural gas pipeline known as the Medicine Bow Lateral from Glenrock to
Cheyenne, Wyoming where the line will interconnect with several interstate
pipelines which serve the mid-continent and west coast regions of the U.S. as
well as the Colorado Front Range markets. There has been no disclosure as to
the proposed initiation or completion of this project, and there can be no
assurance of its ultimate completion.

The Company is filing this Form 10-SB on a voluntary basis. Pursuant to
a private placement of its equity securities that was completed on September 4,
1998, the Company agreed with the purchasers that it would register its

<PAGE>

common stock under Section 12(g) of the Securities Exchange Act of 1934 (the
"Act"). It is the Company's intention, in the event that its obligation to
file reports under the Act is suspended, to continue to file such reports on
a voluntary basis.

The Company currently maintains its principal executive offices at
1050 17th Street, Suite 700, Denver, CO 80265. The Company's telephone number
is (303) 629-6700 and the facsimile number is (303) 629-6800. The Company also
maintains an office at 3651 Lindell Road, Suite A, Las Vegas, Nevada 89103 and a
field office at 400 South Miller Avenue, Gillette, Wyoming 82716.

RECENT DEVELOPMENTS

CMS TRANSACTION

On October 23, 1998, the Company and CMS Energy Corporation's
exploration and production unit, CMS Oil and Gas Company, signed a definitive
purchase and sale agreement (the "CMS Agreement") relating to the development
of the Company's Powder River Basin acreage (the "CMS Transaction").
Pursuant to the terms of the CMS Agreement, CMS Oil and Gas Company acquired
an undivided 50% working interest in approximately 492,000 net acres of
Pennaco's leasehold position in the Powder River Basin for $28.0 million.
The Company acquired the leasehold position which was conveyed to CMS in the
CMS Transaction for approximately $7.0 million. The purchase price provided
for in the CMS Agreement was the result of arm's length negotiations between
the Company and CMS and was also a function of the consideration originally
paid by the Company for such acreage. The Company's Board of Directors
received a fairness opinion from Hanifen Imhoff, Inc. that the CMS
Transaction was fair to the Company's stockholders from a financial point of
view.

The CMS Agreement provides for the development of the Company's lease
acreage, with Pennaco and CMS each operating approximately 50% of the wells
drilled in the area of mutual interest. As is customary in oil and gas
leasehold transactions, the agreement provides for the adjustment of the
purchase price for title defects discovered prior to closing and for the
opportunity for one party to participate in acquisitions made by the other
party in the area of mutual interest defined in the agreement. The agreement
also provides for a preferential purchase right to the other party in the
event either CMS or the Company attempts to sell all or a portion of its
interest in the acreage covered by the agreement. All of the leases in the
area of mutual interest are dedicated to CMS Gas Transmission and Storage, an
affiliate of CMS Oil and Gas, for gathering, compression and transportation.

Pursuant to the terms of the CMS Transaction, CMS agreed to pay Pennaco
$5.6 million of earnest money in the form of a bridge loan (the "CMS Bridge
Loan") secured by substantially all of the Company's oil and gas leases.
Approximately $3.2 million of such amount was paid directly to existing
creditors of the Company. The Company used the balance for general corporate
purposes. The CMS Transaction was structured such that the conveyance of the
working interests occurred at two separate closings. The first closing
occurred on November 20, 1998 and the second closing occurred on January 15,
1999. The Company received $7.6 million at the first closing and received
$14.8 million at the second closing less $1.8 million which is held in escrow
subject to customary closing adjustments. The CMS Bridge Loan was cancelled
at the second closing.

COMMENCEMENT OF DRILLING PROGRAM

On November 15, 1998 the Company initiated its drilling program with the
drilling of its first well in the Powder River Basin. As of January 25,
1999, the Company had drilled approximately 64 net CBM wells. The Company
plans to drill approximately 100 net CBM wells in the first quarter of 1999,
most of which will be drilled on a 100% working interest basis outside of the
CMS area of mutual interest. To date, the Company's wells have each taken an
average of three days to drill. The portion of the first quarter 1999
drilling program to be drilled within the CMS area of mutual interest is
subject to CMS approval. In the first quarter of 1999, the Company expects
net capital expenditures for drilling to be approximately $3.5 million.

Pursuant to a drilling agreement with CBM Drilling, LLC ("CBMD"), the
Company prepaid $360,000 of drilling costs to ensure that drilling rigs
appropriate for Powder River Basin drilling are available for the Company's
planned drilling program. CBMD currently has four drilling rigs that are
primarily dedicated to the Company's drilling program.

CLOSING OF PENDING LEASE ACQUISITIONS

The Company closed a series of transactions in November and December
1998 which resulted in the addition of approximately 10,000 net acres of
leasehold to the Company's acreage inventory for a total cost of
approximately $2.6 million. This acreage was not included in the CMS
Transaction. This amount was recorded in the Company's September 30, 1998
financial statements as lease acquisitions payable.

-2-

<PAGE>

RISK FACTORS

NO OPERATING HISTORY AND REVENUES. The Company is a development stage
company with no revenues or income and is subject to all the risks inherent
in the creation of a new business. Since the Company's principal activities
to date have been limited to organizational activities, prospect development,
acquisition of leasehold interests and commencement of a drilling program, it
has no record of any revenue-producing operations. Consequently, there is no
operating history upon which to base an assumption that the Company will be
able to achieve its business plans.

DEPENDENCE ON GATHERING, COMPRESSION AND TRANSPORTATION FACILITIES. If
the Company begins production of natural gas, the marketability of its
production will depend in part upon the availability, proximity and capacity
of gas gathering and compression systems, pipelines and processing
facilities. Based upon future production estimates for the Company and the
Powder River Basin, additional pipeline capacity will be needed as early as
the beginning of 1999. Pipeline demand in the area is increasing as CBM
development activity continues to expand. The Company's core land position
is located in an area near the development activity. The terms of the CMS
Agreement provide that Pennaco and CMS Oil and Gas establish an Area of
Mutual Interest ("AMI") around the Company's acreage and that both Pennaco
and CMS Oil and Gas dedicate all of the acreage in the AMI to CMS Gas
Transmission and Storage Company ("CMSGT&S") for gathering, compression and
transportation, which shall be provided at competitive rates and tariffs.
CMSGT&S is currently a participant in Fort Union Gas Gathering, LLC. See
"Description of the Business-Overview." Meanwhile, outside of the AMI, the
Company is engaged in negotiations with several pipeline companies to lay
pipeline to the Company's planned drillsites, and to gather, compress and
transport gas. However, as of yet no agreements have been entered into with
any of these companies. Unless and until the Company is able to obtain
satisfactory arrangements for the transport and marketing of its gas, both
within and outside of the AMI, the Company may experience delays, possibly
significant, in connection with its efforts to generate revenues from the
sale of gas. Further, there is limited pipeline capacity outside of the
Powder River Basin which will require expansion and new construction to
accommodate the increasing production. The expansion of the pipeline
capacity is likely to require significant capital outlays by the pipeline
companies and the related plans and specifications are subject to government
regulatory review, permits and approvals. This approval process may result
in delays in the commencement and completion of any pipeline construction
project. No assurance can be given by the Company that certain of its wells
will not be shut in for significant periods of time due to the lack of
capacity in existing pipelines. There can be no assurance that such capacity
will be completed on a timely basis or that the Company will be permitted to
transport any volumes thereon.

In addition, federal and state regulation of gas and oil production and
transportation, general economic conditions, changes in supply and changes in
demand all could adversely affect the Company's ability to produce, gather
and transport its natural gas. If market factors were to change materially,
the financial impact on the Company could be substantial. Most gas
transportation contracts will require the Company to transport minimum
volumes. If the Company transports smaller volumes, it may be liable for
damages proportional to the shortfall.

LEASE ACQUISITION RISKS. It is customary in the oil and gas industry to
acquire a lease interest in a property based upon a preliminary title
investigation. If the title to the leases acquired by the Company prove to
be defective, the Company could lose the costs of acquisition and any
development, or incur substantial costs for curative title work. Oil and gas
leases generally call for annual rental payments and the payment of a
percentage royalty on the oil and gas produced. Courts in many states have
interpreted oil and gas leases to include various implied covenants,
including the lessee's implied obligation to develop the lease diligently, to
prevent drainage of oil and gas by wells on adjacent land,

-3-

<PAGE>

to seek diligently a market for production, and to operate prudently
according to industry standards. Oil and gas leases with similar language may
be interpreted quite differently depending on the state in which the property
is located. Issues decided differently in two states may not yet have been
decided by the courts of a third state, leading to uncertainty as to the
proper interpretation. For instance, royalty calculations can be
substantially different from state to state, depending on each state's
interpretation of typical lease language concerning the costs of production.
There can be no assurance that the leases will be free from litigation
concerning the proper interpretation of the lease terms. Adverse decisions
could result in material costs to the Company or the loss of one or more
leases.

VOLATILITY OF OIL AND GAS MARKETS. If the Company begins production,
the Company's revenues, profitability and future rate of growth will be
substantially dependent upon prevailing market prices for natural gas and
oil, which can be extremely volatile and in recent years have been depressed
by excess domestic and imported supplies. In addition to market factors,
actions of state and local agencies, the United States and foreign
governments, and international cartels affect oil and gas prices. All of
these factors will be beyond the control of the Company. These external
factors and the volatile nature of the energy markets make it difficult to
estimate future prices of natural gas and oil. There is no assurance that the
Company will be able to produce oil or gas on an economic basis in light of
prevailing market prices. If the Company is able to produce natural gas, any
substantial or extended decline in the price of natural gas would have a
material adverse effect on the Company's financial condition and results of
operations, including reduced cash flow and borrowing capacity and could
reduce both the value and the amount of the Company's oil and gas reserves.

PROPERTY ACQUISITION AND COMPETITION. Competition for prospects and
producing properties is intense. The Company has been competing and will
continue to compete with a number of other potential purchasers of prospects
and producing properties, many of which will have greater financial resources
than the Company. The bidding for prospects has become particularly intense
in the Powder River Basin with different bidders evaluating potential
acquisitions with different product pricing parameters and other criteria
that result in widely divergent bid prices. The presence of bidders willing
to pay prices higher than are supported by the Company's evaluation criteria
could further limit the ability of the Company to acquire prospects. In
addition, low or uncertain prices for properties can cause potential sellers
to withhold or withdraw properties from the market. In this environment,
there can be no assurance that there will be a sufficient number of suitable
prospects available for acquisition by the Company or that the Company can
sell prospects or obtain financing for or participants to join in the
development of prospects.

In addition to competition for leasehold acreage in the Powder River
Basin, the oil and gas exploration and production industry is intensely
competitive as a whole. The Company will compete against established
companies with significantly greater financial, marketing, personnel, and
other resources than the Company. Such competition could have a material
adverse effect on the Company's ability to execute its business plan as well
as profitability.

SHUT-IN WELLS, CURTAILED PRODUCTION, AND OTHER PRODUCTION INTERRUPTIONS.
In the event that the Company manages to initiate production and generate
income from its CBM properties, such production may be curtailed or shut-in
for considerable periods of time due to a lack of market demand, government
regulation, pipeline and processing interruptions, allocations, diminished
pipeline capacity, force majeure and such curtailments may continue for a
considerable period of time. There may be an excess supply of gas in areas
where the Company's operations will be conducted. In such an event, it is
possible that there will be no market or a very limited market if the Company
does generate production in the future. There is also the possibility that
drilling rigs may not be available when needed and there may be shortages of
crews, equipment and other manpower requirements.

UNINSURED RISKS. The Company may not be insured against losses or
liabilities which may arise from operations, either because such insurance is
unavailable or because the Company has elected not to purchase such insurance
due to high premium costs or other reasons. The Company currently carries
well control insurance as well as property and general liability insurance.

OPERATING HAZARDS. The oil and natural gas business involves certain
operating hazards such as well blowouts, craterings, explosions,
uncontrollable flows of oil, natural gas or well fluids, fires, formations
with abnormal pressures,

-4-

<PAGE>

pipeline ruptures or spills, pollution, releases of toxic gas and other
environmental hazards and risks, any of which could result in substantial
losses to the Company if it begins commercial production. In addition, the
Company may be liable for environmental damage caused by previous owners of
property purchased or leased by the Company. As a result, substantial
liabilities to third parties or governmental entities may be incurred, the
payment of which could reduce or eliminate the funds available for
exploration, development or acquisitions or result in losses to the Company.
In accordance with customary industry practices, the Company maintains
insurance against some, but not all, of such risks and losses. The Company
may elect to self-insure if management believes that the cost of insurance,
although available, is excessive relative to the risks presented. The
occurrence of an event that is not covered, or not fully covered, by
insurance could have a material adverse effect on the Company's financial
condition and results of operations. In addition, pollution and environmental
risks generally are not fully insurable.

WATER DISPOSAL. The Company believes that the water produced from the
Powder River Basin coal seams, once the Company begins development
activities, will be low in total dissolved solids, allowing the Company to
discharge the water with minimal environmental impact. However, if
non-potable water is discovered, it may be necessary to install and operate
evaporators or to drill disposal wells to re-inject the produced water back
into the underground rock formations adjacent to the coal seams or to lower
sandstone horizons. In the event the Company is unable to obtain the
appropriate permits, non-potable water is discovered or if applicable laws or
regulations require water to be disposed of in an alternative manner, the
costs to dispose of produced water will increase and these costs could have a
material adverse effect on the Company's operations in this area and the
profitability of such operations including rendering future production and
development uneconomic.

REGULATION. The oil and gas industry is extensively regulated by
federal, state and local authorities. Legislation and regulations affecting
the industry are under constant review for amendment or expansion, raising
the possibility of changes that may affect, among other things, the pricing
or marketing of oil and gas production. Substantial penalties may be assessed
for noncompliance with various applicable statutes and regulations, and the
overall regulatory burden on the industry increases its cost of doing
business and, in turn, decreases its profitability. State and local
authorities regulate various aspects of oil and gas drilling and production
activities, including the drilling of wells (through permit and bonding
requirements), the spacing of wells, the unitization or pooling of oil and
gas properties, environmental matters, safety standards, the sharing of
markets, production limitations, plugging and abandonment, and restoration.

