MAGNUM HUNTER RESOURCES INC, S-3/A, 1997-11-17

MAGNUM HUNTER RESOURCES INC
S-3/A, 1997-11-17
CRUDE PETROLEUM & NATURAL GAS

Previous: INTERNEURON PHARMACEUTICALS INC, 8-K, 1997-11-17

Next: LANDMARK SYSTEMS CORP, S-1/A, 1997-11-17

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 17, 1997

REGISTRATION NO. 333-39073
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 2

TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

MAGNUM HUNTER RESOURCES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<C> <C>
NEVADA 87-0462881
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
600 EAST LAS COLINAS BLVD., SUITE 1200 MORGAN F. JOHNSTON, ESQ.
IRVING, TEXAS 75039 600 EAST LAS COLINAS BLVD., SUITE 1200
(972) 401-0752 IRVING, TEXAS 75039
(Address, including zip code, and (972) 401-0752
telephone number, including area code, (Name, address, including zip code, and telephone number,
of Registrant's principal executive offices) including area code, of agent for service)
</TABLE>

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

Copies to:

<TABLE>
<C> <C>
DAVID E. MORRISON, ESQ. WILLIAM L. BOEING, ESQ.
LISA K. BORK, ESQ. HAYNES AND BOONE, LLP
THOMPSON & KNIGHT, P.C. 3100 NATIONSBANK PLAZA
1700 PACIFIC AVENUE, SUITE 3300 901 MAIN STREET
DALLAS, TEXAS 75201 DALLAS, TEXAS 75202
(214) 969-1700 (214) 651-5000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================
<PAGE> 2

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

SUBJECT TO COMPLETION, DATED NOVEMBER 17, 1997

PROSPECTUS

<TABLE>
<C> <C> <C>
6,650,000 SHARES
Magnum Logo MAGNUM HUNTER RESOURCES, INC.
COMMON STOCK
</TABLE>

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

Of the 6,650,000 shares of Common Stock, par value $.002 per share (the
"Common Stock"), of Magnum Hunter Resources, Inc. (the "Company") offered hereby
(the "Offering"), 6,500,000 are being sold by the Company and 150,000 are being
sold by the Selling Shareholder named herein. The Company will not receive any
of the proceeds from the sale of the Common Stock by the Selling Shareholder.
See "Principal and Selling Shareholders."

The Common Stock is listed on the American Stock Exchange under the symbol
"MHR." On November 14, 1997, the closing sale price of the Company's Common
Stock on the American Stock Exchange was $7.125 per share. See "Price Range of
Common Stock and Dividend Policy."

SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

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

<TABLE>
<S> <C> <C> <C> <C>
==============================================================================================================================
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO SELLING
TO PUBLIC COMMISSIONS(1) PROCEEDS TO COMPANY(2) SHAREHOLDER
- ------------------------------------------------------------------------------------------------------------------------------
Per Share......................... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
==============================================================================================================================
</TABLE>

(1) The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses of the Offering payable by the Company
estimated to be $280,000.

(3) The Company has granted the several Underwriters a 30-day option to
purchase up to an additional 997,500 shares of Common Stock on the same
terms and conditions as set forth above solely to cover
over-allotments, if any. If the Underwriters exercise such option in
full, the Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Shareholder will be, before
deducting expenses, $ , $ , $ and
$ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered severally by the Underwriters named
herein subject to prior sale, when, as and if delivered to and accepted by the
Underwriters subject to their right to reject any order in whole or in part, and
subject to certain other conditions. It is expected that delivery of the shares
of Common Stock will be made at the offices of Rauscher Pierce Refsnes, Inc.,
Dallas, Texas on or about , 1997.

RAUSCHER PIERCE REFSNES, INC.

CIBC OPPENHEIMER

JOHNSON RICE & COMPANY L.L.C.
VAN KASPER & COMPANY
------------------------

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

[ARTWORK CONSISTS OF A MAP OF TEXAS, OKLAHOMA AND NEW MEXICO INDICATING THE
COMPANY'S CORE OPERATING AREAS IN THE PERMIAN BASIN PANOMA, WEST TEXAS AND
AUSTIN CHALK AREAS.]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, financial statements, and other data appearing elsewhere or
incorporated by reference in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes the Underwriters' over-allotment option
will not be exercised. See "Underwriting." Unless the context otherwise
requires, all references herein to "Magnum Hunter" or the "Company" include
Magnum Hunter Resources, Inc. and its consolidated subsidiaries. Except as
otherwise indicated, "on a pro forma basis" means that the results for the
stated period or other information has been adjusted to reflect the consummation
of the Transactions (as defined). Certain capitalized terms relating to the oil
and gas business are defined in the "Glossary."

THE COMPANY

Magnum Hunter is an independent energy company engaged in the exploitation
and development, acquisition, exploration and operation of oil and gas
properties with a geographic focus in Texas, Oklahoma and New Mexico. In
December 1995 Magnum Petroleum, Inc. and Hunter Resources, Inc. ("Hunter")
combined their oil and gas reserves and other assets (the "Magnum Hunter
Combination") and the management of Hunter assumed operating control of the
Company. The new management implemented a business strategy that emphasized
acquisitions of long-lived Proved Reserves with significant exploitation and
development opportunities where the Company generally could control operations
of the properties. As part of this strategy, in June 1996 the Company acquired
from a subsidiary of Burlington Resources, Inc. ("Burlington") property
interests located in the Texas Panhandle and western Oklahoma (the "Panoma
Properties") for a net purchase price of $34.7 million. Additionally, in April
1997 the Company acquired from Burlington property interests located in west
Texas and southeast New Mexico (the "Permian Basin Properties") for a net
purchase price of $133.0 million. The Company presently intends to focus its
efforts on its substantial inventory of exploitation and development
opportunities, further acquisitions and, to a lesser extent, selected
exploratory drilling prospects. The Company has identified over 600 development
drilling locations (including both production and injection wells) on its
properties, substantially all of which are low-risk in-fill drilling
opportunities.

On a pro forma basis at December 31, 1996, the Company had an interest in
2,581 wells and had estimated Proved Reserves of 314.2 Bcfe with an SEC PV-10 of
$408.0 million. As adjusted to use market prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December 31, 1996. Approximately 68% of these reserves were
classified as Proved Developed Producing Reserves and 86% were attributable to
the Panoma Properties and the Permian Basin Properties. On a pro forma basis at
December 31, 1996, the Company's Proved Reserves had an estimated Reserve Life
of 14.6 years and were 61% gas. The Company currently serves as operator for
approximately 71% of its properties. Additionally, the Company owns over 500
miles of gas gathering systems and a 50% interest in a gas processing plant that
is connected to the Company's largest gas gathering system, which was purchased
with the Panoma Properties.

Beginning with the Magnum Hunter Combination in December 1995, the Company
has made nine acquisitions for an aggregate net purchase price of $185.4
million. This strategy has added approximately 305.6 Bcfe of reserves
(determined as of the respective times of their acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in a gas processing plant. As a result of its acquisitions, the Company has
achieved substantial growth as described below:

- Proved reserves increased to 314.2 Bcfe on a pro forma basis at year end
1996 (300.5 Bcfe on a pro forma basis at year end 1996 as adjusted for
March 31, 1997 market prices) from 36.7 Bcfe at year end 1995;

- SEC PV-10 increased to $408.0 million on a pro forma basis at year end
1996 ($224.8 million on a pro forma basis at year end 1996 as adjusted
for March 31, 1997 market prices) from $37.2 million at year end 1995;

- Average daily production increased to 50.8 MMcfe in third quarter 1997
from 0.8 MMcfe in fiscal 1995; and

- EBITDA (as defined) increased to $16.0 million for the nine months ended
September 30, 1997 from $(0.5) million in fiscal 1995.
3
<PAGE> 5

BUSINESS STRATEGY

The Company's objective is to increase its reserves, production, cash flow
and earnings utilizing a program of (i) exploitation and development of acquired
properties, (ii) strategic acquisitions, and (iii) a selective exploration
program.

The following are key elements of the Company's strategy:

- Exploitation and Development of Existing Properties. The Company has a
substantial inventory of exploitation projects including development
drilling, workovers and recompletions. The Company seeks to maximize the
value of its properties through development activities including in-fill
drilling, waterflooding and other enhanced recovery techniques.

- Management of Operating Costs. The Company emphasizes strict cost
controls in all aspects of its business and seeks to operate its
properties wherever possible. By operating approximately 71% of its
properties, the Company is generally able to control direct operating and
drilling costs as well as to manage the timing of development and
exploration activities.

- Property Acquisitions. Although the Company has an extensive inventory of
exploitation and development opportunities, it continues to pursue
strategic acquisitions which fit its objectives of having Proved Reserves
with development potential and operating control.

- Expansion of Gas Gathering, Processing and Marketing Operations. The
Company has implemented several programs to expand and increase the
efficiency of its gas gathering systems. The Company owns over 75% and
markets approximately 96% of the gas that moves through its gas gathering
systems and, therefore, directly benefits from any cost and productivity
improvements. The Company is also considering opportunities to acquire or
develop additional gas gathering, processing and marketing capability,
including a proposal to acquire a minority interest in a gas marketing
company.

- Exploration. The Company is systematically increasing its exploration
efforts, focusing on established geological trends where the Company can
employ its geological, geophysical and engineering expertise. The Company
is actively generating and evaluating prospects for the application of
3-D seismic and advanced drilling technologies.

RECENT ACQUISITIONS

Permian Basin Acquisition. On April 30, 1997 the Company acquired the
Permian Basin Properties from Burlington effective as of January 1, 1997 (the
"Permian Basin Acquisition"). The Permian Basin Properties consist of 47 field
areas in west Texas and southeast New Mexico. The net purchase price was $133.0
million after adjustments aggregating $10.5 million. The Permian Basin
Properties include 1,852 producing oil and gas wells on approximately 113,810
gross acres (82,175 net acres) on which the Company has identified, additional
exploitation and development opportunities and expects to have exploration
potential. Approximately 66% of the wells acquired are operated by the Company.
The estimated Proved Reserves attributable to the Permian Basin Properties as of
December 31, 1996 aggregated 191.6 Bcfe with an SEC PV-10 of $243.3 million,
including 60.4 Bcfe of Proved Undeveloped Reserves. As adjusted to use market
prices in effect on March 31, 1997, the Proved Reserves attributable to the
Permian Basin Properties as of December 31, 1996 aggregated 181.6 Bcfe with an
SEC PV-10 of $139.6 million, including 60.3 Bcfe of Proved Undeveloped Reserves.

Panoma Acquisition. In June 1996 the Company purchased the Panoma
Properties from Burlington for a net purchase price of $34.7 million (the
"Panoma Acquisition"). Assets acquired in the Panoma Acquisition included
interests in 520 gas wells in the Texas Panhandle and western Oklahoma and an
associated 427 mile gas gathering system. The Company operates the gas gathering
system and approximately 90% of the acquired gas wells. The estimated Proved
Reserves attributable to the Panoma Properties as of December 31, 1996
aggregated 77.3 Bcfe with an SEC PV-10 of $111.0 million. As adjusted to use
market prices in effect on March 31, 1997, the Proved Reserves attributable to
the Panoma Properties as of December 31, 1996 aggregated 74.2 Bcfe with an SEC
PV-10 of $53.3 million.
4
<PAGE> 6

McLean Plant Acquisition. In January 1997 the Company acquired for $2.5
million a 50% ownership interest in the McLean gas processing plant (the "McLean
Gas Plant"), which currently processes 100% of the gas produced from the Panoma
Properties (the "McLean Plant Acquisition"). This acquisition allows the Company
to capture a significant portion of the processing profits on gas produced from
the Panoma Properties that would otherwise go to third party processors.

DEVELOPMENT AND EXPLORATION ACTIVITIES
Development

The Company has a substantial inventory of exploitation projects including
development drilling, workovers and recompletions, and cost reduction programs.
The Company believes it can enhance the value of selected fields through in-fill
drilling and enhanced recovery projects. The Company has budgeted approximately
$30.0 million for exploitation and development activities in 1998. Major
activities include the following:

Westbrook. The Westbrook Field covers 45 square miles of the Permian
Basin in Mitchell County, Texas and produces from the Clearfork formation
at approximately 3,200 feet. The field is an active waterflood developed on
28 acre, 5-spot spacing. The Company has completed a field study confirming
the opportunity to increase the well density on its acreage within this
field to 10 acre line drive spacing by drilling approximately 250 injection
and producing wells. An engineering review has been completed and
geological studies are ongoing. Twenty new wells have been staked and are
being permitted with the state regulatory commission. One rig will begin
drilling in November 1997 and use of a second rig will commence in the
first quarter of 1998. The Company has budgeted approximately $11.0 million
for development of the Westbrook Field in 1998.

Panoma. The Company has identified 81 development drilling locations
in the Panoma Properties that straddle the Texas Panhandle and western
Oklahoma. Seventy of these locations are in the West Panhandle properties,
which have been developed on 640 acre spacing compared to 160 acre spacing
on other fields located in the area. Of these 70 locations, 31 wells have
been drilled to date and an additional 39 wells are expected to be
completed by mid-1998, effectively reducing spacing to 320 acres per well.
The Company has budgeted approximately $4.0 million for development of the
Panoma Properties through 1998.

Waterfloods. In addition to the Westbrook Field, the Company is
actively involved in five waterflood projects in Texas, four of which are
operated by the Company. The four Company-operated units have had 13 wells
drilled to date, with additional drilling expected during the remainder of
1997 and in 1998. One unit, the Chinquapin Strawn, has started water
injection; a second unit, Fargo West, will start in November 1997; and the
other two units, Magnum Levelland and Starnes Ranch, are estimated to
commence by February 1998. The Company expects response to injection within
one year on each unit. The Company has budgeted approximately $7.3 million
with respect to the five projects in 1998.

Exploration

Magnum Hunter is systematically increasing its exploration efforts,
focusing on established geological trends where the Company can employ its
geological, geophysical and engineering expertise. The Company has budgeted
approximately $6.0 million for exploration activities in 1998, including
geological and geophysical expenses. Two exploratory wells have been drilled in
1997 to date. One of these is located on a 7,500-acre lease block in Roger Mills
County, Oklahoma and was completed as a gas well flowing approximately 500 Mcfe
per day. Drilling of a confirmation well is scheduled to commence in November
1997 at a location approximately two miles west of the initial discovery. A
second exploratory well located on a 3,000 acre lease block in Fayette County,
Texas has encountered oil shows and is awaiting a completion rig to test one of
the objective horizons. The Company owns 25% and 20% working interests,
respectively, in these two prospects.

The Company expects to commence drilling additional exploratory wells
before year-end 1997 on prospects in Oklahoma and Texas. An exploratory well
will commence before year-end 1997 on the Mossy Grove prospect in Walker County,
Texas. The Company owns a 25% working interest in the proposed test well
5
<PAGE> 7

which is located on a 30,000 acre lease block. The primary objective is the Glen
Rose formation at approximately 11,800 feet. Magnum Hunter also owns a 50%
working interest in 2,500 acres on four recently generated prospects in Ellis
County, Oklahoma. The Company expects to commence the first exploratory well in
late 1997, with the Atoka formation as the primary objective. In Victoria
County, Texas the Company has purchased 1,000 mineral acres overlaying a shallow
Frio structure. Magnum Hunter owns a 100% interest in this prospect and plans to
commence an exploratory test well in late 1997 or early 1998. The Company is
actively generating and evaluating prospects for the application of 3-D seismic
and advanced drilling technologies.

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

The Company maintains its corporate headquarters at 600 East Las Colinas
Boulevard, Suite 1200, Irving, Texas 75039 and its telephone number is (972)
401-0752.
6
<PAGE> 8

THE OFFERING (1)

Common Stock offered by the
Company............................. 6,500,000 shares.

Common Stock offered by the Selling
Shareholder....................... 150,000 shares.

Total..................... 6,650,000 shares.

Common Stock outstanding after the
Offering (2)...................... 21,079,598 shares.

Use of Proceeds..................... To repay outstanding indebtedness under
the Credit Facility. In the event the
net proceeds from the Offering exceed
the outstanding indebtedness under the
Credit Facility, the Company will
invest any remaining proceeds in
short-term, interest-bearing,
investment grade securities pending
their application as discussed below.
The Company intends to reborrow amounts
under the Credit Facility to fund some
or all of the following: (i) the
exploitation and development, potential
acquisition, and exploration of oil and
gas properties; (ii) the potential
expansion of the Company's gas
gathering, processing and marketing
activities, including acquisitions; and
(iii) other general corporate purposes.
The Company will not receive any
proceeds from the sale of shares of
Common Stock by the Selling
Shareholder. See "Use of Proceeds."

American Stock Exchange Symbol...... MHR.
- ---------------

(1) Does not include 997,500 shares of Common Stock subject to the Underwriters'
over-allotment option.

(2) Calculated as of September 30, 1997 and excludes (i) 243,500 shares of
Common Stock issuable upon exercise of various outstanding warrants; (ii)
1,168,589 shares of Common Stock issuable upon exercise of options granted
under the Company's stock option plan; (iii) 1,702,127 shares of Common
Stock issuable upon conversion of the TCW Preferred Stock (as defined); and
(iv) 145,000 shares of Common Stock issuable upon exercise of options
granted to certain of the Company's employees. Includes an aggregate of
846,256 shares of Common Stock issued upon the exercise of the Company's
public warrants, which were called for redemption on November 14, 1997. See
"Capitalization" and "Description of Capital Stock."

RISK FACTORS

See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Common Stock.

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

As used herein, the term "Transactions" shall refer to (i) the Company's
offering (the "Debt Offering") of $140.0 million aggregate principal amount of
its 10% Senior Notes due 2007 (the "Notes") and the application of the net
proceeds thereof; (ii) the Permian Basin Acquisition (including the incurrence
of indebtedness under the Company's revolving line of credit (the "Credit
Facility") and the Company's previously existing term loan facility and the use
of proceeds therefrom); (iii) the Panoma Acquisition; (iv) the McLean Plant
Acquisition; (v) the issuance of the TCW Preferred Stock; and (vi) the
conversion or redemption of the Company's Series B and Series C Preferred Stock
into Common Stock, each as more fully described in the Unaudited Pro Forma
Combined Financial Data and the notes thereto.
7
<PAGE> 9

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth summary historical consolidated financial
data of the Company as of and for the two years ended December 31, 1996, for the
nine months ended September 30, 1996 and 1997 and as of September 30, 1997,
which have been derived from the Company's consolidated financial statements,
and unaudited summary pro forma data for the nine months ended September 30,
1997. The historical financial data of the Company for the nine months ended
September 30, 1996 and 1997 and as of September 30, 1997 have been derived from
the Company's unaudited interim consolidated financial statements. The pro forma
income statement and other data for the nine months ended September 30, 1997
give pro forma effect to the Transactions as if the Transactions had occurred on
January 1, 1997. The pro forma financial data do not purport to represent what
the Company's financial position or results of operations would actually have
been had the transactions in fact occurred on the assumed date and are not
necessarily indicative of future operating results or financial position. The
information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Consolidated Financial Data," the Consolidated Financial
Statements and the notes thereto and the Unaudited Pro Forma Combined Financial
Data and the notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------------------
------------------ PRO FORMA
1995 1996 1996 1997 1997
------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Oil and gas............................ $ 617 $ 10,248 $ 6,357 $ 22,793 $ 35,420
Gas gathering, marketing and
processing.......................... -- 5,768 3,143 7,721 7,721
Oil field services and international
sales............................... 32 396 385 3,792 3,792
------- -------- -------- --------- --------
Total operating revenues....... 649 16,412 9,885 34,306 46,933
Operating costs and expenses:
Oil and gas production................. 268 4,390 2,305 8,521 11,560
Gas gathering, marketing and
processing.......................... -- 4,708 2,629 5,803 5,803
Oil field services and international
sales............................... 26 267 521 3,482 3,482
Depreciation and depletion............. 421 2,951 1,888 8,607 12,236
General and administrative............. 977 1,225 670 1,128 1,178
------- -------- -------- --------- --------
Total operating costs and
expenses..................... 1,692 13,541 8,013 27,541 34,259
------- -------- -------- --------- --------
Operating profit (loss).................. (1,043) 2,871 1,872 6,765 12,674
Other income........................... 77 344 214 608 608
Interest expense....................... (2) (2,394) (1,550) (9,298) (13,798)
Benefit (provision) for deferred income
taxes............................... -- (312) (204) 731 203
Minority interest in subsidiary
earnings............................ -- -- -- (40) (40)
------- -------- -------- --------- --------
Net income (loss) before
extraordinary loss........... (968) 509 332 (1,234) (353)
Extraordinary loss from early
extinguishment of debt................. -- -- -- (1,384) --
------- -------- -------- --------- --------
Net income (loss)........................ (968) 509 332 (2,618) (353)
Dividends applicable to preferred
shares................................. (617) (406) (382) (657) (657)
------- -------- -------- --------- --------
Income (loss) applicable to common
shares................................. $(1,585) $ 103 $ (50) $ (3,275) $ (1,010)
======= ======== ======== ========= ========
Income (loss) per common share before
extraordinary loss..................... $ (0.28) $ 0.01 $ 0.00 $ (0.14) $ (0.07)
Extraordinary loss per common share...... -- -- -- (0.10) --
------- -------- -------- --------- --------
Income (loss) per common share........... $ (0.28) $ 0.01 $ (0.00) $ (0.24) $ (0.07)
======= ======== ======== ========= ========
Common shares used in per share
calculation............................ 5,607 12,486 12,084 13,659 13,659
OTHER FINANCIAL DATA:
EBITDA(1)................................ $ (545) $ 6,166 $ 3,974 $ 15,980 $ 25,518
Capital expenditures(2).................. 1,244 41,471 38,787 148,429 148,429
CASH FLOWS:
Net cash (used by) provided by operating
activities............................. $ (849) $ 3,028 $ 1,864 $ 5,897
Net cash used by investing activities.... (2,007) (41,738) (38,599) (147,959)
Net cash provided by financing
activities............................. 2,755 38,853 36,870 143,456
</TABLE>

8
<PAGE> 10

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 1,927
Property, plant and equipment, net.......................... 213,000
Total assets................................................ 240,158
Total debt(4)............................................... 190,748
Stockholders' equity........................................ 31,904
</TABLE>

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

(1) EBITDA is defined as net income (loss) before income taxes and minority
interest, plus the sum of depletion and depreciation and interest expense.
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning
EBITDA because EBITDA is a measure used by certain investors in determining
the Company's historical ability to service its indebtedness. EBITDA should
not be considered as an alternative to, or more meaningful than, net income
or cash flows as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's operating performance or
liquidity.

(2) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and gas properties and other fixed assets.

(3) Adjusted to reflect (i) the sale by the Company of 6,500,000 shares in the
Offering and the application of the net proceeds therefrom and (ii) the
issuance of 846,256 shares of Common Stock to holders of Warrants (which
were called for redemption on November 14, 1997). See "Use of Proceeds" and
"Capitalization."

(4) Consists of long-term debt, including $140.0 million of Notes and $48.0
million of bank debt, and $2.7 million of other notes payable, and excludes
production payment liabilities of $790,000.
9
<PAGE> 11

SUMMARY HISTORICAL AND PRO FORMA OPERATING, RESERVE AND WELL DATA

The following table sets forth certain summary information with respect to
the Company's operations for the periods indicated and summary information with
respect to the Company's estimated proved oil and gas reserves. The pro forma
operating data for the nine months ended September 30, 1997 give effect to the
Transactions as if they had occurred on January 1, 1997, and the pro forma
reserve and well data at December 31, 1996 give effect to the Transactions as if
they had occurred on December 31, 1996. The information contained in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements and the notes thereto, the Unaudited Pro Forma Combined Financial
Data and the notes thereto and "Business and Properties" included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------
---------------- PRO FORMA
1995 1996 1996 1997 1997
------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (MBbl)................................ 30 191 140 490 763
Gas (MMcf)................................ 102 2,675 1,632 6,451 9,095
Natural Gas Equivalents (MMcfe)........... 282 3,821 2,472 9,391 13,672
Average sales price:
Oil (per Bbl)............................. $15.60 $20.46 $19.92 $17.79 $18.68
Gas (per Mcf)............................. 1.46 2.37 2.23 2.18 2.33
Natural Gas Equivalents (per Mcfe)........ 2.19 2.68 2.57 2.43 2.59
Average oil and gas production expense (per
Mcfe)(1).................................. $ 0.95 $ 1.15 $ 1.14 $ 0.91 $ 0.85
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
PRO FORMA 1996
------------------------------
DEC. 31, 1996 MAR. 31, 1997
1995 1996 PRICES PRICES(2)
------- -------- ------------- -------------
<S> <C> <C> <C> <C>
RESERVE AND WELL DATA(3):
Proved Reserves:
Oil (MBbl)................................. 3,768 5,338 20,629 19,851
Gas (MMcf)................................. 14,072 90,566 190,442 181,363
Natural Gas Equivalents (MMcfe)............ 36,678 122,596 314,218 300,470
Percent Proved
Developed Reserves......................... 51% 68% 68% 67%
Percent gas reserves......................... 38% 74% 61% 60%
Reserve Life (years)......................... 16.2 16.6 14.6 14.0
Estimated future net cash flows before tax
(thousands)................................ $45,940 $353,542 $822,385 $447,932
SEC PV-10 (thousands)........................ $37,209 $164,766 $408,049 $224,831
Producing wells:
Gross...................................... 462 729 2,581 2,581
Net........................................ 130 569 1,436 1,436
Average Working Interest................... 28% 78% 56% 56%
Operated wells (4)........................... 130 609 1,833 1,833
</TABLE>

- ---------------
(1) Includes lease operating expenses and production and ad valorem taxes, if
applicable. For the year ended December 31, 1996 and the nine months ended
September 30, 1997, includes internal transfer price expenses for gas
gathering and overhead costs of $0.23 per Mcfe and $0.16 per Mcfe,
respectively.
(2) Proved Reserves, future net cash flows before tax and SEC PV-10 have been
estimated as of December 31, 1996 using March 31, 1997 market prices of
$20.41 per Bbl of oil and $2.30 per Mcf of gas (with appropriate adjustments
for Btu content) and have not been adjusted for production for the three-
month period ended March 31, 1997.
(3) For limitations on the accuracy and reliability of reserves and future net
cash flow estimates, see "Risk Factors -- Uncertainty of Estimates of
Reserves and Future Net Cash Flows." For reserve pricing information, see
"Business and Properties -- Oil and Gas Reserves."
(4) Includes wells operated for third parties.
10
<PAGE> 12

RISK FACTORS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS. Information contained or
incorporated by reference in this Prospectus may contain "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "expect," "intend," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
following matters and certain other factors noted throughout this Prospectus
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.

Prior to making an investment decision, prospective investors should
carefully consider, together with the other information contained in this
Prospectus, the following risk factors:

SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT

The Company is highly leveraged, with outstanding long-term indebtedness of
approximately $188.0 million and stockholders' equity of $31.9 million as of
September 30, 1997. The Company's level of indebtedness has several important
effects on its future operations, including (i) a substantial portion of the
Company's cash flow from operations is dedicated to the payment of interest on
its indebtedness and is not available for other purposes; (ii) the covenants
contained in the Credit Facility require the Company to meet certain financial
tests and limit the Company's ability to borrow additional funds or to acquire
or dispose of assets; and (iii) the Company's ability to obtain additional
financing in the future may be impaired. Additionally, the senior (as opposed to
subordinated) status of the Notes, the Company's high debt to equity ratio, and
the pledge of substantially all of the Company's assets as collateral for the
Credit Facility will for the foreseeable future make it difficult for the
Company to obtain financing on an unsecured basis or to obtain secured financing
other than certain "purchase money" indebtedness collateralized by the acquired
assets.

Although the Company reported an operating profit for fiscal 1996, at
December 31, 1996 the Company had an accumulated deficit of $5.1 million due to
operating losses incurred in prior years. The Company's ability to meet its
financial covenants and to make scheduled payments of principal and interest to
repay its indebtedness is dependent upon its operating results and its ability
to obtain financing. However, there can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future bank
credit will be available in an amount sufficient to enable the Company to
service its indebtedness or make necessary capital expenditures. In such event,
the Company would be required to obtain such financing from the sale of equity
securities or other debt financing. There can be no assurance that any such
financing will be available on terms acceptable to the Company. Should
sufficient capital not be available, the Company may not be able to continue to
implement its business strategy.

The Credit Facility limits the Company's borrowings to amounts determined
by the lenders, in their sole discretion, based upon a variety of factors
including the amount of indebtedness which can be adequately supported by the
value of oil and gas reserves and assets, contracts and throughput attributable
to the gas gathering systems and processing plant, and assets owned by the
Company (the "Borrowing Base"). The Credit Facility was amended effective
September 30, 1997 to increase the maximum commitment from $75.0 million to
$125.0 million, increase the Borrowing Base by $5.0 million to $65.0 million and
modify the Consolidated EBITDA to Interest Expense ratio (as defined in the
Credit Facility). With these adjustments, as of November 14, 1997, the Company
had $20.0 million of borrowing availability under the Borrowing Base. After
application of the net proceeds from the Offering, the Company will have
approximately $ available for reborrowing under the Credit Facility. If
oil or gas prices decline below their current levels, the availability of funds
under the Credit Facility could be materially adversely affected.

The Credit Facility also requires the Company to satisfy certain financial
ratios in the future. One covenant requires the Company to maintain a ratio of
the Company's funded indebtedness divided by the sum of funded indebtedness plus
equity (the "Debt to Capitalization Ratio") of not more than 0.86 until March
31, 1998, not more than 0.75 from April 1, 1998 until September 30, 1998, and
not more than 0.70

11
<PAGE> 13

thereafter. At September 30, 1997, the Company had a Debt to Capitalization
Ratio of 0.86. At September 30, 1997, as adjusted for this Offering and the
exercise of Warrants for 846,256 shares of Common Stock in connection with their
call for redemption on November 14, 1997, the Company would have a Debt to
Capitalization Ratio of . Another covenant requires the Company to
maintain a ratio of Consolidated EBITDA to Interest Expense of not less than
1.80 to 1 through March 31, 1998, not less than 2.00 to 1 from April 1, 1998
through June 30, 1998, not less than 2.25 to 1 from July 1, 1998 through
September 30, 1998, and not less than 2.50 to 1 thereafter. The Company had a
ratio of Consolidated EBITDA to Interest Expense of 1.80 to 1 as of September
30, 1997. The failure to satisfy these covenants or any of the other covenants
in the Credit Facility would constitute an event of default thereunder and,
subject to certain grace periods, may permit the lenders to accelerate the
indebtedness then outstanding under the Credit Facility and demand immediate
repayment thereof. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." and "Description of
Indebtedness -- Description of Credit Facility."

VOLATILITY OF OIL AND GAS PRICES

The Company's revenues, profitability and the carrying value of its oil and
gas properties are substantially dependent upon prevailing prices of, and demand
for, oil and gas and the costs of acquiring, finding, developing and producing
reserves. The Company's ability to maintain or increase its borrowing capacity,
to repay current or future indebtedness, and to obtain additional capital on
attractive terms is also substantially dependent upon oil and gas prices.
Historically, the markets for oil and gas have been volatile and are likely to
continue to be volatile in the future. Prices for oil and gas are subject to
wide fluctuations in response to: (i) relatively minor changes in the supply of,
and demand for, oil and gas; (ii) market uncertainty; and (iii) a variety of
additional factors, all of which are beyond the Company's control. These factors
include domestic and foreign political conditions, the price and availability of
domestic and imported oil and gas, the level of consumer and industrial demand,
weather, domestic and foreign government relations, the price and availability
of alternative fuels and overall economic conditions. The Company's production
is predominantly weighted toward gas, making earnings and cash flow more
sensitive to gas price fluctuations. For 1996, the Company has estimated that a
$0.10 per Mcf change in gas prices would have resulted in a $250,000 difference
in EBITDA, and a $1.00 per Bbl change in oil prices would have resulted in a
$182,000 difference in EBITDA. On a pro forma basis for the Permian Basin
Acquisition for 1996, the Company has estimated that a $0.10 per Mcf change in
gas prices would have resulted in a $1.3 million difference in EBITDA, and a
$1.00 per Bbl change in oil prices would have resulted in a $1.1 million
difference in EBITDA. Furthermore, the marketability of the Company's production
depends in part upon the availability, proximity and capacity of gathering
systems, pipelines and processing facilities. Volatility in oil and gas prices
could affect the Company's ability to market its production through such
systems, pipelines or facilities. Substantially all of the Company's gas
production is currently sold to gas marketing firms or end users either on the
spot market on a month-to-month basis at prevailing spot market prices or under
long-term contracts based on current spot market prices. The Company normally
sells its oil under month-to-month contracts with a variety of purchasers.
Accordingly, the Company's oil and gas sales expose it to the commodities risks
associated with changes in market prices. See "Business and
Properties -- Marketing of Production."

Under full cost accounting, the Company would be required to take a
non-cash charge against earnings to the extent capitalized costs of acquisition,
exploration and development (net of depletion and depreciation), less deferred
income taxes, exceed the SEC PV-10 of its Proved Reserves and the lower of cost
or fair value of unproved properties after income tax effects. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Background."

UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET CASH FLOWS

This Prospectus contains estimates of the Company's oil and gas reserves
and the future net cash flows from those reserves, which have been prepared or
audited by certain independent petroleum consultants. There are numerous
uncertainties inherent in estimating quantities of Proved Reserves of oil and
gas and in projecting future rates of production and the timing of development
expenditures, including many factors beyond the Company's control. The estimates
in this Prospectus are based on various assumptions, including,

12
<PAGE> 14

for example, constant oil and gas prices, operating expenses, capital
expenditures and the availability of funds, and, therefore, are inherently
imprecise indications of future net cash flows. Actual future production, cash
flows, taxes, operating expenses, development expenditures and quantities of
recoverable oil and gas reserves may vary substantially from those assumed in
the estimates. Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth in this
Prospectus. Additionally, the Company's reserves may be subject to downward or
upward revision based upon actual production performance, results of future
development and exploration, prevailing oil and gas prices and other factors,
many of which are beyond the Company's control. See "Business and
Properties -- Oil and Gas Reserves."

The SEC PV-10 of Proved Reserves referred to in this Prospectus should not
be construed as the current market value of the estimated Proved Reserves of oil
and gas attributable to the Company's properties. In accordance with applicable
requirements of the Securities and Exchange Commission (the "Commission"), the
estimated discounted future net cash flows from Proved Reserves are generally
based on prices and costs as of the date of the estimate, whereas actual future
prices and costs may be materially higher or lower. Actual future net cash flows
also will be affected by (i) the timing of both production and related expenses;
(ii) changes in consumption levels; and (iii) governmental regulations or
taxation. In addition, the calculation of the present value of the future net
cash flows using a 10% discount as required by the Commission is not necessarily
the most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company's reserves or the oil and gas
industry in general. Furthermore, the Company's reserves may be subject to
downward or upward revision based upon actual production, results of future
development, supply and demand for oil and gas, prevailing oil and gas prices
and other factors. See "Business and Properties -- Oil and Gas Reserves."

FINDING AND ACQUIRING ADDITIONAL RESERVES; DEPLETION

The Company's future success depends upon its ability to find or acquire
additional oil and gas reserves that are economically recoverable. Except to the
extent the Company conducts successful exploration or development activities or
acquires properties containing Proved Reserves, the Proved Reserves of the
Company will generally decline as they are produced. The decline rate varies
depending upon reservoir characteristics and other factors. The Company's future
oil and gas reserves and production, and, therefore, cash flow and income, are
highly dependent upon the Company's level of success in exploiting its current
reserves and acquiring or finding additional reserves. There can be no assurance
that the Company's planned development projects and acquisition activities will
result in significant additional reserves or that the Company will have success
drilling productive wells at economic returns to replace its current and future
production.

ACQUISITION RISKS

The Company has grown primarily through acquisitions and intends to
continue acquiring oil and gas properties. Although the Company performs a
review of the properties proposed to be acquired, such reviews are subject to
uncertainties. It generally is not feasible to review in detail every individual
property involved in an acquisition. Ordinarily, review efforts are focused on
the higher-valued properties. However, even a detailed review of all properties
and records may not reveal existing or potential problems; nor will it permit
the Company to become sufficiently familiar with the properties to assess fully
their deficiencies and capabilities. Inspections are not always performed on
every well, and potential problems, such as mechanical integrity of equipment
and environmental conditions that may require significant remedial expenditures,
are not necessarily observable even when an inspection is undertaken.

The Company has recently begun to focus its acquisition efforts on larger
packages of oil and gas properties, such as the properties involved in the
Panoma and Permian Basin Acquisitions. The acquisition of larger oil and gas
properties may involve substantially higher costs and may pose additional issues
regarding operations and management. There can be no assurance that oil and gas
properties acquired by the Company will be successfully integrated into the
Company's operations or will achieve desired profitability objectives. See
"Business and Properties -- Recent Acquisitions."

13
<PAGE> 15

EXPLORATION AND DEVELOPMENT RISKS; WATERFLOOD PROJECTS

The Company intends to increase its development and exploration activities.
Exploration drilling and, to a lesser extent, development drilling of oil and
gas reserves involve a high degree of risk that no commercial production will be
obtained and/or that production will be insufficient to recover drilling and
completion costs. The cost of drilling, completing and operating wells is often
uncertain. The Company's drilling operations may be curtailed, delayed or
canceled as a result of numerous factors, including title problems, weather
conditions, compliance with governmental requirements and shortages or delays in
the delivery of equipment. Furthermore, completion of a well does not assure a
profit on the investment or a recovery of drilling, completion and operating
costs. See "Business and Properties -- Development and Exploration Activities."

There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Part of the Company's inventory of development prospects consists of
waterflood projects. With respect to the Permian Basin Properties, the Company
has identified significant potential expenditures related to further developing
an existing waterflood. Waterflooding involves significant capital expenditures
and uncertainty as to the total amount of secondary reserves that can be
recovered. In waterflood operations, there is generally a delay between the
initiation of water injection into a formation containing hydrocarbons and any
increase in production that may result. The operating cost per unit of
production of waterflood projects is generally higher during the initial phases
of such projects due to the purchase of injection water and related costs, as
well as during the later stages of the life of the project as production
declines. The degree of success, if any, of any secondary recovery program
depends on a large number of factors, including the porosity of the formation,
the technique used and the location of injector wells. See "Business and
Properties -- Development and Exploration Activities."

OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS

The Company's oil and gas business involves a variety of operating risks,
including, but not limited to, unexpected formations or pressures,
uncontrollable flows of oil, gas, brine or well fluids into the environment
(including groundwater contamination), blowouts, fires, explosions, pollution
and other risks, any of which could result in personal injuries, loss of life,
damage to properties and substantial losses. Although the Company carries
insurance at levels which it believes are reasonable, it is not fully insured
against all risks. The Company does not carry business interruption insurance.
Losses and liabilities arising from uninsured or under-insured events could have
a material adverse effect on the financial condition and operations of the
Company.

From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
have been subject to production curtailments. The curtailments range from
production being partially restricted to wells being completely shut-in. The
duration of curtailments varies from a few days to several months. In most cases
the Company is provided only limited notice as to when production will be
curtailed and the duration of such curtailments. The Company is not currently
experiencing any material curtailment on its production.

HEDGING RISKS

As of September 30, 1997 the Company had hedged approximately (i) 43% of
its gas production through March 1998 and (ii) 33% of its oil production through
December 1998. These hedges have in the past involved fixed price arrangements
and other price arrangements at a variety of prices, floors and caps. The
Company has in the past and may in the future enter into oil and gas futures
contracts, options and swaps. The Company's hedging activities, while intended
to reduce the Company's sensitivity to changes in market prices of oil and gas,
are subject to a number of risks including instances in which the Company or the
counterparties to its futures contracts could fail to purchase the contracted
quantities of oil or gas. Additionally, the fixed price sales and hedging
contracts limit the benefits the Company will realize if actual prices rise
above the contract prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Hedging Activity" and Note 14 to the Company's Consolidated
Financial Statements.

14
<PAGE> 16

LAWS AND REGULATIONS

The Company's operations are affected by extensive regulation pursuant to
various federal, state and local laws and regulations relating to the
exploration for and development, production, gathering and marketing of oil and
gas. Matters subject to regulation include discharge permits for drilling
operations, drilling and abandonment bonds or other financial responsibility
requirements, reports concerning operations, the spacing of wells, unitization
and pooling of properties, and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas.

Operations of the Company are also subject to numerous environmental laws,
including but not limited to, those governing management of waste, protection of
water, air quality, the discharge of materials into the environment, and
preservation of natural resources. Non-compliance with environmental laws and
the discharge of oil, gas, or other materials into the air, soil or water may
give rise to liabilities to the government and third parties, including civil
and criminal penalties, and may require the Company to incur costs to remedy the
discharge. Laws and regulations protecting the environment have become more
stringent in recent years, and may in certain circumstances impose retroactive,
strict, and joint and several liability rendering entities liable for
environmental damage without regard to negligence or fault. From time to time
the Company has agreed to indemnify sellers of producing properties from whom
the Company has acquired reserves against certain liabilities for environmental
claims associated with such properties. There can be no assurance that new laws
or regulations, or modifications of or new interpretations of existing laws and
regulations, will not increase substantially the cost of compliance or otherwise
adversely affect the Company's oil and gas operations and financial condition or
that material indemnity claims will not arise against the Company with respect
to properties acquired by or from the Company. While the Company does not
anticipate incurring material costs in connection with environmental compliance
and remediation, it cannot guarantee that material costs will not be incurred.
See "Business and Properties -- Regulation."

COMPETITION

The Company encounters substantial competition in acquiring properties,
marketing oil and gas, securing trained personnel and operating its properties.
Many competitors have financial and other resources that substantially exceed
those of the Company. The Company's competitors in acquisitions, development,
exploration and production include major oil companies, numerous independents,
individual proprietors and others. Therefore, competitors may be able to pay
more for desirable leases and to evaluate, bid for and purchase a greater number
of properties or prospects than the financial or personnel resources of the
Company will permit. See "Business and Properties -- Competition."

DEPENDENCE UPON KEY PERSONNEL

The Company is substantially dependent upon three key individuals within
its management, Gary C. Evans, Matthew C. Lutz and Richard R. Frazier, all of
whom were executives of Hunter prior to the Magnum Hunter Combination. The loss
of the services of any one of these individuals could have a material adverse
impact upon the Company. See "Management."

SHARES ELIGIBLE FOR FUTURE SALE; ABSENCE OF DIVIDENDS

The Company is authorized to issue up to 50,000,000 shares of Common Stock.
As of September 30, 1997, 13,733,342 shares were issued and outstanding, and
4,113,392 shares were reserved for issuance upon the conversion of shares of the
TCW Preferred Stock and upon the exercise of all outstanding warrants and
options. See "Description of Capital Stock." The issuance of additional shares
of Common Stock pursuant to such conversion rights and outstanding warrants and
options would reduce the proportionate ownership and voting rights of the Common
Stock then outstanding. The Company's existing management and their affiliates
own 2,265,675 shares of Common Stock that may in the future be sold in
compliance with Rule 144 adopted under the Securities Act. In addition, the
Credit Facility contains a Debt to Capitalization Ratio covenant requiring the
Company to reduce such ratio from approximately 0.86 to 0.75 by June 30, 1998
and 0.70 by

15
<PAGE> 17

December 31, 1998. The possibility that substantial amounts of Common Stock may
be sold in the public market may adversely affect prevailing and future market
prices for the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities in the future.

The Company called for redemption on November 14, 1997 its publicly held
warrants (the "Warrants"), each of which was exercisable for three shares of
Common Stock at an exercise price of $5.50 per share and redeemable at $0.02 per
share. As a result, Warrants were exercised for an aggregate of 846,256 shares
of Common Stock and the remaining Warrants covering 7,920 shares of Common Stock
were redeemed. See "Description of Capital Stock--Warrants."

The Company and its executive officers and directors, holding approximately
2,265,675 shares of Common Stock after the Offering, have agreed that they will
not, without the prior written consent of Rauscher Pierce Refsnes, Inc., for a
period of 90 days after the date of this Offering, directly or indirectly, offer
to sell, sell, pledge, contract to sell, grant any option for the sale of or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for any shares of Common Stock, or any right
or option to acquire any such shares or securities, except, in the case of the
Company, for transactions related to the Company's existing option plans and
other employee benefit plans or related to outstanding stock options and
warrants disclosed in this Prospectus. See "Underwriting."

The Company has not previously paid any cash dividends on the Common Stock
and does not anticipate paying dividends on the Common Stock in the foreseeable
future. It is the present intention of management to utilize all available funds
for the development of the Company's business. In addition, the Company is not
permitted to pay any dividends on the Common Stock unless and until all dividend
rights on outstanding Preferred Stock have been satisfied. The Credit Facility
and the Indenture governing the Notes also restrict the payment of cash
dividends. See "Price Range of Common Stock and Dividend Policy" and
"Description of Indebtedness."

PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS

The Common Stock is subordinate to all outstanding classes of Preferred
Stock of the Company in the payment of dividends and other distributions made
with respect to the stock, including distributions upon liquidation or
dissolution of the Company. The Board of Directors of the Company is authorized
to issue up to 10,000,000 shares of Preferred Stock without first obtaining
shareholder approval except in limited circumstances. The Company has previously
issued several series of Preferred Stock, although only the Series A Preferred
Stock and the TCW Preferred Stock are currently outstanding. The holders of the
TCW Preferred Stock currently have the right to appoint one additional member to
the Board of Directors and upon certain circumstances, up to 75% of the Board.
See "Description of Capital Stock--Preferred Stock." The designation and
issuance of other series of Preferred Stock will create additional securities
that will have dividend and liquidation preferences over the Common Stock or, in
the case of convertible preferred stock, may have the effect of diluting the
current shareholders' interest in the Company upon conversion.

The Company's Articles of Incorporation and Bylaws include certain
provisions that may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the Board of Directors rather than pursue non-negotiated takeover attempts.
These provisions include authorized "blank check" Preferred Stock and the
availability of authorized but unissued Common Stock. The issuance of Preferred
Stock may have the effect of delaying or preventing a change in control of the
Company without further shareholder action and may adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. In certain
circumstances the issuance of Preferred Stock could depress the market price of
the Common Stock. In addition, a change of control would entitle the holders of
the Notes to put the Notes to the Company under the Indenture and the lenders to
accelerate payment of outstanding indebtedness under the Credit Facility, both
of which events could have the effect of discouraging a takeover of the Company
by making such an attempt potentially more expensive. See "Description of
Capital Stock" and "Description of Indebtedness."

16
<PAGE> 18

USE OF PROCEEDS

The net proceeds to the Company from the Offering will be approximately
$ million ($ million assuming exercise of the Underwriters'
over-allotment option) after deducting underwriting discounts and estimated
expenses of the Offering payable by the Company. Such net proceeds will be
utilized to repay outstanding indebtedness under the Credit Facility. In the
event the net proceeds from the Offering exceed the outstanding indebtedness
under the Credit Facility, the Company will invest any remaining proceeds in
short-term, interest-bearing, investment grade securities pending their
application as discussed below. The Company intends to reborrow amounts under
the Credit Facility to fund some or all of the following: (i) the exploitation
and development, potential acquisition and exploration of oil and gas
properties; (ii) the potential expansion of the Company's gas gathering,
processing and marketing activities, including acquisitions; and (iii) other
general corporate purposes.

The Company's current capital expenditures budget of approximately $36.0
million for 1998 includes $30.0 million for exploitation and development
activities and $6.0 million for exploration activities, including geological and
geophysical expenses. Actual expenditures by the Company are discretionary and
will depend upon future events that cannot be predicted, including the actual
results and costs of future exploration and development drilling and other
activities, the availability and cost of oil and gas properties meeting the
Company's acquisition criteria and other matters beyond the control of the
Company. The Company is continually evaluating and pursuing potential property
acquisitions. The Company has no commitments, contracts, understandings or
arrangements at the present time with respect to any material acquisition other
than a non-binding letter of intent regarding a potential acquisition of a
minority interest in a gas marketing company. See "Business and
Properties -- Marketing of Production."

The indebtedness of the Company, a portion of which is to be repaid with
the net proceeds of the Offering, was incurred, along with indebtedness under
the Company's previously existing term loan facility, to fund the Permian Basin
Acquisition, to repay the outstanding indebtedness under the Company's previous
credit facility (which included amounts borrowed to fund the McLean Plant
Acquisition) and to pay the costs associated with the Permian Basin Acquisition
and the related financings. At November 14, 1997, $45.0 million was outstanding
under the Credit Facility at an interest rate of 7.44% per annum. All
indebtedness under the Credit Facility is currently bearing interest at the
LIBOR-based, rather than the prime rate, interest rate option. Amounts
outstanding under the Credit Facility mature on April 30, 2002 with no required
principal payments until maturity, provided the then outstanding principal
balance does not exceed the future borrowing base determinations established
from time to time by the banks. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Indebtedness."

The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholder. See "Principal and Selling Shareholders."

17
<PAGE> 19

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock has been listed on the American Stock Exchange since March
8, 1996. The trading symbol for the Company's Common Stock was changed from
"MPM" to "MHR" on March 18, 1997 to reflect the Company's name change from
Magnum Petroleum, Inc. to Magnum Hunter Resources, Inc. Prior to March 8, 1996,
the Common Stock was listed on the American Stock Exchange Emerging Company
Marketplace. At November 3, 1997, 13,911,243 shares were held by 3,657
shareholders of record. The following table sets forth the range of high and low
quarterly closing sales prices of the Common Stock for the periods indicated.

<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
HIGH LOW (SHARES)
----- ----- --------------
<S> <C> <C> <C>
1994
First Quarter............................................. $3.38 $2.44 878
Second Quarter............................................ 4.38 2.19 2,694
Third Quarter............................................. 3.63 2.88 4,277
Fourth Quarter............................................ 4.81 3.25 15,754

1995
First Quarter............................................. $5.00 $4.00 29,283
Second Quarter............................................ 4.69 3.44 10,406
Third Quarter............................................. 4.69 3.38 19,195
Fourth Quarter............................................ 4.13 2.88 15,768

1996
First Quarter............................................. $3.63 $2.75 19,737
Second Quarter............................................ 4.75 3.06 47,360
Third Quarter............................................. 4.75 3.56 23,781
Fourth Quarter............................................ 5.06 4.25 45,658

1997
First Quarter............................................. $6.63 $4.19 96,554
Second Quarter............................................ 6.31 5.00 41,845
Third Quarter............................................. 6.44 5.00 55,194
Fourth Quarter (through November 14, 1997)................ 7.94 6.38 204,971
</TABLE>

On November 14, 1997, the closing sale price of the Common Stock on the
American Stock Exchange was $7.125 per share.

The Company has not previously paid any cash dividends on Common Stock and
does not anticipate paying dividends on Common Stock in the foreseeable future.
Other than dividends required to be paid on the Company's Preferred Stock, it is
the present intention of management to utilize all available funds for the
development of the Company's business. The Company may not pay any dividends on
Common Stock unless and until all dividend rights on outstanding Preferred Stock
have been satisfied. In addition, both the Indenture governing the Notes and the
Credit Facility restrict the payment of cash dividends. See "Description of
Capital Stock," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Indebtedness."

18
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company at
September 30, 1997 (i) on an actual basis and (ii) as adjusted to give effect to
(a) the sale of the 6,500,000 shares of Common Stock offered by the Company in
the Offering and the application of the estimated net proceeds therefrom and (b)
the issuance of 846,256 shares of Common Stock to holders of Warrants (which
were called for redemption on November 14, 1997). See "Use of Proceeds" and
"Description of Capital Stock." This table should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long term debt, including current maturities:
Credit Facility(1)........................................ $ 48,000 $
10% Senior Notes due 2007(1).............................. 140,000 140,000
Other..................................................... 49 49
-------- --------
Total long-term debt.............................. 188,049
-------- --------
Production payment liability................................ 790 790
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized: 80,000 shares issued and outstanding of
Series A Preferred Stock (no liquidation preference)
and 1,000,000 shares issued and outstanding of TCW
Preferred Stock ($10 liquidation preference per
share)(2).............................................. 1 1
Common Stock, $.002 par value, 50,000,000 shares
authorized: 14,271,975 shares issued and 21,618,231
shares issued (as adjusted)............................ 29 43
Additional paid-in capital................................ 40,291
Accumulated deficit....................................... (8,416) (8,682)
Unrealized gain on investments............................ -- --
Less treasury stock (538,633 shares of Common Stock)...... (1) (1)
-------- --------
Total stockholders' equity............................. 31,904
-------- --------
Total capitalization................................... $220,743 $
======== ========
</TABLE>

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

(1) For a discussion of the Credit Facility and the Notes, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of
Indebtedness."

(2) TCW Preferred Stock refers to the 1996 Series A Convertible Preferred Stock
issued to TCW. See "Description of Capital Stock -- Preferred Stock -- TCW
Preferred Stock."

19
<PAGE> 21

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following historical selected consolidated financial data of the
Company are derived from, and qualified by reference to, the Company's
Consolidated Financial Statements and the notes thereto. The income statement
data for the nine months ended September 30, 1997 are not necessarily indicative
of results for a full year. The historical selected financial data for the two
years ended December 31, 1996 were derived from the Company's audited
consolidated financial statements. The selected financial data for the nine
months ended September 30, 1996 and 1997 have been derived from the Company's
unaudited interim consolidated financial statements and include, in the opinion
of the Company's management, all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the data for such periods.
The information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ---------------------
1995 1996 1996 1997
------- ------- -------- ---------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Oil and gas.................................... $ 617 $10,248 $ 6,357 $ 22,793
Gas gathering, marketing and processing........ -- 5,768 3,143 7,721
Oil field services and international sales..... 32 396 385 3,792
------- ------- -------- ---------
Total operating revenues............... 649 16,412 9,885 34,306
------- ------- -------- ---------
Operating costs and expenses:
Oil and gas production......................... 268 4,390 2,305 8,521
Gas gathering, marketing and processing........ -- 4,708 2,629 5,803
Oil field services and international sales..... 26 267 521 3,482
Depreciation and depletion..................... 421 2,951 1,888 8,607
General and administrative..................... 977 1,225 670 1,128
------- ------- -------- ---------
Total operating costs and expenses..... 1,692 13,541 8,013 27,541
------- ------- -------- ---------
Operating profit (loss).......................... (1,043) 2,871 1,872 6,765
Other income................................... 77 344 214 608
Interest expense............................... (2) (2,394) (1,550) (9,298)
------- ------- -------- ---------
Income (loss) before income tax and minority
interest....................................... (968) 821 536 (1,925)
Benefit (provision) for deferred income
taxes....................................... -- (312) (204) 731
------- ------- -------- ---------
Income (loss) before minority interest........... (968) 509 332 (1,194)
Minority interest in subsidiary earnings......... -- -- -- (40)
------- ------- -------- ---------
Income (loss) before extraordinary loss.......... (968) 509 332 (1,234)
Extraordinary loss from early extinguishment of
debt........................................... -- -- -- (1,384)
------- ------- -------- ---------
Net income (loss)...................... (968) 509 332 (2,618)
Dividends applicable to preferred
shares............................... (617) (406) (382) (657)
------- ------- -------- ---------
Income (loss) applicable to common shares........ $(1,585) $ 103 $ (50) $ (3,275)
======= ======= ======== =========
Income (loss) per common share before
extraordinary loss............................. $ (0.28) $ 0.01 $ 0.00 $ (0.14)
Extraordinary loss per common share.............. -- -- -- (0.10)
------- ------- -------- ---------
Income (loss) per common share................... $ (0.28) $ 0.01 $ (0.00) $ (0.24)
======= ======= ======== =========
Common shares used in per share calculation...... 5,607 12,486 12,084 13,659
</TABLE>

20
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ---------------------
1995 1996 1996 1997
------- ------- -------- ---------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)........................................ $ (545) $ 6,166 $ 3,974 $ 15,980
Capital expenditures(2).......................... 1,244 41,471 38,787 148,429
CASH FLOWS:
Net cash (used by) provided by operating
activities..................................... $ (849) $ 3,028 $ 1,864 $ 5,897
Net cash used by investing activities............ (2,007) (41,738) (38,599) (147,959)
Net cash provided by financing activities........ 2,755 38,853 36,870 143,456
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- ------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ (916) $ 2,279 $ 1,927
Property, plant and equipment, net........................ 36,405 73,648 213,000
Total assets.............................................. 40,065 83,072 240,158
Total debt(3)............................................. 9,612 38,766 190,748
Stockholders' equity...................................... 24,496 35,154 31,904
</TABLE>

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

(2) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and gas properties and other fixed assets.

(3) Consists of long-term debt, including $140.0 million of Notes and $48.0
million of bank debt, and $2.7 million of other notes payable at September
30, 1997, and excludes production payment liabilities of $288,000, $937,000
and $790,000 as of December 31, 1995 and 1996 and September 30, 1997,
respectively.

21
<PAGE> 23

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

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and "Selected Consolidated Financial Data" and
respective notes thereto, included elsewhere herein. The information below
should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of management of the
Company. Because of the size and scope of the Company's recent acquisitions and
the relatively small scale of the Company's operations prior to 1996, the
results of operations from period to period are not necessarily comparative.

BACKGROUND

In December 1995 the Company entered into the Magnum Hunter Combination
pursuant to which the Company issued to Hunter 5,085,077 shares of Common Stock
and 111,825 shares of the Company's Series C Preferred Stock (which were
subsequently converted into 335,475 shares of Common Stock) and assumed certain
liabilities in exchange for all the capital stock of Hunter's subsidiaries (the
"Hunter Subsidiaries"). The acquired assets included developed and undeveloped
oil and gas properties, a gas gathering system, and an established oil and gas
consulting and operating company, and were valued at $12.5 million at the time
of acquisition based upon the then current stock price. In connection with the
Magnum Hunter Combination, the management of Hunter assumed operating control of
the Company.

The new management implemented a business strategy that emphasized
acquisition of long-lived, Proved Reserves with significant exploitation and
development opportunities that management considered to have a lower risk
profile than the Company's historic projects. Prior to the Magnum Hunter
Combination, the Company was primarily focused on developing and selling higher
risk, non-operated exploratory and development projects and did not focus on
acquisitions. In order to improve the economics of acquisitions, the Company
emphasizes strict cost control in all aspects of its business and seeks to
operate its properties wherever possible. The Company also participates, to a
lesser extent, in selected exploration projects on a controlled risk basis.

As a part of the Company's new strategy, in June 1996 the Company acquired
the Panoma Properties, which include interests in 520 gas wells in the Texas
Panhandle and western Oklahoma and an associated 427 mile gas gathering system,
from Burlington for a net purchase price of $34.7 million. The Company assumed
operations of approximately 90% of the wells and of the gathering system and
began planning for increased density development drilling on the Panoma
Properties.

In January 1997 the Company purchased for $2.5 million a 50% interest in a
gas processing plant, the McLean Gas Plant, which currently processes 100% of
the gas produced from the Panoma Properties. The Company receives 100% of the
net profits of the plant until it recoups its investment, after which time the
Company will receive 50% of the net profits. As of September 30, 1997 the
Company had recouped approximately 35% of its $2.5 million investment.
Management believes that the acquisition of the McLean Gas Plant allows the
Company to capture a significant portion of the profits generated from
processing the gas produced at the Panoma Properties that would otherwise go to
third party processors.

In April 1997 the Company purchased the Permian Basin Properties from
Burlington for a net purchase price of $133.0 million after purchase price
adjustments of $10.5 million. These properties consist of approximately 1,852
producing oil and gas wells and associated acreage in west Texas and southeast
New Mexico. This acquisition substantially increased the Company's cash flow and
inventory of exploitation, development and exploration opportunities.

On April 29, 1997 the Company received and accepted two new loan
commitments from Bankers Trust Company, as Agent, and other banks for senior
credit facilities for the Company and several of its subsidiaries. The two new
senior credit facilities were structured as the $130.0 million Credit Facility
with a term of five years and a $60.0 million one year senior subordinated
bridge facility (the "Term Loan Facility") convertible

22
<PAGE> 24

into a five year term loan. The new credit facilities were conditioned, among
other things, upon the closing of the Permian Basin Acquisition, which took
place on April 30, 1997. The Credit Facility gives the Company the flexibility
of choosing a range of either "LIBOR" or "Prime" based interest rate options.
This Credit Facility replaced the Company's previously existing $100.0 million
revolving credit facility.

On May 29, 1997 the Company placed, through a Rule 144A private placement
offering, $140.0 million aggregate principal amount of Notes. Net proceeds from
the sale of the Notes were used to completely repay the Term Loan Facility in
the principal amount of $60.0 million and to repay a substantial portion of the
indebtedness outstanding under the Credit Facility. The Notes bear interest at
10% per annum, with interest payable on June 1 and December 1 commencing on
December 1, 1997.

The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
into a "full cost pool" as incurred, and properties in the pool are depleted and
charged to operations using the unit-of-production method based on the ratio of
current production to total proved oil and gas reserves. To the extent that such
capitalized costs (net of accumulated depreciation, depletion and amortization)
less deferred taxes exceed the SEC PV-10 of estimated future net cash flow from
Proved Reserves of oil and gas, and the lower of cost or fair value of unproved
properties after income tax effects, such excess costs are charged to
operations. Once incurred, a write-down of oil and gas properties is not
reversible at a later date even if oil or gas prices increase. While the Company
has never been required to write-down its asset base, significant downward
revisions of quantity estimates or declines in oil and gas prices from those in
effect on December 31, 1996 which are not offset by other factors could result
in a write-down for impairment of oil and gas properties.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996

As discussed above, the Company acquired the Panoma Properties in June
1996, the McLean Gas Plant in January 1997, and the Permian Basin Properties in
April 1997. As such, the results of operations for the nine month period ended
September 30, 1997 included nine months of operations for the Panoma Properties
and the McLean Gas Plant and five months for the Permian Basin Properties, while
the corresponding period in 1996 contained three months of operations for the
Panoma Properties and no results related to the McLean Gas Plant and the Permian
Basin Properties. Unless otherwise stated, the increases in the 1997 interim
period over the 1996 period were a result of these acquisitions.