FEDERAL AND STATE TAXATION. Federal and state income, severance,
franchise, excise, and other tax laws are of particular significance to the
oil and gas industry. Recent legislation has eroded previous benefits to oil
and gas producers, and any subsequent legislation may continue this trend.
The states in which the Company conducts its oil and gas activities also
impose taxes, including, without limitation, real and personal property
taxes, upon the ownership or production of oil and gas within such states.
There can be no assurance that the tax laws will not be changed or
interpreted in the future in a manner which adversely affects the Company.

RELIANCE UPON DIRECTORS AND OFFICERS. The Company is wholly dependent,
at the present, upon the personal efforts and abilities of its officers who
will exercise control over the day to day affairs of the Company, and upon
its directors, some of whom are engaged in other activities, and will devote
limited time to the Company's activities. Currently several employees of the
Company are not employed by the Company on a full time basis and are serving
in their respective capacities as consultants. This situation will continue
until the Company's business warrants and the Company is able to afford an
expanded staff. There can be no assurance given that the volume of business
necessary to employ all essential personnel on a full time basis will be
obtained nor that the Company's proposed operations will prove to be
profitable. The Company will continue to be highly dependent on the
continued services of its executive officers, and a limited number of other
senior management and technical personnel. Loss of the services of one or
more of these individuals could have a material adverse effect on the
Company's operations. The Company does have employment agreements with
several of its executive officers. The Company does not maintain key person
life insurance on any of its executive officers.

NON-ARM'S LENGTH TRANSACTIONS AND RELATED PARTY TRANSACTIONS. The
number of shares of common stock, par value $0.001 per share (the "Common
Stock"), of the Company or options to purchase shares of Common Stock

-5-

<PAGE>

issued to present stockholders of the Company for cash and/or services was
arbitrarily determined and may not be considered the product of arm's length
transactions. It is anticipated that the Company may deal with related
parties when contracting for acquisition and development projects. In
certain circumstances, the fairness of such transactions will be reviewed and
approved by members of the Board of Directors that do not have interests
therein. It is anticipated that there will not be any other review as to the
fairness of the Company's dealings with related parties. A director of the
Company, Mark A. Erickson, is also a consultant to R.I.S. Resources (USA),
Inc. ("RIS USA"), a wholly owned subsidiary of R.I.S. Resources International
Corp. ("RIS") and serves as a director of RIS. RIS is engaged in the
gathering, processing and marketing of natural gas. RIS owns approximately
26% of the outstanding shares of the Company.

INDEMNIFICATION OF OFFICERS AND DIRECTORS FOR SECURITIES LIABILITIES.
The bylaws of the Company provide that the Company may indemnify any
director, officer, agent and/or employee as to those liabilities and on those
terms and conditions as are specified in the Nevada Business Corporation Act.
Further, the Company may purchase and maintain insurance on behalf of any
such persons whether or not the corporation would have the power to indemnify
such person against the liability insured against. The foregoing could result
in substantial expenditures by the Company and prevent any recovery from such
officers, directors, agents and employees for losses incurred by the Company
as a result of their actions. Further, the Company has been advised that in
the opinion of the Securities and Exchange Commission ("SEC"), indemnification
is against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable.

LIMITED MARKET FOR SECURITIES. At present, a limited market exists for
the Company's Common Stock in the OTC Bulletin Board system. There can be no
assurance that the OTC Bulletin Board will provide adequate liquidity or that
a trading market will be sustained. A purchaser of stock may, therefore, be
unable to resell shares purchased should the purchaser desire to do so. The
Company has not been advised by any entity that it intends to make a market
in the Company's Common Stock, nor has the Company taken any affirmative
steps to encourage or market maker to begin trading in the Company's
securities. Furthermore, it is unlikely that a lending institution will
accept the Company's securities as pledged collateral for loans unless a
trading market develops providing necessary and adequate liquidity for the
trading of shares.

"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON
MARKETABILITY OF SECURITIES. The SEC has adopted regulations which generally
define "penny stock" to be an equity security that has a market price of less
than $5.00 per share. The Company's Common Stock may be subject to rules that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000, or annual
incomes exceeding $200,000 or $300,000 together with their spouse).

For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and
have received the purchaser's prior written consent to the transaction.
Additionally, for any transaction, other than exempt transactions, involving
a penny stock, the rules require the delivery, prior to the transaction, of a
risk disclosure document mandated by the SEC relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both
the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed
control over the market. Finally, monthly statements must be sent disclosing
recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the "penny
stock" rules may restrict the ability of broker-dealers to sell the Company's
Common Stock and may affect the ability of investors to sell the Company's
Common Stock in the secondary market.

CUMULATIVE VOTING, PREEMPTIVE RIGHTS AND CONTROL. There are no
preemptive rights in connection with the Common Stock. The stockholders may
be further diluted in their percentage ownership of the Company in the event
additional shares are issued by the Company in the future. Cumulative voting
in the election of Directors is not provided for in the Company's bylaws or
under Nevada law. Accordingly, the holders of a majority of the shares of
Common Stock, present in person or by proxy, will be able to elect all of the
Company's Board of Directors.

NO DIVIDENDS ANTICIPATED. At the present time, the Company does not
anticipate paying dividends, cash or otherwise, on its Common Stock in the
foreseeable future. Future dividends will depend on earnings, if any, of the
Company, its financial requirements and other factors. Investors who
anticipate the need of an immediate income from their investment in the
Company's Common Stock should refrain from the purchase thereof.

-6-

<PAGE>

BUSINESS

GENERAL

The Company was incorporated in January 1998 to engage in the business
of oil and gas exploration and production. To date, the Company's main focus
and primary objective has been the procurement of mineral leasehold interests
in the Powder River Basin of Wyoming and Montana and the commencement of its
CBM drilling program. Since its inception, the Company has issued common
stock and securities to raise capital, recruited and organized management,
and has developed a strategic plan for the development of its Powder River
Basin acreage. Other than the acquisition of leasehold interests, the
Company has conducted limited operations.

CBM production is similar to traditional natural gas production in terms
of the physical producing facilities and the product produced. However, the
subsurface mechanisms that allow the gas to move to the wellbore and the
producing characteristics of CBM wells are significantly different from
traditional natural gas production.

Coal is a black organic mineral formed from buried deposits of plant
material from ancient coastal swamps. Methane, or natural gas, is a common
component of coal, though coals vary in their methane content per ton.
Rather than being limited to open spaces in the coal structure, methane is
adsorbed within the inner coal surfaces. When the coal is fractured and
exposed to lower pressures (near a well or in a coal mine) the gas leaves
(desorbs from) the coal. Whether a coal bed will produce commercial
quantities of natural gas depends on its original content of gas per ton of
coal, the thickness of the coal beds, the reservoir pressure and the
existence of fractures through which the released gas can flow to the
wellhead (permeability). Frequently, coal beds are partly or completely
saturated with water. As the water is produced, space is created for gas to
leave the coal and flow to the well. Contrary to traditional gas wells, new
CBM wells often produce water for several months (dewatering) and then, as
the water production decreases because the coal seams are being drained, and
the pressure decreases, natural gas production increases.

The coal beds of the Powder River Basin are among the thickest coals in
the world, potentially containing extensive recoverable coal bed gas
reserves, and are located in the Tongue River Member of the Paleocene Fort
Union and lower Eocene Wasatch formations. This coal seam contains 10 to 12
coal beds ranging in thickness from approximately five feet to over 200 feet,
with cumulative thicknesses of all coal seams ranging up to 350 feet. In the
Fort Union formation, where the Company intends to drill, gas occurs in
sandstones and coal beds at a number of different stratigraphic levels. Well
depths in the Powder River Basin are relatively shallow, between 350 and
1,200 feet.

Coal beds produce nearly pure methane gas while traditional gas wells
normally produce gas that contains small portions of ethane, propane, and
other, heavier, hydrocarbon gases. Methane normally constitutes more than
90% of the total gases in the production from traditional gas wells. The
Powder River Basin gas does not contain significant amounts of contaminants,
such as hydrogen sulfide, carbon dioxide or nitrogen, that are sometimes
present in traditional natural gas production. Therefore the properties of
the Powder River Basin gas, such as heat content per unit volume (Btu), are
very close to the average properties of pipeline gas from traditional gas
wells.

STRATEGY

Pennaco's business strategy is to build an exploration and production
company that is focused on creating value for its stockholders through
profitable growth in reserves, production and cash flow per share. The key
components of the Company's business strategy include the following: (i)
concentrate activities in the Rocky Mountain and Mid-Continent regions of the
U.S., (ii) lever the expertise of its technical and management team in areas
of prior experience, (iii) acquire producing properties with development and
exploitation potential utilizing industry contacts and opportunities known to
the Company's senior management, (iv) assemble acreage positions through
lease acquisition and farm-ins to conduct a balanced exploration and
development effort, (v) seek to acquire operating control and majority
ownership interests in order to optimize the timing and efficiency of
operations, (vi) participate in gas gathering, processing, transportation,
and marketing activities in order to maximize product price realizations and
(vii) maintain a strong balance sheet in order to be in a position to
capitalize on opportunities as they occur.

-7-

<PAGE>

The Company intends to add production by creating and forming strategic
alliances with mid-stream companies (gathering and marketing) and down-stream
companies (pipeline companies and end users). If the Company establishes
significant production and cash flow in the Powder River Basin, it plans to
pursue other CBM projects as well as more conventional oil and gas projects.

DRILLING AND PRODUCTION STRATEGY

The Company initiated its drilling program on November 15, 1998 and
had approximately 64 net wells as of January 25, 1999. The Company plans to
drill over 100 net CBM wells in the first quarter of 1999. The wells the
Company has drilled to date have each taken an average of three days to drill
and are in various stages of completion awaiting construction of gathering
and compression systems and connection to a pipeline. The success of the
Company's drilling program (including the magnitude of any potential
reserves) cannot be determined until the wells are completed, connected to a
gathering system and flow tested for a significant period of time. The
Company estimates that its capital expenditures will total approximately $8.5
million for the first quarter of 1999, which will be allocated approximately
40% to drilling and 60% to lease acquisition.

The Company's ability to complete its drilling program is entirely
dependent upon the availability of sufficient capital, equipment and
personnel. The estimated cost per well is approximately $50,000 to $60,000 to
drill and complete. The estimated drilling portion of the total well cost is
approximately $15,000. The Company has entered into a drilling agreement
with CBMD, pursuant to which it has prepaid drilling costs of $360,000.
Additionally, the Company has agreed to loan CBMD $90,000, which loan will be
secured by all the personal property and equipment of CBMD, and has agreed if
requested on or before June 30, 1999 to loan CBMD an additional $150,000
which would be similarly secured. To date, CBMD has not requested an advance
of the additional $150,000 under the drilling agreement. Based on the
agreement that every third well shall be drilled at no cost to Pennaco, the
prepaid drilling costs will be recovered after approximately 75 wells are
drilled for Pennaco by CBMD. The prepayments were made to ensure that
drilling rigs will be available and dedicated to the Company's planned
drilling program and that these rigs would meet the specific requirements of
the Company. CBMD currently has four CBM drilling rigs that are primarily
dedicated to the Company's drilling program.

STRATEGIC ALLIANCE AND PARTNERING

On October 23, 1998, the Company and CMS Energy Corporation's
exploration and production unit, CMS Oil and Gas Company signed the CMS
Agreement. Pursuant to the terms of the CMS Agreement, CMS Oil and Gas
Company acquired an undivided 50% working interest in approximately
492,000 net acres of Pennaco's leasehold position in the Powder River Basin
for $28.0 million. The CMS Agreement provides for the development of the
Company's lease acreage, with Pennaco and CMS each operating approximately
50% of the wells drilled in the area of mutual interest. As is customary in
oil and gas leasehold transactions, the agreement provides for the adjustment
of the purchase price for title defects discovered prior to closing and for
the opportunity for one party to participate in acquisitions made by the
other party in the area of mutual interest defined in the agreement. The
agreement also provides for a preferential purchase right to the other party
in the event either CMS or the Company attempts to sell all or a portion of
its interests covered by the agreement. All of the leases in the area of
mutual interest are dedicated to CMS Gas Transmission and Storage, an
affiliate of CMS Oil and Gas Company, for gathering, compression and
transportation.

MARKETING OF PRODUCTION

If the Company successfully produces oil and/or natural gas, it does not
plan to refine or process its production, but plans to sell the production to
unaffiliated oil and natural gas purchasing companies in the area in which it
is produced. If the Company produces natural gas, it expects to sell it
under contracts to both interstate and intrastate natural gas pipeline
companies, as well as companies who transport natural gas overground.

TITLE TO PROPERTIES

The Company believes it has satisfactory title to all of its properties
in accordance with standards generally accepted in the oil and gas industry.
The Company's properties are subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which the Company believes do not materially interfere with the use of or
affect the value of such properties.

COMPETITION

Competition for prospects and producing properties is intense. The
Company has been competing and will continue to compete with a number of
other potential purchasers of prospects and producing properties, many of
which will have greater financial resources than the Company. The bidding for
prospects has become particularly intense in

-8-

<PAGE>

the Powder River Basin with different bidders evaluating potential
acquisitions with different product pricing parameters and other criteria
that result in widely divergent bid prices. The presence of bidders willing
to pay prices higher than are supported by the Company's evaluation criteria
could further limit the ability of the Company to acquire prospects. In
addition, low or uncertain prices for properties can cause potential sellers
to withhold or withdraw properties from the market. In this environment,
there can be no assurance that there will be a sufficient number of suitable
prospects available for acquisition by the Company or that the Company can
sell prospects or obtain financing for or participants to join in the
development of prospects.

REGULATION

The Company's operations will be subject to extensive and continually
changing regulation, as legislation affecting the oil and natural gas
industry is under constant review for amendment and expansion. Many
departments and agencies, both federal and state, are authorized by statute
to issue and have issued rules and regulations binding on the oil and natural
gas industry and its individual participants. The failure to comply with
such rules and regulations can result in substantial penalties. The
regulatory burden on the oil and natural gas industry will increase the
Company's cost of doing business and, consequently, affect its profitability.
However, the Company does not believe that it will be affected in a
significantly different manner by these regulations than its competitors in
the oil and natural gas industry.