Oil and gas sales were $22.8 million in 1997, a 259% increase over sales of
$6.4 million in 1996. In 1997, the Company sold 489,771 Bbl of oil, a 250%
increase, and 6,451 MMcf of gas, a 295% increase. The price received for oil was
$17.79 per Bbl and for gas was $2.18 per Mcf in 1997, representing an 11%
decrease in oil price from $19.92 per Bbl in 1996 and a 2% decrease in gas price
from $2.23 per Mcf in 1996. Oil and gas production costs increased 270% to $8.5
million in 1997 from $2.3 million in 1996. The gross operating margin from oil
and gas production was $14.3 million in 1997, a 252% increase over gross
operating margin of $4.1 million in 1996, principally due to the volume increase
of oil and gas sold. On an equivalent unit basis, the gross margin was $1.52 per
Mcfe in 1997 versus $1.64 in 1996, a 7% decrease, principally due to decline in
sales price received for both oil and gas between 1996 and 1997.

Gas gathering, marketing, and processing revenues were $7.7 million in the
1997 period, a 146% increase over revenues of $3.1 million in 1996, principally
as a result of the acquisition of the Panoma gas gathering system and the McLean
Gas Plant. Costs from these activities were $5.8 million in 1997, a 121%
increase over costs of $2.6 million in 1996. Gross operating margin was $1.9
million in 1997 versus $514,000 in 1996, a 273% increase. As a result of the
acquisition of the Panoma gas gathering system, total gathering system
throughput increased 100% to 20.2 MMcf per day in 1997 compared with 10.1 MMcf
per day in 1996. Due to the McLean Gas Plant acquisition, gas plant processing
throughput was 14.5 MMcf per day in 1997 versus none reported in 1996. Gross
operating margin from gathering operations was $0.24 per Mcf of throughput in
1997 versus $0.29 per Mcf in 1996. The gross operating margin from gas
processing was $0.23 per Mcf of throughput versus none reported in 1996.

23
<PAGE> 25

Revenues from oil field services and international sales were $3.8 million
in 1997, an 885% increase over revenues of $385,000 in 1996, principally due to
an increase in sales of Hunter Butcher International, L.L.C. ("Hunter Butcher")
in the amount of $3.4 million. Operating costs were $3.5 million in 1997 a $3.0
million increase over 1996, also principally due to Hunter Butcher. The gross
operating margin from these activities was $310,000 in 1997 versus a loss of
$136,000 in the 1996 period. The margin from Hunter Butcher operations was
$60,000 in 1997 versus $32,000 in the 1996 period. Oil field services produced
an operating margin of $250,000 in 1997 versus a loss of $168,000 in 1996.

Depreciation and depletion expense increased 356% to $8.6 million in 1997
from $1.9 million in 1996 due to the acquisitions. Depletion expense on oil and
gas production in 1997 was $8.0 million, or $0.85 per Mcfe, in 1997 versus $1.6
million, or $0.66 per Mcfe in 1996. General and administrative expense increased
68% to $1.1 million in 1997 from $670,000 in 1996, due to increased staffing and
other costs as a result of the acquisitions.

Operating profit increased to $6.8 million in 1997 from $1.9 million in
1996, a 261% increase. Other income increased 184% to $608,000 due to gain on
sale of marketable securities. Interest expense increased to $9.3 million in
1997 from $1.6 million in 1996, an increase of 500%, due to increased levels of
borrowing under the Company's revolving credit lines, the Notes, and bridge
financing used to fund the acquisitions previously mentioned. The Company
incurred a net loss before income tax and minority interest of $1.9 million in
1997, versus net income of $536,000 in 1996, principally due to interest expense
on the acquisitions exceeding operating income and due to the higher charge for
depreciation and depletion. The Company provided for a deferred income tax
benefit of $731,000 on this loss in 1997 versus deferred income tax expense of
$204,000 in 1996. After recording a $40,000 minority interest in Hunter Butcher,
the Company reported a net loss in 1997 before extraordinary items of $1.2
million, or $0.14 per common share, versus a $332,000 net profit, or no cents
per common share, in 1996.

The Company realized an extraordinary loss of $1.4 million ($0.10 per
common share) as required under Accounting Principles Board ("APB") Statement
No. 26 and Statement of Financial Standards ("SFAS") No. 4, from the early
extinguishment of bank debt. The early extinguishment was a result of the Notes
financing and new amended revolving credit agreements with banks arranged to
repay the Company's previous credit facility in conjunction with the purchase of
the Permian Basin Properties from Burlington. The net loss in 1997, after the
extraordinary charge, applicable to common shareholders was $3.3 million ($0.24
per common share) in 1997 compared to a loss of $50,000 (no cents per common
share) in 1996. The Company accrued $657,000 in dividends on its preferred stock
in 1997 versus $382,000 in 1996.

COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995

After deduction for preferred dividends, the Company reported net income
applicable to common shares for the year ended December 31, 1996 of $0.1
million, a $1.7 million increase as compared to the net loss of $1.6 million for
the year ended December 31, 1995. Prior to the preferred dividends in both
periods, the Company reported net income of $0.5 million in 1996, a $1.5 million
increase over 1995. Net income per common share was $0.01 for 1996, as compared
to a $0.28 per share loss in 1995. This increase was the result of higher
production volumes in 1996 from (i) acquisition activities, which included the
Magnum Hunter Combination in December 1995 and the Panoma Acquisition in June
1996, (ii) increased prices received for oil and gas products, (iii) the
acquisition of gas gathering systems in the Panoma Acquisition, and (iv) gas
marketing activities. During 1996, oil and gas production volumes increased
significantly to 3.8 Bcfe, an average of 10,470 Mcfe per day, as compared to 0.3
Bcfe, an average of 773 Mcfe per day, in 1995. The increased revenues recognized
from production volumes were aided by a 22% increase in the average price
received per Mcfe of production to $2.68 during 1996. The average oil price
increased 31% to $20.46 per Bbl in 1996, as compared to $15.60 per Bbl in 1995,
while average gas prices increased 62% to $2.37 per Mcf in 1996 as compared to
$1.46 per Mcf in 1995.

As a result of the acquisition activity and higher prices, total revenues
in 1996 were $16.4 million, a $15.8 million increase over 1995. This increase
consisted of an increase in oil and gas sales of $9.6 million from 1995 to 1996
and an increase in gas gathering, marketing and services revenue of $6.1 million
over the same period.

24
<PAGE> 26

After the Panoma Acquisition in June 1996, the percentage of the Company's
reserves attributable to gas was 74% as compared to 38% at the end of 1995. Due
to the Company's owning more properties and larger volume of production, oil and
gas production expenses increased $4.1 million to $4.4 million in 1996 versus
$0.3 million in 1995. The average cost of oil and gas produced per Mcfe was
$1.15 in 1996, an increase of $0.20 per Mcfe, due to costs of startup of
operations at the Panoma Properties.

Gross margin from oil and gas production increased $5.5 million to $5.9
million in 1996 from $0.4 million in 1995. Gross margins from gas gathering,
marketing, and services increased to $1.2 million in 1996, from $0.0 million in
1995.

Depreciation and depletion expense increased to $3.0 million in 1996, a
$2.5 million increase over 1995, as a result of the Panoma Acquisition and the
Magnum Hunter Combination. The Company-wide depreciation and depletion rate was
$0.77 per Mcfe in 1996 versus $1.49 per Mcfe in 1995. General and administrative
expense increased to $1.2 million in 1996, a $0.2 million increase over 1995,
due to higher operational staffing and associated costs as a result of expanded
operations, partially offset by a reduction in promotional and related expenses.
Other income increased to $0.3 million in 1996 due to a gain on sale of assets.
Interest expense increased to $2.4 million due to increased financing costs
incurred as a result of the Magnum Hunter Combination and the Panoma
Acquisition.

The Company made a provision for deferred income taxes of $0.3 million in
1996. No income taxes were due for 1996 as a result of utilization of net
operating loss carryforwards. At December 31, 1996 the Company had $6.9 million
available in such carryforwards to offset against future income. Dividends
applicable to preferred stock were $0.4 million for 1996, a $0.2 million
decrease from 1995, due to the redemption of the Series B and Series C Preferred
Stock during 1996, offset by the effect of the issuance of the TCW Preferred
Stock at the end of 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company has three principal operating sources of cash: (i) sales of oil
and gas, (ii) revenues from gas gathering, processing, and marketing, and (iii)
revenues from petroleum management and consulting services. The Company's cash
flow is highly dependent upon oil and gas prices. Decreases in the market price
of oil and gas could result in reductions of both cash flow and the Borrowing
Base under the Company's Credit Facility, which would result in decreased funds
available, including funds for capital expenditures.

In December 1996 the Company issued $10.0 million of TCW Preferred Stock to
facilitate its development drilling program.

On April 30, 1997 the Company closed the acquisition of the Permian Basin
Properties for a net purchase price of approximately $133.0 million. At the same
time, the Company's previously existing $100.0 million credit facility was
replaced by two new credit facilities, the $130.0 million Credit Facility and
the $60.0 million Term Loan Facility, for a total of $190.0 million. The initial
advances under these new facilities totaled $179.5 million, including funds to
complete the Permian Basin Acquisition, to pay principal and accrued interest
remaining on the Company's previous credit facility, and to provide cash for
working capital purposes.

On May 29, 1997 the Company sold, through a Rule 144A private placement
offering, $140.0 million aggregate principal amount of Notes. Net proceeds from
the sale of the Notes were used to completely repay the Company's Term Loan
Facility in the principal amount of $60.0 million and to repay a substantial
portion of the indebtedness outstanding under the Credit Facility. The Notes
bear interest at 10% per annum, with interest payable on June 1 and December 1
commencing on December 1, 1997. After paydown, the maximum commitment under the
Credit Facility was reduced from $130.0 million to $75.0 million, with a
Borrowing Base of $60.0 million. The Credit Facility was amended effective
September 30, 1997 to increase the maximum commitment from $75.0 million to
$125.0 million, increase the Borrowing Base by $5.0 million to $65.0 million and
modify the Consolidated EBITDA to Interest Expense ratio. With these
adjustments, total long-term debt under the Credit Facility at September 30,
1997 was $48.0 million, leaving $17.0 million available to draw at such time,
prior to the next borrowing base redetermination based upon financial results of
the Company. At November 14, 1997, total long-term debt under the Credit
Facility was $45.0 million,

25
<PAGE> 27

leaving $20.0 million available to draw at such time. At September 30, 1997, the
Company had $3.1 million in cash and cash equivalents and $1.9 million in net
working capital, in addition to the funds available under the Credit Facility.

The Company called for redemption on November 14, 1997 its publicly traded
Warrants, each of which was exercisable for three shares of Common Stock at an
exercise price of $5.50 per share and redeemable at $0.02 per share. As a
result, Warrants were exercised for an aggregate of 846,256 shares of Common
Stock and the remaining Warrants covering 7,920 shares of Common Stock were
redeemed. The Company received cash proceeds of approximately $4.7 million.

For 1996 the Company had a net increase in cash of $143,000. The Company's
operating activities provided net cash of $3.0 million, principally from
operating income before depreciation, depletion and deferred taxes, reduced by a
net increase in accounts receivable over accounts payable. The Company used
$41.7 million in investing activities, principally for additions to property and
equipment of $41.5 million, as well as increases in deposits and other assets.
Financing activities provided $38.9 million of cash, principally from the
aggregate proceeds from the issuance of long-term debt of $56.5 million and
production payments of $750,000, less payments on such debt and production
payments of $27.5 million, as well as proceeds from the issuance of preferred
stock of $9.8 million. The Company also paid $295,000 to redeem a portion of the
outstanding Series C Preferred Stock and $438,000 to pay dividends on preferred
stock.

For 1995 the Company had a net decrease in cash of $101,000 as the proceeds
received from the sale of preferred stock were principally used for oil and gas
acquisition and development activity and for the payment of dividends and
payables. The Company's operating activities used net cash of $849,000,
principally as a result of the net loss from operations and the payoff of a
substantial amount of accounts payable. Investing activities used net cash of
$2.0 million, largely from acquisition and development of oil and gas
properties. Financing activities accounted for net cash provided of $2.8
million, principally from the proceeds received due to the issuance of preferred
stock mentioned above. Partially offsetting the proceeds from the stock
issuances were advances made to Magnum Hunter Production, Inc. for acquisition
costs and working capital of $1.0 million, prior to the Magnum Hunter
Combination and the ultimate consolidation, and the payment of preferred
dividends of $583,000.

CAPITAL REQUIREMENTS

For fiscal 1997 the Company has budgeted approximately $20.0 million for
development and exploration activities, including $5.0 million budgeted for
development projects on the Permian Basin Properties and $3.0 million budgeted
for exploration projects. In addition, with respect to the recently closed
Permian Basin Acquisition, the Company anticipates that it will spend
approximately $38.1 million over a four year period beginning in 1997 in a
development program to enhance an existing waterflood project in the Westbrook
Field located in Mitchell County, Texas. For fiscal 1998, the Company has
budgeted approximately $36.0 million on development and exploration activities,
of which $6.0 million is projected to be spent on exploration projects,
including geological and geophysical expenses. The Company is not contractually
obligated to proceed with any of its budgeted capital expenditures. The amount
and allocation of future capital expenditures will depend on a number of factors
that are not entirely within the Company's control or ability to forecast,
including drilling results and changes in oil and gas prices. As a result,
actual capital expenditures may vary significantly from current expectations.

On April 30, 1997, the Company acquired from Burlington, effective as of
January 1, 1997, the Permian Basin Properties. The net purchase price was $133.0
million after adjustments. The Company financed the acquisition of the Permian
Basin Properties with the $130.0 million Credit Facility and the $60.0 million
Term Loan Facility. The Credit Facility and the Term Loan Facility were used to
pay the $123.0 million balance (after deducting a $10.0 million earnest money
deposit) of the net purchase price, to repay the $53.7 million in outstanding
indebtedness under the Company's previous credit facility and to pay costs
associated with the Permian Basin Acquisition and the related financings. In
addition to providing the Company with significant new sources of earnings and
operating cash flow, management of the Company believes the Permian Basin

26
<PAGE> 28

Properties will provide significant opportunities for exploitation and
development of both oil and gas reserves through a combination of enhanced
recovery projects and new drilling projects.

Based upon the Company's anticipated level of operations, the Company
believes that cash flow from operations together with the availability under the
Credit Facility (approximately $12.0 million as of September 30, 1997) will be
adequate to meet its anticipated requirements for working capital, capital
expenditures and scheduled interest payments for the foreseeable future. As
adjusted for the Offering and full exercise of the Warrants, the Company would
have had approximately $ available for borrowing under the Credit
Facility as of September 30, 1997.

INFLATION AND CHANGES IN PRICES

During the past several years, the Company has experienced some inflation
in oil and gas prices with moderate increases in property acquisition and
development costs. During 1996, the Company received somewhat higher commodity
prices for the natural resources produced from its properties. The results of
operations and cash flow of the Company have been, and will continue to be,
affected to a certain extent by the volatility in oil and gas prices. Should the
Company experience a significant increase in oil and gas prices that is
sustained over a prolonged period, it would expect that there would also be a
corresponding increase in oil and gas finding costs, lease acquisition costs,
and operating expenses. Periodically the Company enters into futures, options,
and swap contracts to reduce the effects of fluctuations in crude oil and gas
prices. It is policy of the Company not to enter into any such arrangements
which exceed 50% of the Company's oil and gas production during the next 12
months.

The Company markets oil and gas for its own account, which exposes the
Company to the attendant commodities risk. Substantially all of the Company's
gas production is currently sold to gas marketing firms or end users either on
the spot market on a month-to-month basis at prevailing spot market prices or
under long-term contracts based on current spot market prices. The Company
normally sells its oil under month-to-month contracts with a variety of
purchasers.

HEDGING ACTIVITY

Periodically, the Company enters into futures, options, and swap contracts
to reduce the effects of fluctuations in crude oil and gas prices. As of
September 30, 1997 the Company had 33% of its oil production and 43% of its gas
production hedged although lesser or greater amounts may be hedged in the
future. At September 30, 1997 the Company had open contracts for oil price
collars of 30,000 Bbls of oil per month (with cap and floor prices of $22.25 and
$18.50, respectively) through December 1998. At September 30, 1997 the Company
had open contracts for gas price swaps of 100,000 MMBtu of gas per month at
$1.905 per MMBtu through January 1998, 100,000 MMBtu of gas per month at $1.77
per MMBtu through January 1998 and 300,000 MMBtu of gas per month at an average
price of $2.67 per MMBtu through March 1998. The average Btu content of gas
produced by the Company exceeds 1,100 Btu per Mcf of gas. Therefore, each of the
above gas prices should be increased by 10% to reflect the actual gas price per
Mcf received by the Company. All of these swaps are against the El Paso Permian
Basin Index. These contracts expire monthly. The gains or losses on the
Company's hedging transactions are determined as the difference between the
contract price and a reference price, generally closing prices on New York
Mercantile Exchange. The resulting transaction gains and losses are determined
monthly and are included in the period the hedged production or inventory is
sold. Net gains or losses relating to these derivatives for the years ended
December 31, 1995 and 1996 were $0.0 and $(0.3) million, respectively.

YEAR 2000 MODIFICATIONS

The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.

27
<PAGE> 29

BUSINESS AND PROPERTIES

THE COMPANY

Magnum Hunter is an independent energy company engaged in the exploitation
and development, acquisition, exploration and operation of oil and gas
properties with a geographic focus in Texas, Oklahoma and New Mexico. In
December 1995 the Company consummated the Magnum Hunter Combination and the
management of Hunter assumed operating control of the Company. The new
management implemented a business strategy that emphasized acquisitions of
long-lived Proved Reserves with significant exploitation and development
opportunities where the Company generally could control the operations of the
properties. As part of this strategy, in June 1996 the Company acquired the
Panoma Properties from Burlington for a net purchase price of $34.7 million.
Additionally, in April 1997 the Company acquired the Permian Basin Properties
from Burlington for a net purchase price of $133.0 million. The Company
presently intends to focus its efforts on its substantial inventory of
exploitation and development opportunities, further acquisitions and, to a
lesser extent, selected exploratory drilling prospects. The Company has
identified over 600 development drilling locations (including both production
and injection wells) on its properties, substantially all of which are low-risk
in-fill drilling opportunities.

On a pro forma basis at December 31, 1996, the Company had an interest in
2,581 wells and had estimated Proved Reserves of 314.2 Bcfe with an SEC PV-10 of
$408.0 million. As adjusted to use market prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December 31, 1996. Approximately 68% of these reserves were
Proved Developed Producing Reserves and 86% were attributable to the Panoma
Properties and the Permian Basin Properties. On a pro forma basis at December
31, 1996, the Company's Proved Reserves had an estimated Reserve Life of 14.6
years and were 61% gas. The Company serves as operator for approximately 71% of
its properties (based on the number of producing wells in which the Company owns
an interest). Additionally, the Company owns over 500 miles of gas gathering
systems and a 50% interest in a gas processing plant that is connected to the
Company's largest gas gathering system, which was purchased with the Panoma
Properties.

Beginning with the Magnum Hunter Combination in December 1995, the Company
has made nine acquisitions for an aggregate net purchase price of $185.4
million. This strategy has added approximately 305.6 Bcfe of reserves
(determined as of the respective times of their acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in the McLean Gas Plant. As a result of its acquisitions, the Company has
achieved substantial growth as described below:

- Proved Reserves increased to 314.2 Bcfe on a pro forma basis at year end
1996 (300.5 Bcfe on a pro forma basis at year end 1996 as adjusted for
March 31, 1997 market prices) from 36.7 Bcfe at year end 1995;

- Average daily production increased to 50.8 MMcfe in third quarter 1997
from 0.8 MMcfe in fiscal 1995; and

- EBITDA increased to $16.0 million for the nine months ended September 30,
1997 from $(0.5) million in fiscal 1995.

BUSINESS STRATEGY

The following are key elements of the Company's strategy:

- Exploitation and Development of Existing Properties. The Company has a
substantial inventory of exploitation projects including development
drilling, workovers and recompletions. The Company seeks

28
<PAGE> 30

to maximize the value of its properties through development activities
including in-fill drilling, waterflooding and other enhanced recovery
techniques.

RECENT ACQUISITIONS

The most significant of the Company's completed acquisitions are the
Permian Basin Acquisition, the Panoma Acquisition, the McLean Plant Acquisition
and the Magnum Hunter Combination.

Permian Basin Acquisition

On April 30, 1997 the Company acquired from Burlington, effective as of
January 1, 1997, the Permian Basin Properties, consisting of 25 field areas in
west Texas and 22 field areas in southeast New Mexico, for a net purchase price
of $133.0 million after adjustments aggregating $10.5 million. The primary
producing formations include the Yates, Seven Rivers and Queen in Lea and Eddy
Counties, New Mexico; the Atoka in the Brunson Ranch Field in Loving County,
Texas; the Clearfork in the Westbrook Field in Mitchell County, Texas; the San
Andres in the Levelland/Slaughter Field in Cochran County, Texas; and the Canyon
Sand in Sutton County, Texas. The Permian Basin Properties include 1,852
producing oil and gas wells on approximately 113,810 gross acres (82,175 net
acres). One of the Company's subsidiaries, Gruy Petroleum Management Co.
("Gruy"), serves as operator on approximately 66% of the wells on the Permian
Basin Properties. Management of the Company believes the Permian Basin
Properties provide significant opportunities for exploitation and development of
both oil and gas through enhanced recovery projects and drilling.

During 1996 daily net production from the Permian Basin Properties was 25.8
MMcf per day of gas and over 2,500 Bbl per day of oil. According to Ryder Scott
Co. ("Ryder Scott"), independent petroleum engineers engaged by the Company to
evaluate the Permian Basin Properties, as of December 31, 1996, the Permian
Basin Properties had Proved Reserves of 15.3 MMBbl of oil and 99.9 Bcf of gas,
or on a Natural Gas Equivalent Basis, 191.6 Bcfe. Ryder Scott further estimated
the future net cash flows and the SEC PV-10 for the Permian Basin Properties to
be $468.8 million and $243.3 million, respectively, as of December 31, 1996
based on prices of $23.61 per Bbl of oil and $4.12 per Mcf of gas at December
31, 1996. Based on market prices of $20.41 per Bbl of oil and $2.30 per Mcf of
gas at March 31, 1997, future net cash flows and the SEC PV-10 for the Permian
Basin Properties would be $267.3 million and $139.6 million, respectively, as of
December 31, 1996. Approximately 68% of the Proved Reserves were classified as
Proved Developed Producing Reserves as of December 31, 1996. See "-- Oil and Gas
Reserves." Based on the $133.0 million adjusted purchase price and Proved
Reserves of 186.9 Bcfe as of April 30, 1997, the Company paid approximately
$0.71 per Mcfe for the Permian Basin Properties.

29
<PAGE> 31

The major fields in the Permian Basin Properties are the Westbrook,
Levelland/Slaughter, Lea County Shallow Properties and the Brunson Ranch.

Westbrook. The Westbrook Field covers 45 square miles of the Permian
Basin in Mitchell County, Texas and produces from the Clearfork formation
at a depth of approximately 3,200 feet. The following table sets forth
information regarding three properties in the Westbrook Field at the time
they were purchased in the Permian Basin Acquisition on April 30, 1997. The
interests acquired in the Permian Basin Acquisition include the following
three properties in the Westbrook Field:

<TABLE>
<CAPTION>
GROSS OIL
WELL WORKING NET REVENUE PRODUCTION
PROPERTY OPERATOR COUNT INTEREST INTEREST (BBL/D)
-------- ----------- ----- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Southwest Westbrook Unit... Company 135 89.9% 77.1% 560
Morrison "G" Lease......... Company 2 83.8% 72.9% 10
North Westbrook Unit....... Third Party 294 2.0% 1.6% 1,560
</TABLE>

Most of the leases and units in the field had waterflood projects
initiated in the 1960's and those projects are still active. The Company
plans to initiate waterflood enhancement operations on the Southwest
Westbrook Unit and the Morrison "G" Lease.

Ryder Scott attributed approximately 10.0%, or $24.3 million, of the
SEC PV-10 at December 31, 1996 (9.9%, or $13.8 million, at such date using
March 31, 1997 market prices) to a four year enhancement program,
commencing in 1997, on an existing waterflood project on the Westbrook
Field in Mitchell County, Texas. The Company has identified approximately
250 drilling locations, including production and injection wells, to
further develop the fields at a cost of approximately $38.1 million. When
completed, the properties will be developed on a ten acre, line drive
waterflood pattern, as opposed to the current 28 acre, five-spot pattern.
The Company has budgeted approximately $11.0 million for 1998 for
development of the Westbrook Field.

Levelland/Slaughter. The Levelland and Slaughter Fields consist of 155
wells located in Cochran County, Texas that produce from the San Andres
formation at a depth of 5,000 feet. The interests acquired in the Permian
Basin Acquisition include the following three properties in the Levelland
and Slaughter Fields:

<TABLE>
<CAPTION>
GROSS OIL
WELL WORKING NET REVENUE PRODUCTION
PROPERTY OPERATOR COUNT INTEREST INTEREST (BBL/D)
-------- -------- ----- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
TLB Unit.......................... Company 52 100.0% 87.3% 90
Veal Lease........................ Company 20 100.0% 87.1% 250
NW Slaughter Unit................. Company 83 74.9% 62.8% 310
</TABLE>

Discovered in the 1930's, all three properties have been actively
waterflooded since the 1970's. While the projects are mature, additional
drilling and waterflood enhancement are likely. No Proved Undeveloped
Reserves were assigned by Ryder Scott to either the Veal Lease or the TLB
Unit. Proved Undeveloped Reserves were assigned by Ryder Scott to the NW
Slaughter Unit in contemplation of a carbon dioxide injection project which
is anticipated for that property. The operator of an adjacent property has
been successfully injecting carbon dioxide for several years to enhance
production.

Lea County Shallow Properties. The Lea County Shallow Properties
consist of approximately 300 wells in Lea County, New Mexico which are in
the Rhodes, Jalmat, Monument, Langlia Mattix, Eumont and Eunice Fields. The
fields produce from the Yates, Seven Rivers, Queen and other formations at
depths generally shallower than 3,000 feet. Production is generally high
Btu gas, which produces into low pressure gathering systems. No Proved
Undeveloped Reserves have been assigned by Ryder Scott to the properties,
but the Company anticipates that numerous recompletion, stimulation,
workover or development drilling opportunities will result from detailed
geological and engineering studies which are planned.

30
<PAGE> 32

Brunson Ranch. The Brunson Ranch Field consists of four wells located
in Loving County, Texas in the deep Delaware Basin geological province of
the Permian Basin. Three of these wells are currently producing a total of
approximately 2.4 MMcf of gas per day from the Atoka formation at a depth
of approximately 16,000 feet. The Company recompleted an additional well in
June 1997 that is producing 2.1 MMcf of gas per day. Undeveloped potential
exists on the properties through redrilling the Atoka formation and
completing such wells using technology designed for high bottom hole
pressure conditions.

Burlington has agreed to indemnify the Company for breaches by Burlington
of the purchase agreement as well as any claims attributable to or arising out
of acts or omissions of Burlington (including, but not limited to, environmental
claims) occurring before January 1, 1997. There are certain limitations on the
amount of, and time period for bringing, a claim for indemnity made by the
Company. Burlington is a defendant in two actions claiming that Burlington
underpaid royalty owners on properties in New Mexico and Texas, including
properties that are a part of the Permian Basin Properties. The plaintiffs in
the New Mexico action are seeking class certification while the Texas action has
been certified as a class action. Burlington's indemnity would hold the Company
harmless from any of these claims arising prior to January 1, 1997. The Company
has also agreed, subject to certain limitations, to indemnify Burlington for
matters arising subsequent to January 1, 1997 as well as for certain liabilities
and obligations assumed by the Company as part of the purchase transaction.

Panoma Acquisition

On June 28, 1996, the Company purchased from Burlington interests in 520
gas wells in the Texas Panhandle and western Oklahoma (470 of which are operated
by the Company) and the associated 427 mile gas gathering system. The net
purchase price, after certain purchase price adjustments, was $34.7 million,
funded by borrowings under the Company's previous credit facility. Gruy is the
operator of the gas gathering system and the wells that were previously operated
by Burlington. According to Gaffney, Cline & Associates, independent petroleum
engineers engaged by the Company to evaluate the Panoma Properties ("Gaffney,
Cline"), the Proved Reserves attributable to the Panoma Properties as of
December 31, 1996 aggregated 77.3 Bcfe with an SEC PV-10 of $111.0 million. As
adjusted to use market prices in effect on March 31, 1997, the Proved Reserves
attributable to the Panoma Properties as of December 31, 1996 aggregated 74.2
Bcfe with an SEC PV-10 of $53.3 million.

The Panoma Properties consist of approximately 520 gas wells in the West
Panhandle, East Panhandle, and South Erick Fields along a corridor 65 miles long
and 20 miles wide stretching from Beckham County, Oklahoma to Gray County,
Texas. All wells are less than 2,800 feet deep and produce dry gas from the
Granite Wash and/or Brown Dolomite formations.

McLean Plant Acquisition

On January 1, 1997, the Company complemented its Panoma Acquisition by
purchasing for $2.5 million a 50% ownership interest in the McLean Gas Plant,
which is connected to the Panoma gas gathering system, and a related products
pipeline. The Company receives 100% of the net profits from the McLean Gas Plant
until it recoups the $2.5 million purchase price, after which time it will
receive 50% of the net profits. See "-- Gathering and Processing of Gas."

Magnum Hunter Combination

The recent growth experienced by the Company commenced with the Magnum
Hunter Combination in December 1995. In that transaction, the Company assumed
certain liabilities and issued an aggregate value of $12.5 million of stock
consisting of 5,085,077 shares of Common Stock and 111,825 shares of the
Company's Series C Preferred Stock, which were subsequently converted into
335,475 shares of Common Stock. In connection with the Magnum Hunter
Combination, management of the Company was replaced by Hunter's management team.
The acquisition of the Hunter Subsidiaries significantly increased the size and
expanded the nature of the Company's business. The Hunter Subsidiaries were
engaged in: (i) the acquisition, production and sale of crude oil; (ii) the
gathering, transmission and marketing of gas; (iii) the management

31
<PAGE> 33

and operation of producing oil and gas properties for interest owners; and (iv)
the provision of consulting and U.S. export services to facilitate Latin
American trade in energy products. The acquisition of Gruy, a Hunter Subsidiary
that specializes in the management of producing properties, has enabled the
Company to gain a higher level of expertise in operating oil and gas properties.
Estimated Proved Reserves for the properties acquired in the Magnum Hunter
Combination were 3.1 MMBbl of oil and 11.0 Bcf of gas as of December 31, 1995.

DEVELOPMENT AND EXPLORATION ACTIVITIES

Overview

The Company presently intends to focus its efforts on its substantial
inventory of exploitation and development activities, further acquisitions and,
to a lesser extent, selected exploratory drilling prospects.

The Company seeks to minimize its overhead and capital expenditures by
subcontracting the drilling, redrilling and workover of wells to independent
drilling contractors and by outsourcing other services. The Company typically
compensates its drilling subcontractors on a turnkey (fixed price), footage or
day rate basis depending on the Company's assessment of risk and cost
considerations.

Development Drilling

The Company's development strategy focuses on maximizing the value and
productivity of its oil and gas asset base through development drilling and
enhanced recovery projects. The Company has budgeted approximately $30.0 million
for exploitation and development activities for 1998. The Company has identified
over 600 development drilling locations (including both production and injection
wells) on its properties. In exploiting its producing properties, the Company
relies upon its in-house technical staff of petroleum engineering and geological
professionals and utilizes the services of outside consultants on a selective
basis.

Permian Basin Properties. In evaluating the Permian Basin Properties,
the Company believes there are many development opportunities. The Company
has identified approximately 400 drilling locations, including production
and injection wells, on the Permian Basin Properties. Engineering and
geological studies are being initiated to more precisely identify specific
development locations. In addition, in evaluating the Permian Basin
Properties, Ryder Scott attributed approximately 10.0%, or $24.3 million,
of their SEC PV-10 at December 31, 1996 (9.9%, or $13.8 million, at such
date using March 31, 1997 prices) to a four-year enhancement program,
commencing in 1997, on an existing waterflood in the Westbrook Field in
Mitchell County, Texas. The proposed waterflood project is estimated to
cost an aggregate of $38.1 million. The Company has budgeted approximately
$11.0 million for development of the Westbrook Field in 1998.

Panoma Properties. The Company believes that developmental drilling
can enhance the value of its recently acquired Panoma Properties, which
produce from the Brown Dolomite and Granite Wash formations in the Texas
Panhandle and western Oklahoma. The easternmost fields are developed on 160
acre spacing because the original spacing of 640 acres proved inadequate to
drain reserves efficiently. In-fill development is underway in the
westernmost field with 31 wells of a 70 well program having been completed
during the first nine months of 1997. Upon completion of the 70 well
program, the westernmost field will be developed with 320 acre spacing. The
Company has budgeted approximately $4.0 million for development of the
Panoma Properties through 1998.

Waterfloods. The Company believes it can enhance the value of selected
west Texas fields through in-fill drilling and enhanced recovery projects,
including several waterflood projects. While waterfloods typically take
considerable time to respond to fluid injection, the west Texas properties
have in-fill drilling potential that management believes could result in a
somewhat faster increase in production and cash flow. The Company has
budgeted approximately $7.3 million in 1998 for five west Texas waterflood
projects.

32
<PAGE> 34

Exploratory Drilling

The Company attempts to lessen the risks inherent in exploratory drilling
by (i) concentrating in specific areas in the United States where the Company's
technical staff has considerable experience and which are in known producing
trends where the potential for significant reserves exists; (ii) diversifying
through investment in multiple prospects; (iii) utilizing 3-D seismic and other
advanced technologies; and (iv) promoting out interests to industry partners.

The Company plans to spend approximately $3.0 million of its $20.0 million
1997 capital budget on exploratory drilling. The Company has a $6.0 million
exploration budget for 1998, including geological and geophysical expenses. Two
exploratory wells have been drilled in 1997 to date. One of these is located on
a 7,500 acre lease block in Roger Mills County, Oklahoma and was completed as a
gas well flowing approximately 500 Mcfe per day. Drilling of a confirmation well
is scheduled to commence in November 1997 at a location approximately two miles
west of the initial discovery. A second exploratory well located on a 3,000 acre
block in Fayette County, Texas has encountered oil shows and is awaiting a
completion rig to test one of the objective horizons. The Company owns 25% and
20% working interests, respectively, in these two prospects. The Company expects
to commence additional exploratory wells before year-end 1997 on prospects in
Oklahoma and Texas. An exploratory well will commence before year-end 1997 on
the Mossy Grove prospect in Walker County, Texas. The Company owns a 25% working
interest in the proposed test well which is located on a 30,000 acre lease
block. The primary objective is the Glen Rose formation at approximately 11,800
feet. Magnum Hunter also owns a 50% working interest in 2,500 acres on four new
prospects in Ellis County, Oklahoma. The Company expects to commence the first
exploratory well in late 1997, with the Atoka formation as the primary
objective. In Victoria County, Texas the Company has purchased 1,000 acres
overlaying a shallow Frio structure. Magnum Hunter owns a 100% interest in this
prospect and plans to commence an exploratory test well in late 1997 or early
1998. The Company is actively generating and evaluating prospects for the
application of future 3-D seismic and advanced drilling technologies.

GATHERING AND PROCESSING OF GAS

Hunter Gas Gathering, Inc., a wholly owned subsidiary of the Company, owns
four gas gathering systems located in Oklahoma, Texas and Louisiana, none of
which are subject to regulation by the Federal Energy Regulatory Commission
("FERC"), and a 50% ownership interest in the McLean Gas Plant in the Texas
Panhandle. Two of the gas gathering systems, Panoma and North Appleby, account
for more than 90% of the throughput from the Company's four systems. Gruy
operates all four gas gathering systems.

Generally, the gathering systems transport the gas from wells to a common
point where it is dehydrated prior to redelivery to downstream pipelines. In
managing its gas gathering systems, the Company has emphasized operating
efficiency and overhead management and introduced a program which ties
throughput costs to volume transported rather than to compression capacity. The
Company believes that its focus on volume-based pricing reduces the potential
financial impact of a decline in actual throughput.

The Panoma system, the largest of the Company's four gas gathering systems,
consists of approximately 427 miles of pipeline. The main trunklines run east to
west for approximately 66 miles with the east end starting in Beckham County,
Oklahoma and the west end starting in Gray County, Texas. Gas throughput for the
Panoma gas gathering system is approximately 16.3 MMcf per day. The Panoma gas
gathering system currently delivers gas to El Paso Natural Gas Company for
transport to markets in western Oklahoma and the West Coast, although the
Company is actively seeking additional markets for such gas. The Company, which
operates approximately 489 of the approximately 540 wells connected to the
Panoma system, is also actively seeking to add new wells to such system through
acquisition, development or arrangements with third party producers.

The Company's North Appleby gas gathering system is located primarily in
Nacogdoches County in east Texas. Approximately 39 wells are connected to the
system, which delivers approximately 3.2 MMcf per day for third parties to
Natural Gas Pipeline Co. for transportation to other markets. The Company's
other two systems deliver an aggregate of 1.5 MMcf per day for third parties
from 66 wells into various markets. The Company is presently negotiating a
possible sale of one such system.

33
<PAGE> 35

Effective January 1, 1997, the Company purchased for $2.5 million a 50%
ownership interest in the McLean Gas Plant, the gas processing facility
connected to the Company's Panoma gas gathering system. The purchase also
included a 23-mile products pipeline between the McLean Gas Plant and the Koch
Pipeline at Lefors, Texas and all gas and product purchase and sales agreements
related to the plant. The McLean Gas Plant is a modern cryogenic gas processing
plant with a capacity of 23.0 MMcf per day with a current throughput of 16.5
MMcf per day. The Company acquired its 50% ownership interest in the plant from
Carrera Gas Company, L.L.C. ("Carrera") of Tulsa, Oklahoma, which owns the
remaining 50% of the plant and operates the facility. Under terms of the
Company's operating agreement with Carrera, the Company receives 100% of the net
profits from the McLean Gas Plant until it recoups the $2.5 million purchase
price, at which point net profits will be divided equally between the Company
and Carrera. As of September 30, 1997 the Company had recouped approximately 35%
of its $2.5 million investment.

MARKETING OF PRODUCTION

The Company markets all of its gas production as well as gas it purchases
from third parties to gas marketing firms or end users either on the spot market
on a month-to-month basis at prevailing spot market prices or at negotiated
prices under long-term contracts. Marketing gas for its own account exposes the
Company to the attendant commodities risk. In 1996 the Company sold
approximately 91% of its gas to Crosstex, a gas marketing firm in Dallas, Texas
formed in January 1997 when Comstock Resources, Inc. sold its gas gathering,
processing and marketing operations. The Company does not anticipate that
Crosstex will purchase more than 10% of the Company's total oil and gas
production during 1997. The Company typically obtains letters of credit
guaranteeing the payment of the purchase price for its gas.

The Company normally sells its own oil under month-to-month contracts with
a variety of purchasers. Oil is usually sold for the Company's own account
through Enmark Services, a marketing agent in Dallas, Texas. While the Company
has historically been able to sell oil above posted prices, it is also exposed
to the commodities risk inherent in short-term contracts. For a discussion of
the Company's hedging activities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Hedging Activity" and Note 14 to the Company's Consolidated
Financial Statements.

The market for oil and gas produced by the Company depends on factors
beyond its control, including the extent of domestic production and imports of
oil and gas, the proximity and capacity of gas pipelines and other
transportation facilities, weather, demand for oil and gas, the marketing of
competitive fuels and the effects of state and federal regulation. The oil and
gas industry also competes with other industries in supplying the energy and
fuel requirements of industrial, commercial and individual consumers.

In October 1997 Hunter Gas Gathering, Inc. entered into a nonbinding letter
of intent to acquire a 30% interest in a privately held gas marketing firm,
Natural Gas Transmission Services, Inc., for an estimated consideration of
approximately $4.0 to $5.0 million payable in the Company's Common Stock. This
gas marketing firm had net income of $2.3 million on total revenues of $154.9
million and $2.2 million on total revenues of $131.4 million in 1996 and the
first nine months of 1997, respectively. As part of the proposed acquisition,
the Company plans to dedicate 100% of its gas production to such firm for
marketing. The proposed transaction (including the purchase price) is subject to
due diligence and negotiation of a definitive agreement (neither of which has
commenced to date) and other contingencies, and there is no assurance this
transaction will be consummated.

PETROLEUM MANAGEMENT AND CONSULTING SERVICES; OTHER ACTIVITIES

Gruy

The Company acquired Gruy in the Magnum Hunter Combination in December
1995. Gruy, which conducts operations for both the Company and third parties,
has a 40-year history of managing properties for third parties, which include
banks, financial institutions, bankruptcy trustees, estates, individual
investors, trusts and independent oil and gas companies. Gruy provides drilling,
completion and other well-site services; advice regarding environmental and
other regulatory compliance; receipt and disbursement functions and other
managerial services; petroleum engineering services; and consultation as an
expert witness. Gruy

34
<PAGE> 36

manages, operates and provides consulting services on oil and gas properties
located in Texas, Oklahoma, Mississippi, Louisiana, New Mexico and Kansas. Gruy
is an important component of the Company's acquisition program. As the operator
of wells for third parties and as a provider of consulting services for the
energy industry, Gruy is often able to identify attractive acquisition
opportunities.

Hunter Butcher

The Company provides consulting services to Latin American energy companies
through Hunter Butcher. Hunter Butcher has primarily focused on assisting
energy-related Mexican companies in obtaining financing for their purchases in
the United States of products for import into Mexico. This is accomplished
through a commercial bank credit facility established to facilitate short and
medium term credit for Hunter Butcher to purchase these products and resell them
to its clients at a slight premium. The credit risk to Hunter Butcher on such
resales is lessened by partial guarantees of approximately 85% to 90% of such
borrowings by the Export Import Bank of the United States (the "ExIm Bank"), by
credit insurance and through deposits by Hunter Butcher's clients to secure the
unguaranteed portion of the indebtedness and certain interest. Hunter Butcher
could, however, incur a loss under such arrangement in repaying indebtedness
under the credit facility since the applicable ExIm Bank guaranty and deposit
would not be adequate to pay interest under the credit facility at the default
rate or cover other possible losses. In addition, the Company itself may from
time to time guarantee the indebtedness incurred under the credit facility by
Hunter Butcher for its clients, but the Credit Facility limits the Company to
guaranteeing not more than $3.0 million of such indebtedness at any time.

OIL AND GAS RESERVES

General

All information set forth in this Prospectus regarding estimated proved
reserves, related estimated future net cash flows and SEC PV-10 of the Company's
oil and gas interests is taken from reports prepared (i) by Gaffney, Cline and
Glenn Harrison Petroleum Consultants, Inc. ("Glenn Harrison"), both independent
petroleum engineers in Dallas, Texas with respect to the Company's interests at
December 31, 1996 (using oil and gas prices at both December 31, 1996 and March
31, 1997), (ii) by the engineers named in the footnotes to the tables below with
respect to the Company's interests at December 31, 1995 and (iii) by Ryder Scott
with respect to the Permian Basin Properties at December 31, 1996 (using oil and
gas prices at both December 31, 1996 and March 31, 1997) and with respect to all
the Company's properties at September 30, 1997. The estimates of these
independent petroleum engineers were based upon their review of production
histories and other geological, economic, ownership and engineering data
provided by the Company and, in the case of Ryder Scott's report at December 31,
1996, by Burlington and the Company.

In accordance with Commission guidelines (and except for the alternative
estimates of future net cash flows and SEC PV-10 as of December 31, 1996 using
March 31, 1997 prices), the estimates of future net cash flows from Proved
Reserves and their SEC PV-10 are made using oil and gas sales prices in effect
as of the dates of such estimates and are held constant throughout the life of
the properties. The Company's estimates of Proved Reserves, future net cash
flows and SEC PV-10 were estimated using the following weighted average prices
(other than prices at March 31, 1997, which are market prices as adjusted for
Btu content), before deduction of production taxes:

<TABLE>
<CAPTION>
PRICES USED IN RESERVE REPORTS AT DECEMBER 31,
----------------------------------------------------
PRO FORMA 1996(1)
----------------------------------
DECEMBER 31, 1996 MARCH 31, 1997
1995 1996 PRICES(2) PRICES(3)
------ ------ ----------------- --------------
<S> <C> <C> <C> <C>
Gas (per Mcf)........................ $ 1.46 $ 4.03 $ 4.05 $ 2.30
Oil (per Bbl)........................ $15.60 $24.37 $24.18 $20.41
</TABLE>

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

(1) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.

(2) Proved Reserves attributable to the Permian Basin Properties at December 31,
1996 were estimated based upon weighted average prices (before deduction of
production taxes) of $4.12 per Mcf of gas and $23.61 per Bbl of oil.

35
<PAGE> 37

(3) Proved Reserves attributable to the Permian Basin Properties at December 31,
1996 using prices at March 31, 1997 were based upon market prices (before
deduction of production taxes) of $2.30 per Mcf of gas and $20.41 per Bbl of
oil.

All reserves are evaluated at contract temperature and pressure which can
affect the measurement of gas reserves. Operating costs, development costs and
certain production-related and ad valorem taxes were deducted in arriving at the
estimated future net cash flows. No provision was made for income taxes. The
following estimates set forth reserves considered to be economically recoverable
under normal operating methods and existing conditions at the prices and
operating costs prevailing at the dates indicated above. The estimates of the
SEC PV-10 from future net cash flows differ from the standardized measure of
discounted future net cash flows set forth in the notes to the Consolidated
Financial Statements of the Company, which is calculated after provision for
future income taxes. There can be no assurance that these estimates are accurate
predictions of future net cash flows from oil and gas reserves or their present
value.

Proved Reserves are estimates of oil and gas to be recovered in the future.
Reservoir engineering is a subjective process of estimating the sizes of
underground accumulations of oil and gas that cannot be measured in an exact
way. The accuracy of any reserve estimates is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports contained
herein. Results of drilling, testing, and production subsequent to the date of
the estimate may justify revision of such estimate. Future prices received for
the sale of oil and gas may be different from those used in preparing these
reports. The amounts and timing of future operating and development costs may
also differ from those used. Accordingly, reserve estimates are often different
from the quantities of oil and gas that are ultimately recovered. See "Risk
Factors -- Uncertainty of Estimates of Reserves and Future Net Cash Flows."

Except for the effect of changes in oil and gas prices, no major discovery
or other favorable or adverse event is believed to have caused a significant
change in these estimates of the Company's proved reserves since December 31,
1996.

No estimates of Proved Reserves of oil and gas have been filed by the
Company with, or included in any report to, any United States authority or
agency (other than the Commission) since January 1, 1996.

36
<PAGE> 38

Company Reserves

The following tables set forth the estimated Proved Reserves of oil and gas
of the Company and the SEC PV-10 thereof on (i) an actual basis at December 31,
1995 and 1996 and (ii) a pro forma basis giving effect to the Permian Basin
Acquisition as if it had occurred on December 31, 1996 (using oil and gas prices
at both December 31, 1996 and March 31, 1997).

ESTIMATED PROVED OIL AND GAS RESERVES(1)

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
PRO FORMA 1996(4)
-----------------------------
DECEMBER 31, MARCH 31,
1995(2) 1996(3) 1996 PRICES 1997 PRICES(5)
---------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
NET GAS RESERVES (MCF):
Proved Developed Producing Reserves...... 8,796,748 71,166,555 148,486,702 139,410,810
Proved Developed Non-Producing
Reserves............................... -- 108,586 161,546 160,960
Proved Undeveloped Reserves.............. 5,275,168 19,290,856 41,793,954 41,791,208
---------- ----------- ----------- -----------
Total Proved Gas Reserves...... 14,071,916 90,565,997 190,442,202 181,362,984
========== =========== =========== ===========
NET OIL RESERVES (BBL):
Proved Developed Producing Reserves...... 1,681,841 1,849,846 10,804,735 10,050,370
Proved Developed Non-Producing
Reserves............................... -- 112,338 125,979 119,641
Proved Undeveloped Reserves.............. 2,085,898 3,376,071 9,698,562 9,681,158
---------- ----------- ----------- -----------
Total Proved Oil Reserves...... 3,767,739 5,338,255 20,629,276 19,851,169
========== =========== =========== ===========
Total Proved Reserves (Mcfe)... 36,678,350 122,595,527 314,217,858 300,469,998
========== =========== =========== ===========
</TABLE>

ESTIMATED SEC PV-10 OF PROVED RESERVES(1)

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------
PRO FORMA 1996(4)
------------------------------
DECEMBER 31, MARCH 31,
1995(2) 1996(3) 1996 PRICES 1997 PRICES(5)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
ESTIMATED SEC PV-10(6):
Proved Developed Producing
Reserves......................... $19,036,205 $115,858,134 $295,509,505 $161,683,897
Proved Developed Non-Producing
Reserves......................... -- 664,308 987,032 682,003
Proved Undeveloped
Reserves......................... 18,173,125 48,244,017 111,552,418 62,465,119
----------- ------------ ------------ ------------
Total SEC PV-10 of Proved
Reserves......................... $37,209,330 $164,766,459 $408,048,955 $224,831,019
=========== ============ ============ ============
</TABLE>

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

(1) Based upon (i) reserve report at December 31, 1995 prepared by James J.
Weisman, Jr.; (ii) reserve reports at December 31, 1996 prepared by Gaffney,
Cline and Glenn Harrison; and (iii) reserve report relating to the Permian
Basin Properties at December 31, 1996 prepared by Ryder Scott.

(2) Includes reserves acquired in the Magnum Hunter Combination. See "-- Recent
Acquisitions."

(3) Includes reserves acquired in the Panoma Acquisition. See "-- Recent
Acquisitions."

(4) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.

(5) Proved Reserves and SEC PV-10 have been estimated as of December 31, 1996
using March 31, 1997 market prices of $20.41 per Bbl of oil and $2.30 per
Mcf of gas. Such Proved Reserves and SEC PV-10 have not been adjusted for
production for the three-month period ended March 31, 1997.

(6) SEC PV-10 differs from the standardized measure of discounted future net
cash flows set forth in the notes to the Consolidated Financial Statements
of the Company, which is calculated after provision for future income taxes.

37
<PAGE> 39

Significant Properties

On December 31, 1996, after giving pro forma effect to the Permian Basin
Acquisition, 86% of the Company's Proved Reserves on a Bcfe basis were located
in the Permian Basin Properties and the Panoma Properties. On such date the
Company's properties included, on a pro forma basis, working interests in 2,581
gross (1,436 net) productive oil and gas wells. The Company also held interests
in 10,992 gross (5,003 net) undeveloped acres on a pro forma basis at December
31, 1996.

The following table sets forth summary information with respect to the
Company's estimated Proved Reserves of oil and gas on a pro forma basis at
December 31, 1996.

<TABLE>
<CAPTION>
SEC PV-10(1)
---------------------- NATURAL GAS
AMOUNT % OF OIL GAS EQUIVALENT
(IN THOUSANDS) TOTAL (BBL) (MCF) (MCFE)
-------------- ----- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Permian Basin Properties(2)(3).... $243,282 59.6% 15,291,021 99,876,205 191,622,331
Panoma Properties(4).............. 111,030 27.2% 28,531 77,114,929 77,286,115
Other(5).......................... 53,736 13.2% 5,309,724 13,451,068 45,309,412
-------- ----- ---------- ----------- -----------
Total(2)................ $408,048 100.0% 20,629,276 190,442,202 314,217,858
======== ===== ========== =========== ===========
</TABLE>

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

(1) SEC PV-10 differs from the standardized measure of discounted future net
cash flows set forth in the notes to the Consolidated Financial Statements
of the Company, which is calculated after provision for future income taxes.

(2) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.

(3) Based on a reserve report at December 31, 1996 prepared by Ryder Scott.

(4) Based on a reserve report at December 31, 1996 prepared by Gaffney, Cline.

(5) Based on reserve reports at December 31, 1996 prepared by Gaffney, Cline and
Glenn Harrison.

Permian Basin Reserves

The following tables set forth as of December 31, 1996 the estimated Proved
Reserves and the SEC PV-10 thereof for the Permian Basin Properties.

ESTIMATED PROVED OIL AND GAS RESERVES OF THE PERMIAN BASIN PROPERTIES(1)

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
-----------------------------------
DECEMBER 31, 1996 MARCH 31, 1997
PRICES PRICES(2)
----------------- --------------
<S> <C> <C>
NET GAS RESERVES (MCF):
Proved Developed Producing Reserves....................... 77,320,147 71,319,816
Proved Developed Non-Producing Reserves................... 52,960 52,960
Proved Undeveloped Reserves............................... 22,503,098 22,503,098
----------- -----------
Total Proved Reserves of gas...................... 99,876,205 93,875,874
----------- -----------
NET OIL RESERVES (BBL):
Proved Developed Producing Reserves....................... 8,954,889 8,296,370
Proved Developed Non-Producing Reserves................... 13,641 13,641
Proved Undeveloped Reserves............................... 6,322,491 6,304,139
----------- -----------
Total Proved Reserves of oil...................... 15,291,021 14,614,150
----------- -----------
Total Proved Reserves (Mcfe)...................... 191,622,331 181,560,774
=========== ===========
</TABLE>

38
<PAGE> 40

ESTIMATED SEC PV-10 OF PROVED RESERVES OF THE PERMIAN BASIN PROPERTIES(1)

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

(1) Based upon reserve reports at December 31, 1996 prepared by Ryder Scott.

(2) Proved Reserves and SEC PV-10 have been estimated as of December 31, 1996
using March 31, 1997 market prices of $20.41 per Bbl of oil and $2.30 per
Mcf of gas at the Permian Basin Properties. Such Proved Reserves and SEC
PV-10 have not been adjusted for production for the three-month period ended
March 31, 1997.

(3) SEC PV-10 differs from the standardized measure of discounted future net
cash flows set forth in the notes to the Consolidated Financial Statements
of the Company, which is calculated after provision for future income taxes.

OIL AND GAS PRODUCTION, PRICES AND COSTS

The following table shows the approximate net production attributable to
the Company's oil and gas interests, the average sales price and the average
production expense attributable to the Company's oil and gas production for the
periods indicated. Except for pro forma data, production and sales information
relating to properties acquired or disposed of is reflected in this table only
since or up to the closing date of their respective acquisition or sale and may
affect the comparability of the data between the periods presented.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
---------------------------------- ENDED
PRO SEPTEMBER 30,
FORMA ---------------
1994 1995 1996 1996(1) 1996 1997
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Oil and gas production:
Oil (MBbl)................................ 42 30 191 1,105 140 490
Gas (MMcf)................................ 88 102 2,675 13,811 1,632 6,451
Natural Gas Equivalents (MMcfe)........... 340 282 3,821 20,441 2,472 9,391
Average sales price(2):
Oil (per Bbl)............................. $14.20 $15.60 $20.46 $20.15 $19.92 $17.79
Gas (per Mcf)............................. 1.53 1.46 2.37 2.22 2.23 2.18
Natural Gas Equivalents (per Mcfe)........ 2.15 2.19 2.68 2.59 2.57 2.43
Oil and gas production expense (per
Mcfe)(3).................................. $ 0.94 $ 0.95 $ 1.15 $ 0.84 $ 1.14 $ 0.91
</TABLE>

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

(1) Gives effect to the Permian Basin Acquisition as if it had occurred on
January 1, 1996.

(2) Before deduction of production taxes and net of hedging results for the two
years ended December 31, 1996.

(3) Includes lease operating expenses and production and ad valorem taxes, if
applicable. For the years ended December 31, 1996 on a historical basis and
December 31, 1996 on a pro forma basis and the nine months ended September
30, 1997, includes internal transfer price expenses for gas gathering and
overhead costs of $0.23 per Mcfe, $0.04 per Mcfe and $0.16 per Mcfe,
respectively. Internal transfer price expenses are not available for the
nine months ended September 30, 1996.

39
<PAGE> 41

DRILLING ACTIVITY

The following table sets forth the results of the Company's drilling
activities during the three fiscal years ended December 31, 1996 and the period
from January 1, 1997 through September 30, 1997. Since September 30, 1997
through October 28, 1997, the Company has drilled one dry hole and has completed
13 producing wells. At October 28, 1997 the Company was in the process of
drilling seven development wells (4.7 net wells).

<TABLE>
<CAPTION>
GROSS WELLS(1) NET WELLS(2)
----------------------------- -----------------------------
YEAR TYPE OF WELL PRODUCING(3) DRY(4) TOTAL PRODUCING(3) DRY(4) TOTAL
- ------- ------------ ------------ ------ ----- ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
1994 Exploratory................. -- -- -- -- -- --
Development................. 2 1 3 0.50 0.25 0.75
1995 Exploratory................. 2 -- 2 0.55 -- 0.55
Development................. -- -- -- -- -- --
1996 Exploratory................. 4 4 8 2.63 2.60 5.23
Development................. 3 -- 3 0.66 -- 0.66
1997(5) Exploratory................. 2 -- 2 0.45 -- 0.45
Development................. 46 -- 46 40.63 -- 40.63
</TABLE>

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

(1) The number of gross wells is the total number of wells in which a working
interest is owned. Fluid injection wells for waterflood and other enhanced
recovery projects are not included as gross wells.

(2) The number of net wells is the sum of fractional working interests owned in
gross wells expressed as whole numbers and fractions thereof.

(3) A producing well is an exploratory or development well found to be capable
of producing either oil or gas in sufficient quantities to justify
completion as an oil or gas well.

(4) A dry well is an exploratory or development well that is not a producing
well.

(5) Based on wells completed through September 30, 1997.

OIL AND GAS WELLS

The following table sets forth the number of productive oil and gas wells
in which the Company had a working interest at December 31, 1996.

<TABLE>
<CAPTION>
PRODUCTIVE WELLS
-------------------------------------------
GROSS(1) NET(2)
----------------- -----------------------
LOCATION OIL GAS TOTAL OIL GAS TOTAL
-------- --- --- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Texas............................................. 113 447 560 53.35 381.72 435.07
Oklahoma.......................................... 26 117 143 21.85 103.09 124.94
Mississippi....................................... 4 -- 4 2.98 -- 2.98
New Mexico........................................ 3 3 6 2.48 0.64 3.12
California........................................ 14 -- 14 1.05 -- 1.05
Kansas............................................ 2 -- 2 1.90 -- 1.90
--- --- --- ----- ------ ------
Total................................... 162 567 729 83.61 485.45 569.06
=== === === ===== ====== ======
</TABLE>

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

(1) The number of gross wells is the total number of wells in which a working
interest is owned. Well counts include wells with multiple completions, but
do not include injector wells.

(2) The number of net wells is the sum of fractional working interests owned in
gross wells expressed as whole numbers and fractions thereof.

On a pro forma basis at December 31, 1996, the Company had a working
interest in 2,581 gross (1,436 net) productive oil and gas wells.

40
<PAGE> 42

OIL AND GAS ACREAGE

The following table summarizes the Company's developed and undeveloped
leasehold acreage at December 31, 1996.

<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
------------------ -----------------
LOCATION GROSS(1) NET(2) GROSS(1) NET(2)
-------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Texas.................................................... 167,216 151,293 10,432 4,711
Oklahoma................................................. 45,610 42,982 -- --
Mississippi.............................................. 528 452 -- --
New Mexico............................................... 840 702 -- --
California............................................... 509 38 -- --
Kansas................................................... 80 69 -- --
------- ------- ------ -----
Total.......................................... 214,783 195,536 10,432 4,711
======= ======= ====== =====
</TABLE>

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

(1) The number of gross acres is the total number of acres in which a working
interest is owned.

(2) The number of net acres is the sum of fractional working interests owned in
gross acres expressed as whole numbers and fractions thereof.

On a pro forma basis at December 31, 1996, the Company held interests in
328,033 gross (277,419 net) developed acres and 10,992 gross (5,003 net)
undeveloped acres.

Substantially all of the Company's interests are leasehold working
interests or overriding royalty interests (as opposed to mineral or fee
interests) under standard onshore oil and gas leases. As is customary in the
industry, the Company generally acquires oil and gas acreage without any
warranty of title except as to claims made by, through or under the transferor.
Although the Company has title examined by a landman or title attorney prior to
acquisition of developed acreage in those cases in which the economic
significance of the acreage justifies the cost, there can be no assurance that
losses will not result from title defects or from defects in the assignment of
leasehold rights. In many instances, title opinions may not be obtained if in
the Company's judgment it would be uneconomical or impractical to do so.

COMPETITION

The oil and gas industry is highly competitive. Competitors of the Company
include major oil companies, other independent oil and gas concerns, and
individual producers and operators, many of which have substantially greater
financial resources and larger staffs and facilities than those of the Company.
In addition, the Company frequently encounters competition in the acquisition of
oil and gas properties and gas gathering systems, and in its management and
consulting business. The principal means of such competition are the amount and
terms of the consideration offered. The principal means of such competition with
respect to the sale of oil and gas production are product availability and
price. The price at which the Company's gas may be sold will continue to be
affected by a number of factors, including the price of alternate fuels such as
oil and coal and competition among various gas producers and marketers. See
"Risk Factors -- Competition."

REGULATION

General Federal and State Regulation

The Company's oil and gas exploration, production and related operations
are subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry
increases the Company's cost of doing business and affects its profitability.
Because such rules and regulations are frequently amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.

The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for

41
<PAGE> 43

the unitization or pooling of oil and gas properties, the establishment of
maximum rates of production from wells, and the regulation of spacing, plugging
and abandonment of such wells. Many states restrict production to the market
demand for oil and gas. Some states have enacted statutes prescribing ceiling
prices for gas sold within their states.

FERC regulates interstate gas transportation rates and service conditions,
which affect the marketing of gas produced by the Company, as well as the
revenues received by the Company for sales of such production. Since the
mid-1980s, FERC has issued a series of orders, culminating in Order Nos. 636,
636-A and 636-B ("Order 636"), that have significantly altered the marketing and
transportation of gas. Order 636 mandates a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of FERC's purposes in issuing the orders is to increase competition within
all phases of the gas industry. Order 636 and subsequent FERC orders on
rehearing have been appealed and are pending judicial review. Because these
orders may be modified as a result of the appeals, it is difficult to predict
the ultimate impact of the orders on the Company and its gas marketing efforts.
Generally, Order 636 has eliminated or substantially reduced the interstate
pipelines' traditional role as wholesalers of gas, and has substantially
increased competition and volatility in gas markets.

The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to market. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Company is not
able to predict with certainty the effects, if any, of these regulations on its
operations. However, the regulations may increase transportation costs or reduce
wellhead prices for oil and natural gas liquids. Finally, from time to time
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and gas wells below natural production
capacity in order to conserve supplies of oil and gas. See "Risk Factors -- Laws
and Regulations."