TRANSPORTATION AND SALE OF NATURAL GAS. The FERC regulates interstate
natural gas pipeline transportation rates as well as the terms and conditions
of service. FERC's regulations will affect the marketing of any natural gas
produced by the Company, as well as any revenues received by the Company for
sales of such natural gas. In 1985, the FERC adopted policies that make
natural gas transportation accessible to natural gas buyers and sellers on an
open-access, nondiscriminatory basis. The FERC issued Order No. 636 on April
8, 1992, which, among other things, prohibits interstate pipelines from
making sales of gas tied to the provision of other services and requires
pipelines to "unbundle" the services they provide. This has enabled buyers
to obtain natural gas supplies from any source and secure independent
delivery service from the pipelines. All of the interstate pipelines subject
to FERC's jurisdiction are now operating under Order No. 636 open access
tariffs. On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking
regarding the regulation of short term natural gas transportation services.
FERC proposes to revise its regulations to require all available short term
capacity (including capacity released by shippers holding firm entitlements)
to be allocated through an auction process. FERC also proposes to require
pipelines to offer additional services under open access principles, such as
"park and loan" services. In a related initiative, FERC issued a Notice of
Inquiry on July 29, 1998 seeking input from natural gas industry players and
affected entities regarding virtually every aspect of the regulation of
interstate natural gas transportation services. Among other things, FERC is
seeking input on whether to retain cost-based rate regulation for long term
transportation services, potential changes in the manner in which rates are
designed, and the use of index driven or incentive rates for pipelines. The
July 29, 1998 Notice of Inquiry may lead to a subsequent Notice of Proposed
Rulemaking to further revise FERC's regulations.

Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any
such proposals might become effective or their effect, if any, on the
Company's operations. The natural gas industry historically has been closely
regulated; thus there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.

REGULATION OF PRODUCTION. The production of oil and natural gas is subject
to regulation under a wide range of state and federal statutes, rules, orders
and regulations. State and federal statutes and regulations require permits for
drilling operations, drilling bonds and reports concerning operations. Wyoming
and Montana have regulations

-9-

<PAGE>

governing conservation matters, including provisions for the unitization or
pooling of oil and natural gas properties, the establishment of maximum rates
of production from oil and natural gas wells and the regulation of the
spacing, plugging and abandonment of wells. The effect of these regulations
is to limit the amount of oil and natural gas the Company can produce from
its wells and to limit the number of wells or the locations at which the
Company can drill. Moreover, each state generally imposes a production or
severance tax with respect to production and sale of crude oil, natural gas
and gas liquids within its jurisdiction.

FEDERAL OR STATE LEASES. The Company's operations on federal or state
oil and gas leases will be subject to numerous restrictions, including
nondiscrimination statutes. Such operations must be conducted pursuant to
certain on-site security regulations and other permits and authorizations
issued by the Bureau of Land Management, Minerals Management Service and
other agencies. In order to drill wells on Wyoming state land, the Company
is required to file an Application for Permit to Drill with the Wyoming Oil
and Gas Commission. Drilling on acreage controlled by the federal government
requires the filing of a similar application with the Bureau of Land
Management. While the Company has been able to obtain required drilling
permits to date, there can be no assurance that permitting requirements will
not adversely effect the Company's ability to complete its drilling program
at the cost and in the time period currently anticipated.

ENVIRONMENTAL REGULATIONS. Various federal, state and local laws and
regulations governing the discharge of materials into the environment, or
otherwise relating to the protection of the environment, will affect the
Company's operations and costs. In particular, the Company's exploration,
development and production operations, its activities in connection with
storage and transportation of crude oil and other liquid hydrocarbons and its
use of facilities for treating, processing or otherwise handling hydrocarbons
and wastes therefrom will be subject to stringent environmental regulation.
Because CBM wells typically produce significant amounts of water, the Company
is required to file applications with state and federal authorities, as
applicable, to enable it to dispose of water produced from its wells. While
the Company has been able to obtain required water disposal permits to date,
there can be no assurance that such permitting requirements will not
adversely effect the Company's ability to complete its drilling and
development program at the cost and in the time period currently anticipated.

As with the industry generally, compliance with existing regulations
will increase the Company's overall cost of business. Such areas affected
include unit production expenses primarily related to the control and
limitation of air emissions and the disposal of produced water, capital costs
to drill exploration and development wells resulting from expenses primarily
related to the management and disposal of drilling fluids and other oil and
gas exploration wastes and capital costs to construct, maintain and upgrade
equipment and facilities.

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original act, on certain classes of persons that
contributed to the release of a "hazardous substance" into the environment.
These persons include the "owner" or "operator" of the site and companies
that disposed or arranged for the disposal of the hazardous substances found
at the site. CERCLA also authorizes the Environmental Protection Agency and,
in some instances, third parties to act in response to threats to the public
health or the environment and to seek to recover from the responsible classes
of persons the costs they incur. In the course of its ordinary operations,
the Company may generate waste that may fall within CERCLA's definition of a
"hazardous substance." The Company may be jointly and severally liable under
CERCLA for all or part of the costs required to clean up sites at which such
wastes have been disposed.

The Company may own or lease properties that have been used for the
exploration and production of hydrocarbons in the past. Many of these
properties will have been owned by third parties whose actions with respect
to the treatment and disposal or release of hydrocarbons or other wastes were
not under the Company's control. These properties and wastes disposed
thereon may be subject to CERCLA and analogous state laws. Under such laws,
the Company could be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or
operators), to clean up contaminated property (including contaminated
groundwater) or to perform remedial plugging operations to prevent future
contamination.

EMPLOYEES

The Company currently has 13 employees and approximately 10 consulting
geologists, engineers, and land acquisition professionals. The Company plans
to hire additional employees as needed. The Company has an outsourcing
arrangement with Trinity Petroleum Management, LLC which provides for
administrative services, specifically land administration, accounting and
production reporting. The Agreement is effective until March 1, 1999 when it
converts to a month-to-month arrangement. The Company believes that this
outsourcing arrangement allows the Company to hire fewer full-time employees
and more efficiently control administrative expenses.

-10-

<PAGE>

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

RESULTS OF OPERATION

As a development stage company, the Company has no revenues from
operations. During the period from the Company's inception (January 26,
1998) through September 30, 1998, the Company reported a net loss of
$4,076,338. No revenues were realized during this period. Expenses incurred
from the Company's inception (January 26, 1998) through September 30, 1998
totaled $5,386,558, including general and administrative expenses of
$2,918,356 and exploration expenses of $1,784,069, including geologic
consulting fees, geologic data and lease rentals.

In the accompanying financial statements, in accordance with APB No. 25
"Accounting for Stock Issued to Employees," the Company has recognized a
non-cash charge to earnings for compensation expense of approximately
$1,790,000 for the period from inception (January 26, 1998) through September
30, 1998 for stock, warrants, and options issued to certain officers and
employees. Compensation expense was calculated based on the difference
between the closing price per share on the last trading day prior to the date
of employment with the Company and the $1.75 unit price for shares and
warrants purchased by an officer of the Company hired at the beginning of
July and the option price for options awarded to certain officers and key
employees hired in July and August 1998. The restricted securities were
offered as an incentive to attract a senior management team to the Company.
The Company believes that the offers made by the Board of Directors were at
fair market value due to the restricted nature of the securities to be issued
and the lack of a liquid trading market for the Company's Common Stock at the
time of the offer. However, APB No. 25 requires the measurement of
compensation expense at the date of employment rather than at the offer date.
Further, APB No. 25 requires that compensation be measured based on the
quoted market price of the stock once a company's stock is publicly traded.
While the Company was not yet a registrant, the Company's shares have been
quoted on the OTC Bulletin Board system since July 1, 1998.

LIQUIDITY AND CAPITAL RESOURCES

The capital resources of the Company are limited. At present, the
Company is not producing revenues and its main source of funds has been the
sale of the Company's equity securities. The Company had approximately $1.3
million in cash as of September 30, 1998. All cash at present is being used
to fulfill certain leasehold purchase commitments that the Company has
entered into and to fund certain ongoing general and administrative expenses.
On October 23, 1998, the Company and CMS Oil and Gas Company announced the
CMS Transaction. See "Recent Developments -- CMS

-11-

<PAGE>

Transaction." Pursuant to the terms of the CMS Agreement, CMS paid Pennaco
$5.6 million in the form of the CMS Bridge Loan secured by substantially all
of the Company's oil and gas leases. Approximately $3.2 million of such
amount was paid directly to existing creditors of the Company. The Company
intends to use the balance for general corporate purposes. The Company
received $7.6 million at the first closing on November 20, 1998 and $14.8
million at the second closing on January 15, 1999 less $1.8 million which is
held in escrow subject to customary closing adjustments. The CMS Bridge Loan
was canceled at the second closing. Pro forma for the CMS Transaction as of
September 30, 1998, the Company had no debt and approximately $23.0 million
of cash. While the proceeds of the CMS Transaction allowed the Company to
repay its current liabilities and should allow the Company to fund its
development activities for the first half of 1999, the Company will require
further funding to meet its capital expenditure plans. Should the Company's
cash flow from operations continue to be insufficient to satisfy its capital
expenditure requirements, there can be no assurance that additional debt or
equity financing will be available to meet these requirements. At present,
there are no agreements or understandings between the Company and its
officers and directors or affiliates and any lending institutions with
respect to any debt or equity financings.

Should the Company be able to obtain debt financing in the future, its
level will have several important effects on the Company's future operations,
including (i) a substantial portion of the Company's cash flow will be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes and (ii) the Company's ability to obtain
additional financing in the future may be impaired. To address the
operational and administrative requirements of the Company's ongoing
development activities, it is anticipated that during the next twelve months
employee requirements will increase to approximately 18 employees.
Currently, the Company has 13 employees.

ITEM 3. DESCRIPTION OF PROPERTY.

Following the second closing of the CMS Transaction, the Company owned
oil and gas leases and options covering approximately 292,000 net acres in
the Powder River Basin of Wyoming and Montana. Approximately 60% of the
acreage is located on federal and state land and approximately 40% of the
acreage is located on private land. The Company's leases generally have five
to ten year primary terms. The federal leases are generally ten year term
leases and newly acquired fee and state leases are generally five-year term
leases. Leasehold net revenue interests average greater than 80%.

Historically, oil and gas has been produced from a number of other
reservoirs in the Powder River Basin that are typically greater in depth than
CBM locations. Over 80% of the Company's leasehold acreage allow for
development of all depths. These leases cover both the shallow CBM and
exploration potential for oil and gas from the deeper horizons. Past
exploration of the sedimentary section below the Paleocene coal section has
resulted in production from sandstone reservoirs in twenty-five formations
from upper Cretaceous to Pennsylvanian age. No production has been generated
from the Company's leases.

While the Company had drilled approximately 64 net wells as of January
25, 1999, the wells are in various stages of completion and are awaiting
construction of gathering and compression systems and connection to a
pipeline. The success of the Company's drilling program cannot be determined
until the wells are completed, connected to a gathering system and flow
tested for a significant period of time. As of the date hereof, the Company
has not produced any oil or gas nor does it currently have the ability to
produce any oil or gas. Certain of the Company's undeveloped oil and gas
properties have reserves classified as proved undeveloped; however, such
amounts are not significant.

The Company's office space is currently subleased pursuant to an
agreement in principle with Evansgroup, Inc. The term of the sublease
commenced on April 6, 1998 and expires on September 30, 2000. The sublease
concerns approximately 11,524 square feet at a yearly rent of approximately
$173,000.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information concerning the beneficial
ownership of the Common Stock as of September 30, 1998 for (i) each current
director who owns shares, (ii) each officer of the Company who owns shares,
(iii) all persons known by the Company to beneficially own more than 5% of
the outstanding shares of the Common Stock, and (iv) all officers and
directors of the Company as a group. Unless otherwise indicated in the
footnotes below, the address of each stockholder is 1050 17th Street, Suite
700, Denver, Colorado, 80265.

-12-

<PAGE>

Number of Percentage of
Name and Address(1) Shares Owned(2) Shares Owned(3)
- ------------------- --------------- ---------------
<S> <C> <C>
Paul M. Rady 857,144(4) 5.4%
Jeffrey L. Taylor 543,375(5) 3.5%
Glen C. Warren, Jr. 262,500(6) 1.7%
Gregory V. Gibson 100,000(7) *
David W. Lanza 50,000(8) *
Mark A. Erickson 41,250(9) *
R. I. S. Resources International
Corp. 4,000,000(10) 25.4%
All officers and directors as a group
(six persons) 1,854,269(11) 11.8%
</TABLE>

- ---------------
* Less than 1%

(1) Unless otherwise noted, the Company believes that all shares are
beneficially owned and that all persons named in the table or family
members have sole voting and investment power with respect to all shares
owned by them.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are
held by such person (but not those held by any other person) and which
are exercisable within 60 days from the date hereof have been exercised.

(3) Assumes 14,795,179 shares outstanding plus, for each individual, any
securities that specific person has the right to acquire within 60 days.
Options and warrants held by persons other than the specific individual
for whom an ownership interest percentage is being calculated are not
considered in calculating that specific individual's ownership interest
percentage.
(4) Includes 285,715 shares issuable upon the exercise of currently
exercisable stock purchase warrants, exercisable at a price of $1.75 per
share.
(5) Includes 400,000 shares issuable to Mr. Taylor upon the exercise of
currently vested stock options, exercisable at a price of $1.25 per
share. Mr. Taylor's address is 7220 Avenida Encinas, Suite 204,
Carlsbad, California 92009.
(6) Includes 87,500 shares issuable upon the exercise of presently
exercisable stock purchase warrants exercisable at a price of $1.75 per
share.
(7) Represents 100,000 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share. Mr.
Gibson's address is 2010 Main Street, Suite 400, Irvine, California
92614.
(8) Represents 50,000 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share. Mr.
Lanza's address is 710 3rd Street, Marysville, California 95901.
(9) Includes 31,250 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share.
(10) The address of RIS is 609 West Hastings Street, 11th Floor, Vancouver,
British Columbia V6B 4W4, Canada. According to the directors and
officers of RIS, the only person who owns more than 10% of the
outstanding voting rights of RIS is John Hislop, who owns 10.22% of the
outstanding RIS common stock.
(11) Includes 581,250 shares issuable upon the exercise of vested stock
options which are exercisable at a price of $1.25 per share, and
373,215 shares issuable upon the exercise of stock purchase warrants
which are exercisable at a price of $1.75 per share.

-13-

<PAGE>

ITEM 5. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS.