Environmental Regulation

The Company's exploration, development, and production of oil and gas,
including its operation of saltwater injection and disposal wells, are subject
to various federal, state and local environmental laws and regulations. Such
laws and regulations can increase the costs of planning, designing, installing
and operating oil and gas wells. The Company's domestic activities are subject
to a variety of environmental laws and regulations, including but not limited
to, the Oil Pollution Act of 1990 ("OPA"), the Clean Water Act ("CWA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA"), the Clean Air Act ("CAA"),
and the Safe Drinking Water Act ("SDWA"), as well as state regulations
promulgated under comparable state statutes. The Company also is subject to
regulations governing the handling, transportation, storage, and disposal of
naturally occurring radioactive materials that are found in its oil and gas
operations. Civil and criminal fines and penalties may be imposed for
non-compliance with these environmental laws and regulations. Additionally,
these laws and regulations require the acquisition of permits or other
governmental authorizations before undertaking certain activities, limit or
prohibit other activities because of protected areas or species, and impose
substantial liabilities for cleanup of pollution.

Under the OPA, a release of oil into water or other areas designated by the
statute could result in the Company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the CWA for the costs of
remediation, and civil and criminal fines and penalties.

CERCLA and comparable state statutes, also known as "Superfund" laws, can
impose joint and several and retroactive liability, without regard to fault or
the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past

42
<PAGE> 44

owners or operators under certain conditions, and entities that arrange for the
disposal or treatment of, or transport hazardous substances found at the site.
Although CERCLA, as amended, currently exempts petroleum, including but not
limited to, crude oil, gas and natural gas liquids from the definition of
hazardous substance, the Company's operations may involve the use or handling of
other materials that may be classified as hazardous substances under CERCLA.
Furthermore, there can be no assurance that the exemption will be preserved in
future amendments of the act, if any.

RCRA and comparable state and local requirements impose standards for the
management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. The Company generates hazardous and nonhazardous
solid waste in connection with its routine operations. From time to time,
proposals have been made that would reclassify certain oil and gas wastes,
including wastes generated during pipeline, drilling, and production operations,
as "hazardous wastes" under RCRA which would make such solid wastes subject to
much more stringent handling, transportation, storage, disposal, and clean-up
requirements. This development could have a significant impact on the Company's
operating costs. While state laws vary on this issue, state initiatives to
further regulate oil and gas wastes could have a similar impact.

Because oil and gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.

Additionally, in the course of the Company's routine oil and gas
operations, surface spills and leaks, including casing leaks, of oil or other
materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the Company
but operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, be attributable to the
Company. The Company currently expects to spend approximately $725,000 over the
next five years in connection with remediation and environmental compliance,
including $75,000 for the remainder of 1997, $200,000 in 1998 and $150,000 in
1999.

It is not anticipated that the Company will be required in the near future
to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. There can be no assurance
that more stringent laws and regulations protecting the environment will not be
adopted or that the Company will not otherwise incur material expenses in
connection with environmental laws and regulations in the future. See "Risk
Factors -- Laws and Regulations."

EMPLOYEES

At September 30, 1997, the Company had 57 full-time employees of which nine
were management, 21 were administrative and 27 were field employees. None of the
Company's employees are represented by a union. Management considers its
relations with employees to be good.

FACILITIES

The Company occupies approximately 11,590 square feet of office space at
600 East Las Colinas Boulevard, Suite 1200, Irving, Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock, Texas. The Company also has field production offices in Midland, Texas
and Hobbs, New Mexico.

LEGAL PROCEEDINGS

No legal proceedings are pending other than ordinary routine litigation
incidental to the Company's business, the outcome of which management believes
will not have a material adverse effect on the Company.

43
<PAGE> 45

MANAGEMENT

The following table sets forth the directors, executive officers and other
significant employees of the Company, their ages, and all offices and positions
with the Company. Each director is elected for a period of one year and
thereafter serves until his successor is duly elected by the stockholders of the
Company and qualifies.

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Gary C. Evans........ 40 Director, President and Chief Executive Officer of the
Company
Matthew C. Lutz...... 63 Chairman and Executive Vice President of Exploration and
Business Development of the Company
Chris Tong........... 41 Senior Vice President and Chief Financial Officer of the
Company
David S. Krueger..... 48 Vice President and Chief Accounting Officer of the Company
Morgan F. Johnston... 37 Vice President, General Counsel and Secretary of the Company
Richard R. Frazier... 50 President and Chief Operating Officer of Magnum Hunter
Production, Inc. and Chief Operating Officer of Gruy
R. Renn Rothrock, 55
Jr. ............... President of both Hunter Gas Gathering, Inc. and Gruy and
Executive Vice President of Magnum Hunter Production, Inc.
Michael McInerney.... 56 Vice President, Corporate Development & Investor Relations
Gerald W. Bolfing.... 69 Director of the Company
Oscar C. Lindemann... 75 Director of the Company
John H. Trescot, 72
Jr. ............... Director of the Company
James E. Upfield..... 77 Director of the Company
</TABLE>

Gary C. Evans has served as President, Chief Executive Officer and a
director of the Company since December 31, 1995 and Chairman and Chief Executive
Officer of all of the Hunter Subsidiaries since their formation or acquisition.
He served as Chief Financial Officer from January 1997 to August 1997. He acted
as Chairman, President and Chief Executive Officer of Hunter from September 1992
until October 1996. Previously, he was President and Chief Operating Officer of
Hunter from December 1990 to September 1992. From 1985 to 1990, Mr. Evans was
Chairman, President and Chief Executive Officer of Sunbelt Energy, Inc. and its
subsidiaries, which were merged with Hunter. From 1981 to 1985, Mr. Evans was
associated with the Mercantile Bank of Canada where he held various positions
including Vice President and Manager of the Energy Division of the Southwestern
United States. From 1978 to 1981, he served in various capacities with National
Bank of Commerce (now BancTexas, N.A.) including Credit Manager and Credit
Officer. Mr. Evans serves on the Board of Directors of Karts International
Incorporated, a Nasdaq-listed company, and Digital Communications Technology
Corporation, an American Stock Exchange listed company.

Matthew C. Lutz became Chairman as of March 31, 1997 after having served as
Vice Chairman of the Company since December 31, 1995. Mr. Lutz has also served
as Executive Vice President of Exploration and Business Development since
December 31, 1995. Mr. Lutz held similar positions with Hunter from September
1993 until October 1996. From 1984 through 1992, Mr. Lutz was Senior Vice
President of Exploration and on the Board of Directors of Enserch Exploration,
Inc. with responsibility for such company's worldwide oil and gas exploration
and development program. Prior to joining Enserch, Mr. Lutz spent 28 years with
Getty Oil Company. He advanced through several technical, supervisory and
managerial positions which gave him various responsibilities including
exploration, production, lease acquisition, administration and financial
planning.

Chris Tong became Senior Vice President and Chief Financial Officer as of
August 18, 1997. Previously, Mr. Tong was Senior Vice President of Finance of
Tejas Acadian Holding Company and its subsidiaries including Tejas Gas Corp.,
Acadian Gas Corporation and Transok, Inc., all of which are wholly-owned
subsidiaries of Tejas Gas Corporation. Mr. Tong held these positions since
August 1996, and served in other treasury positions with Tejas beginning August
1989. He was also responsible for managing Tejas' property and liability
insurance. From 1980 to 1989, Mr. Tong served in various energy lending
capacities with Canadian Imperial Bank of Commerce, Post Oak Bank, and Bankers
Trust Company in Houston, Texas. Prior to his banking career, Mr. Tong also
served over a year with Superior Oil Company as a Reservoir Engineering

44
<PAGE> 46

Assistant. Mr. Tong is a Summa Cum Laude graduate of the University of
Southwestern Louisiana with a Bachelor of Arts degree in Economics and a minor
in Mathematics.

David S. Krueger has served as Chief Accounting Officer of the Company
since January 1997. Mr. Krueger acted as Vice President-Finance of Cimarron Gas
Holding Co., a gas processing and natural gas liquids marketing company in
Tulsa, Oklahoma, from April 1992 until January 1997. He served as Vice
President/Controller of American Central Gas Companies, Inc., a gas gathering,
processing and marketing company from May 1988 until April 1992. From 1974 to
1986, Mr. Krueger served in various managerial capacities for Southland Energy
Corporation. From 1971 to 1973, Mr. Krueger was a staff accountant with Arthur
Andersen LLP. Mr. Krueger, a certified public accountant, graduated from the
University of Arkansas with a B.S./B.A. degree in Business Administration and
earned his M.B.A. from the University of Tulsa.

Morgan F. Johnston has served as Vice President and General Counsel since
April 1, 1997 and has served as the Company's Secretary since May 1, 1996. Mr.
Johnston was in private practice as a sole practitioner from May 1, 1996 to
April 1, 1997, specializing in corporate and securities law. From February 1994
to May 1996, Mr. Johnston served as general counsel for Millennia, Inc.
(formerly known as SOI Industries, Inc.) and Digital Communications Technology
Corporation, two American Stock Exchange listed companies. He also served as
general counsel to Halter Capital Corporation, a private consulting firm from
August 1991 to May 1996. For the two years prior to August 1, 1991 he was
securities counsel for Motel 6 L.P., a New York Stock Exchange listed company.
Mr. Johnston graduated cum laude from Texas Tech Law School in May 1986 and is
licensed to practice law in the State of Texas.

Richard R. Frazier has been President of Magnum Hunter Production, Inc. and
Chief Operating Officer of Magnum Hunter Production, Inc. and Gruy since January
1994. From 1977 to 1993, Mr. Frazier was employed by Edisto Resources
Corporation in Dallas, serving as Executive Vice President Exploration and
Production from 1983 to 1993, where he had overall responsibility for its
property acquisition, exploration, drilling, production, gas marketing and
engineering functions. From 1972 to 1976, Mr. Frazier served as District
Production Superintendent and Petroleum Engineer with HNG Oil Company (now Enron
Oil & Gas Company) in Midland, Texas. Mr. Frazier's initial employment, from
1968 to 1971, was with Amerada Hess Corporation as a petroleum engineer involved
in numerous projects in Oklahoma and Texas. Mr. Frazier graduated in 1970 from
the University of Tulsa with a Bachelor of Science Degree in Petroleum
Engineering. He is a registered Professional Engineer in Texas and a member of
the Society of Petroleum Engineers and many other professional organizations.

R. Renn Rothrock, Jr. has been President of both Hunter Gas Gathering, Inc.
and Gruy and Executive Vice President of Magnum Hunter Production, Inc. since
January 1994. He served as Executive Vice President and Chief Operating Officer
of Gruy from May 1988 until January 1994. Mr. Rothrock was Executive Vice
President and General Manager of Gruy Engineering Corporation from 1986 until
May 1988. Over his 32-year career, Mr. Rothrock has also served as a reservoir
engineer and operations research engineer at Skelly Oil Company and as an area
engineer at Amerada Petroleum Corporation; the Engineering Editor of Petroleum
Engineer International Magazine; Vice President and Energy Manager of the First
National Bank of Mobile, Alabama; Executive Vice President of Energy Assets
International Corporation, a public company that financed oil and gas ventures;
and the producer and operator of his own gas gathering and transportation
system. Mr. Rothrock earned a B.S. degree in Petroleum Engineering and an M.S.
degree in Engineering from the University of Oklahoma. He is a member of the
Society of Professional Engineers, the National Society of Professional
Engineers, the National Academy of Forensic Engineers and the Texas Society of
Professional Engineers. Mr. Rothrock is a registered Professional Engineer in
Texas and Oklahoma.

Michael McInerney has been Vice President, Corporate Development & Investor
Relations of the Company since October 1997. Prior to joining the Company, Mr.
McInerney owned Energy Advisors, Inc., an energy consulting firm, from June 1993
until October 1997. Mr. McInerney was employed from 1981 until June 1993 by
Triton Energy Corporation, an independent energy company, where his
responsibilities included investor relations, acquisitions and corporate
planning. Before joining Triton Energy Corporation, Mr. McInerney served nine
years in various financial management positions with American Natural Resources
Company, a gas transmission and distribution corporation. Mr. McInerney
graduated from the University of Michigan with a B.B.A.

45
<PAGE> 47

Gerald W. Bolfing has been a director of the Company since December 31,
1995. Mr. Bolfing was appointed a director of Hunter in August 1993. He is an
investor in the oil and gas business and a past officer of one of Hunter's
former subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing
Food Stores in Waco, Texas. During this time, he also joined American Service
Company in Atlanta, Georgia from 1964 to 1965, and was active with Cable
Advertising Systems, Inc. of Kerrville, Texas from 1978 to 1981. He joined a
Hunter subsidiary in the well servicing business in 1981 where he remained
active until its divestiture in 1992. Mr. Bolfing is on the board of directors
of Capital Marketing Corporation of Hurst, Texas.

Oscar C. Lindemann has served as a director of the Company since December
31, 1995. Mr. Lindemann was previously a director of Hunter, having been
appointed in November 1995. Mr. Lindemann has over 40 years experience in the
financial industry. Mr. Lindemann began his banking career with the Texas Bank
and Trust in Dallas, Texas in 1951. He served the bank until 1977 in many
capacities, including Chief Executive Officer and Chairman of the Board. Since
leaving Texas Bank and Trust, he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce, also in Dallas. Mr. Lindemann
has also served as a consultant to the banking industry. He retired from
commercial banking in 1987. Mr. Lindemann is a former President of the Texas
Bankers Association, and a former state representative to the American Bankers
Association. He was a Founding Director and Board Member of VISA, and a member
of the Reserve City Bankers Association. He has served as an instructor at both
the Southwestern Graduate School of Banking at Southern Methodist University and
the School of Banking of the South at Louisiana State University. He has also
served as a faculty member for four years in the College of Business
Administration at the University of Texas in Austin teaching various banking
subjects.

John H. Trescot, Jr. has served as a director of the Company since June 5,
1997. For the last five years, Mr. Trescot has been a principal of AWA
Management Corporation, a professional consulting firm specializing in oil,
timber, pulp and paper, and financial management. Early in his career, Mr.
Trescot held various positions in woodlands, and pulp and paper, advancing to
the position of Senior Vice President, Southern Operations at Hudson Pulp &
Paper Corp. (now part of Georgia Pacific Corp.) Later Mr. Trescot became Vice
President of The Charter Company, a corporation with operations in oil,
communications and insurance. In 1979, Mr. Trescot became the Chief Executive
Officer of "Jari" Florestal e Agropecuaria, Ltda., a pulp, timber, rice and
kaolin operation in the Amazon Basin of Brazil owned by D.K. Ludwig. In 1981,
Mr. Trescot became the Chief Executive Officer of TOT Drilling Corp., a contract
drilling company drilling in west Texas and New Mexico.

James E. Upfield has served as a director of the Company since December 31,
1995. Mr. Upfield was appointed a director of Hunter in August 1992. Mr. Upfield
is Chairman of Temtex Industries, Inc. based in Dallas, Texas, a public company
that produces consumer hard goods and building materials. In 1969, Mr. Upfield
served on a select Presidential Committee serving postal operations of the
United States of America. He later accepted the responsibility for the Dallas
region, which encompassed Texas and Louisiana. From 1959 to 1967, Mr. Upfield
was President of Baifield Industries, Inc. ("Baifield") and its predecessor, a
company he founded in 1949 which merged with Baifield in 1963. Baifield was
engaged in prime government contracts for military systems and sub-systems in
the production of high-strength, light-weight metal products. In 1967, Baifield
was acquired by Automatic Sprinkler Corporation of America, where Mr. Upfield
remained until resigning in 1968 to pursue other business opportunities.

SIGNIFICANT OFFICERS OF SUBSIDIARIES

R. Douglas Cronk, age 50, has been Vice President of Operations for Magnum
Hunter Production, Inc. since May 1996, at which time the Company acquired from
Mr. Cronk Rampart Petroleum, Inc., based in Abilene, Texas. Rampart had been an
active operating and exploration company in the north central and west Texas
region since 1983. Prior to the formation of Rampart, Mr. Cronk was an
independent oil and gas consultant in Houston, Texas for approximately two
years. From 1974 to 1981, Mr. Cronk held various positions with subsidiaries of
Deutsch Corporation of Tulsa, Oklahoma, including Southland Drilling and
Production where he became Vice President of Drilling and Production. Mr. Cronk
is a Chemical Engineer graduate from the University of Tulsa.

46
<PAGE> 48

Russell A. Talley, age 64, has been Executive Vice President and Drilling
Manager of Gruy Company since January 1991. From 1959 to 1970, Mr. Talley worked
for Diamond Shamrock Oil & Gas Company in Amarillo, Texas, where he had
substantial responsibilities in drilling, production and workover programs. From
1970 to 1985, Mr. Talley worked for Samedan Oil Corporation in Houston, Texas,
where he became the Manager of Offshore Drilling and Production. He managed all
domestic and Canadian drilling operations and supervised international
operations in Ecuador, the North Sea and Canada. From 1985 to 1987, Mr. Talley
was Vice President of Operations for Seagull Energy E & P, Inc. in Houston,
where he was responsible for all onshore and offshore drilling operations. In
1988 he established Texstar Energy Operators, Inc., which was acquired by Gruy
in 1991.

47
<PAGE> 49

PRINCIPAL AND SELLING SHAREHOLDERS

SECURITY OWNERSHIP

The following table sets forth certain information as of September 30, 1997
and after giving effect to the Offering made hereby, regarding the share
ownership of the Company by (i) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock of
the Company, (ii) each director, (iii) the Company's Chief Executive Officer and
the two other most highly compensated executive officers of the Company
(including the Selling Shareholder), and (iv) all directors and executive
officers of the Company, as a group. Additionally, this table reflects the
number of shares of Common Stock to be sold by the Selling Shareholder in this
Offering. None of the directors or executive officers named below owned, as of
September 30, 1997, any shares of the Company's Series A Preferred Stock or its
TCW Preferred Stock. The business address of each officer and director listed
below is: c/o Magnum Hunter Resources, Inc., 600 East Las Colinas Blvd., Suite
1200, Irving, Texas 75039.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------------- SHARES --------------------------
NUMBER PERCENT OF BEING NUMBER PERCENT
NAME OF SHARES(1) CLASS(1) OFFERED OF SHARES(1) OF CLASS(1)
---- ------------- ------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
Gary C. Evans(2)................... 1,618,046 11.7% 150,000 1,468,046 6.7%
Matthew C. Lutz.................... 271,338 2.0 -- 271,338 1.3%
Gerald W. Bolfing.................. 324,022 2.4 -- 324,022 1.5%
Oscar C. Lindemann................. 1,624 * -- 1,624 *
John H. Trescot, Jr. .............. 22,154 * -- 22,154 *
James E. Upfield................... 29,268 * -- 29,268 *
Richard R. Frazier................. 148,623 1.1 -- 148,623 *
--------- ---- ------- --------- ----
All directors and executive
officers as a group (8
persons)........................ 2,415,675 15.8% 150,000 2,265,675 10.7%
Beneficial owners of 5% or more
(excluding persons named above)
TCW Group, Inc.
865 South Figueroa Street
Los Angeles, CA 90017.............. 1,702,127(3) 11.0% -- 1,702,127 8.1%
</TABLE>

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

* Less than 1%.

(1) The number of shares outstanding was calculated in accordance with Rule
13d-3(d) promulgated under the Exchange Act. For purposes of calculating the
beneficial ownership of each shareholder, it was assumed (in accordance with
the Commission's definition of "beneficial ownership") that such shareholder
had exercised all options, conversion rights or warrants by which such
shareholder had the right, within 60 days following September 30, 1997, to
acquire shares of Common Stock.

(2) Includes 17,024 shares held in the name of Jacquelyn Evelyn Enterprises
Inc., a corporation whose sole shareholder is Mr. Evans' wife. Mr. Evans
disclaims any ownership in such securities other than those in which he has
an economic interest. For certain additional information regarding Mr.
Evans's relationship with the Company, see "Management."

(3) Consists of shares attributable to shares of Common Stock issuable upon
conversion of 1,000,000 shares of the Company's TCW Preferred Stock.

48
<PAGE> 50

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

The Company is presently authorized to issue 50,000,000 shares of Common
Stock, par value $.002, of which 13,733,342 shares were issued and outstanding
at September 30, 1997. The holders of Common Stock are entitled to equal
dividends and distributions, per share, with respect to the Common Stock when,
as and if declared by the Board of Directors from funds legally available
therefor. No holder of any shares of Common Stock has a preemptive right to
subscribe for any securities of the Company nor are any shares of Common Stock
subject to redemption or convertible into other securities of the Company. Upon
liquidation, dissolution or winding up of the Company, and after payment of
creditors and preferred shareholders, if any, the assets will be divided
pro-rata on a share-for-share basis among the holders of the shares of Common
Stock. All shares of Common Stock now outstanding are fully paid, validly issued
and non-assessable. Holders of the Common Stock do not have cumulative voting
rights, so that holders of more than 50% of the combined shares voting for the
election of directors may elect all of the directors, if they choose to do so
and, in that event, the holders of the remaining shares will not be able to
elect any members to the Board of Directors. At September 30, 1997, there were
reserved for issuance (i) 1,097,676 shares of Common Stock issuable upon
exercise of various outstanding warrants (including the public Warrants); (ii)
1,313,589 shares of Common Stock issuable upon exercise of options held by
management and other employees; and (iii) 1,702,127 shares of Common Stock
issuable upon conversion of the TCW Preferred Stock.

PREFERRED STOCK

Under the Company's Articles of Incorporation, as amended, the Board of
Directors has the power, generally without further action by the holders of the
Common Stock, to designate the relative rights and preferences of the Preferred
Stock, par value $.001 (the "Preferred Stock"), and issue the Preferred Stock in
one or more series as designated by the Board of Directors. The designation of
rights and preferences could include preferences as to liquidation, redemption
and conversion rights, voting rights, dividends or other preferences, any of
which may be dilutive of the interest of the holders of the Common Stock or
other series of Preferred Stock. The issuance of Preferred Stock may have the
effect of delaying or preventing a change in control of the Company without
further shareholder action and may adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, the issuance of Preferred Stock could depress the market price of
the Common Stock. The Board of Directors effects a designation of each series of
Preferred Stock by filing with the Nevada Secretary of State a Certificate of
Designation defining the rights and preferences of each such series. Documents
so filed are matters of public record and may be examined in accordance with
procedures of the Nevada Secretary of State, or copies thereof may be obtained
from the Company.

The Board of Directors designated a Series A Preferred Stock in May 1993
and subsequently issued 216,000 shares of such series, of which 80,000 shares
are presently outstanding. The Board of Directors also previously designated a
Series B Preferred Stock and issued 248,500 shares of such series, and a Series
C Preferred Stock and issued 625,000 shares of such series. No shares of either
the Series B or Series C Preferred Stock are currently outstanding. The Board of
Directors designated a 1996 Series A Convertible Preferred Stock (the "TCW
Preferred Stock") and issued 1,000,000 shares of such series in December 1996.
See " -- TCW Preferred Stock."

Series A Preferred Stock

There are presently 80,000 shares of Series A Preferred Stock outstanding,
which are entitled to an aggregate dividend in the total amount of $7.50 per
share, payable only from the allocation of 50% of the net operating revenue
received by the working interest owners in the West Dilley Prospect and between
50% and 60% of the net operating revenue in excess of $500,000 received by the
working interest owners in the Hope Prospect. The Company owns 90% of the
working interest in such prospects. The dividend is cumulative to the extent
accrued but not paid. To date no dividends have accrued or been paid on the
Series A Preferred Stock because the revenues generated from such prospect,
which are allocable to the working interests, have not

49
<PAGE> 51

exceeded the associated costs, so no net operating revenue has yet been
generated that could be allocated to the payment of such dividends. The shares
of Series A Preferred Stock have a liquidation preference on the liquidation
proceeds from the Company's interest in the West Dilley Prospect and the Hope
Prospect. The Company has not yet paid and does not anticipate paying any
dividends on the Series A Preferred Stock because the wells located in the West
Dilley Prospect and the Hope Prospect from which the dividends are required to
be paid are plugged and abandoned. The Company has agreed with TCW to use its
best efforts to negotiate with the holders of the Series A Preferred Stock for
the repurchase of their shares.

TCW Preferred Stock

In December 1996, the Company issued 1,000,000 shares of its TCW Preferred
Stock in a private placement with Trust Company of the West, as trustee,
custodian or agent for certain institutional investors, TCW Asset Management
Company, as agent for certain institutional investors, TCW Debt and Royalty Fund
IVB and TCW Debt and Royalty Fund IVC (collectively, "TCW"). Holders of such
shares are entitled to receive when, as and if declared by the Board of
Directors out of funds legally available for the purpose, cumulative dividends
at a quarterly rate of $.21875 per share, commencing December 31, 1996.
Dividends on the TCW Preferred Stock cumulate from the date of original issue of
the TCW Preferred Stock, and accumulations of dividends bear interest at 8.75%
per annum. Such dividends are normally to be paid in cash, but the holders of
the TCW Preferred Stock can require the Company to pay accumulated dividends in
tradeable shares of Common Stock if dividends are not declared or paid within
certain time limitations. If the holders make such a demand, the Company is
obligated to file a "shelf" registration statement with respect to such shares.
The use of proceeds from the sale of the TCW Preferred Stock is limited to
development of proved undeveloped properties, working capital and/or a reduction
of any indebtedness outstanding under its credit facilities.

The shares are convertible into shares of Common Stock at a conversion
price of $5.875 per share (subject to various adjustments). Beginning in
December 1998, the Company has an option, if certain conditions are satisfied,
to exchange shares of the TCW Preferred Stock into convertible subordinated
debentures of equivalent value or into shares of Common Stock. The holders also
have the right to require the Company to redeem all or any part of the TCW
Preferred Stock upon certain sales of all or substantially all of the Company's
assets or upon changes in control.

The holders of the TCW Preferred Stock are entitled, on all matters
submitted for a vote of the holders of shares of Common Stock, whether pursuant
to law or otherwise, to a number of votes per share of the TCW Preferred Stock
equal to the number of shares of Common Stock issuable upon conversion of one
share of the TCW Preferred Stock on the date of such vote, and on all such
matters such holders vote together as one class with the holders of Common Stock
and the holders of all other shares of stock entitled to vote with the holders
of Common Stock on such matters. The holders of the TCW Preferred Stock have the
right, as a class, to elect at least one member of the Board of Directors of the
Company. Upon certain special events, the holders of the TCW Preferred Stock
will have the right, voting separately from all other classes and series, to
elect a total of 75% of the directors of the Company either through call of a
special meeting of the shareholders of the Company or at the annual meeting to
elect directors. Such special events ("Voting Events") include but are not
limited to (i) failure by the Company to redeem the TCW Preferred Stock when
such redemption is required; (ii) certain events causing any debt or security of
the Company or any of its subsidiaries to become due prior to its stated
maturity or prior to its regularly scheduled payment (if, except for the
Company's senior bank or other credit facility, such debt exceeds $3.0 million,
and if the Company is given notice of the acceleration); (iii) bankruptcy of the
Company; (iv) dissolution of the Company; and (v) breach by the Company of any
terms regarding the TCW Preferred Stock in the TCW Stock Purchase Agreement or
Certificate of Designation. If the average closing price of the Company's Common
Stock is below certain levels after January 1, 1999, the occurrence of a Voting
Event will give the holders of the TCW Preferred Stock the right, voting
separately from all other classes and series, to elect one additional director
of the Company every 60 days (or every 45 days, if the Board of Directors
increases above seven persons, excluding persons appointed by such holders)
until the Voting Event no longer remains outstanding.

50
<PAGE> 52

So long as any TCW Preferred Stock is outstanding, the Company cannot,
without the affirmative vote of all of the holders of the outstanding shares of
TCW Preferred Stock, voting separately as a class, amend or repeal any provision
of the Articles of Incorporation which affect the dividend rate, liquidation
amount, liquidation preference, conversion price, dividend and liquidation
priority, voting rights, or mandatory redemption rights and terms of the TCW
Preferred Stock. Unless the vote or consent of the holders of a greater number
of shares is then required by law or as provided in the immediately preceding
sentence, and so long as any shares of the TCW Preferred Stock are outstanding,
the Company cannot, without the affirmative vote or consent of the holders of at
least 70% of the outstanding shares of TCW Preferred Stock, voting as a separate
class: (i) amend or repeal any provision of, or add any provision to, the
Company's Articles of Incorporation which affect the other rights, powers,
preferences or terms of the TCW Preferred Stock; (ii) consolidate or merge with
or into any other corporation where (1) the Company is not the surviving
corporation or (2) the Company issues to any person as consideration in respect
of such consolidation or merger any capital stock of the Company representing
50% or more of the Company's outstanding capital stock prior to such
consolidation or merger; (iii) sell, transfer or convey all or substantially all
of the assets of the Company, or dissolve or liquidate the Company; (iv)
reclassify any Common Stock into shares having any preference or priority as to
the payment of dividends or the distribution of assets superior to or on a
parity with any such preference or priority of the 1996 Series A Preferred
Stock; (v) declare or pay any dividend, or make any distribution, or purchase,
redeem or otherwise acquire for value any capital stock or other interest in the
Company outstanding on or after first issuance of the 1996 Series A Preferred
Stock, or make any other distribution of its assets, to the holders of any stock
junior to the 1996 Series A Preferred Stock, unless (i) no Voting Events have
occurred and are continuing immediately prior to and after such distributions,
and (ii) all accumulated dividends with respect to the 1996 Series A Preferred
Stock have been paid in full immediately prior to such distribution; or (vi)
amend or otherwise modify in any material respect the Company's Development Plan
furnished pursuant to the Stock Purchase Agreement relating to the TCW Preferred
Stock.

Upon the request of at least 51% of the outstanding TCW Preferred Stock and
the Common Stock issuable upon conversion or redemption of the TCW Preferred
Stock and in payment of dividends on the TCW Preferred Stock (collectively, the
"Conversion Shares"), the Company has the obligation to register the Conversion
Shares under the Securities Act (subject to certain limitations). The holders of
the TCW Preferred Stock are entitled to require two effective registration
statements pursuant to their demand registration rights. If the Company proposes
to register any of its securities under the Securities Act, the Company has the
obligation (subject to certain limitations and exceptions) to give written
notice to the holders of outstanding TCW Preferred Stock and Conversion Shares
of its intention to do so. Upon the written request of a holder or holders of
any such TCW Preferred Stock and Conversion Shares given within 30 days after
receipt of any such notice, the Company has an obligation to use its best
efforts to cause all Conversion Shares, the holders of which have requested
registration thereof, to be registered under the Securities Act. The Company has
promised to indemnify (i) the holders of Common Stock registered pursuant to the
foregoing registration rights provisions and (ii) the underwriters of such
registered offerings for any losses arising from any misstatement or omission in
any offering materials related to such registered offerings.

Pursuant to the provisions of the TCW Preferred Stock, the Company has
agreed (i) not to effect any public or private sale or distribution of its
equity securities during the period in which TCW has exercised its demand
registration rights, subject to certain exceptions and (ii) to cause each holder
of its privately-placed equity securities purchased from the Company at any time
after the date of the TCW Stock Purchase Agreement to agree not to effect any
public sale or distribution of any such securities, including a sale pursuant to
Rule 144 under the Securities Act (except as part of a permitted underwritten
registration).

WARRANTS

Public Warrants

In November 1993 the Company issued warrants in a public offering (the
"Warrants"). Each Warrant represented the right to purchase three shares of
Common Stock at an exercise price of $5.50 per share and was redeemable at $0.02
per share. The Company called the Warrants for redemption on November 14,

51
<PAGE> 53

1997. As a result, Warrants were exercised for an aggregate of 846,256 shares of
Common Stock and the remaining Warrants covering 7,920 shares of Common Stock
were redeemed.

Miscellaneous Outstanding Warrants

Between December 1995 and January 1997, the Company issued warrants
exercisable for an aggregate of 343,500 shares of Common Stock at exercise
prices ranging from $3.00 to $4.50 per share. These warrants, which expire
between June 1997 and January 2000, were issued in exchange for certain services
rendered. As of September 30, 1997, 100,000 of such warrants had been exercised.

In October 1996, the Company granted American Founders Life Insurance
Company warrants to purchase 75,000 shares of Common Stock for prices ranging
from $5.18 to $6.13 per share (25,000 at $5.18, 25,000 at $5.65 and 25,000 at
$6.13) as part of a production payment financing. These warrants expire between
October 31, 1999 and October 31, 2001, depending upon the balance of a certain
investment. The warrants are subject to adjustment upon certain
reclassifications of the shares of Common Stock underlying the warrants.

REGISTRATION RIGHTS

Certain holders of the Company's securities have been granted registration
rights for their Common Stock. These include (i) certain piggyback and demand
registration rights held by the holders of the TCW Preferred Stock, (ii)
piggyback registration rights on shares received upon exercising a warrant
issued to Research Works, Inc. on January 16, 1996, and (iii) piggyback
registration rights on shares received upon exercising warrants issued to
American Founders Life Insurance Company.

TRANSFER AGENT

Securities Transfer Corporation of Dallas, Texas is the transfer agent and
registrar for the Common Stock and the Warrants.

INDEMNIFICATION

The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty of certain specified circumstances. The
Articles of Incorporation, with certain exceptions, eliminate any personal
liability of a director to the Company or its shareholders for monetary damages
for the breach of a director's fiduciary duty, and therefore a director cannot
be held liable for damages to the Company or its shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
director. Nevada law permits indemnification if a director or officer acts in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation. A director or officer must be indemnified as to
any matter in which he successfully defends himself. Indemnification is
prohibited as to any matter in which the director or officer is adjudged liable
to the corporation. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

52
<PAGE> 54

DESCRIPTION OF INDEBTEDNESS

DESCRIPTION OF CREDIT FACILITY

On April 30, 1997, the Company entered into a $130.0 million revolving
credit facility (the "Credit Facility") with Bankers Trust Company, as
Administrative Agent, and certain other lenders (collectively, the "Lenders").
The purpose of the Credit Facility was to (i) repay the remaining $53.7 million
of indebtedness under the Company's previous credit facility, (ii) partially
finance the Permian Basin Acquisition, and (iii) provide funds for working
capital support and general corporate purposes. A $20.0 million letter of credit
sub-facility is available as support for purposes approved by the Lenders. The
Credit Facility is subject to a Borrowing Base determination established on
October 1 and April 1 of each year by the Lenders.

Following the offering of the Notes, the Credit Facility was decreased to
$75.0 million and the Borrowing Base was reduced to $60.0 million. The Credit
Facility was amended effective September 30, 1997 to increase the maximum
commitment of the Credit Facility to $125.0 million, increase the Borrowing Base
to $65.0 million and modify the Consolidated EBITDA to Interest Expense ratio
test. At November 14, 1997, $45.0 million was outstanding under the Credit
Facility.

Under the terms of the Credit Facility, the Company must maintain a Debt to
Capitalization Ratio of not more than 0.86 until March 31, 1998, not more than
0.75 from April 1, 1998 until September 30, 1998 and not more than 0.70
thereafter. Another covenant requires the Company to maintain a ratio of
Consolidated EBITDA to Interest Expense of not less than 1.80 to 1 through March
31, 1998, not less than 2.00 to 1 from April 1, 1998 until June 30, 1998, not
less than 2.25 to 1 from July 1, 1998 through September 30, 1998 and not less
than 2.50 to 1 thereafter. The Credit Facility also contains certain financial
and other covenants, which include a minimum tangible net worth test, a minimum
current ratio and other customary covenants in addition to the Debt to
Capitalization Ratio and the ratio of Consolidated EBITDA to Interest Expense.

The Company may select an interest rate equal to the Base Rate (defined in
the Credit Facility as the higher of (i) the prime rate of Bankers Trust Company
or (ii) the sum of the overnight rate on federal funds transactions plus 0.50%)
or a LIBOR-based rate, which varies depending upon the Company's usage of its
Borrowing Base. The LIBOR-based interest rate will range from LIBOR plus 1.00%
if less than 25% of the Borrowing Base is used to LIBOR plus 1.75% if 75% or
more of the Borrowing Base is used. At November 14, 1997 the Credit Facility
bore interest at 7.44% per annum, all of which was at the LIBOR-based rate.

The Credit Facility has a maturity of five years with no required principal
payments until maturity, provided that the outstanding principal balance does
not exceed the Borrowing Base determinations established from time to time by
the Lenders. Outstanding indebtedness is secured by a first priority security
interest taken by the Lenders in substantially all assets owned now or in the
future by the Company (including its subsidiaries). All of the capital stock of
all wholly owned material subsidiaries of the Company is pledged pursuant to the
Credit Facility. Each of the Company's wholly owned subsidiaries has guaranteed
the Credit Facility.

The Credit Facility contains representations and warranties, conditions to
extensions of credit, events of default and indemnifications on terms customary
for credit facilities of this type.

DESCRIPTION OF THE NOTES

The Notes were issued under an indenture (the "Indenture") dated as of May
29, 1997 by and among the Company, each of the Company's subsidiaries, except
Hunter Butcher, as guarantors (the "Subsidiary Guarantors"), and First Union
National Bank of North Carolina, as Trustee (the "Trustee"). Upon the issuance
of the Exchange Notes (defined below), the Indenture will be subject to and
governed by the provisions of the Trust Indenture Act of 1939, as amended (the
"TIA"). The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the TIA and all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture.
Capitalized terms used in this summary and not otherwise defined below have the
meaning

53
<PAGE> 55

assigned to them in the Indenture. For purposes of this "-- Description of the
Notes" section, references to the "Company" include only Magnum Hunter
Resources, Inc. and not its Subsidiaries.

The Company is currently conducting an exchange offer (the "Exchange
Offer"), pursuant to which the Company is offering to exchange up to $140.0
million aggregate principal amount of its 10% Senior Notes due 2007 (the
"Exchange Notes") that have been registered under the Securities Act of 1933, as
amended, for a like aggregate principal amount of its outstanding Notes (the
"Outstanding Notes"). The Exchange Offer expires at 5:00 p.m., New York City
time, on December 2, 1997, unless extended. The Exchange Notes will be issued
under the same Indenture as the Outstanding Notes, and the Exchange Notes, the
Private Exchange Notes (if any) and the Outstanding Notes will constitute a
single series of debt securities under the Indenture. The Exchange Notes, the
Private Exchange Notes and the Outstanding Notes are sometimes collectively
referred to herein as the "Notes."

The Notes are general unsecured obligations of the Company ranking pari
passu in right of payment to all unsubordinated indebtedness of the Company and
ranking senior in right of payment to all subordinated indebtedness of the
Company. The Guarantees are general unsecured obligations of the Subsidiary
Guarantors and rank pari passu in right of payment to all unsubordinated
indebtedness of the Subsidiary Guarantors and rank senior in right of payment to
all subordinated indebtedness of the Subsidiary Guarantors. However, the Notes
are effectively subordinated to secured indebtedness of the Company and the
Subsidiary Guarantors to the extent of the value of the assets securing such
indebtedness.

The Notes mature on June 1, 2007. Interest on the Notes generally will
accrue at the rate of 10% per annum and will be payable semi-annually in cash on
each June 1 and December 1, commencing on December 1, 1997. The Notes are not
entitled to the benefit of any mandatory sinking fund.

The Notes will be redeemable, at the Company's option, in whole at any time
or in part from time to time, on and after June 1, 2002 at a premium declining
ratably to par on or after June 1, 2005, plus accrued interest, if any, thereon
to the date of redemption. At any time, or from time to time, on or prior to
June 1, 2000, the Company may, at its option, use all or a portion of the net
cash proceeds of one or more Equity Offerings to redeem up to 35% of the
aggregate principal amount of the Notes originally issued at a redemption price
equal to 110% of the aggregate principal amount of the Notes to be redeemed,
plus accrued interest, if any, thereon to the date of redemption; provided,
however, that at least 65% of the aggregate principal amount of Notes originally
issued remains outstanding immediately after giving effect to any such
redemption.

Each Subsidiary Guarantor has unconditionally guaranteed, on a senior
basis, jointly and severally, to each holder and the Trustee, the full and
prompt performance of the Company's obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes. The
obligations of each Subsidiary Guarantor will be limited to the maximum amount
which, after giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantor and after giving effect to any collections from or payments
made by or on behalf of any other Subsidiary Guarantor in respect of the
obligations of such other Subsidiary Guarantor under its Guarantee or pursuant
to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under its Guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in an
amount pro rata, based on the net assets of each Subsidiary Guarantor,
determined in accordance with GAAP.

The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued interest, if any, thereon to the date of
purchase.

The Indenture contains covenants providing for, among other things, (i)
limitation on incurrence of additional indebtedness, (ii) limitation on
restricted payments, (iii) limitation on asset sales, (iv) limitation on
dividend and other payment restrictions affecting Restricted Subsidiaries, (v)
limitation on preferred stock of Restricted Subsidiaries, (vi) limitation on
liens, (vii) limitations on merger, consolidation and sale of

54
<PAGE> 56

assets, (viii) limitations on transactions with affiliates, (ix) limitation on
Restricted and Unrestricted Subsidiaries, (x) additional Subsidiary Guarantees,
(xi) limitation on conduct of business, and (xii) reports to holders.

Upon an Event of Default, the Trustee or the holders of at least 25% in
principal amount of outstanding Notes may declare the principal, premium, if
any, and accrued and unpaid interest on all the Notes to be immediately due and
payable. The holders of a majority in principal amount of the Notes may rescind
such declaration of acceleration in certain circumstances.

55
<PAGE> 57

UNDERWRITING

The Underwriters named below, represented by Rauscher Pierce Refsnes, Inc.,
CIBC Oppenheimer Corp., Johnson Rice & Company L.L.C. and Van Kasper & Company
(collectively, the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
and the Selling Shareholder the number of shares of Common Stock set forth
opposite their respective names below. The nature of the obligations of the
Underwriters is such that if any of such shares are purchased, all must be
purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Rauscher Pierce Refsnes, Inc................................
CIBC Oppenheimer Corp. .....................................
Johnson Rice & Company L.L.C. ..............................
Van Kasper & Company........................................

---------
Total............................................. 6,650,000
=========
</TABLE>

The Underwriters propose to offer the shares of Common Stock offered hereby
to the public at the price to public set forth on the cover page of this
Prospectus. The Underwriters may allow a concession to selected dealers who are
members of the National Association of Securities Dealers, Inc. ("NASD") not in
excess of $ per share, and the Underwriters may allow, and such dealers
may reallow, to members of the NASD a concession not in excess of $ per
share. After the public offering, the price to public, the concession and the
reallowance may be changed by the Representatives.

The Company has granted an option to the Underwriters, exercisable within
30 days after the date of this Prospectus, to purchase up to an aggregate of
997,500 additional shares of Common Stock at the initial price to public, less
the underwriting discount, set forth on the cover page of this Prospectus. The
Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
the Company that number of additional shares of Common Stock which is
proportionate to such Underwriter's initial commitment as indicated in the table
above.

The Company, the Selling Shareholder and its executive officers and
directors have agreed that for a period of 90 days after the date of this
Prospectus they will not, directly or indirectly, offer to sell, sell, pledge,
contract to sell, grant any option to sell, or otherwise dispose of any shares
of Common Stock (or securities convertible into or exercisable or exchangeable
for, or any rights or options to purchase or acquire, Common Stock or such
securities) without the prior written consent of Rauscher Pierce Refsnes, Inc.,
except, in the case of the Company, for transactions related to the Company's
existing option plans and other employee benefit plans or related to outstanding
stock options and warrants disclosed in this Prospectus.

The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
the Offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.

In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. The transactions may include over-allotment and
stabilization transactions and purchases to cover syndicate short positions
created in connection with the Offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock, and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of

56
<PAGE> 58

Common Stock than they are required to purchase from the Selling Shareholder and
the Company in the Offering. The Representatives also may impose a penalty bid,
whereby selling concessions allowed to syndicate members or other broker-dealers
in respect of the shares of Common Stock sold in the Offering for their account
may be reclaimed by the syndicate if such shares of Common Stock are repurchased
by the syndicate in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market, and these activities may be discontinued at any time. These transactions
may be effected on the American Stock Exchange, in the over-the-counter market
or otherwise.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

As a result of a recently completed merger, CIBC Oppenheimer Corp. ("CIBC
Oppenheimer") is affiliated with CIBC, Inc.("CIBC"). CIBC is a Lender under the
Credit Facility, which will be paid down with the proceeds of the Offering.
Accordingly, more than 10% of the net proceeds of the Offering, not including
underwriter compensation, may be paid to CIBC Oppenheimer and its affiliates.
Thus, pursuant to subparagraph (c)(8) of Rule 2710 of the Conduct Rules
promulgated by the National Association of Securities Dealers, Inc., the
Underwriters are required to comply with Rule 2720(c)(3) of the Conduct Rules
regarding certain potential conflicts of interest, which requires in paragraph
(B) that the Offering is of a class of equity securities for which a bona fide
independent market exists as of the date of filing and is expected to exist on
the effective date. The market for the Common Stock meets the definition of bona
fide independent market as stated in Rule 2720(b)(3) of the Conduct Rules.

Except as described with regard to CIBC Oppenheimer and CIBC, with respect
to subparagraph (c)(8) of Rule 2710 of the Conduct Rules relating to "Conflicts
of Interest" arising from "Proceeds Directed to a Member," none of the proceeds
of the Offering are intended to be paid to NASD members participating in the
distribution of the Offering or associated or affiliated persons of NASD members
participating in the distribution of the Offering or members of the immediate
family of any such person.

In the ordinary course of their business, certain of the Underwriters have
engaged in transactions with and performed services for the Company. In
addition, CIBC and CIBC Oppenheimer may continue to participate on a regular
basis in various general financing and banking transactions for the Company and
its affiliates.

LEGAL MATTERS

Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and the Selling Shareholder by Thompson & Knight,
P.C., Dallas, Texas. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by Haynes and Boone, LLP.

EXPERTS

The consolidated balance sheet of Magnum Hunter Resources, Inc. as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, included elsewhere
and incorporated by reference in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report which is included
and incorporated by reference herein and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.

The financial statements of the Company as of December 31, 1995 and for the
year then ended have been audited by Hein + Associates LLP, independent
certified public accountants, as stated in their report which is included and
incorporated by reference herein and have been so included in reliance upon the
report of such

57
<PAGE> 59

firm given upon their authority as experts in accounting and auditing. The
change in accountants from Hein + Associates LLP to Deloitte & Touche LLP was
effective for fiscal 1996 and was not due to any disagreements between the
Company and Hein + Associates LLP.

The historical summaries of revenues and direct operating expenses of the
Permian Basin Properties for the years ended December 31, 1996 and 1995 and the
Properties Acquired June 28, 1996 have been audited by Hein + Associates LLP,
independent certified public accountants, as stated in their reports, the first
of which is included and incorporated by reference herein and the second of
which is incorporated by reference herein and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.

The reference to the report of Ryder Scott Co., independent petroleum
consultants, contained herein estimating the Proved Reserves, future net cash
flows from such Proved Reserves and the SEC PV-10 of such estimated future net
cash flows for the Permian Basin Properties as of December 31, 1996 is made in
reliance upon the authority of such firm as an expert with respect to such
matters.

The reference to the report of Gaffney, Cline & Associates Inc.,
independent petroleum consultants, contained herein estimating the Proved
Reserves, future net cash flows from such Proved Reserves and the SEC PV-10 of
such estimated future net cash flows for the Company's properties (other than
certain west Texas properties) as of December 31, 1996 is made in reliance upon
the authority of such firm as experts with respect to such matters.

The reference to the report of Glenn Harrison Petroleum Consultants, Inc.,
independent petroleum consultants, contained herein estimating the Company's
Proved Reserves, future net cash flows from such Proved Reserves and the SEC
PV-10 of such estimated future net cash flows for certain west Texas properties
as of December 31, 1996 is made in reliance upon the authority of such firm as
experts with respect to such matters.

The reference to the reports of James J. Weisman, Jr., an independent
petroleum engineer, contained herein auditing the Company's estimates of its
Proved Reserves, the estimated future net cash flows from such Proved Reserves,
and the SEC PV-10 of such estimated future net cash flows as of December 31,
1995 is made in reliance upon the authority of such individual as an expert with
respect to such matters.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the office of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally,
the Commission maintains a web site that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's web site is http://www.sec.gov. The
Company's Common Stock is listed on the American Stock Exchange and copies of
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of the American Stock Exchange, 86 Trinity Place,
New York, New York 10006-1881.

This Prospectus constitutes a part of a registration statement on Form S-3
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act. This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and reference is
hereby made to the Registration Statement and to the exhibits relating thereto
for further information with respect to the Company and the Common Stock. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to a copy of such
document

58
<PAGE> 60

filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.

The Company, a corporation organized under the laws of Nevada, has its
principal executive offices located at 600 East Las Colinas Boulevard, Suite
1200, Irving, Texas 75039; its telephone number is (972) 401-0752.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents and information heretofore filed with the
Commission by the Company are hereby incorporated by reference into this
Prospectus:

1. The Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996, as amended by Form 10-KSB/A filed June 27, 1997;

2. An amendment to the Company's Quarterly Report on Form 10-QSB/A for
the quarter ended September 30, 1996, filed on March 18, 1997;

3. The Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997, as amended by Form 10-QSB/A filed on May 21, 1997,
June 30, 1997 and September 30, 1997;

4. The Company's Current Reports on Form 8-K dated January 20, 1997
(as amended by Form 8-K/A filed on February 5, 1997), February 28, 1997,
April 30, 1997, May 20, 1997 and May 29, 1997; and

5. The description of Common Stock contained in the Registration
Statement on Form 8-A of the Company heretofore filed with the Commission,
including any amendments or reports filed for the purpose of updating such
description.

All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the Offering
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.

THE COMPANY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS IS DELIVERED, ON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN (OTHER THAN EXHIBITS TO SUCH DOCUMENTS WHICH
ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). WRITTEN
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO THE COMPANY, 600 EAST LAS COLINAS
BLVD., SUITE 1200, IRVING, TEXAS 75039, ATTENTION: MORGAN F. JOHNSTON, VICE
PRESIDENT, GENERAL COUNSEL AND SECRETARY. TELEPHONE REQUESTS MAY BE DIRECTED TO
MR. JOHNSTON AT (972) 401-0752.

59
<PAGE> 61

GLOSSARY

The terms defined in this glossary are used throughout this Prospectus.

BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.

BBL/D. One barrel of oil or other liquid hydrocarbons per day.

BCF. One billion cubic feet of gas.

BCF/D. One billion cubic feet of gas per day.

BCFE. One billion cubic feet of natural gas equivalents converting one Bbl
of oil to six Mcf of gas.

BTU. British Thermal Unit, the quantity of heat required to raise one pound
of water by one degree Fahrenheit.

DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.

DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.

DRY HOLE. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.

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

GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.

IN-FILL WELL. A well drilled between known producing wells to better
exploit the reservoir.

MBBL. One thousand barrels of oil or other liquid hydrocarbons.

MCF. One thousand cubic feet of gas.

MCFE. One thousand cubic feet of natural gas equivalents converting one Bbl
of oil to six Mcf of gas.

MCFE/D. Mcfe per day.

MMBBL. One million barrels of oil or other liquid hydrocarbons.

MMBTU. One million Btu.

MMCF. One million cubic feet of gas.

MMCFE. One million cubic feet of natural gas equivalents converting one Bbl
of oil to six Mcf of gas.

MMCF/D. One million cubic feet of gas per day.

NATURAL GAS EQUIVALENT. The amount of gas having the same Btu content as a
given quantity of oil, with one Bbl of oil being converted to six Mcf of gas.

NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.

NET REVENUE INTEREST. A share of the Working Interest that does not bear
any portion of the expense of drilling and completing a well and that represents
the holder's share of production after satisfaction of all royalty, overriding
royalty, oil payments and other nonoperating interests.

PRODUCTIVE WELL. A well that is producing oil or gas or that is capable of
production in paying quantities.

60
<PAGE> 62

NON-PRODUCING RESERVES. Proved Developed Reserves that consist of (i)
proved reserves from wells which have been completed and tested but are not
producing due to lack of market or minor completion problems which are expected
to be corrected and (ii) proved reserves currently behind the pipe in existing
wells and which are expected to be productive due to both the well log
characteristics and analogous production in the immediate vicinity of the wells.

PRODUCING RESERVES. Proved Developed Reserves that can be expected to be
recovered from currently producing zones under the continuation of present
operating methods.

PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.

PROVED RESERVES. The estimated quantities of oil, gas and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.

PROVED UNDEVELOPED RESERVES. Proved reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion.

RECOMPLETION. The completion for production of an existing wellbore in a
different formation or producing horizon from that in which the well was
previously completed.

RESERVE LIFE. The estimated productive life of a proved reservoir based
upon the economic limit of such reservoir producing hydrocarbons in paying
quantities assuming certain price and cost parameters. For purposes of this
Prospectus, reserve life is calculated by dividing the Proved Reserves (on an
Mcfe basis) at the end of the period by projected production volumes for the
next 12 months.

ROYALTY INTEREST. An interest in an oil and gas property entitling the
owner to a share of oil and gas production free of cost of production.

SEC PV-10. The present value of proved reserves is an estimate of the
discounted future net cash flows from each of the properties at December 31,
1996, or as otherwise indicated. Net cash flow is defined as net revenues less,
after deducting production and ad valorem taxes, future capital costs and
operating expenses, but before deducting federal income taxes. As required by
rules of the Commission, the future net cash flows have been discounted at an
annual rate of 10% to determine their "present value." The present value is
shown to indicate the effect of time on the value of the revenue stream and
should not be construed as being the fair market value of the properties. In
accordance with Commission rules, estimates have been made using constant oil
and gas prices and operating costs, at December 31, 1996, or as otherwise
indicated.

UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.

WORKING INTEREST. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production, subject to all royalties, overriding royalties and other burdens and
to all costs of exploration, development and operations and all risks in
connection therewith.

61
<PAGE> 63

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 64

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
Unaudited Pro Forma Combined Income Statement for the year
ended December 31, 1996................................... F-3
Unaudited Pro Forma Combined Income Statement for the nine
months ended
September 30, 1997........................................ F-4
Notes to Unaudited Pro Forma Combined Financial Data........ F-5
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report -- Hein + Associates LLP....... F-8
Independent Auditors' Report -- Deloitte & Touche LLP....... F-9
Consolidated Balance Sheets as of December 31, 1995 and
1996...................................................... F-10
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1996................................ F-11
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995
and 1996.................................................. F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1996................................ F-13
Notes to Consolidated Financial Statements.................. F-14
Supplemental Information on Oil and Gas Producing Activities
(Unaudited)............................................... F-29
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 1997
(Unaudited)............................................... F-32
Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1997 and the nine months
ended September 30, 1996 and 1997 (Unaudited)............. F-33
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 (Unaudited)............. F-34
Notes to Unaudited Consolidated Financial Statements........ F-35
FINANCIAL STATEMENTS OF PERMIAN BASIN PROPERTIES
Independent Auditors' Report -- Hein + Associates LLP....... F-37
Historical Summaries of Revenues and Direct Operating
Expenses of the Permian Basin Properties for the years
ended December 31, 1995 and 1996 and for the four month
unaudited periods ended April 30, 1996 and 1997........... F-38
Notes to Historical Summaries of Revenues and Direct
Operating Expenses for the years ended December 31, 1995
and 1996 and for the four month unaudited periods ended
April 30, 1996 and 1997................................... F-39
</TABLE>

F-1
<PAGE> 65

UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following unaudited pro forma combined financial data are derived from
the Consolidated Financial Statements of the Company herein and certain
historical financial data in respect of various assets acquired by the Company.
The historical revenues and oil and gas production and gas gathering and
marketing expenses of the McLean Gas Plant, the Panoma Properties and the
Permian Basin Properties represent amounts recorded with respect to such
properties for the period indicated. The Unaudited Pro Forma Income Statement
for the year ended December 31, 1996 has been prepared assuming the Panoma
Acquisition, the issuance of the TCW Preferred Stock, the McLean Plant
Acquisition, the conversion of the Series B and Series C Preferred Stock into
Common Stock, the Permian Basin Acquisition (including the incurrence of
indebtedness under the Credit Facility and the Company's previously existing
term loan facility and the use of proceeds therefrom) and the offering of the
Notes (the "Debt Offering") and the application of the net proceeds therefrom
had been consummated as of January 1, 1996. The Unaudited Pro Forma Income
Statement for the nine months ended September 30, 1997 has been prepared
assuming the Permian Basin Acquisition (including the incurrence of indebtedness
under the Credit Facility and the Company's previously existing term loan
facility and the use of proceeds therefrom) and the Debt Offering and the
application of the net proceeds therefrom had been consummated as of January 1,
1997. The pro forma adjustments set forth on the attached Unaudited Pro Forma
Income Statements reflect the following as if they occurred on the dates
hereinabove set forth:

(1) Recent Transactions. The Panoma Acquisition completed in June
1996; the conversion or redemption of the Series B and Series C Preferred
Stock in 1996; the issuance of the TCW Preferred Stock in December 1996;
and the McLean Plant Acquisition in January 1997.

(2) Permian Basin Acquisition. The Permian Basin Acquisition completed
in April 1997 (including the incurrence of indebtedness under the Credit
Facility and the Company's previously existing term loan facility (the
"Term Loan Facility") to finance the Permian Basin Acquisition and repay
the indebtedness under the previous credit facility (the "Previous Credit
Facility")).

(3) The Debt Offering. The Debt Offering and the application of the
net proceeds therefrom.

The unaudited pro forma combined financial data should be read in
conjunction with the notes thereto and with the Consolidated Financial
Statements of the Company and the notes thereto and the historical summaries of
revenues and direct operating expenses of the Permian Basin Properties, all of
which are included herein.

The unaudited pro forma combined financial data are not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the transactions described above had occurred at the dates
presented or which may be obtained in the future. In addition, future results
may vary significantly from the results reflected in such statements due to
normal oil and gas production declines, changes in prices paid for oil and gas,
future acquisitions, drilling activity and other factors.

F-2
<PAGE> 66

UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA RECENT
PRO FORMA PRO FORMA PRO FORMA RECENT PRO FORMA TRANSACTIONS,
MAGNUM ADJUSTMENTS ADJUSTMENTS FOR TRANSACTIONS AND ADJUSTMENTS PERMIAN BASIN
HUNTER FOR RECENT PERMIAN BASIN PERMIAN BASIN FOR DEBT ACQUISITION AND
HISTORICAL TRANSACTIONS ACQUISITION ACQUISITION OFFERING DEBT OFFERING
---------- ------------ --------------- -------------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Oil and gas sales......... $10,248 $ 3,267(1) $ 39,433(9) $ 52,948 $ -- $ 52,948
Gas gathering, marketing
and processing.......... 5,768 3,562(2) -- 10,304 -- 10,304
974(1)
Oil field services and
international sales..... 396 -- -- 396 -- 396
------- ------- -------- -------- ---- --------
Total operating
revenue........... 16,412 7,803 39,433 63,648 -- 63,648
Operating Costs and
Expenses:
Oil and gas production.... 4,390 1,049(1) 11,646(9) 17,085 17,085
Gas gathering, marketing
and processing.......... 4,708 695(1) -- 6,879 -- 6,879
1,476(2)
Oil field services and
international sales..... 267 -- -- 267 -- 267
Depreciation and
depletion............... 2,951 1,203(3) 12,961(10) 17,282 -- 17,282
167(4)
General and
administrative.......... 1,225 100(5) 150(11) 1,475 -- 1,475
------- ------- -------- -------- ---- --------
Total operating
costs and
expenses.......... 13,541 4,690 24,757 42,988 -- 42,988
------- ------- -------- -------- ---- --------
Operating profit............ 2,871 3,113 14,676 20,660 -- 20,660
Other income.............. 344 -- -- 344 -- 344
Interest expense.......... (2,394) (1,555)(6) (14,059)(12) (18,008) 262(13) (17,746)
------- ------- -------- -------- ---- --------
Income before taxes and
extraordinary item........ 821 1,558 617 2,996 262 3,258
Provisions for deferred
income taxes............ (312) (584)(7) (231)(7) (1,127) (98)(7) (1,225)
------- ------- -------- -------- ---- --------
Income before extraordinary
item...................... 509 974 386 1,869 164 2,033
389(8)
Dividends applicable to
preferred shares........ (406) (858)(8) -- (875) -- (875)
------- ------- -------- -------- ---- --------
Income applicable to common
shares before
extraordinary item........ $ 103 $ 505 $ 386 $ 994 $164 $ 1,158
======= ======= ======== ======== ==== ========
Income per share before
extraordinary item...... $ .01 $ .03 $ .03 $ .07 $.01 $ .08
======= ======= ======== ======== ==== ========
OTHER FINANCIAL DATA:
EBITDA(14)................ $ 6,166 $ 4,483 $ 27,637 $ 38,286 $ -- $ 38,286
Capital expenditures...... $41,471 $ 2,500 $133,000 $176,971 $ -- $176,971
</TABLE>

See accompanying notes to Unaudited Pro Forma Combined Financial Data

F-3
<PAGE> 67

UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
PERMIAN
PRO FORMA PRO FORMA BASIN
MAGNUM ADJUSTMENTS FOR PRO FORMA ADJUSTMENTS ACQUISITION
HUNTER PERMIAN BASIN PERMIAN BASIN FOR DEBT AND DEBT
HISTORICAL ACQUISITION ACQUISITION OFFERING OFFERING
---------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales................ $22,793 $12,627(9) $ 35,420 $ -- $ 35,420
Gas gathering, marketing and
processing.................... 7,721 -- 7,721 -- 7,721
Oil field services and
international sales........... 3,792 -- 3,792 -- 3,792
------- ------- -------- ---- --------
Total operating
revenue................ 34,306 12,627 46,933 -- 46,933
Operating Costs and Expenses:
Oil and gas production........... 8,521 3,039(9) 11,560 -- 11,560
Gas gathering, marketing and
processing.................... 5,803 -- 5,803 -- 5,803
Oil field services and
international sales........... 3,482 -- 3,482 -- 3,482
Depreciation and depletion....... 8,607 3,629(10) 12,236 -- 12,236
General and administrative....... 1,128 50(11) 1,178 -- 1,178
------- ------- -------- ---- --------
Total operating costs and
expenses.................... 27,541 6,718 34,259 -- 34,259
------- ------- -------- ---- --------
Operating profit................... 6,765 5,909 12,674 -- 12,674
Other income..................... 608 -- 608 -- 608
Interest expense................. (9,298) (4,587)(12) (13,885) 87(13) (13,798)
------- ------- -------- ---- --------
Income before tax, minority
interest and extraordinary
item............................. (1,925) 1,322 (603) 87 (516)
Income tax (expense) benefit....... 731 (497)(7) 234 (31)(7) 203
Minority interest in subsidiary
earnings...................... (40) -- (40) -- (40)
------- ------- -------- ---- --------
Income before extraordinary item... (1,234) 825 (409) 56 (353)
Dividends applicable to preferred
stock......................... (657) -- (657) -- (657)
------- ------- -------- ---- --------
Income (loss) applicable to
common shares before
extraordinary item............ $(1,891) $ 825 $ (1,066) $ 56 $ (1,010)
======= ======= ======== ==== ========
Income (loss) per share before
extraordinary item............... $ (0.14) $ 0.07 $ (0.07) $ -- $ (0.07)
======= ======= ======== ==== ========
OTHER FINANCIAL DATA:
EBITDA(14)......................... $15,980 $ 9,538 $ 25,518 $ -- $ 25,518
======= ======= ======== ==== ========
</TABLE>

See accompanying notes to Unaudited Pro Forma Combined Financial Data

F-4
<PAGE> 68

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS)

(1) To record the operating revenues and oil and gas production expenses and
gas gathering and marketing expenses for the first six months of 1996 for
the Panoma Properties that were acquired effective July 1, 1996 as if the
Panoma Acquisition had occurred on January 1, 1996.