The following individuals are the officers, directors, and key employees
and consultants of the Company:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
OFFICERS AND DIRECTORS

Jeffrey L. Taylor 30 Chairman of the Board, Director
Paul M. Rady 45 President, Chief Executive Officer, Director
Glen C. Warren, Jr. 42 Chief Financial Officer, Executive Vice President, Director
Gregory V. Gibson 48 Vice President, Legal, Secretary, Director
Terrell A. Dobkins 46 Vice President of Production
Brian A. Kuhn 40 Vice President of Land
Mark A. Erickson 40 Director
David W. Lanza 30 Director

TECHNICAL TEAM

William Travis Brown, Jr. 53 Exploration Manager
George L. Hampton, III 46 Senior Geologist
Dirck Tromp 32 Staff Geologist
Todd H. Gilmer 46 Project Hydrology Consultant
John Dolloff 69 Senior Geology Consultant
Brian Hughes 43 Production and Engineering Consultant
</TABLE>

PAUL M. RADY, CHIEF EXECUTIVE OFFICER, PRESIDENT, DIRECTOR

Mr. Rady joined the Company in June 1998 as its Chief Executive Officer,
President and Director. Mr. Rady has entered into an employment agreement
with an initial term of four years with automatic renewal provisions. Mr.
Rady was with Barrett Resources Corporation ("Barrett"), an oil and gas
exploration and production company listed on the New York Stock Exchange, for
approximately eight years. During his tenure at Barrett, Mr. Rady held
various executive positions including his most recent position as Chief
Executive Officer, President and Director. As Chief Executive Officer he was
responsible for all aspects of the Company including, operations, financings,
representing the corporation to the investment community, and working with
the Board of Directors to set the direction of the Company. Other positions
held by Mr. Rady were Chief Operating Officer, Executive Vice President -
Exploration, and Chief Geologist - Exploration Manager. Prior to his
employment at Barrett, Mr. Rady was with Amoco Production Company ("Amoco")
based in Denver, Colorado for approximately 10 years. Mr. Rady received a
Bachelor of Arts degree in Geology from Western State College of Colorado in
1978 and a Master of Science Degree in Geology from Western Washington
University in 1980.

JEFFREY L. TAYLOR, CHAIRMAN OF THE BOARD

Currently Mr. Taylor is the President and Director of Foreign
Investments for the London Taylor Group. The London Taylor Group is a
southern California-based financial service provider acting as venture
capitalist and investment banker to private and small cap public companies.
During the last five years, Mr. Taylor has been a Member of the Board of
Directors of various public companies including, TransAmerica Industries,
Yuma Gold Mines, and Cornucopia Resources. He has also served during the last
five years as Vice President of Metallica Resources, Vice President of
Goldbelt Resources, Vice President of Arrowhead Minerals Corporation, and
Executive Vice President of Corporate Finance of Ultra Petroleum. Prior to
founding the London Taylor Group, Mr. Taylor was an analyst and financial
service provider for Global Resource Investments, Inc. of Carlsbad,
California and the Chief Financial Officer

-14-

<PAGE>

for International Art Commission of San Francisco, California. Mr. Taylor
holds a Master of Business Administration, Finance degree from the University
of San Diego.

GLEN C. WARREN, JR., CHIEF FINANCIAL OFFICER, EXECUTIVE VICE PRESIDENT,
DIRECTOR

Mr. Warren joined the Company in July 1998 as its Chief Financial
Officer, Executive Vice President and Director. Mr. Warren has entered into
an employment contract with an initial term of four years with automatic
renewal provisions. Prior to assuming his duties as the Company's Chief
Financial Officer, Mr. Warren was an investment banker with Lehman Brothers
Inc. in New York and focused on equity and debt financing, as well as mergers
and acquisitions for energy and natural resource companies. Prior to Lehman
Brothers, Mr. Warren was also an investment banker with Dillon, Read & Co.,
Inc. and Kidder, Peabody & Co. Incorporated with a total of nine years of
investment banking experience. Mr. Warren also has six years of exploration
and production experience with Amoco Production Company in New Orleans. Mr.
Warren received an MBA degree from the Anderson Graduate School of Management
at U.C.L.A. in 1989 and a Juris Doctorate degree in 1981 and a Bachelor of
Arts degree in Interdisciplinary Science in 1978, both from the University of
Mississippi.

GREGORY V. GIBSON, VICE PRESIDENT, LEGAL, SECRETARY, DIRECTOR

Mr. Gibson has been an attorney specializing in securities and
securities broker dealerships for over 15 years. Mr. Gibson is a southern
California-based practicing attorney with the law firm of Gibson, Haglund &
Johnson. Prior to his present affiliations, Mr. Gibson was corporate counsel
for three years to Global Resource Investment Limited, a southern
California-based broker-dealer specializing in resource and foreign publicly
traded securities. Prior to working at Global, Mr. Gibson was practicing
securities and international law with the law firms of Gibson & Haglund and
Gibson, Ogden & Johnson. Mr. Gibson attended Claremont Men's College and
Brigham Young University for undergraduate studies and received his Juris
Doctorate degree from Pepperdine University School of Law.

TERRELL A. DOBKINS, VICE PRESIDENT OF PRODUCTION

Mr. Dobkins has over 20 years experience in the petroleum industry. Mr.
Dobkins started his career at Amoco Production Company where he had extensive
experience in Rocky Mountain Low Permeability Gas Reservoirs and worked in
operations, completions and reservoir engineering. Mr. Dobkins worked as a
Manager for three years at American Hunter Exploration where he was involved
in all U.S. operations and engineering. More recently, Mr. Dobkins served
eight years at Barrett Resources, most recently as Manager of Acquisitions,
and was involved in the development of several projects, including
completions, operations and reservoir engineering.

-15-

<PAGE>

BRIAN A. KUHN, VICE PRESIDENT OF LAND

Mr. Kuhn has 18 years experience in the oil and gas industry as a
landman. Mr. Kuhn worked as a landman for thirteen years at Amoco Production
Company from June 1980 to April 1993. While at Amoco, Mr. Kuhn spent three
years in the Powder River Basin and other basins of the Rocky Mountain
region. Most recently, Mr. Kuhn was employed as a Division Landman for five
years at Barrett Resources Corporation where he worked in the Rocky Mountain
region and numerous other basins. Mr. Kuhn has extensive experience in the
acquisition of producing properties, testifying as expert witness before
state regulatory agencies, management of lease acquisition and negotiation of
both large and small exploration transactions. Mr. Kuhn earned a BBA in
Petroleum Land Management from the University of Oklahoma in May 1980. Mr.
Kuhn is also a member of the American Association of Petroleum Landmen,
Oklahoma City Association of Petroleum Landmen and the Tulsa Association of
Petroleum Landmen.

MARK A. ERICKSON, DIRECTOR

Mr. Erickson is a registered petroleum engineer with fifteen years
experience in project financial modeling and management. He is currently a
consultant with RIS USA. Prior to that, Mr. Erickson worked as an asset
manager for North American Resources Company, a $200 million subsidiary of
Montana Power. He received his BS in Petroleum Engineering at Montana Tech
and Masters in Mineral Economics from the Colorado School of Mines.

DAVID LANZA, DIRECTOR

Mr. Lanza has been a real estate developer, oil and gas real property
and lease developer, and business owner in California, Nevada, Colorado,
Texas and Wyoming for the past ten years. He is currently the President of
Hust Brothers, a commercial real estate and development company, Vice
President and principal of Hust Brothers Inc., a national automotive
wholesale company, and President and principal of Colusa Motor Sales. Mr.
Lanza has majority interest in Marysville Auto Parts which owns and operates
13 automotive chain stores. Mr. Lanza graduated from the University of
Southern California receiving his Bachelor of Science in Business
Administration.

WILLIAM TRAVIS BROWN, JR., EXPLORATION MANAGER

Mr. Brown is a Chief Geologist for the Company. He began his career
with Amoco in 1969 as an operations and production geologist in the Rocky
Mountain Region. He has extensive experience in the Green River and Powder
River Basins. From 1969 to present, Mr. Brown has conducted extensive work in
3-D seismic & stratigraphic analysis, geological mapping, well site analysis,
and strategic land acquisition for several companies including Amoco
Production, Lear Petroleum, Davis Oil, and Coastal Oil and Gas where he
initiated the coal degassification CBM project in the Powder River Basin.
Mr. Brown received his B.S. in Geology at Columbia University and his Master
of Science and Ph.D. candidacy in Geology at the University of New Mexico.

GEORGE L. HAMPTON, III, SENIOR GEOLOGIST

Mr. Hampton has recently been employed by the Company as Senior
Geologist. Prior to his employment by the Company, Mr. Hampton served as
Chief Geologist of Thermal Energy Corporation ("TEC") a joint venture with
Torch Operating. While at TEC Mr. Hampton supervised the geology and drilling
and/or completion of 100 shallow CBM wells. Mr. Hampton is a petroleum
geologist with 20 years experience in the oil and gas business. He has spent
the last 18 years specializing in CBM exploration, production and analysis.
His career began in 1978 as a geologist for Amoco. From 1979 to 1982 he
participated in the early CBM projects in the San Juan, Piceance, Uinta and
Green River basins. He left Amoco in 1986 to form Hampton & Associates, Inc.,
a consulting company specializing in CBM. While there, he and a team of CBM
experts consulted for a number of major and independent petroleum companies
including: Conoco, British Petroleum, Chevron, Amoco, Helmerich & Payne,
Devon Energy (Blackwood & Nichols), Celsius, Torch, MarkWest, Meridian and
Evergreen. Mr. Hampton was responsible for generation and evaluation of CBM
prospects worldwide. He has also supervised over 100 CBM wells. As a
founding partner of Cairn Point Publishing, he worked on and supervised the
creation and publishing of THE INTERNATIONAL COAL SEAM GAS REPORT, 1997. Mr.
Hampton received his BS and MSC in Geology at Brigham Young University.

DIRCK TROMP, STAFF GEOLOGIST

Mr. Tromp is a certified professional geologist with nine years of
varied geologic and hydrogeologic experience in the petroleum, mining, and
environmental fields. He began his career as a research geologist with the
U.S. Geological Survey. The majority of his experience has been as a
hydrogeologist and geochemist with Roy F. Weston, Inc., an international
environmental consulting firm. Mr. Tromp has extensive experience with
digital mapping, 3-D computer hydrologic conceptual modeling and groundwater
flow modeling. He has designed and installed groundwater systems and
hydrocarbon recovery wells. He has a strong working knowledge of
environmental compliance requirements. Mr. Tromp holds a BS in Geological
Engineering and MSc in Geology/Geochemistry both from the Colorado School of
Mines.

-16-

<PAGE>

TODD H. GILMER, PROJECT HYDROLOGY CONSULTANT

Mr. Gilmer is a consulting Project Hydrologist for the Company.
Recently Mr. Gilmer was one of the principal hydrologists for Amoco's Pine
River (Los Pinos) CBM water project in the San Juan Basin and has conducted a
CBM hydrologic study for Western Gas Resources in the Powder River Basin. He
is a hydrogeologist with 25 years of experience in hydro-geological
investigation and water production problems in the petroleum and mineral
industries. He is skilled in water resource exploration, development and
evaluation and has vast experience working with government and environmental
regulatory agencies. Mr. Gilmer began his career as a hydrogeologist with
Wright Water Engineers of Denver in 1973. From 1974-1986 he worked for
several water resource companies where he managed several coal mine baseline
studies and ground water flow modeling projects. From 1986 to present he has
been owner/senior hydrogeologist for Gilmer Geophysics, Inc. where he has
continued his work on hydrology projects for major coal mining and petroleum
companies. He is the author of many publications on hydrology. Mr. Gilmer
earned his BS degree in Geophysics from the University of Minnesota and
attended graduate school for two years at the same institution where he
studied geophysics and hydrogeology.

JOHN DOLLOFF, SENIOR GEOLOGY CONSULTANT

Mr. Dollof is a consulting senior geologist to the Company. Mr. Dolloff
has over 40 years of exploration and production geology and management
experience in the Rocky Mountain, Mid-Continent and west Texas areas.
Beginning his career with Standard Oil of Texas, he was staff geologist with
the predecessor of Champlin Petroleum (Union Pacific Resources) where he
advanced to become District Manager. He became Regional Manager for
Helmerich & Payne and for nine years he managed an 11-state oil and gas
exploration program. He has also served as exploration manager and Senior
Vice-President for several petroleum companies in the Rocky Mountain Region.
Mr. Dolloff earned his BS in Geology from Yale University and MSc Geology
from University of Minnesota.

BRIAN HUGHES, PRODUCTION AND ENGINEERING CONSULTANT

Mr. Hughes is a petroleum engineer with more than twenty years of
supervisory and management experience in nearly all aspects of the natural
gas business. He has been a consulting, drilling, and production engineer
for completion operations in several CBM and tight gas sandstone projects in
the western Rocky Mountains. Prior to 1988, Mr. Hughes was a petroleum
engineer with Shell Oil where he was responsible for all Shell-operated units
in west Texas. Mr. Hughes received his B.S. in Mechanical Engineering from
the U.S. Military Academy and a Masters degree in Petroleum Engineering from
the University of Texas.

Directors' terms are one year.

ITEM 6. EXECUTIVE COMPENSATION.

The Company has recently entered into four-year employment agreements
with Paul M. Rady, who was hired by the Company in June 1998, and Glen C.
Warren, Jr., who was hired in July 1998.

The employment agreement with Mr. Rady provides for a salary of $120,000
per year, bonus compensation equal to 2% of the Company's net cash flow,
participation in the Company's standard insurance plans for its executives,
and participation in the Company's other incentive compensation programs at
the discretion of the Board of Directors. Mr. Rady was granted 400,000 stock
options exercisable at $2.50 per share and 400,000 stock options exercisable
at $5.00 per share which vest ratably over a four-year period commencing in
June 1999. Mr. Rady's stock options are subject to accelerated vesting in
the event of his termination without cause or in the event of a change of
control of the Company. The stock options expire in 2008, subject to earlier
termination if the employment is terminated. If Mr. Rady's employment with
the Company is terminated without cause prior to June 1, 1999, Mr. Rady is
entitled to termination compensation of $2,000,000. If Mr. Rady's employment
with the Company is terminated without cause after June 1, 1999, Mr. Rady is
entitled to termination compensation of $3,000,000. Mr. Rady's employment
agreement automatically renews on each anniversary of the effective date
after June 1, 2001 for an additional two years unless the

-17-

<PAGE>

Company notifies Mr. Rady in writing 90 days prior to such anniversary that
it will not be renewing his employment agreement.

The employment agreement with Mr. Warren provides for a salary of
$100,000 per year, bonus compensation equal to 1% of the Company's net cash
flow, participation in the Company's standard insurance plans for its
executives, and participation in the Company's other incentive compensation
programs at the discretion of the Board of Directors. Mr. Warren was granted
200,000 stock options exercisable at $2.50 per share, 100,000 stock options
exercisable at $3.25 per share, and 200,000 stock options exercisable at
$5.00 per share which vest ratably over a four-year period commencing in July
1999. The stock options expire in 2008. Mr. Warren's stock options are
subject to accelerated vesting in the event of his termination without cause
or in the event of a change of control of the Company. If Mr. Warren's
employment with the Company is terminated without cause prior to July 1,
1999, Mr. Warren is entitled to termination compensation of $400,000. If Mr.
Warren's employment with the Company is terminated without cause after July 1,
1999 but before July 1, 2000, Mr. Warren is entitled to termination
compensation of $750,000. If Mr. Warren's employment with the Company is
terminated without cause after July 1, 2000, Mr. Warren is entitled to
termination compensation of $1,250,000. Mr. Warren's employment agreement
automatically renews on each anniversary of the effective date after June 1,
2002 for an additional year, unless the Company notifies Mr. Warren in
writing 90 days prior to such anniversary that it will not be renewing his
employment agreement.

The following table provides certain summary information concerning
compensation earned by the Company's Chief Executive Officer and Chief
Financial Officer (the "Named Executive Officers") during the period ended
September 30, 1998.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
---------------------------------------- Awards
------
Other Securities All
Annual Underlying Other
Name and Principal Position Salary(1) Bonus Comp. Options (#) Comp.
- --------------------------- --------- ----- ----- ------------ ------
<S> <C> <C> <C> <C>
Paul M. Rady .............................. $ 35,000 $ -- -- 800,000 $ --
President and Chief Executive Officer
Glen C. Warren, Jr. ....................... $ 25,000 $ -- -- 512,150 $ --
Chief Financial Officer and
Executive Vice President
</TABLE>

- --------------
(1) Reflects compensation paid from date of employment through September 30,
1998. Mr. Rady began employment with the Company on June 16, 1998.
Mr. Warren began employment with the Company on July 2, 1998.

1998 STOCK OPTION AND INCENTIVE PLAN

On March 24, 1998, the Board of Directors adopted the 1998 Stock Option
and Incentive Plan (the "Plan") which was subsequently approved by the
stockholders of the Company. The stockholders of the Company approved an
amendment to the Plan on June 29, 1998. The Plan is intended to provide
incentive to key employees and directors of, and key consultants, vendors,
customers, and others expected to provide significant services to, the
Company, to encourage proprietary interest in the Company, to encourage such
key employees to remain in the employ of the Company and its Subsidiaries, to
attract new employees with outstanding qualifications, and to afford
additional incentive to consultants, vendors, customers, and others to
increase their efforts in providing significant services to the Company. The
Plan is administered by the Board of Directors or can be administered by a
Committee appointed by the Board of Directors, which Committee shall be
constituted to permit the Plan to comply with Rule 16b-3 of the Act, and
which shall consist of not less than two members. The Board of Directors, or
the Committee if there be one, at its discretion, can select the eligible
employees and consultants to be granted awards, determine the number of
shares to be applicable to such award, and designate any Options as Incentive
Stock Options or Nonstatutory Stock Options (except that no Incentive Stock
Option may be granted to a non-employee director or a non-employee
consultant). The

-18-

<PAGE>

stock subject to awards granted under the Plan are shares of the Company's
authorized but unissued or reacquired Common Stock. The aggregate number of
shares which may be issued as awards or upon exercise of awards under the
Plan is 4,500,000 shares. As of September 30, 1998, Non-statutory Stock
Options to purchase 2,960,150 have been granted to key employees and
directors for exercise prices ranging from $1.25 to $5.00 per share pursuant
to the vesting schedules of the respective agreements. Options in the amount
of 612,500 are currently vested while the balance of the options vest over
the passage of time or are tied to certain benchmarks being achieved with
regards to the drilling of wells or obtaining certain annual gross production
revenues. No Incentive Stock Option Agreements have been entered into by the
Company as of July 31, 1998. The shares that may presently be issued
pursuant to the exercise of an option awarded by the Plan have not been
registered under the Securities Act of 1933 (the "Securities Act"), any state
securities authority, nor any foreign securities authority, and will be
subject to the limitations of Rule 144.

The following table reflects certain information regarding stock options
granted to the Named Executive Officers during the period ended September 30,
1998.
<TABLE>
<CAPTION>

OPTION GRANTS AS OF THE PERIOD ENDED SEPTEMBER 30, 1998

INDIVIDUAL GRANTS

NUMBER OF PERCENTAGE OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES AS OF EXERCISE
OPTIONS THE PERIOD ENDED PRICE PER EXPIRATION
NAME GRANTED SEPTEMBER 30, 1998 SHARE DATE
---- ---------- ------------------- --------- -----------------
<S> <C> <C> <C> <C>
Paul M. Rady 400,000 13.5% $ 2.50 June 15, 2008
400,000 13.5% $ 5.00 June 15, 2008

Glen C. Warren, Jr. 200,000 6.8% $ 2.50 July 1, 2008
100,000 3.4% $ 3.25 July 1, 2008
200,000 6.8% $ 5.00 July 1, 2008
12,150 0.4% $ 5.00 September 4, 2008
</TABLE>

The following table reflects certain information concerning the number
of unexercised options held by the Named Executive Officers and the value of
such officers' unexercised options as of September 30, 1998. No options were
exercised by the Named Executive Officers during the period ended September
30, 1998.

-19-

<PAGE>

AGGREGATED OPTION EXERCISED IN 1998
AND OPTION VALUES AS OF THE PERIOD ENDED SEPTEMBER 30, 1998

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
SHARES OPTIONS HELD AT OPTIONS HELD AT
ACQUIRED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998(1)
ON VALUE ------------------ ---------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------- -------- ----------- ------------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
Paul M. Rady -- $ -- -- 800,000 $ -- $ 250,000

Glen C. Warren, Jr. -- $ -- -- 512,150 $ -- $ 125,000
</TABLE>

- --------------
(1) Options are "in-the-money" if the closing market price of the Company's
Common Stock exceeds the exercise price of the options. The exercise price
of the options granted to the Named Executive Officers is $2.50 per share.
The value of unexercised options for each of the Named Executive Officers
represents the difference between the exercise price of such options and
the closing price of the Company's Common Stock on September 30, 1998
($3.125 per share).

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

A Director of the Company, Mark A. Erickson is also a consultant to RIS
USA, a wholly owned subsidiary of RIS. RIS USA is engaged in the downstream
gathering, processing and marketing gas business. RIS owns approximately 26%
of the issued and outstanding shares of the Company. If the Company deals
with related parties the fairness of the transactions will be reviewed only
by members of the Board of Directors that do not have interests in the
transactions.

During the period from inception to September 30, 1998, a company, of
which Jeffrey L. Taylor, the Company's Chairman, serves as a director,
provided administrative services for the Company and was paid compensation of
approximately $16,000.

Gregory V. Gibson, a Director of the Company, provided legal services
to the Company during the period from inception to September 30, 1998. The
Director's firm Gibson, Haglund & Johnson, was paid approximately $148,000
and Mr. Gibson was paid approximately $15,000 for the period from
inception to September 30, 1998.

-20-

<PAGE>

ITEM 8. DESCRIPTION OF SECURITIES.

GENERAL

The authorized Common Stock of the Company consists of 50,000,000 shares
of $0.001 par value common stock. The following summary of the terms and
provisions of the Company's capital stock does not purport to be complete and
is qualified in its entirety by reference to the Company's Articles of
Incorporation and By-laws, which have been filed as exhibits to the Company's
registration statement, of which this prospectus is a part, and applicable
law.

COMMON STOCK

The holders of Common Stock are entitled to one vote for each share on
all matters voted upon by stockholders, including the election of directors.
Such holders are not entitled to vote cumulatively for the election of
directors. Holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of directors standing for
election.

Holders of Common Stock are entitled to participate pro rata in such
dividends as may be declared in the discretion of the Board of Directors out
of funds legally available therefor. Holders of Common Stock are entitled to
share ratably in the net assets of the Company upon liquidation after payment
or provision for all liabilities. Holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock
are not subject to any redemption provisions and are not convertible into any
other securities of the Company. All outstanding shares of Common Stock are
fully paid and non-assessable.

The Common Stock is quoted on the OTC Bulletin Board system under the
symbol "PNEG."

As of November 15, 1998, 14,795,179 shares are issued and outstanding.

SHARE PURCHASE WARRANTS

The Company has 607,500 warrants outstanding with an exercise price of
$5.00 per share issued September 4, 1998, via a private placement exempt from
the registration requirements of the Securities Act. These warrants may be
exercised any time within six months of the date of issuance.

The Company has 398,215 warrants outstanding with an exercise price of
$1.75 per share for the first year of exercisability and $1.96 per share for
the second year of exercisability. 310,715 of these warrants were issued
July 1, 1998 and 87,500 were issued September 4, 1998, via private placements
exempt from the registration requirements of the Securities Act and may be
exercised within two years from the date of issuance.

The Company has 75,200 warrants outstanding with an exercise price of
$3.58 per share issued September 4, 1998, via a private placement exempt from
the registration requirements of the Securities Act. These warrants may be
exercised any time within two years from the date of issuance.

None of the shares underlying the above-referenced warrant have been
registered under the Securities Act.

YORKTON WARRANTS

The Company entered into a Fiscal Agency Agreement with Yorkton
Securities, Inc., an Ontario, Canada Corporation ("Yorkton") for a period of
one year, whereby Yorkton will provide to the Company corporate finance
services and market consultation. In consideration for said fiscal agency
services, the Company contracted to pay Yorkton a fee in the amount of
128,000 warrants (the "Yorkton Warrants"). The Yorkton Warrants consist of
warrants to purchase up to 128,000 shares of Common Stock at an exercise
price of $1.25 per share any time after April 15, 1999

-21-

<PAGE>

and before April 15, 2000. Shares issued pursuant to exercise of the Yorkton
Warrants have not been registered under the Securities Act.

TRANSFER AGENT

The Company's transfer agent is: Pacific Stock Transfer Company, 3690
South Eastern, Las Vegas, Nevada 89109.

PART II

ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.

Effective July 1, 1998, trading in the Common Stock commenced on the OTC
Bulletin Board system. During the period from July 1, 1998 to September 30,
1998, the closing prices ranged from $3.125 to $6.16 per share.

The Company has not paid any cash dividends on its Common Stock since
its incorporation and anticipates that, for the foreseeable future, earnings,
if any, will continue to be retained for use in its business. As of
September 30, 1998, the approximate number of record holders of the Common
Stock was 120.

ITEM 2. LEGAL PROCEEDINGS.

No material legal proceedings to which the Company is a party are
pending nor are any known to be contemplated and the Company knows of no
legal proceedings pending or threatened, or judgments entered against any
Director or Officer of the Company in his capacity as such.

ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

David E. Coffey C.P.A. was previously the principal accountant for
Pennaco Energy, Inc. On October 30, 1998, his appointment as principal
accountant was terminated and KPMG Peat Marwick LLP was engaged as principal
accountants. The decision to change accountants was approved by the board of
directors.

In connection with the audit of the period from January 26, 1998 (date
of inception) to April 15, 1998, and the subsequent interim period through
October 30, 1998, there were no disagreements with David E. Coffey, C.P.A. on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to his satisfaction would have caused him to make reference in
connection with his opinion to the subject matter of the disagreement.

The audit report of David E. Coffey, C.P.A. on the financial statements
of Pennaco Energy, Inc. as of April 15, 1998 and for the period from January 26,
1998 (date of inception) to April 15, 1998, did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope, or accounting principles.

ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.

Set forth below is certain information concerning all sales of
securities by the Company during the past three years that were not
registered under the Securities Act:

(a) The Company issued 995,000 shares in January 1998 pursuant to a
share-for-share exchange with the stockholders of International Metal
Protection, Inc. in a transaction conducted solely to reincorporate the
Company in a new jurisdiction. This transaction was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act. There was no change in ownership and the stockholders
made no significant investment decision.

(b) The Company issued 500,000 shares in February 1998 for the purchase
price of $.10 per share pursuant to a private placement exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act. At that time, the Company had only a business plan and
no assets. There were eleven offerees in this offering, all of whom made
purchases and all of whom were sophisticated investors. The Company fully
apprised each of the offerees of the Company's start-up nature and gave them
full details regarding the Company's business plan. There was no general
solicitation or advertising used in connection with the offer to sell or sale
of these securities. The purchasers were advised that the securities, once
purchased, could not be resold or otherwise transferred without subsequent
registration under the Securities Act. Each purchaser represented to the
Company that they were purchasing the securities for their own account for
investment purposes only.

(c) The Company issued 4,530,000 shares in February 1998 for a purchase
price of $.22 per share pursuant to a Regulation D, Rule 504 offering.
Offerees were provided with a private placement memorandum containing
detailed information about the Company and its plan. The Company required
each prospective investor to represent in writing that (i) they had adequate
means of providing for their current needs and personal contingencies and had
no need to sell the securities in the foreseeable future and (ii) they, either
alone or with their duly designated purchaser representative, had such
knowledge and experience in business and financial matters that they were
capable of evaluating the risks and merits of an investment in the securities.

(d) The Company issued 5,000,000 shares in April 1998 for a purchase
price of $1.25 per share pursuant to a Regulation D, Rule 506 offering. The
Company accepted subscriptions only from accredited investors. Offerees were
provided with a private placement memorandum containing detailed information
about the Company and its plan. The Company required each prospective
investor to represent in writing that (i) they had received and reviewed the
private placement memorandum and understood the risks of an investment in the
Company; (ii) they had the experience and knowledge with respect to similar
investments which enabled them to evaluate the merits and risks of such
investment, or they had obtained and relied upon an experienced independent
adviser with respect to such evaluation; (iii) they had adequate means to
bear the economic risk of such investment, including the loss of the entire
investment; (iv) they had adequate means to provide for their current needs
and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered
or qualified under applicable state securities laws and, therefore, that they
could not sell or transfer the securities unless the securities were
subsequently registered or an exemption therefrom was available to them;
(vii) they were acquiring the securities for investment solely for their own
account and without any intention of reselling or distributing them; and
(viii) they understood that the securities would bear a restrictive legend
prohibiting transfers except in compliance with the provisions of the
securities, the subscription agreement executed by the purchaser and the
applicable federal and state securities laws.