(2) To record operating revenues and gas gathering and marketing expenses
related to the Company's 50% interest in the McLean Gas Plant, which was
acquired for $2,500 in January 1997, for the year ended December 31, 1996
as if the McLean Gas Plant had been acquired on January 1, 1996. The
Company will receive 100% of the net profits generated by the facility
until the $2,500 purchase price is recovered, after which it will receive
50% of the net profits. If the Company had received 50% of the net profits
generated by the McLean Gas Plant during the pro forma period presented,
its gross margin would have been reduced by $1,043.

(3) To record the pro forma depletion adjustment to reflect the Company's
depletion expense as if the Panoma Properties that were acquired effective
July 1, 1996 had been acquired on January 1, 1996.

(4) To record one year of depreciation expense on the McLean Gas Plant
(depreciable life is 15 years) as if the McLean Gas Plant had been acquired
on January 1, 1996.

(5) To record estimated additional general and administrative expenses that
would have been incurred if the Panoma Properties that were acquired
effective July 1, 1996 had been acquired on January 1, 1996.

(6) To record interest expense as if the McLean Plant Acquisition and the
Panoma Acquisition had occurred on January 1, 1996 as set forth below.
These acquisitions were assumed to be financed by the Previous Credit
Facility with an average interest rate during 1996 of 7.625%.

<TABLE>
<S> <C>
McLean Gas Plant-interest................................... $ 191
Panoma Properties-interest.................................. 1,321
Panoma Properties-amortization of associated debt issuance
costs..................................................... 43
------
$1,555
======
</TABLE>

(7) To record the effect of the pro forma adjustments on deferred and current
federal and state income taxes at an assumed tax rate of 37.5% after
consideration of available net operating losses and other carryforwards.

(8) To remove the $389 of dividends applicable to Series B and Series C
Preferred Stock that was redeemed or converted to Common Stock in late 1996
as if the redemption or conversion had occurred on January 1, 1996, and to
record dividends at a rate of 8.75% on the TCW Preferred Stock issued in
December 1996 as if it had been outstanding since January 1, 1996.

(9) To record the Permian Basin Properties operating revenues and oil and gas
production expenses as if the Permian Basin Acquisition had occurred on
January 1, 1996 for the December 31, 1996 pro forma income statement and on
January 1, 1997 for the pro forma September 30, 1997 income statement.

(10) To record the pro forma depletion adjustment to reflect the Company's
depletion expense as if the Permian Basin Properties had been acquired on
January 1, 1996 for the December 31, 1996 pro forma income statement and on
January 1, 1997 for the pro forma September 30, 1997 income statement.

(11) To record the Company's estimates of general and administrative expenses
that would have been incurred if the Permian Basin Properties had been
acquired on January 1, 1996 for the December 31, 1996 pro forma income
statement and on January 1, 1997 for the September 30, 1997 income
statement,

F-5
<PAGE> 69

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)

net of estimated fees that would have been earned by the Company from third
parties on the properties it operates, as follows:

<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Additional general and administrative expenses............ $ 702 $ 235
Operating fees earned from third parties.................. (552) (185)
----- -----
$ 150 $ 50
===== =====
</TABLE>

(12) To record the interest expense associated with the borrowing of $119,500
under the Credit Facility and $60,000 under the Term Loan Facility to
complete the Permian Basin Acquisition and to refinance the Previous Credit
Facility as if the acquisition and refinancing had closed on the beginning
of the respective periods.

The Credit Facility and the Term Loan Facility are assumed to have interest
rates of 9.0% and 11.5%, respectively. The debt issuance costs associated
with the facilities are as follows:

<TABLE>
<S> <C>
Credit Facility debt issuance costs......................... $ 700
Term Loan Facility debt issuance costs...................... 1,800
------
$2,500
======
</TABLE>

The components of this interest expense adjustment are as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Elimination of pro forma interest adjustments for
McLean Plant Acquisition and Panoma Acquisition and
amortization of associated debt issuance costs....... $(1,555) $ --
Elimination of historical interest expense on Previous
Credit Facility...................................... (2,394) (1,415)
Interest on Credit Facility............................ 10,755 3,585
Amortization of debt issuance costs on Credit
Facility............................................. 133 44
Interest on Term Loan Facility......................... 6,900 2,300
Amortization of debt issuance costs on Term Loan
Facility............................................. 220 73
------- -------
$14,059 $ 4,587
======= =======
</TABLE>

(13) To adjust interest expense to reflect the repayment of the Term Loan
Facility and repayment of $75,500 of indebtedness under the Credit Facility
with the net proceeds of the Debt Offering. The interest rate on the Notes
is 10.0%. After repayment of the Term Loan Facility, using the net proceeds
of the Debt Offering, the Credit Facility will bear interest on an assumed
interest rate of 7.6% per annum. The $4,500 of estimated debt issuance
costs are amortized using the effective yield method over the life of the
Notes. This adjustment excludes an extraordinary charge to expense of
$1,800 debt issuance costs

F-6
<PAGE> 70

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA -- (CONTINUED)
(IN THOUSANDS)

associated with repayment of the Term Loan Facility. The components of the
interest expense adjustment are as follows:

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Interest on the Notes.................................. $14,000 $ 4,667
Amortization of debt issuance costs on Notes........... 270 90
Elimination of interest on $75,500 of debt under Credit
Facility and effect of reduction of interest rate on
Credit Facility following repayment of Term Loan
Facility............................................. (7,412) (2,471)
Elimination of interest and amortization of associated
debt issuance costs on Term Loan Facility............ (7,120) (2,373)
------- -------
$ (262) $ (87)
======= =======
</TABLE>

(14) EBITDA is defined as net income (loss) before income taxes and minority
interest, plus the sum of depletion and depreciation and interest expense.
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning
EBITDA because EBITDA is a measure used by certain investors in determining
the Company's historical ability to service its indebtedness. EBITDA should
not be considered as an alternative to, or more meaningful than, net income
or cash flows as determined in accordance with generally accepted
accounting principles or as an indicator of the Company's operating
performance or liquidity.

F-7
<PAGE> 71

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

We have audited the accompanying consolidated balance sheet of Magnum
Hunter Resources, Inc. (formerly Magnum Petroleum, Inc.) and Subsidiaries as of
December 31, 1995, and the related consolidated statements of operations, cash
flows, and stockholders' equity for the year then ended. 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
misstatements. 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 Magnum Hunter Resources,
Inc. and Subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.

HEIN + ASSOCIATES LLP

Dallas, Texas
April 3, 1996

F-8
<PAGE> 72

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Magnum Hunter Resources, Inc.

We have audited the accompanying consolidated balance sheet of Magnum
Hunter Resources, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Magnum Hunter Resources,
Inc. and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP

Dallas, Texas
March 14, 1997 (April 30, 1997 as to Note 16)

F-9
<PAGE> 73

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,544 $ 1,687
Securities available for sale............................. 101 233
Accounts receivable:
Trade, net of allowance of $134 and $132................ 1,247 4,372
Due from affiliates....................................... 116 241
Notes receivable from affiliate........................... 121 264
Current portion of long-term note receivable.............. 201 198
Prepaid and other......................................... 22 52
------- -------
TOTAL CURRENT ASSETS................................ 3,352 7,047
------- -------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method:
Unproved................................................ 843 459
Proved.................................................. 36,257 70,575
Pipelines................................................. 1,087 7,102
Other property............................................ 146 381
------- -------
TOTAL PROPERTY, PLANT AND EQUIPMENT................. 38,333 78,517
Accumulated depreciation, depletion and impairment........ (1,928) (4,869)
------- -------
NET PROPERTY, PLANT AND EQUIPMENT........................... 36,405 73,648
------- -------
OTHER ASSETS
Deposits and other assets................................. 118 645
Long-term notes receivable, net of imputed interest....... 190 1,732
------- -------
TOTAL ASSETS........................................ $40,065 $83,072
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued liabilities............ $ 1,283 $ 3,698
Gas imbalance payable..................................... -- 242
Dividends payable......................................... 177 22
Suspended revenue payable................................. 794 784
Current maturities of long-term debt...................... 2,014 22
------- -------
TOTAL CURRENT LIABILITIES........................... 4,268 4,768
------- -------
LONG-TERM LIABILITIES
Long-term debt, less current maturities................... 7,598 38,744
Production payment liability.............................. 288 937
Other..................................................... 290 --
Deferred income taxes..................................... 3,125 3,469
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -- $.001 par value; 10,000,000 shares
authorized 216,000 designated as Series A; 80,000 and
80,000 issued and outstanding, respectively, liquidation
amount $0............................................... -- --
925,000 designated as Series B; 62,050 and none issued
and outstanding, respectively.......................... -- --
625,000 designated as Series C; 625,000 and none shares
issued and outstanding, respectively................... 1 --
1,000,000 designated as 1996 Series A Convertible; none
and 1,000,000 issued and outstanding, respectively,
liquidation amount none and $10,000,000 respectively... -- 1
Common stock -- $.002 par value; 50,000,000 shares
authorized 11,598,183 shares issued and 14,252,822
issued and outstanding, respectively.................... 23 29
Additional paid-in capital................................ 29,660 40,216
Accumulated deficit....................................... (5,245) (5,142)
Unrealized gain on investments............................ 57 51
------- -------
24,496 35,155
Treasury stock (544,495 shares of common stock)........... -- (1)
------- -------
TOTAL STOCKHOLDERS' EQUITY.......................... 24,496 35,154
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $40,065 $83,072
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-10
<PAGE> 74

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1995 1996
----------- ----------
<S> <C> <C>
OPERATING REVENUE
Oil and gas sales......................................... $ 617 $ 10,248
Gas gathering and marketing............................... -- 5,768
Oil field services and commissions........................ 32 396
----------- ----------
TOTAL OPERATING REVENUE........................... 649 16,412
----------- ----------
OPERATING COSTS AND EXPENSES
Oil and gas production.................................... 268 4,390
Gas gathering and marketing............................... -- 4,708
Costs related to other services........................... 26 267
Depreciation and depletion................................ 421 2,951
General and administrative................................ 977 1,225
----------- ----------
TOTAL OPERATING COSTS AND EXPENSES................ 1,692 13,541
----------- ----------
OPERATING PROFIT (LOSS)..................................... (1,043) 2,871
OTHER INCOME................................................ 77 344
INTEREST EXPENSE............................................ (2) (2,394)
----------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES....................... (968) 821
Provision for deferred income taxes....................... -- (312)
----------- ----------
NET INCOME (LOSS)........................................... (968) 509
DIVIDENDS APPLICABLE TO PREFERRED SHARES.................... (617) (406)
----------- ----------
INCOME (LOSS) APPLICABLE TO COMMON SHARES................... $ (1,585) $ 103
=========== ==========
INCOME (LOSS) PER COMMON SHARE.............................. $ (0.28) $ 0.01
=========== ==========
COMMON SHARES USED IN PER SHARE CALCULATION................. 5,606,669 12,485,893
=========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-11
<PAGE> 75

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED
PREFERRED STOCK COMMON STOCK TREASURY STOCK ADDITIONAL COSTS OF
------------------ ------------------- ----------------- PAID-IN WARRANT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFERING
--------- ------ ---------- ------ -------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994................. 645,775 $ 1 4,537,045 $ 9 -- $ -- $12,606 $(240)
Conversion of preferred stock to common
stock.................................... (11,300) -- 28,900 --
Issuance and costs from exercise of
warrants................................. 20,750 -- 833,324 2 2,841 240
Issuance of Series C preferred stock....... 249
Issuance of common stock to acquire oil and
gas properties........................... 386,615 1 1,378
Issuance of common stock for services...... 602,222 1 1,370
Issued to directors for collateral......... 125,000 --
Sale of investment shares..................
Payments received on receivable from
stockholders.............................
Acquisition of Hunter Resources, Inc. for
Series C preferred stock and common
stock.................................... 111,825 -- 5,085,077 10 11,216
Dividends declared on preferred stock......
Net loss from operations...................
Unrealized gain on investments.............
--------- --- ---------- --- -------- ---- ------- -----
Balance at December 31, 1995................. 767,050 1 11,598,183 23 -- -- 29,660 --
Conversion of preferred stock to common
stock.................................... (658,934) (1) 1,821,638 4 (3)
Redemption of 28,116 shares of Series C
preferred stock.......................... (28,116) -- (294)
Issuance of 1996 Series A convertible
preferred stock, net of offering costs... 1,000,000 1 9,785
Shares issued as collateral, returned and
held as treasury stock................... 610,170 1 (610,170) (1) (1)
Exercise of employees' common stock
options.................................. -- -- 12,258 -- 9
Issuance of common stock to acquire oil and
gas properties........................... 188,410 1 51,300 -- 938
Sale of investment shares..................
Dividends declared on preferred stock...... 34,421 -- 2,117 -- 122
Net income from operations.................
Unrealized gain on investments.............
--------- --- ---------- --- -------- ---- ------- -----
Balance at December 31, 1996................. 1,080,000 $ 1 14,252,822 $29 (544,495) $ (1) $40,216 $ --
========= === ========== === ======== ==== ======= =====

<CAPTION>
UNREALIZED
RECEIVABLE GAIN(LOSS)
ACCUMULATED FROM ON
DEFICIT STOCKHOLDER INVESTMENTS
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994................. $(3,659) $ (63) $ (9)
Conversion of preferred stock to common
stock....................................
Issuance and costs from exercise of
warrants.................................
Issuance of Series C preferred stock.......
Issuance of common stock to acquire oil and
gas properties...........................
Issuance of common stock for services......
Issued to directors for collateral.........
Sale of investment shares.................. 9
Payments received on receivable from
stockholders............................. 63
Acquisition of Hunter Resources, Inc. for
Series C preferred stock and common
stock....................................
Dividends declared on preferred stock...... (618)
Net loss from operations................... (968)
Unrealized gain on investments............. 57
------- ----- ----
Balance at December 31, 1995................. (5,245) -- 57
Conversion of preferred stock to common
stock....................................
Redemption of 28,116 shares of Series C
preferred stock..........................
Issuance of 1996 Series A convertible
preferred stock, net of offering costs...
Shares issued as collateral, returned and
held as treasury stock...................
Exercise of employees' common stock
options..................................
Issuance of common stock to acquire oil and
gas properties...........................
Sale of investment shares.................. (57)
Dividends declared on preferred stock...... (406)
Net income from operations................. 509
Unrealized gain on investments............. 51
------- ----- ----
Balance at December 31, 1996................. $(5,142) $ -- $ 51
======= ===== ====
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-12
<PAGE> 76

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (968) $ 509
Adjustments to reconcile net income (loss) to cash
provided by (used for)
operating activities:
Depreciation and depletion............................. 421 2,951
Deferred income taxes.................................. -- 312
Common stock issued for services....................... 102 --
(Gain) loss on sale of assets.......................... 76 (143)
Interest accrued on notes receivable from
stockholders.......................................... -- --
Other.................................................. 15 32
Changes in certain assets and liabilities:
Accounts receivable.................................. (37) (3,250)
Costs in excess of billings on uncompleted drilling
contracts........................................... 55 --
Deposits and other assets............................ -- (30)
Accounts payable and accrued liabilities............. (513) 2,647
------- -------
Net Cash Provided By (Used By) Operating
Activities....................................... (849) 3,028
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.............................. 88 318
Additions to property and equipment....................... (1,244) (41,471)
Increase in deposits and other assets..................... -- (527)
Loan made for promissory note receivable.................. (121) (58)
Payments received on promissory notes receivable.......... 334 --
Purchase of securities available for sale................. (30) --
Obligations and property acquisitions funded in Hunter
acquisition............................................ (1,034) --
------- -------
Net Cash Used By Investing Activities............. (2,007) (41,738)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production
payment................................................ -- 57,262
Payments of principal on long-term debt and production
payment................................................ (186) (27,459)
Payments on other liabilities............................. -- (290)
Proceeds from issuance of common and preferred stock, net
offering costs......................................... 3,332 9,796
Redemption of preferred stock............................. -- (295)
Payments received on notes receivable..................... 62 277
Increase in segregated funds for payments of notes
payable................................................ 130 --
Dividends paid............................................ (583) (438)
------- -------
Net Cash Provided By Financing Activities......... 2,755 38,853
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (101) 143
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,645 1,544
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,544 $ 1,687
======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

F-13
<PAGE> 77

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF OPERATIONS

Magnum Hunter Resources, Inc. (the "Company"), formerly Magnum Petroleum,
Inc., is incorporated under the laws of the state of Nevada. The Company is
engaged in the acquisition, operation and development of oil and gas properties,
the gathering, transmission and marketing of gas, providing management and
advisory consulting services on oil and gas properties for third parties, and
providing consulting and U.S. export services to facilitate Latin American trade
in energy products. In conjunction with the above activities, the Company owns
and operates oil and gas properties in six states, predominantly in the
Southwest region of the United States. In addition, the Company owns and
operates four gathering systems located in Texas, Louisiana and Oklahoma.

MERGER AND CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its existing wholly-owned subsidiaries, Gruy Petroleum
Management Company, Hunter Gas Gathering, Inc., Inesco Corporation, Magnum
Hunter Production, Inc., Midland Hunter Petroleum Limited Liability Company, and
SPL Gas Marketing, Inc. and its 51% owned subsidiary, Hunter Butcher
International Limited Liability Company. As more fully discussed in Note 3, the
Company entered into an amended definitive agreement on December 19, 1995 to
acquire all of the assets, subject to the existing liabilities, of Hunter
Resources, Inc. ("Hunter"). The purchase was accounted for by the purchase
method effective December 31, 1995. As such, the accompanying consolidated
financial statements for 1995 include the balance sheet accounts of Hunter.
However, the Statement of Operations for 1995 does not include the operations of
Hunter for that fiscal year. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the consolidated financial statements of the prior year to
conform with the current presentation.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. The Company has cash
deposits in excess of federally insured limits.

INVESTMENTS

In 1994, the Company adopted Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under
this standard, the equity securities held by the Company that have readily
determinable fair values are classified as current assets available-for-sale and
are measured at fair value. Unrealized gains and losses for these investments
are reported as a separate component of stockholders' equity.

At December 31, 1995, the Company's available for sale securities had an
amortized cost basis of $44,440, gross unrealized gains reported in equity of
$57,200 and fair market value of $101,640. During 1995, securities were sold for
gross proceeds of $73,083 and the Company realized a gain of $19,370.

At December 31, 1996, the Company's available for sale securities had an
amortized cost basis of $150,000, gross unrealized gains reported in equity of
$51,150 and a fair market value of $232,500. During 1996, securities were sold
for gross proceeds of $187,312 and the Company realized a gain of $142,872.

F-14
<PAGE> 78

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUSPENDED REVENUES

Suspended revenue interests represent oil and gas sales payable to third
parties largely on properties operated by the Company. The Company distributes
such amounts to third parties upon receipt of signed division orders or
resolution of other legal matters.

OIL AND GAS PRODUCING OPERATIONS

The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.

All capitalized costs of oil and gas properties, including the estimated
future costs to develop proved reserves, are amortized on the unit-of-production
method using estimates of proved reserves. Cost directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization base until the related properties are evaluated. Such unproved
properties are assessed periodically and any provision for impairment is
transferred to the full-cost amortization base. Sales of oil and gas properties
are credited to the full-cost pool unless the sale would have a significant
effect on the amortization rate. Abandonments of properties are accounted for as
adjustments to capitalized costs with no loss recognized. The Company's unproved
properties excluded from the amortization base were $843,000 and $459,000 at
December 31, 1995 and 1996, respectively. The remaining costs associated with
unproved properties were expended in 1995 and are expected to be evaluated and
transferred into the amortization base over the next twelve months.

The net capitalized costs are subject to a "ceiling test," which generally
limits such costs to the aggregate of the estimated present value of future net
revenues from proved reserves discounted at ten percent based on current
economic and operating conditions.

DRILLING OPERATIONS

Fees from fixed-price contracts with other working interest owners to
drill, complete and place oil and gas wells into production, less related costs,
are accounted for as adjustments to oil and gas properties.

PIPELINES

Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 15 years. Gain or loss on
retirement or sale or other disposition of assets is included in results of
operations in the period of disposition.

OTHER PROPERTY

Other property and equipment are carried at cost. Depreciation is provided
using the straight-line method over estimated useful lives ranging from five to
ten years. Gain or loss on retirement or sale or other disposition of assets is
included in results of operations in the period of disposition.

OTHER OIL AND GAS RELATED SERVICES

Other oil and gas related services consist largely of fees earned from the
Company's salt water disposal facility. Such fees are recognized in the month
the disposal service is provided.

IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS

The Financial Accounting Standards Board has issued Statement No. 121,
("SFAS No. 121") "Accounting for Impairments of Long-Lived Assets and Assets to
be Disposed of", and Statement No. 123, "Accounting For Stock-Based
Compensation" ("SFAS No. 123"). The Company adopted the provisions of

F-15
<PAGE> 79

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS No.121 in 1996 but it did not have any effect on the Company's consolidated
financial statements, and it adopted the disclosures only portion of SFAS No.123
as it continued to follow the provisions of APB No. 25 which is the intrinsic
value method of accounting for stock-based compensation. See Note 15 which
follows for the effect of stock based compensation on a pro forma basis.

INCOME TAXES

The Company files a consolidated federal income tax return. Income taxes
are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due, if any, plus net deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. Deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets include recognition of operating losses that are
available to offset future taxable income and tax credits that are available to
offset future income taxes. Valuation allowances are recognized to limit
recognition of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax assets will
more likely than not be realized.

INCOME OR LOSS PER COMMON SHARE

Income or loss per common share is based on the weighted average number of
shares of common stock outstanding. Convertible securities and warrants were
anti-dilutive at December 31, 1995 and 1996 and were not included in the
calculation of income or loss per common share.

DEFERRED COST OF WARRANT EXERCISE OFFERING

The Company incurred costs to update its registration statement relating to
Series C preferred stock that is convertible into common stock and relating to
common stock purchase warrants. The Company made an offer to the warrant holders
allowing them to exercise their warrants at a discount through February 16,
1995. As presented in Note 9, certain of the common stock purchase warrants were
exercised prior to the expiration of the discount period. The Company had
deferred direct costs as of December 31, 1994 of $240,281 related to the
discounted warrant exercise offering. Such costs and $250,488 incurred in 1995
were offset against the proceeds received in 1995 from the exercise of the
warrants. There were no warrants exercised during 1996.

USE OF ESTIMATES AND CERTAIN SIGNIFICANT ESTIMATES

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.

NOTE 2 -- CHANGE IN ACCOUNTING METHOD

The Company accounted for its oil and gas producing activities using the
successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:

(1) The Company recently acquired the subsidiaries of Hunter (See note
3),which comprise corporations engaged in oil and gas related activities
and which utilize the full cost method of accounting for these activities.
For both legal and accounting purposes, the Company is the acquiring
entity;

F-16
<PAGE> 80

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

however, the subsidiaries are increasing their oil and gas activities and
have more proved oil and gas reserves than the Company. Furthermore,
management of Hunter became the management of the Company upon completion
of the acquisition. One of the Hunter subsidiaries specializes in the
management of oil and gas properties and all accounting functions and
financial reporting have been undertaken by the subsidiary's personnel. The
individuals employed by the subsidiaries have comprised the vast majority
of the Company's employees and the Company believes that by allowing these
employees and Hunter's management to continue to use the full cost method,
it would greatly benefit in accurately reporting on its oil and gas
operations.

(2) The subsidiaries have established relationships with lending
sources which the Company intends to continue to utilize and expand upon.
These sources are accustomed to evaluating the subsidiaries' financial
statements on the full cost method of accounting. The Company intends to
request additional borrowing arrangements from these lenders and believes
that it is desirable for these lending sources to review financial
statements prepared on a consistent basis.

The accompanying financial statements have been restated to apply the full
cost method retroactively. This change in accounting principle has no
significant effect on income taxes. The effect of the accounting change in
accumulated deficit as previously reported for 1995 is:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
STATEMENT OF ACCUMULATED DEFICIT:
Balance at Beginning of Period as Previously Reported....... $(4,166,058)
Add Adjustment for the Cumulative Effect on Prior Years of
Applying Retroactively the Full Cost Method............... 506,651
-----------
Balance at Beginning of Period, as Adjusted................. (3,659,407)
Net Loss.................................................... (968,272)
Preferred Dividends......................................... (617,220)
-----------
Balance at End of Year...................................... $(5,244,899)
===========
</TABLE>

The effect on 1995 operations of changing the accounting method was to
increase net loss and net loss per share by $307,000 and $.05, respectively.

NOTE 3 -- ACQUISITIONS AND DISPOSITIONS

During March 1995, the Company acquired an additional fifty percent (50%)
working interest (for a total of 100% working interest) in a proved undeveloped
oil and gas property on which one well is located. The acquisition cost of this
additional interest was $410,000, of which $130,000 was paid in cash and 80,000
shares of the Company's restricted common stock, valued at $3.50 per share, were
issued. During April 1995, the Company also acquired an additional 40 percent
(40%) working interest (for a total of ninety percent (90%) working interest) in
a proved undeveloped property on which one well is located. The acquisition cost
of this additional interest was $480,000, of which $20,000 was paid in cash and
125,000 shares of the Company's restricted common stock were issued, valued at
$3.50 per share, and the transfer of securities held by the Company as an
investment in equity securities at December 31, 1994.

In October 1995, the Company issued 85,131 shares of restricted common
stock, valued at $3.52 per share, in an acquisition completed by a Hunter
subsidiary for the remaining stock ownership interest in a limited liability
company. Also, in October 1995, the Company issued 64,176 shares of restricted
common stock, valued at $4.00 per share, in an acquisition of oil and gas
properties completed by a Hunter subsidiary.

F-17
<PAGE> 81

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 1995, the Company issued 32,308 shares of restricted common stock,
valued at $3.25 per share, in an acquisition of a proven undeveloped property by
a Hunter subsidiary.

The Company executed a definitive agreement on July 21, 1995 to acquire all
of the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter"). Pursuant to the agreement, the Company issued, subject to
shareholder approval, 2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired. In addition, 575,000 shares of restricted
common stock were issued to a third party as an additional cost of the
acquisition. The third party distributed a total of 250,000 of the shares to a
former director and a former officer of the Company for their assistance in
completing the acquisition.

On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an amended agreement. Under the terms of the amendment,
which was executed by Hunter shareholders representing over fifty percent (50%)
of the common stock of Hunter, an additional 2,335,077 shares of restricted
common stock and 111,825 shares of Series C preferred stock were issued to
Hunter. The acquisition was recorded under the "purchase method" of accounting,
based upon the estimated value of the shares issued of $12,495,005. The
operations of Hunter have been consolidated with those of the Company beginning
on December 31, 1995.

On June 28, 1996, the Company purchased 469 gas wells and approximately 427
miles of a gas gathering pipeline system for a net purchase price of
$34,652,395. The properties are located in the Panhandle of Texas and Western
Oklahoma and are referred to as the "Panoma Properties." As the purchase was not
completed until the end of the second quarter of 1996, the consolidated
financial statements for 1996 include the operating results of the Panoma
Properties for only the last six months of the year.

On November 4, 1996, the Company entered into an agreement to sell certain
oil and gas properties for $1,850,000, including $150,000 of restricted
securities of an American Stock Exchange listed company and a $1,700,000
promissory note payable out of 100% of the net oil and gas income of the
properties. The agreement calls for the Company's subsidiary to continue to
operate the properties for a monthly management fee.

The following summary, prepared on a pro forma basis, presents the results
of operations for the years ended December 31, 1995 and 1996, as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information includes the effects of adjustments for increased general and
administrative expense, interest expense, depreciation, depletion and income
taxes:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenue................................................... $12,515,000 $20,653,000
Net Income (Loss) Applicable to Common Stock.............. (4,403,000) (304,000)
Net Income (Loss) Per Common Share........................ $ (.79) $ (.02)
Average shares outstanding................................ 5,606,669 12,485,893
</TABLE>

NOTE 4 -- NOTES RECEIVABLE

During July of 1994, the Company received an interest bearing note due on
May 1, 1995, in exchange for $319,206 paid by the Company. Interest in the
amount of $3,000 per month accrued through February 28, 1995 and was paid in
March 1995. For the remaining two months, interest in the amount of $4,500 per
month was accrued which, along with the principal amount, was paid during May
1995. The note was collateralized by securities, the fair market value of which
was less than the amount of the note.

On July 28, 1995, the Company received a non-interest bearing note
receivable in the amount of $223,500 in exchange for its interest in an oil and
gas property. Interest at 10 percent was imputed on the note

F-18
<PAGE> 82

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resulting in a discount of $28,366. The note provides for payments of $7,000 per
month which were received timely in 1996. As of December 31, 1996, the unpaid
balance, net of discount, is $112,288.

On November 4, 1996, the Company received an interest bearing note due on
November 1, 1999, in exchange for its interest in oil and gas properties.
Interest is at the rate of 12% per annum. The note is collateralized by stock in
an American Stock Exchange listed company and the oil and gas properties sold.
As of December 31, 1996, the unpaid balance was $1,627,534.

NOTE 5 -- RELATED PARTY TRANSACTIONS

In conjunction with the acquisition of Hunter, the Company assumed a note
receivable with a balance of $120,758 and $178,527 at December 31, 1995 and
1996, respectively, from an owner in an affiliated limited liability company.
The note provides for interest at ten percent and has a due date of January 31,
1997.

In connection with the acquisition of Hunter, the Company assumed a note
receivable from a company affiliated with the President of the Company in the
amount of $54,615 at December 31, 1995 and 1996. This note bears interest at ten
percent and is due on demand. Additionally, trade accounts receivable from this
affiliated company were $51,346 and $30,761 at December 31, 1995 and 1996,
respectively.

In connection with the acquisition of Hunter, the Company assumed unsecured
accounts receivable from the President personally in the amount of $10,000 as of
December 31, 1995, which amount has been subsequently repaid.