(e) The Company issued 128,000 share purchase warrants with an exercise
price of $1.25 per share, exercisable after April 15, 1999, to Yorkton, an
accredited investor, in April 1998 pursuant to a private placement exemption
from the registration requirements of the Securities Act under Section 4(2)
of the Securities Act. These warrants were issued pursuant to a negotiated
transaction between the Company and Yorkton, whereby Yorkton agreed to
provide corporate finance services to the Company for one year in return for
these warrants.

(f) The Company issued 2,000,000 shares in June 1998 to RIS pursuant to a
Regulation D, Rule 506 offering for a purchase price of $1.75 per share. The
Company accepted subscriptions only from accredited investors. Offerees

-22-

<PAGE>

were provided with a private placement memorandum containing detailed
information about the Company and its plan. The Company required each
prospective investor to represent in writing that (i) they had received and
reviewed the private placement memorandum and understood the risks of an
investment in the Company; (ii) they had the experience and knowledge with
respect to similar investments which enabled them to evaluate the merits and
risks of such investment, or they had obtained and relied upon an experienced
independent adviser with respect to such evaluation; (iii) they had adequate
means to bear the economic risk of such investment, including the loss of the
entire investment; (iv) they had adequate means to provide for their current
needs and possible personal contingencies; (v) they had no need for liquidity
of their investment in the Company; (vi) they understood that the securities
had not been registered under the Securities Act and may have not been
registered or qualified under applicable state securities laws and,
therefore, that they could not sell or transfer the securities unless the
securities were subsequently registered or an exemption therefrom was
available to them; (vii) they were acquiring the securities for investment
solely for their own account and without any intention of reselling or
distributing them; and (viii) they understood that the securities would bear
a restrictive legend prohibiting transfers except in compliance with the
provisions of the securities, the subscription agreement executed by the
purchaser and the applicable federal and state securities laws.

(g) The Company issued 796,429 units were purchased in June, July and
September 1998 pursuant to a Regulation D, Rule 506 offering by three members
of the management team of the Company, for a purchase price of $1.75 per
unit, each unit consisting of one share and a one share purchase warrant for
every two shares purchased. All units were purchased by three members of
the management team of the Company. Offerees were provided with a private
placement memorandum containing detailed information about the Company and
its plan. The Company required each prospective investor to represent in
writing that (i) they had received and reviewed the private placement
memorandum and understood the risks of an investment in the Company; (ii)
they had the experience and knowledge with respect to similar investments
which enabled them to evaluate the merits and risks of such investment, or
they had obtained and relied upon an experienced independent adviser with
respect to such evaluation; (iii) they had adequate means to bear the
economic risk of such investment, including the loss of the entire
investment; (iv) they had adequate means to provide for their current needs
and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered
or qualified under applicable state securities laws and, therefore, that they
could not sell or transfer the securities unless the securities were
subsequently registered or an exemption therefrom was available to them;
(vii) they were acquiring the securities for investment solely for their own
account and without any intention of reselling or distributing them; and
(viii) they understood that the securities would bear a restrictive legend
prohibiting transfers except in compliance with the provisions of the
securities, the subscription agreement executed by the purchaser and the
applicable federal and state securities laws.

(h) The Company issued 980,000 units on September 4, 1998 pursuant to a
Regulation D, Rule 506 offering for a purchase price of $3.25 per unit, each
unit consisting of one share and a one share purchase warrant for every two
shares purchased. Under the terms of the stock subscription agreement, one
of the subscribers to the offering subscribed for an additional 235,000 units
at a purchase price of $3.25 per unit. The Company accepted subscriptions
only from accredited investors. Offerees were provided with a private
placement memorandum containing detailed information about the Company and
its plan. The Company required each prospective investor to represent in
writing that (i) they had received and reviewed the private placement
memorandum and understood the risks of an investment in the Company; (ii)
they had the experience and knowledge with respect to similar investments
which enabled them to evaluate the merits and risks of such investment, or
they had obtained and relied upon an experienced independent adviser with
respect to such evaluation; (iii) they had adequate means to bear the
economic risk of such investment, including the loss of the entire
investment; (iv) they had adequate means to provide for their current needs
and possible personal contingencies; (v) they had no need for liquidity of
their investment in the Company; (vi) they understood that the securities had
not been registered under the Securities Act and may have not been registered
or qualified under applicable state securities laws and, therefore, that they
could not sell or transfer the securities unless the securities were
subsequently registered or an exemption therefrom was available to them;
(vii) they were acquiring the securities for investment solely for their own
account and without any intention of reselling or distributing them; and
(viii) they understood that the securities would bear a restrictive legend
prohibiting transfers except in compliance with the provisions of the
securities, the subscription agreement executed by the purchaser and the
applicable federal and state securities laws. Yorkton served as placement
agent for this private placement. As compensation, Yorkton received share
purchase warrants to purchase 75,200 shares at an exercise price of $3.58.

ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Nevada Revised Statutes and certain provisions of the Company's
Bylaws under certain circumstances provide for indemnification of the
Company's Officers, Directors and controlling persons against liabilities
that they may incur in such capacities. A summary of the circumstances in
which such indemnification is provided for is contained herein, but this
description is qualified in its entirety by reference to the Company's Bylaws
and to the statutory provisions.

In general, any Officer, Director, employee or agent may be indemnified
against expenses, fines, settlements or judgments arising in connection with
a legal proceeding to which such person is a party, if that person's actions
were in good faith, were believed to be in the Company's best interest, and
were not unlawful. Unless such person is successful upon the merits in such
an action, indemnification may be awarded only after a determination by
independent decision of the Board of Directors, by legal counsel, or by a
vote of the stockholders, that the applicable standard of conduct was met by
the person to be indemnified.

The circumstances under which indemnification is granted in connection
with an action brought on behalf of the Company is generally the same as
those set forth above; however, with respect to such actions, indemnification
is granted only with respect to expenses actually incurred in connection with
the defense or settlement of the action. In such actions, the person to be
indemnified must have acted in good faith and in a manner believed to have
been in the Company's best interest, and must not have been adjudged liable
for negligence or misconduct.

Indemnification may also be granted pursuant to the terms of agreements
that may be entered in the future or pursuant to a vote of stockholders or
Directors. The statutory provision cited above also grants the power to the
Company to purchase and maintain insurance which protects its Officers and
Directors against any liabilities incurred in connection with their service
in such a position, and such a policy may be obtained by the Company.

-23-

<PAGE>

PENNACO ENERGY, INC.
(A DEVELOPMENT STAGE COMPANY)

FINANCIAL STATEMENTS

SEPTEMBER 30, 1998

(WITH INDEPENDENT AUDITORS' REPORT THEREON)

F-1

<PAGE>

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Directors
Pennaco Energy, Inc.:

We have audited the accompanying balance sheet of Pennaco Energy, Inc. (a
development stage company) as of September 30, 1998, and the related
statements of operations, stockholders' deficit and cash flows for the period
from January 26, 1998 (inception) to September 30, 1998. 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 audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pennaco Energy, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for
the period from January 26, 1998 (inception) to September 30, 1998, in
conformity with generally accepted accounting principles.

KPMG LLP

Denver, Colorado
November 20, 1998

F-2

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Balance Sheet

September 30, 1998

PRO FORMA
ASSETS HISTORICAL (NOTE 2)
------------ -----------
(unaudited)

<S> <C> <C>
Current assets:
Cash $ 1,358,125 22,966,124
Drilling deposit 250,000 250,000
Prepaid expenses and other current assets 78,753 78,753
------------ ----------

Total current assets 1,686,878 23,294,877
------------ ----------

Property and equipment:
Undeveloped oil and gas properties, at cost (using the
successful efforts method of accounting)
(note 9) 16,054,802 9,054,802
Computer software and equipment 176,993 176,993
Furniture and fixtures 69,092 69,092
------------ ----------

16,300,887 9,300,887
Less accumulated depreciation (34,217) (34,217)
------------ ----------

Net property and equipment 16,266,670 9,266,670
------------ ----------

Deferred income tax asset 1,280,000 1,280,000

Other assets 64,415 64,415
------------ ----------

$ 19,297,963 33,905,962
------------ ----------
------------ ----------
</TABLE>

(Continued)

F-3

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Balance Sheet

PRO FORMA
LIABILITIES AND STOCKHOLDERS' EQUITY HISTORICAL (NOTE 2)
------------ -----------
(unaudited)
<S> <C> <C>
Current liabilities:
Bridge loan payable, including accrued interest (note 3) $ 3,241,867 --
Note payable to shareholder, including accrued interest
(note 3) 504,583 --
Lease acquisitions payable 2,645,551 --
Accounts payable and accrued liabilities 286,006 286,006
Income tax payable -- 7,560,000
------------ ----------

Total current liabilities 6,678,007 7,846,006

Stockholders' equity (note 6):
Common stock, $.001 par value. Authorized 50,000,000
shares; 14,795,179 shares issued and outstanding 14,795 14,795
Additional paid-in capital 16,681,499 16,681,499
Retained earnings (deficit) accumulated during the
development stage (4,076,338) 9,363,662
------------ ----------

Total stockholders' equity 12,619,956 26,059,956
------------ ----------
------------ ----------
Commitments (note 8)

$ 19,297,963 33,905,962
------------ ----------
------------ ----------
</TABLE>

See accompanying notes to financial statements.

F-4

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Operations

Period from January 26, 1998 (inception) to September 30, 1998
<TABLE>
<S> <C>
Interest income $ 30,250
-------------
Expenses:
Exploration 1,784,069
Depreciation and amortization 34,217
General and administrative (note 6) 2,918,356
Interest expense, including $4,583 payable to shareholder 649,946
-------------

Total expenses 5,386,588
-------------

Loss before income taxes (5,356,338)

Income tax benefit 1,280,000
-------------

Net loss and deficit accumulated during the
development stage $ (4,076,338)
-------------
-------------

Loss per share $ (.38)
-------------
-------------

Weighted average common shares outstanding 10,615,560
-------------
-------------
</TABLE>

See accompanying notes to financial statements.

F-5

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Stockholders' Equity

Period from January 26, 1998 (inception) to September 30, 1998

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 26, 1998 (INCEPTION) -- $ -- -- -- --

Common stock issued in connection with share
exchange (note 1) 995,000 995 (995) -- --
Common stock issued, net of offering costs of
$178,014 (note 6) 12,030,000 12,030 10,607,551 -- 10,619,581
Compensation relating to common stock and
warrants issued (note 6) -- -- 1,340,000 -- 1,340,000
Stock option compensation (note 6) -- -- 450,000 -- 450,000
Units issued, net of offering costs of $288,225
(note 6) 1,770,179 1,770 4,268,443 -- 4,270,213
Warrants issued for services (note 6) -- -- 16,500 -- 16,500
Net loss for the period -- -- -- (4,076,338) (4,076,338)
---------- --------- ---------- ---------- ----------
BALANCES AT SEPTEMBER 30, 1998 14,795,179 $ 14,795 16,681,499 (4,076,338) 12,619,956
---------- --------- ---------- ---------- ----------
---------- --------- ---------- ---------- ----------
</TABLE>

See accompanying notes to financial statements.

F-6

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

Statement of Cash Flows

Period from January 26, 1998 (inception) to September 30, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (4,076,338)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 34,217
Compensation relating to common stock and warrants issued 1,340,000
Stock option compensation 450,000
Warrants issued for services 16,500
Increase in accrued interest on bridge loan and note payable 46,450
Deferred income tax benefit (1,280,000)
Increases in operating assets and liabilities:
Prepaid expenses and other current assets (78,753)
Other assets (64,415)
Accounts payable and accrued liabilities 286,006
-------------

Net cash used in operating activities (3,326,333)
-------------

Cash flows from investing activities:
Capital expenditures (16,300,887)
Drilling deposit (250,000)
Increase in lease acquisitions payable 2,645,551
-------------

Net cash used by investing activities (13,905,336)
-------------

Cash flows from financing activities:
Proceeds from issuance of bridge loan 3,200,000
Proceeds from issuance of note payable 500,000
Proceeds from issuance of common stock, net of offering costs 14,889,794
-------------

Net cash provided by financing activities 18,589,794
-------------
Net increase in cash 1,358,125

Cash at beginning of period --
-------------

Cash at end of period $ 1,358,125
-------------
-------------

Supplemental disclosures of cash flow information:
Cash paid for interest $ 603,496
-------------
-------------

Cash paid for income taxes $ --
-------------
-------------
</TABLE>

See accompanying notes to financial statements.

F-7

<PAGE>

PENNACO ENERGY, INC.
(A Development Stage Company)

September 30, 1998

Notes to Financial Statements

(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) ORGANIZATION AND BASIS OF PRESENTATION

Pennaco Energy, Inc. (the "Company") is an independent, energy
company primarily engaged in the acquisition and development of
natural gas production from coal bed methane properties in the
Rocky Mountain region of the United States. The Company was
incorporated on January 26, 1998 under the laws of the state of
Nevada and its headquarters are in Denver, Colorado.

The Company's activities to date have been limited to
organizational activities, prospect development activities, and
acquisition of leases and option rights. The Company currently has
oil and gas lease rights in the Powder River Basin in northeastern
Wyoming and southeastern Montana. Currently the Company has no
revenue producing operations. Accordingly, the Company is
considered to be in the development stage.

The Company was incorporated as a wholly-owned subsidiary of
International Metal Protection Inc. (International Metal).
Subsequently, all of the outstanding shares of International Metal
were exchanged for shares of the Company and International Metal
was merged into the Company. The 995,000 shares issued in the
exchange were recorded at their par value of $.001 per share as
International Metal had no assets or liabilities at the date of the
merger. International Metal and its predecessor, AKA Video
Communications Inc., had been inactive for the two years ended
December 31, 1997 and prior thereto.

The Company's year end is December 31.

(B) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.

The Company is subject to a number of risks and uncertainties
inherent in the oil and gas industry. Among these are risks
related to fluctuating oil and gas prices, uncertainties related to
the estimation of oil and gas reserves and the value of such
reserves, effects of competition and extensive environmental
regulation, risks associated with the search for and the
development of oil and gas reserves, and many other factors, many
of which are necessarily beyond the Company's control. The
Company's financial condition and results of operations will depend

(Continued)
F-8

<PAGE>

significantly upon the Company's ability to find and develop natural
gas and oil reserves and upon the prices received for natural gas and
oil produced, if any. These prices are subject to fluctuations in
response to changes in supply, market uncertainty and a variety of
additional factors that are beyond the control of the Company.

(D) CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with
an initial maturity of three months or less to be cash equivalents.

(E) OIL AND GAS ACTIVITIES

The Company follows the successful efforts method of accounting for
its oil and gas activities. Accordingly, costs associated with the
acquisition, drilling and equipping of successful exploratory wells
are capitalized. Geological and geophysical costs, delay and
surface rentals and drilling costs of unsuccessful exploratory
wells are charged to expense as incurred. Costs of drilling
development wells, both successful and unsuccessful, are
capitalized. Upon the sale or retirement of oil and gas
properties, the cost thereof and the accumulated depreciation and
depletion are removed from the accounts and any gain or loss is
credited or charged to operations. Depletion of capitalized
acquisition, exploration and development costs is computed on the
units-of-production method by individual fields as the related
proved reserves are produced.

Capitalized costs of unproved properties are assessed periodically
and a provision for impairment is recorded, if necessary, through a
charge to operations.

Proved oil and gas properties are assessed for impairment on a
field-by-field basis. If the net capitalized costs of proved oil
and gas properties exceeds the estimated undiscounted future net
cash flows from the property a provision for impairment is recorded
to reduce the carrying value of the property to its estimated fair
value.

(F) OTHER PROPERTY AND EQUIPMENT

Other property and equipment is recorded at cost. Depreciation and
amortization is provided using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 15 years.

F-9

<PAGE>

(G) INCOME TAXES

The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS
109). SFAS No. 109 requires the use of the asset and liability
method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
net operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted income tax rates expected to
apply to taxable income in the years in which those differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in income tax rates
is recognized in the results of operations in the period that
includes the enactment date.

(h) STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION (SFAS 123). This statement defines a fair
value method of accounting for its stock compensation plans. SFAS
123 allows an entity to measure compensation costs for these plans
using the intrinsic value based method of accounting as prescribed
in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25). The pro forma disclosures of net loss
and loss per share required by SFAS 123 are included in note 5.

(i) LOSS PER SHARE

Loss per share is based on the weighted average number of common
shares outstanding during the period. Outstanding stock options
and warrants were excluded from the computation as their effect was
antidilutive.

(2) CMS TRANSACTION

On October 23, 1998, the Company and CMS Oil and Gas Company signed a
definitive agreement (the "CMS Agreement") relating to the development
of the Company's Powder River Basin acreage (the "CMS Transaction").
Pursuant to the terms of the CMS Agreement, CMS Oil and Gas Company will
acquire an undivided 50% working interest in approximately 490,500 net
acres of Pennaco's leasehold position in the Powder River Basin for
$28,000,000. The Company acquired the leasehold position which is being
conveyed to CMS in the CMS Transaction for approximately $7,000,000. The
purchase price provided for in the CMS Agreement was the result of arm's
length negotiations between the Company and CMS. The basic form of joint
operating agreement between the parties shall be the 1989 AAPL Model
Form of Joint Operating Agreement. The CMS Agreement provides that the
parties shall in good faith negotiate a development agreement for the
exploration, development and production of coal bed methane from the
leases. The development agreement shall provide that each party will
operate approximately 50% of the wells drilled in the are of mutual
interest. Pennaco and CMS have divided the acreage in the area of mutual
interest into project areas which will be operated by one party or the
other. The Company will account for its remaining 50% interest in the
acreage in the area of mutual interest in the Powder River Basin at cost
as undeveloped oil and gas properties using the successful efforts
method of accounting. As is customary in oil and gas leasehold
transactions, the agreement provides for the adjustment of the purchase
price for title defects discovered prior to closing and for the
opportunity for one party to participate in acquisitions made by the
other party in the area of mutual interest defined in the agreement. The
agreement also provides for a preferential purchase right to the other
party in the event either CMS or the Company attempted to sell all or a
portion of its interest in the acreage covered by the agreement. All of
the leases in the area of mutual interest are dedicated to CMS Gas
Transmission and Storage, an affiliate of CMS Oil and Gas Company, for
gathering, compression and transportation.

Pursuant to the terms of the CMS Transaction, CMS agreed to pay Pennaco
$5,600,000 of earnest money in the form of a bridge loan (the "CMS Bridge
Loan") which was secured by substantially all of the Company's oil and gas
leases. Approximately $3,200,000 of such amount was paid directly to
existing creditors of the Company. The CMS Transaction is
structured such that the conveyance of the working interests will occur
at two separate closings. The first closing occurred on November 20,
1998, and the second closing is scheduled to occur on January 15, 1999.
The Company received $7,600,000 at the first closing and will receive
$14,800,000 at the second closing subject to customary closing adjustments.
The CMS Bridge Loan will be canceled if both closings occur or if the
buyer wrongfully fails to close or fails to meet the seller's conditions to
closing. The CMS Transaction is subject to cancellation if the title to
greater than 20% of the lease acreage subject to the CMS Agreement is
deemed defective and incurable.

The unaudited pro forma balance sheet of the Company as of September 30,
1998 gives effect to the sale of the interest in the properties and the
use of a portion of the proceeds to repay the note payable to
shareholders and lease acquisitions payable, all as if the transactions
had occurred on that date.

F-10

<PAGE>

(3) BRIDGE LOAN

The Company borrowed $3,200,000 under a bridge loan. The bridge loan
was payable on October 23, 1998 with interest at 18%. The bridge loan was
secured by undeveloped oil and gas properties with a carrying value of
approximately $2,668,000. The bridge loan was repaid in full with
proceeds from the CMS Transaction and the note was canceled on October 23,
1998.

(4) NOTE PAYABLE TO SHAREHOLDER

The unsecured note payable to shareholder bears interest at the prime
rate (8.25% at September 30, 1998) and matures on December 31, 1998.
Under the terms of the note, all interest will be forgiven if the loan
is repaid in full prior to November 30, 1998. Interest payable on the
note for the period from inception to September 30, 1998 was $4,583.
The note payable was repaid in full on November 23, 1998, therefore
no interest was due.

(5) INCOME TAXES

The income tax benefit of $1,280,000 includes a deferred federal income
tax benefit of $1,210,000 and a deferred state income tax benefit of
$70,000. The income tax benefit recorded for the period from inception
to September 30, 1998 differs from the expected income tax benefit
(based on the statutory rate of 34%) primarily as a result of state
income taxes and stock and stock option compensation which is not
deductible for tax purposes.

At September 30, 1998, the Company has a net operating loss carryforward
for federal income tax purposes of approximately $(3,560,000) which is
available to offset future federal taxable income, if any, through 2018.
The tax effects of temporary differences that give rise to the deferred
tax assets at September 30, 1998 are a result of the net operating loss
carryforward.

F-11

<PAGE>

(6) STOCKHOLDERS' EQUITY

(a) COMMON STOCK

Since it's formation in January 1998, the Company completed four
private placement offerings of common stock. In February 1998,
500,000 shares were issued at $.10 per share. Proceeds to the
Company were approximately $50,000. Also in February 1998,
4,530,000 shares were issued at $.22 per share. Proceeds to the
Company were approximately $997,000. In April 1998, 5,000,000
shares were issued at $1.25 per share. The proceeds to the
Company were $6,250,000. In June 1998, 2,000,000 shares were
issued at $1.75 per share. Proceeds to the Company were
approximately $3,500,000. The Company incurred approximately
$723,000 in offering costs relating to these offerings, which have
been charged to additional paid-in capital.

In June 1998, the Company offered certain individuals the right to
acquire common stock at $1.75 per share along with a share purchase
warrant for every two shares purchased, conditioned upon their
acceptance of employment as officers of the Company.

No compensation cost was recorded for the individuals who commenced
employment with the Company prior to July 1, 1998 (the date the
Company's common stock commenced trading) as the estimated fair
value of common stock approximated the common stock issuance price
and the warrant exercise price. Compensation expense of $450,000
was recorded for the shares and warrants issued subsequent to July
1, 1998 based on the difference between the closing price per share
on the last trading day prior to the date of employment with the
Company and the common stock issuance price and the warrant exercise
price.

During the period from inception to September 30, 1998 a total of
796,429 units were issued at $1.75 per unit to officers and key
employees of the Company. The units consist of one share of common
stock and one warrant for each two shares issued. The warrants
have an exercise price of $1.75 per share in the first year and
$1.96 per share in the second year and are exercisable at any time.
Proceeds to the Company were approximately $1,394,000.

In September 1998, the Company issued 960,000 units at $3.25 per
unit. Each unit consists of one share of common stock and one
warrant for each two shares issued. The warrants have an exercise
price of $5.00 per share and may be exercised any time prior to
March 4, 1999.

Proceeds to the Company were approximately $3,165,000. Offering
costs of $288,225 were charged to additional paid in capital. Under
the terms of the stock subscription agreement, one of the subscribers
to the offering subscribed for an additional 235,000 units for
$763,750 which was deposited into an escrow account representing
the aggregate purchase price of the additional 235,000 units. Under
the terms of the escrow agreement the shares and the shares of
common stock underlying the warrants are to be registered for
resale under the Securities Act of 1993 (the "Act") with the U.S.
Securities and Exchange Commission by December 31, 1998. The Company
has also undertaken to have the shares qualified by way of an
exemption order provided by the respective Securities Commissions
in Canada.

F-12
<PAGE>

The escrow proceeds were deposited into an interest bearing escrow
account together with certificates representing the Units to be
purchased. In the event the registration statement is not declared
effective and the Canadian exemption order is not obtained on or
before the December 31, 1998, the subscriber may elect to either
purchase the escrow units or receive a refund from the escrow account
of the $763,750 paid with their subscription, plus interest thereon,
and an additional Unit for each 10 Units purchased in the Offering.
The subscriber is also entitled to receive an additional Unit for
each 10 Units previously acquired in the Offering in the event that
the Company does not maintain an effective registration statement
until such time as the registered securities may be resold pursuant
to Rule 144 promulgated under the Act. The $763,750 in escrow and
the related 235,000 units are not reflected in the accompanying
financial statements.

(b) WARRANTS

The Company issued warrants to purchase 128,000 shares of common
stock to a company for corporate finance services for a period of
one year commencing April 15, 1998. The warrants are exercisable
at $1.25 per share anytime after April 15, 1999 and expire April
15, 2000. The estimated fair value of the warrants issued of
$16,500 was charged to expense during the period from January 26,
1998 to September 30, 1998. In September 1998, the Company agreed
to issue warrants to purchase 75,200 shares of common stock to the
same company in connection with the placement of units in the
September 1998 unit offering. The warrants are exercisable at a
price of $3.58 per share and expire September 4, 2000.

On March 24, 1998, the Company adopted the 1998 Stock Option and
Incentive Plan (the Plan). The aggregate number of shares which
may be issued as awards under the Plan is 4,500,000 shares. As of
September 1998, options to purchase common stock have been granted
to key employees and directors at exercise prices ranging from
$1.25 to $5.00 per share.

Stock option activity for the Plan for the period from inception to
September 30 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
OPTIONS PER SHARE
--------- ---------
<S> <C> <C>
BALANCE, JANUARY 26, 1998 (INCEPTION) -- $ --
Granted 2,960,150 2.70
Canceled (200,000) 1.25
---------
BALANCE, SEPTEMBER 30, 1998 2,760,150 2.81
---------
---------

</TABLE>

F-13

<PAGE>

A summary of the range of exercise prices and the weighted-average
contractual life of outstanding stock options at September 30, 1998, is
as follows:
<TABLE>
<CAPTION>

NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
SEPTEMBER 30, EXERCISE REMAINING SEPTEMBER 30, EXERCISE
1998 PRICE LIFE (YEARS) 1998 PRICE
------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.25 800,000 $ 1.25 9.6 612,500 $ 1.25
2.50 918,000 2.50 8.7 -- --
3.25 430,000 3.25 4.8 -- --
5.00 612,150 5.00 4.4 -- --
--------- -------
$ 1.25 - 5.00 2,760,150 2.81 7.4 612,500 1.25
--------- ------- --- ------- -------
--------- ------- --- ------- -------
</TABLE>

The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. No compensation expense has
been recognized for options granted at or above market value at
date of grant. Compensation expense of $1,340,000 has been
recorded for the period from inception to September 30, 1998 for
options granted below the market value, based upon the difference
between the option price and the quoted market price at the date of
grant.

Had compensation cost for the Company's stock-based compensation
plans been determined based upon the fair value of options on the
grant dates, consistent with the provisions of SFAS 123, the
Company's pro forma net loss and loss per share for the period from
January 26, 1998 to September 30, 1998 would have been $(6,682,454)
and $(.63), respectively.

The weighted average fair value of options granted during 1998 was
$1.33 per share. The weighted average remaining contractual life
of all options outstanding at September 30, 1998 was approximately
6.2 years. The fair value of each option grant was estimated at
the date of grant using the Black-Scholes option-pricing model with
the following assumptions: no expected dividends, expected life of
the options of 1 to 10 years, volatility of 72%, and a risk-free
interest rate of 5.5%.

(7) RELATED PARTY TRANSACTIONS

RIS Resources International Corporation (RIS International) owns
4,000,000 shares of the Company's common stock. A member of the Board
of Directors of the Company also serves as a consultant to RIS
International. From April 1, 1998 through June 22, 1998 he served as
an officer of the Company. Since that time he has consulted with the
Company and has received approximately $5,700 as compensation for his
services.

F-14

<PAGE>

During the period from inception to September 30, 1998, a company for
which the Company's Chairman serves as a director provided
administrative services for the Company for which it received
compensation of approximately $16,000.

One of the Company's Directors provided legal services to the Company
during the period from inception to September 30, 1998. The Director's
firm was paid approximately $148,000 and the Director was paid
approximately $15,000 for the period from inception to September 30,
1998.

(8) COMMITMENTS

(a) EMPLOYMENT AGREEMENTS

The Company has entered into four-year employment agreements with
two officers, its President and its Chief Financial Officer and
Executive Vice President. Under the terms of the agreement with
the President, if employment is terminated without cause prior to
June 1, 1999, the President is entitled to termination compensation
of $2,000,000, or $3,000,000 if he is terminated without cause
after June 1, 1999 but before the expiration of his employment
agreement in June 2002. Under terms of the agreement with the
Executive Vice President and Chief Financial Officer, if employment
is terminated without cause prior to July 1, 1999, the chief
Financial Officer and Executive Vice President is entitled to
termination compensation of $400,000, $750,000 if he is terminated
without cause after July 1, 1999 but before July 1, 2000 and
$1,250,000 if he is terminated without cause thereafter but prior
to the expiration of his employment agreement.

(b) LEASE COMMITMENTS

The Company entered into an amendment to its office lease agreement
in Denver, Colorado effective June 1, 1998. The amended lease
covers 11,524 square feet for a term of two years and four months.
During the term of the lease, rent is payable in the amount of
$172,860 base rent per year. During the four months of the lease
from June 1, 1998 through September 30, 1998, the Company paid
$57,620 in rent.

(9) DISCLOSURES ABOUT CAPITALIZED COSTS, COST INCURRED AND RESERVES

Costs incurred in oil and gas producing activities for the period from
January 26, 1998 to September 30, 1998 are as follows:
<TABLE>
<S> <C>
Unproved property acquisition costs $ 16,054,802
--------------
--------------
</TABLE>

Certain of the Company's undeveloped oil and gas properties have
reserves classified as proved undeveloped; however, such amounts are not
significant.

F-15

<PAGE>

PART III

ITEM 1. INDEX TO EXHIBITS.

<TABLE>
<S> <C>
+3.1 Articles of Incorporation

+3.2 By-laws

+10.1 Mineral Lease Purchase Agreement dated February 23, 1998 between
High Plains Associates, Inc. and Pennaco Energy, Inc.

+10.2 Letter Agreement dated January 23, 1998 between High Plains
Associates, Inc. and Taylor Oil Properties

+10.3 Assignment of Option and Exercise of Option dated March 6, 1998
between High Plains Associates, Inc. and Pennaco Energy, Inc.

+10.4 Agreement dated March 6, 1998 between High Plains Associates,
Inc. and Pennaco Energy, Inc.

+10.5 Pennaco Energy, Inc. 1998 Stock Option and Incentive Plan

+10.6 Form of Pennaco Energy, Inc. Incentive Stock Option Agreement

+10.7 Form of Pennaco Energy, Inc. Non-Statutory Stock Option Agreement

+10.8 Employment Agreement dated June 10, 1998 between Pennaco Energy,
Inc. and Paul M. Rady

+10.9 Employment Agreement dated July 2, 1998 between Pennaco Energy,
Inc. and Glen C. Warren

+10.10 Secured Promissory Note dated August 13, 1998 from Pennaco
Energy, Inc. to Venture Capital Sourcing, SA

+10.11 Second Amendment to Security Agreement dated August 13, 1998
between Pennaco Energy, Inc. and Venture Capital Sourcing, SA

+10.12 Purchase and Sale Agreement between Pennaco Energy, Inc., as
Seller and CMS Oil and Gas Company, as Buyer, dated October 23,
1998 (Certain portions of this Purchase and Sale Agreement
have been omitted based upon a request for confidential
treatment filed with the SEC.)

+10.13 Secured Promissory Note dated October 23, 1998 from Pennaco
Energy, Inc. to CMS Oil and Gas Company

+10.14 Sublease Agreement dated October 23, 1998 between Pennaco
Energy, Inc. and Evansgroup, Inc.

+10.15 Agreement Regarding The Drilling of Coal Bed Methane Wells

*10.16 First Amendment to Purchase and Sale Agreement dated November
20, 1998

*10.17 Second Amendment to Purchase and Sale Agreement dated January 15,
1999

+16 Letter of David E. Coffey, C.P.A. dated December 18, 1998.

+27 Financial Data Schedule
</TABLE>

- --------------
+ Previously filed
* Filed herewith

ITEM 2. DESCRIPTION OF EXHIBITS.

As appropriate, the issuer should file those documents required to be
filed as Exhibit Number 2, 3, 5, 6, and 7 in Part III of Form 1-A. The
registrant also shall file:

(12) ADDITIONAL EXHIBITS - Any additional exhibits which the issuer
may wish to file, which shall be so marked as to indicate clearly the subject
matters to which they refer.

13. FORM F-X - Canadian issuers shall file a written irrevocable
consent and power of attorney on Form F-X.

<PAGE>

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.

PENNACO ENERGY, INC.

By: /s/ Paul M. Rady
-----------------------------------
Paul M. Rady, President and Chief
Executive Officer

<PAGE>

EXHIBIT 10.16

FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT

This Amendment is entered into this 20th day of November, 1998, by and
between Pennaco Energy, Inc., a Nevada corporation, whose address is 1050 17th
Street, Suite 700, Denver, Colorado 80265 ("SELLER") and CMS Oil and Gas
Company, a Michigan corporation, whose address is 1021 Main Street, Suite 2800,
Houston, Texas 77002-6606 ("BUYER").

WHEREAS, Seller and Buyer are parties to that certain Purchase and Sale
Agreement ("AGREEMENT"), dated October 23, 1998, concerning the sale of an
undivided 50% of Seller's right, title and interest in certain Assets located in
Campbell, Sheridan and Johnson Counties, Wyoming, and Big Horn, Rosebud and
Powder River Counties, Montana as more fully described in the Agreement, and

WHEREAS, the Parties desire to amend the Agreement as hereinafter provided.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:

1. Paragraph 4.4(a)(i) is amended by changing the deadline for delivery
of Notices of Title Defects from December 1, 1998, to December 15, 1998.

2. The Parties hereby elect under Paragraph 4.4(c)(ii) to give Seller the
option of attempting to cure Title Defects to the satisfaction of buyer after
the Second Closing Date through and including January 31, 1998, provided,
however, that the lesser of (i) the Purchase Price attributable to such Title
Defects or (ii) 10% of the Purchase Price shall be placed in escrow at the
Second Closing pending such cure.

3. The Parties reserve the right by mutual consent to further extend the
option of Seller to cure Title Defects beyond January 31, 1998, pursuant to
Paragraph 4.4(c)(ii).

4. The Parties acknowledge that Exhibit A to the Assignment and
Conveyance delivered by Seller to Buyer at the First Closing differs from
Exhibit A - Part I to the Agreement and hereby confirm that Exhibit A - Part I
is hereby deemed amended to conform to Exhibit A to the Assignment and
Conveyance delivered by Seller to Buyer at the First Closing. Those leases
which were on Exhibit A - Part I to the Agreement which are not on Exhibit A to
the Assignment and Conveyance delivered at the First Closing shall be included
in the Second Closing.

5. Exhibit G to the Agreement is hereby amended to provide that the
opinion of counsel is only as to CMS Oil and Gas Company and not also as to CMS
Gas Transmission and Storage.

<PAGE>

6. Exhibit B to the Agreement is hereby amended by the deletion of the
October 1, 1998, CBM Drilling Agreement and the addition of the November __,
1998, Agreement with CBM Drilling LLC for the drilling of coalbed methane wells,
which agreement may be in draft form as of the First Closing Date.

7. The Parties hereby agree that CMS shall have access to all test data
on the wells drilled by Pennaco on the Excluded Lands.

8. The Parties acknowledge that during Buyer's due diligence, it
discovered an Affidavit recorded by Stephen D. Morris of Diamond M. Company
alleging that Diamond M Company has not been paid in full by High Plains
Associates for certain mineral leases nor has it been paid its overriding
royalty interest for said leases. The Parties agree that such claims do not
constitute a breach of the representations and warranties of Seller in Paragraph
5.6 of the Agreement.

Except as provided above, this Agreement remains in full force and effect
according to its terms.

Seller:

PENNACO ENERGY, INC.

By: /s/ PAUL M. RADY
-------------------------------------
Paul M. Rady
President

Buyer:

CMS OIL AND GAS COMPANY

By: /s/ AUSTIN S. MURR
-------------------------------------
Austin S. Murr
Manager, Land and International Contracts

-2-

<PAGE>

EXHIBIT 10.17

SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT

This Amendment is entered into this 15th day of January, 1999, by and
between Pennaco Energy, Inc., a Nevada corporation, whose address is 1050 17th
Street, Suite 700, Denver, Colorado 80265 ("SELLER") and CMS Oil and Gas
Company, a Michigan corporation, whose address is 1021 Main Street, Suite 2800,
Houston, Texas 77002-6606 ("BUYER").

WHEREAS, Seller and Buyer are parties to that certain Purchase and Sale
Agreement dated October 23, 1998, concerning the sale of an undivided 50% of
Seller's right, title and interest in certain Assets located in Campbell,
Sheridan and Johnson Counties, Wyoming, and Big Horn, Rosebud and Powder River
Counties, Montana as more fully described in the Agreement, as amended by that
certain First Amendment dated November 20, 1998 (the "AGREEMENT"), and

WHEREAS, the Parties desire to further amend the Agreement as hereinafter
provided.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows:

1. The Parties hereby elect under Paragraph 4.4(c)(ii) to give Seller the
option of attempting to cure Title Defects 13, 20, 26, 27, 28, and 35 described
in Buyer's December 15, 1998, Notice of Title Defects to the satisfaction of
Buyer after the Second Closing Date through and including April 15, 1999,
provided, however, that One Million Eight Hundred Six Thousand Three Hundred
Seventy-Seven Dollars ($1,806,377.00) is deposited in escrow at the Second
Closing pending such cure (the "Deposit") pursuant to the Escrow Agreement of
even date between Seller, Buyer and Norwest Bank Colorado, National Association,
a copy of which is attached as Exhibit I hereto. The Deposit shall be allocated
as follows:

<TABLE>
<CAPTION>
Defect Number Deposit Amount
------------- --------------
<S> <C>
13 $ 833,525
20 194,333
26 248,332
27 147,375
28 254,689
35 128,123
-----------
$ 1,806,377
</TABLE>

Upon the cure of each Defect to the satisfaction of the Buyer or the mutual
agreement of the parties that the claimed Defect is not a Defect under the
Agreement, Seller shall, if the associated Leases were not included in the
Assignment and Conveyance delivered at the First Closing, tender an

<PAGE>

Assignment and Conveyance of the associated Interests in the form of Exhibit F
to the Agreement (together with any governmental forms of assignment, if
applicable) and the parties shall execute joint written instructions to the
Escrow Agent requesting that the Deposit Amount attributable to such Defect
be withdrawn from escrow and paid to Seller. If Seller is unable to cure a
Defect to the satisfaction of Buyer on or before April 15, 1999, the
provisions of Paragraph 4.4(c)(iii) shall apply. If Buyer elects not to
accept assignment of the Leases affected by such Defect and such Leases were
included in the Assignment and Conveyance delivered at the First Closing,
Buyer shall reassign such leases to Seller by an Assignment in the form of
Exhibit F to the Agreement. The parties acknowledge that as to Title Defect
13, the portion pertaining to the Federal Tax Lien is waived and, in the
event a Release is not obtained, Seller reserves the right to argue that the
Affidavit does not constitute a title defect. Buyer hereby elects under
paragraph 4.4(c)(iii)(3) to accept assignment of the Leases covered by the
Title Defects asserted by Buyer but not set forth above.

2. Paragraph 2.4 is hereby amended to provide that the payment by Buyer
to Seller for Excess Net Mineral Acres shall not be made at the Second Closing
but shall be included in the Final Settlement Statement pursuant to Paragraph
12.2 of the Agreement, subject to completion of the procedure contemplated by
paragraph 2.4 and upon assignment to Buyer by Seller of the Leases for such
Excess Net Mineral Acres which are required to be assigned to Buyer or which
Buyer elects to receive pursuant to paragraph 2.4.

3. The parties acknowledge that the determinations required under
paragraph 4.4(a)(ii) and (iii) cannot be made until after the Second Closing
Date and, therefore, any adjustments required under Sections 4.4(c)(iii)(1) and
(2) and 4.5 shall be made in the Final Settlement Statement pursuant to
Paragraph 12.2 of the Agreement.

4. The Parties acknowledge that Exhibit A to the Assignment and
Conveyance delivered by Seller to Buyer at the Second Closing differs from
Exhibit A - Part II to the Agreement and hereby confirm that Exhibit A - Part II
is hereby deemed amended to conform to Exhibit A to the Assignment and
Conveyance delivered by Seller to Buyer at the Second Closing.

5. Paragraph 18.3e of the Agreement and Article XVI.C of the Interim
Joint Operating Agreement are hereby amended to provide that during the term of
the Interim Joint Operating Agreement, or until Buyer gives written notice to
the contrary, the following shall apply in lieu of the provisions of those
paragraph:

Seller as Operator will call for advance payment of estimated capital costs
in accordance with the provisions of the Interim Operating Agreement and
Accounting Procedure ("JOA"). Seller and Buyer will contribute the
respective shares of such advance into the escrow account established at
the first closing. Upon joint instruction of Seller and Buyer, escrow
agent will deposit amounts required for payment to vendors and service
providers into Seller's operating account. Upon payment of any invoice
with funds drawn down from the escrow account, Seller will immediately
submit a copy of the check and the invoice to Buyer in accordance with the
notice provisions of the Interim Joint Operating Agreement. In the

-2-
<PAGE>

event either Party fails to fund its share of any Capital Costs, the
other Party may send a Notice of Default. If the default is not cured
within 30 days of the receipt of such Notice of Default, the defaulting
Party, if the Operator of such operation, shall automatically be removed
as operator of such operation without the necessity of a vote under
Article V of the JOA and, whether or not Operator, the defaulting Party
shall assign all of its interest in such operation and the affected
Leases to the other Party. As to Capital Costs, the foregoing remedies
shall be the exclusive remedies of the Parties for the failure of a
Party to fund such Capital Costs and the Non-Defaulting Party shall not
be entitled to also pursue the remedies set forth in Article VII.D of
the JOA. The Parties will confer in good faith no less frequently than
annually to consider the ongoing need for the Escrow Account
arrangement, taking into account the prior performance of Seller in
fulfilling its financial obligations, the most current financial
condition of Seller and the availability of other measures, if
appropriate, to secure the financial performance of Seller. The Parties
will confer regarding the necessity of the escrow arrangement and act in
a commercially reasonable manner.

Except as provided above, the Agreement remains in full force and effect
according to its terms.

Seller:

PENNACO ENERGY, INC.

By: /s/ PAUL M. RADY
-----------------------------------
Paul M. Rady
President

Buyer:

CMS OIL AND GAS COMPANY

By: /s/ AUSTIN S. MURR
-----------------------------------
Austin S. Murr
Manager, Land and International Contracts

-3-