A company owned by two former directors of the Company previously operated
several of the wells in which the Company owned an interest. Operating fees paid
this company were $35,519 in 1995. The operations of these wells were
transferred to a subsidiary of Hunter during 1995. In addition, the related
company received a commission of $25,000 from the sale of an oil and gas
property to the Company in 1995.

During 1996, as part of the Company's overall compensation package, the
Company's officers and directors were granted the right to participate in
certain development and exploration projects of the Company on a promoted basis.

As of December 31, 1996, eleven (11) of the Company's officers and
directors as a group spent an aggregate of $137,340 participating in 6 wells.
The Company discontinued this program as of January 1, 1997.

F-19
<PAGE> 83

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT

Long-term debt at December 31, 1995 and 1996 consisted of the following:

<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
BANKS
Revolving promissory note, collateralized by pipeline and
oil and gas properties, due June 30, 2001, interest at
LIBOR + 2.25% (total of 7.625% at December 31,
1996)(1)................................................. $ -- $38,700,000
Promissory note, collateralized by pipelines and oil and
gas properties, payable in monthly installments for 1996
of $174,000 through October 1, 1996, then $171,000
thereafter plus interest at prime plus one percent (total
of 9.75% at December 31, 1995), assumed in Hunter
acquisition(2)........................................... 9,555,000 --
Note payable, payable in monthly installments of $498
through July 1996 plus interest at 7.25 percent,
collateralized by truck.................................. 3,000 --
Note payable to bank collateralized by vehicle payable in
monthly installments of $1,031 including interest at 8.5%
through February 1999.................................... -- 24,000
OTHER
Notes payable, non-interest bearing and uncollateralized,
payable in monthly installments of $1,000 through July 1,
2000, assumed in Hunter acquisition...................... 54,000 42,000
---------- -----------
Total Long-Term Debt............................. 9,612,000 38,766,000
Less Current Portion........................ 2,014,000 22,000
---------- -----------
Long-Term Debt................................... $7,598,000 $38,744,000
========== ===========
</TABLE>

Maturities of long-term debt based on contractual requirements for the
years ending December 31, are as follows:

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

(1) The revolving promissory note to the banks is a borrowing under a
$100,000,000 line of credit on which there existed a borrowing base of
$55,000,000 at December 31, 1996. The level of the borrowing base is
dependent on the valuation of the assets pledged, primarily oil and gas
reserve values. The line of credit includes covenants, the most restrictive
of which require maintenance of a current ratio, interest coverage ratio,
and tangible net worth, as specified in the loan agreement. The bank group
must approve all dividends paid on common stock.

(2) The promissory note to bank was a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately $8.7 million
at December 31, 1995. The balance at December 31, 1995 included $1,125,000
due to the seller of certain oil and gas properties which was refinanced in
February,

F-20
<PAGE> 84

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1996 under the line of credit. The final principal payments under the line
of credit were due June 1, 2000. The amount that could be borrowed under the
line of credit was based upon a designated percentage of oil and gas reserve
values. The line of credit included covenants, the most restrictive of which
require maintenance of a current ratio and tangible net worth, as
specifically defined in the loan agreement.

NOTE 7 -- PRODUCTION PAYMENT LIABILITY

As a result of the merger with Hunter in 1995, the Company assumed an
obligation under a production payment conveyance. The conveyance provides for a
royalty payment equal to 50% of the monthly net revenue proceeds received by the
Company in certain oil and gas properties. The balance owed under the conveyance
bears interest at 15% per annum and is non-recourse to the Company. The balance
owed under this conveyance was $288,000 and $210,000 at December 31, 1995 and
1996, respectively.

In November, 1996, the Company entered into a second production payment
conveyance with the same party. The Company received a production payment amount
of $750,000 and agreed to make royalty payments of up to 50% of the monthly net
revenue proceeds received from certain oil and gas properties. The balance owed
under the conveyance was $726,000 at December 31, 1996. The production payment
bears interest at the rate of 13.5% per annum and is non-recourse to the
Company.

NOTE 8 -- INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires the recognition of a liability or asset, net of a valuation allowance,
for the deferred tax consequences of all temporary differences between the tax
bases and the reported amounts of assets and liabilities, and for the future
benefit of operating loss carryforwards. The following is a reconciliation of
income tax expense reported in the statement of operations:

<TABLE>
<CAPTION>
1996
--------
<S> <C>
Tax expense at statutory rates.............................. $279,000
State taxes................................................. 24,000
Other....................................................... 9,000
--------
Total............................................. $312,000
========
</TABLE>

The tax effects of significant temporary differences and carryforwards are
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Property and equipment, including intangible drilling
costs................................................... $(5,890,000) $(6,381,000)
Annualized gain on investment............................. -- (32,000)
----------- -----------
Total deferred tax liability.............................. (5,890,000) (6,413,000)
----------- -----------
Allowance for doubtful accounts........................... 50,000 49,000
Depletion carryforwards................................... 365,000 361,000
Operating loss carryforwards.............................. 2,350,000 2,534,000
----------- -----------
Total deferred tax assets....................... 2,765,000 2,944,000
----------- -----------
Valuation allowance....................................... -- --
----------- -----------
Net Deferred Tax Liability...................... $(3,125,000) $(3,469,000)
=========== ===========
</TABLE>

The Company and its subsidiaries have net operating loss carryforwards
(NOL) of approximately $6,900,000 that expire, if unused, in years through 2011,
none in 1997. Approximately $1,700,000 of the NOL

F-21
<PAGE> 85

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carries a limitation of approximately $200,000 per year. In addition, the
Company has depletion carryforwards of approximately $1,000,000.

NOTE 9 -- STOCKHOLDERS' EQUITY

Shares of preferred stock may be issued in such series, with such
designations, preferences, stated values, rights, qualifications or limitations
as determined solely by the Board of Directors. Of the 10,000,000 shares of
$.001 par value preferred stock the Company is authorized to issue, 216,000
shares have been designated as Series A Preferred Stock, 925,000 shares have
been designated as Series B Preferred Stock, 625,000 shares have been designated
as Series C Preferred Stock and 1,000,000 shares have been designated as 1996
Series A Convertible Preferred Stock. Thus, 7,234,000 preferred shares have been
authorized for issuance but have not been issued nor have the rights of these
preferred shares been designated. No dividends can be paid on the common stock
until the dividend requirements of the preferred shares have been satisfied.

Holders of the Series A Preferred Stock are entitled to receive dividends
only to the extent that funds are available from the West Dilley Prospect. Such
dividends are limited to $7.50 per share, in the aggregate. Dividend payments to
Series A preferred shareholders will be based on fifty percent (50%) of the net
operating revenue received by the working interest owners of the West Dilley
Prospect. Due to a decline in production from the well located on this prospect,
the Company has shut this well in and is no longer producing the property. The
Series A dividends are not cumulative except for unpaid amounts due from this
calculation. No dividends have been paid on the Series A preferred stock. There
is no aggregate annual dividend requirement for the Series A preferred stock.

The Series B Preferred Stock was issued as a unit, comprised of 1,000
shares of Series B Preferred Stock and two production certificates. The Series B
preferred stockholders are entitled to receive cumulative dividends of $0.35
annually per share, payable quarterly. The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the Company's net revenue from production of
oil and gas. The Board of Directors declared dividends on the Series B preferred
stock of $25,172 and $21,893 for the years ended December 31, 1994 and 1995,
respectively. Beginning June 15, 1994, the Company offered to exchange (the
"Exchange Offer") 1,250 shares of common stock for each Series B production
certificate. During 1994, 141.1 production certificates were exchanged for
176,375 shares of common stock and the Series B preferred shareholders agreed to
convert their Series B preferred shares into common stock at December 31, 1995
if all dividends were paid through that date. All of the shares were converted
to common stock during 1996.

Separate and apart from the Exchange Offer, two of the Company's officers
and directors (the "Officers") set aside 125,000 shares (the "Stock") of their
own common stock of the Company for a single individual (the "Individual") who
owned approximately 55% of the Series B production certificates that were
exchanged. The Stock was being held by an independent party to this transaction
until fair market value of the Exchange Shares, when the Exchange Shares become
eligible for sale pursuant to Rule 144 of the Securities Act of 1933, is
determined. The Company issued 125,000 shares of its common stock to the
Officers in exchange for their assignment to the Company of all of the Officers'
rights, title and interest in the Stock. The Company has recorded the new shares
issued at par value. The value of the exchange shares was determined in 1996,
and the Company issued 5,000 shares of its common stock to the Individual.
Subsequent to year-end, the 125,000 shares being held were returned to the
Company and are being held as treasury stock.

The Series C preferred stock was convertible at the option of the holder at
any time into three shares of common stock and, after November 12, 1994, would
automatically convert into common stock any time the closing bid price of the
common stock equals or exceeds $5.00 per share for twenty consecutive trading
days. The Series C preferred stock was redeemable by the Company beginning
November 12, 1995, at $10.50 per share plus accrued and unpaid dividends. If
declared by the Board of Directors, dividends accrue at the annual rate of $1.10
per share, are cumulative from the date of first issuance and are paid quarterly
in arrears. The

F-22
<PAGE> 86

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Board of Directors declared dividends on the Series C preferred stock of
$595,327 and $339,827 for the years ended December 31, 1995 and 1996,
respectively. The aggregate annual dividend requirements for the 625,000 shares
of Series C preferred stock outstanding at December 31, 1995 and 1996 amounts to
$687,500 and none, respectively. As of December 31, 1996, all Series C preferred
stock had been redeemed or converted to common stock.

On December 6, 1996, the Company entered into an agreement to issue
1,000,000 shares of new Series A preferred stock, known as the 1996 Series A
Convertible Preferred Stock, in a private placement. The shares have a stated
and liquidation value of $10 per share and pay a fixed annual cumulative
dividend of eight and three quarters percent (8.75%) payable quarterly in
arrears beginning December 31, 1996. The shares are convertible into shares of
common stock at a conversion price of $5.875 per share. Beginning in December
1998, the Company has an option to exchange the stock into convertible
subordinated debentures of equivalent value. The purpose of the private
placement was to fund the capital cost necessary to drill certain development
projects and to fund the capital costs of several West Texas waterflood
projects. Proceeds from the offering were initially used to reduce the Company's
existing bank indebtedness. Certain capital expenditure requirements for
developmental drilling and waterflood projects are required under the agreement
whereby this stock was issued. In addition, under the terms of the preferred
stock, the Company is required to raise an aggregate of $15 million of
additional equity by March 31, 1998 or the Company is required to redeem on June
30 of each of the years 2006, 2007, and 2008, 333,333 shares of preferred stock.
On December 23, 1996, the 1996 Series A Convertible Preferred Stock was issued,
resulting in net proceeds to the Company after offering costs of $9,787,000.
Dividends of $22,000 were declared in 1996 and paid subsequent to year end.

The preferred shareholders are not entitled to vote except on those matters
in which the consent of the holders of preferred stock is specifically required
by Nevada law. If the Company were to liquidate prior to payment of the full
dividend requirements on the preferred stock, the preferred stock would receive
a liquidation preference from the liquidation proceeds. The Series A preferred
shareholders would receive an amount equal to the lesser of the proceeds from
the liquidation of the West Dilley Prospect or the remaining unpaid dividend.
The 1996 Series A Convertible Preferred Stock would receive an amount of $10 per
share. On liquidation, holders of all series of the preferred stock would be
entitled to receive the par value, $.001 per share, in preference to the common
stock shareholders.

The Series C preferred stock was originally issued as a unit comprised of
one share of Series C preferred stock and warrants to purchase three (3) shares
of common stock. A total of 1,687,500 warrants were issued and are exercisable
at $5.50 per share through November 12, 1998. The Company offered the holders of
the warrants a discount period commencing November 15, 1994 and ending February
16, 1995 during which time the warrants could be exercised at $4.00. During this
time, warrants were exercised for 833,324 shares of common stock. The exercise
of these warrants resulted in cash proceeds of $3,333,298 to the Company. The
warrants are redeemable by the Company at $0.02 per warrant upon 30 day notice
at any time after November 12, 1995 or earlier if the closing bid price of the
common stock equals or exceeds $6.75 for five consecutive trading days. At
December 31, 1995, 854,176 of the warrants remained outstanding.

The Company granted an unrelated company the right to acquire 100,000
shares of common stock under the terms of a consulting agreement. The rights
became exercisable at the rate of 3,325 shares in November 1994, 8,335 shares
per month from December 1994 through October 1995 and 4,990 shares in November
1995. The rights are exercisable at $4.125 per share. The rights expire in June
1997.

In October 1995, in connection with an acquisition of oil and gas
properties, the Company issued 25,000 warrants with an exercise price of $4.00
per share, and 25,000 warrants with an exercise price of $4.50 per share with
each such warrant expiring in October 1997. In December 1995 the Company issued
37,500 warrants at an exercise price of $3.00 per share to an unaffiliated third
party for services rendered. The warrants expire in December 1997.

F-23
<PAGE> 87

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1995, 20,750 representatives' warrants were exercised at $12.00 per
warrant resulting in $249,000 of proceeds to the Company. Each warrant entitles
the holder to receive one share of Series C preferred stock and three (3) common
stock warrants exercisable at $4.00 per share through February 1995 and $5.50
thereafter. 9,300 shares of Series C preferred stock and 2,000 shares of Series
B preferred stock have also been converted into 28,900 shares of common stock.
The Company issued 5,000 shares of common stock, valued at $3.50 per share to
its directors, which resulted in $17,500 of compensation expense in 1995. Also,
22,222 shares of common stock with a value of $3.80 per share were issued for
services rendered in 1995.

In January, 1996, 60,000 warrants were issued at an exercise price of
$3.375 per share and expiring in January 1999. At December 31, 1996, 45,000 of
these warrants had been earned. In connection with the receipt of a production
payment, in October 1996 the Company issued 25,000 warrants with an exercise
price of $5.18 expiring October 1999, 25,000 warrants with an exercise price of
$5.65 expiring October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996.

At December 31, 1996, the Company had 1,176,676 total warrants issued,
including the publicly traded warrants. Additionally, in 1996, 610,170 shares of
the Company's common stock that had been held as collateral were returned and
held in the treasury, 12,258 shares of common stock were issued upon exercise of
employees' stock options, 239,710 shares of common stock, valued at $939,000,
were issued to acquire oil and gas properties, and 36,538 shares of common stock
were issued as dividends on the Company's Series C Preferred Stock.

NOTE 10 -- SUPPLEMENTAL CASH FLOW INFORMATION

During 1995, as more fully described in Note 3, the Company issued common
stock and preferred stock valued at $12,495,005 in the acquisition of the assets
from Hunter Resources, Inc. Oil and gas properties were acquired by issuing
$1,379,204 of common stock and $22,220 of marketable securities; preferred stock
was converted to common stock; and common stock was issued, creating a
receivable from a shareholder of $250. In addition $17,500 of common stock was
issued as compensation to directors and $84,444 of common stock was issued for
services rendered in 1995.

During 1996, the Company purchased oil and gas properties by issuing
239,710 shares of its common stock, valued at $938,444. The Company converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common stock. 36,538 shares of common stock valued at $121,700 were issued in
lieu of cash dividends on preferred stock. The Company received equity
securities with a fair value of $150,000 as partial payment for the sale of
property interests. Interest paid in 1996 was $2,344,308.

NOTE 11 -- ENVIRONMENTAL ISSUES

Being engaged in the oil and gas exploration and development business, the
Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions, the Company
has received contractual warranties that no such violations exist, while in
other acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any material liability
which the Company may have, as it relates to any environmental clean up,
restoration or the violation of any rules or regulations relating thereto.

F-24
<PAGE> 88

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- COMMITMENTS AND CONTINGENCIES

The Company assumed in the Hunter acquisition lease agreements for the use
of office space and office equipment. The office space lease extends through
November 2001 with an option to renew the lease for a three year term. The
various office equipment leases extend until 1999. The leases have been
classified as operating leases. The following is a schedule by years of future
minimum lease payments required under the operating lease agreements:

<TABLE>
<S> <C>
Year Ended December 31:
1997...................................................... $183,046
1998...................................................... 173,168
1999...................................................... 169,815
2000...................................................... 173,711
2001...................................................... 159,235
Thereafter................................................ 0
--------
Total Minimum Payments Required................... $858,975
========
</TABLE>

Rental expense was $61,191 and $129,169 for 1995 and 1996, respectively.

At December 31, 1996, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $87,750 as of
December 31, 1996 for potential expenses to be incurred in settlement of the
litigation. In the opinion of management, any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition, cash flows or results of operations.

NOTE 13 -- FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

Financial instruments that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from individual oil and gas investors.
These parties are primarily located in the Southwestern regions of the United
States. No single receivable is considered to be sufficiently material as to
constitute a concentration. The Company does not ordinarily require collateral,
but in the case of receivables for joint operations, the Company often has the
ability to offset amounts due against the participant's share of production from
the related property. The Company believes the allowance for doubtful accounts
at December 31, 1995 and 1996 is adequate.

Management estimates the market values of notes receivable and payable
based on expected cash flows and believes those market values approximate
carrying values at December 31, 1995 and 1996. The market values of equity
investments are based upon quoted prices (see Note 1).

NOTE 14 -- COMMODITY DERIVATIVES AND HEDGING ACTIVITIES

Periodically, the Company enters into futures, options, and swap contracts
to reduce the effects of fluctuations in crude oil and gas prices. At December
31, 1996, the Company had open contracts for oil price collars on 12,000 barrels
of oil per month (with cap and floor prices of $22.20 and $18.00, respectively)
through February 1997 and 15,000 barrels of oil per month (with cap and floor
prices of $25.10 and $20.00, respectively) from March 1997 through August, 1997.
At December 31, 1996, the Company had open contracts for gas prices swaps of
302,000 MMbtu of gas per month at $2.16 per MMbtu during January 1997, 100,000
MMbtu of gas per month at $1.905 per MMbtu from February 1997 through January
1998 and another 100,000 MMbtu of gas per month at $1.77 per MMbtu from February
1997 through January 1998. These contracts expire monthly as indicated above.
The gains or losses on the Company's hedging transactions are determined as the
difference between the contract price and a reference price, generally closing
prices on the NYMEX. The resulting transaction gains and losses are determined
monthly and are included in the

F-25
<PAGE> 89

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

period the hedged production or inventory is sold. Net losses relating to these
derivatives for the years ended December 31, 1995 and 1996 were none and
$272,000, respectively.

NOTE 15 -- STOCK COMPENSATION PLAN

The Company adopted in 1996 two stock compensation plans for its employees
and directors, (i) the Magnum Hunter Resources Employee Stock Ownership Plan,
(the "ESOP"), and (ii) the Magnum Hunter Resources, Inc. 1996 Incentive Stock
Option Plan (the "Option Plan"). In addition, the Company authorized the
issuance of its common stock to participants in the Magnum Hunter Resources,
Inc. 401(k) plan in an amount that matched employee contributions up to one
hundred percent (100%). The cost of this matching contribution was $59,000 in
1996.

ESOP

The Company established an ESOP and a related trust as a long-term benefit
for its employees. Under terms of the ESOP, eligible participants may elect to
make elective deferred contributions of not less than 1% or more than 15% of
their annual compensation, limited in combination with the 401(k) plan to the
maximum allowable per year by the Internal Revenue Code. The Plan also allows
for the Company to make discretionary contributions to the ESOP, but it is not
the intent of the Company to do so. It is also the Company's intent to invest
all contributions in Common Stock. In this regard, on October 11, 1996, the ESOP
purchased 22,556 shares of the Company's Common Stock for $3.75 per share from a
third party. To fund this purchase, the ESOP borrowed $84,585 from a bank.
Participant contributions will be used to acquire shares at the price stated
above by retiring the principal and interest of this debt. As of December 31,
1996, no participant contributions had been made to the ESOP.

1996 Incentive Stock Option Plan

The Company established this plan effective April 1, 1996, and is governed
by Section 422 of the Internal Revenue Code, and Section 16(b) of the Securities
Exchange Act of 1934. The Option Plan covers 1,200,000 shares of the Company's
Common Stock. Eligibility is limited to employees and directors of the Company
and its subsidiaries. The actual selection of grantees is made by the Board of
Directors. The term of the Option Plan is 10 years, and the term of the options
is at the discretion of the Board, with a term of 5 years. All options are fully
vested and exercisable when granted. The exercise price is fair market value at
the date of grant, except for individuals who own 10% or more of the Company's
stock.

Prior to 1995, Hunter had granted certain of its employees and directors
options to purchase its common shares. In connection with the Hunter
Combination, the Company has substituted the Hunter options with 264,558 options
under the Plan, 239,022 of which have an exercise price of $.73425 per share and
25,536 of which have an exercise price of $1.65 per share. During 1996, 12,258
of these options were exercised. In addition, during 1996, the Board granted the
remaining 935,442 options to employees and directors at an exercise price of
$4.50 per share.

F-26
<PAGE> 90

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a summary of stock option activity under the Option Plan:

<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding -- Beginning of Year..... 264,558 $0.82 264,558 $0.82
Granted.............................. -- -- 935,442 4.50
Exercised............................ -- -- (12,258) .73
Canceled............................. -- -- -- --
--------- ----- --------- -----
Outstanding -- End of Year........... 264,558 $0.82 1,187,742 $3.72
========= ===== ========= =====
</TABLE>

The following is a summary of plan stock options outstanding at December
31, 1996:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING
OPTIONS CONTRACTUAL LIFE NUMBER OF
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISABLE OPTIONS
-------------- ----------- ---------------- -------------------
<S> <C> <C> <C>
$ .73................................ 226,764 1.0 35,242
1.65................................ 25,536 3.0 --
4.50................................ 935,442 4.3 935,442
--------- -------
1,187,742 970,684
========= =======
</TABLE>

The Company adopted the disclosures only portion of SFAS No. 123 as it
continued to follow the provisions of APB No. 25, which is the intrinsic value
method of accounting for stock-based compensation.

On a pro forma basis, the effect of stock based compensation had the
Company adopted Statement No. 123 is as follows:

<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net Income (Loss):
As reported............................................... $ 103,000
Pro Forma................................................. (1,540,000)
Primary Earnings per Share:
As reported............................................... .01
Pro Forma................................................. (.12)
Fully Diluted Earnings per Share:
As reported............................................... .01
Pro Forma................................................. (.12)
</TABLE>

The weighted average grant date fair value of options granted was $2.56 and
of warrants granted was $1.09 during 1996. Fair value of options and warrants
was calculated by using the Black-Scholes options pricing model using the
following weighted average assumptions for 1996 activity: risk free interest
rate of 5.74%, expected life of 4.28 years, expected volatility of 60.8% and no
dividend yield.

NOTE 16 -- SUBSEQUENT EVENTS

In January, 1997, the Company purchased a fifty percent (50%) interest in
the McLean Gas Plant, the gas processing facility connected to the Company's
Panoma gas gathering system for $2.5 million. Under the terms of the purchase
agreement, the Company will receive 100% of the net profits of the plant until
it receives the $2.5 million purchase price, at which point its net profits
interest will revert to fifty percent (50%), the

F-27
<PAGE> 91

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's ownership position. The acquisition was funded through the Company's
revolving credit agreement with certain banks.

On April 30, 1997, the Company acquired from a subsidiary of Burlington
Resources, Inc., effective as of January 1, 1997, the Permian Basin Properties,
consisting of 25 field areas in west Texas and 22 field areas in southeast New
Mexico, for a net purchase price of $133.0 million after adjustments of $10.5
million for production cash flow from January 1, 1997 to the closing date and
other minor adjustments.

The Company financed the acquisition of the Permian Basin Properties with a
new $130.0 million credit facility (the "New Credit Facility") and a senior
subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility (the "Previous Credit
Facility") and to pay the costs associated with the Permian Basin Acquisition
and the related financings. The New Credit Facility currently bears interest at
9.0% per annum. After repayment of the Term Loan Facility using the proceeds of
a $140.0 million offering of Senior Subordinated Notes due 2007, the New Credit
Facility bore interest at LIBOR plus 1.75% per annum, which was 7.6% based on
the LIBOR rate at April 30, 1997. The unpaid principal amount under the New
Credit Facility matures on April 30, 2002. At April 30, 1997, the interest rate
on the Term Loan Facility was 11.5% per annum. The Term Loan Facility initially
matures on April 30, 1998, at which time the Company has the option to extend
such facility for an additional five years.

NOTE 17 -- EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS

Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum Hunter Resources, Inc. Mr. Evans' agreement terminates December 31, 1997
and continues thereafter on a year to year basis and provides for a base salary
of $200,000 per annum. Mr. Lutz's agreement terminates September 30, 1998 and
continues thereafter on a year to year basis and provides for a base salary of
$100,000 per annum. Both agreements provide that the same benefits supplied to
other Company employees shall be available to the employee. The employment
agreements also contain, among other things, covenants by the employee that in
the event of termination, he will not associate with a business that competes
with the Company for a period of one year after cessation of employment. The
Company also has key man life insurance on Mr. Evans in the amount of
$1,000,000.

F-28
<PAGE> 92

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)

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

Estimates of petroleum reserves have been made by independent engineers and
Company employees. These estimates include reserves in which the Company holds
an economic interest under production-sharing and other types of operating
agreements. These estimates do not include probable or possible reserves. The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.

Estimated quantities of proved oil and gas reserves of the Company were as
follows:

<TABLE>
<CAPTION>
GAS
OIL (THOUSAND
(BARRELS) CUBIC FEET)
--------- -----------
<S> <C> <C>
December 31, 1995
Proved reserves........................................... 3,767,739 14,071,916
Proved developed reserves................................. 1,681,841 8,796,748
December 31, 1996
Proved reserves........................................... 5,338,255 90,565,997
Proved developed reserves................................. 1,962,184 71,275,141
</TABLE>

The changes in proved reserves for the year ended December 31, 1995 and
1996 were as follows:

<TABLE>
<CAPTION>
GAS
OIL (THOUSAND
(BARRELS) CUBIC FEET)
--------- -----------
<S> <C> <C>
RESERVES AT DECEMBER 31, 1994............................... 1,260,520 4,914,207
Purchase of minerals-in-place............................... 3,122,382 10,973,298
Extensions and discoveries.................................. 38,498 564,247
Production.................................................. (29,972) (102,056)
Revisions of estimates...................................... (623,689) (2,277,780)
--------- ----------
RESERVES AT DECEMBER 31, 1995............................... 3,767,739 14,071,916
Purchase of minerals-in-place............................... 2,678,579 81,943,557
Sale of minerals-in-place................................... (214,381) (1,318,164)
Extensions and discoveries.................................. -- 151,606
Production.................................................. (191,203) (2,674,793)
Revisions of estimates...................................... (702,479) (1,608,125)
--------- ----------
RESERVES AT DECEMBER 31, 1996............................... 5,338,255 90,565,997
========= ==========
</TABLE>

F-29
<PAGE> 93

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES -- (CONTINUED)

The aggregate amounts of capitalized costs relating to oil and gas
producing activities and the related accumulated depreciation, depletion and
impairment as of December 31, 1995 and 1996 were as follows:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Unproved oil and gas properties........................... $ 842,889 $ 459,254
Proved properties......................................... 36,256,428 70,574,890
----------- -----------
Gross Capitalized Costs................................... 37,099,317 71,034,144
Accumulated depreciation, depletion and impairment........ (1,914,602) (4,513,541)
----------- -----------
Net Capitalized Costs........................... $35,184,715 $66,520,603
=========== ===========
</TABLE>

Costs incurred in oil and gas producing activities, both capitalized and
expensed, during the years ended December 31, 1995 and 1996 were as follows:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Property acquisition costs
Proved properties......................................... $27,983,521 $31,982,821
Unproved properties..................................... 142,545 --
Exploration costs....................................... 340,411 1,114,733
Development costs......................................... -- 837,273
----------- -----------
Total Costs Incurred............................ $28,466,477 $33,934,827
=========== ===========
</TABLE>

Results of operations from oil and gas producing activities for the years
ended December 31, 1995 and 1996 were as follows:

<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Oil and gas production revenue............................. $ 616,596 $10,247,688
Disposal services revenue.................................. 31,978 20,487
Production costs........................................... (267,647) (4,389,465)
Depreciation and depletion................................. (421,101) (2,598,939)
--------- -----------
Results of Operations for Producing Activities... $ (40,174) $ 3,279,771
========= ===========
</TABLE>

The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1995 and 1996 were as
follows:

<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Future cash inflows.................................... $ 95,068,694 $ 492,157,062
Future development and production costs................ (37,746,877) (138,614,804)
------------ -------------
Future net cash flows, before income tax............... 57,321,817 353,542,258
Future income taxes.................................... (11,381,779) (102,341,098)
------------ -------------
Future Net Cash Flows.................................. 45,940,038 251,201,160
10% annual discount.................................... (16,120,359) (134,116,299)
------------ -------------
Standardized Measure of Discounted Future Net
Cash Flows................................. $ 29,819,679 $ 117,084,861
============ =============
</TABLE>

F-30
<PAGE> 94

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES -- (CONTINUED)

The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1995 and 1996 were as
follows:

<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Purchases of minerals-in-place........................... $30,507,745 $129,544,769
Sales of minerals-in-place............................... -- (2,195,780)
Extensions, discoveries and improved recovery, less
related costs.......................................... 582,001 302,785
Sales of oil and gas produced, net of production costs... (350,083) (5,858,223)
Development costs incurred during the period............. -- --
Revision of prior estimates:
Net change in prices and costs......................... 4,864,688 14,993,539
Change in quantity estimates........................... (7,637,000) (10,107,737)
Accretion of discount.................................... 623,512 2,981,968
Net change in income taxes............................... (5,006,300) (42,396,139)
----------- ------------
Net Change..................................... $23,584,563 $ 87,265,182
=========== ============
</TABLE>

Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flows related to proved oil and gas reserves, less the tax basis of the
properties involved.

The assumption used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.

F-31
<PAGE> 95

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,081
Accounts receivable
Trade, net of allowance of $133......................... 14,211
Due from affiliates..................................... 119
Notes receivable from affiliate........................... 412
Current portion of long-term note receivable.............. 619
Prepaid and other......................................... 1,024
--------
TOTAL CURRENT ASSETS................................ 19,466
--------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved................................................ 460
Proved.................................................. 215,513
Pipelines................................................. 9,841
Other property............................................ 653
--------
TOTAL PROPERTY, PLANT AND EQUIPMENT................. 226,467
Accumulated depreciation, depletion and impairment........ (13,467)
--------
NET PROPERTY, PLANT AND EQUIPMENT................... 213,000
--------
OTHER ASSETS
Deposits and other assets................................. 6,046
Long-term notes receivable, net of imputed interest....... 1,646
--------
TOTAL ASSETS........................................ $240,158
========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables and accrued liabilities.................... $ 13,753
Dividends payable......................................... 219
Suspended revenue payable................................. 846
Current maturities of long-term debt...................... 22
Notes payable............................................. 2,699
--------
TOTAL CURRENT LIABILITIES........................... 17,539
--------
LONG-TERM LIABILITIES
Long-term debt, less current maturities................... 188,027
Production payment liability.............................. 790
Deferred income taxes..................................... 1,858
Minority interest......................................... 40
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock -- $.001 par value; 10,000,000 shares
authorized, 216,000 designated as Series A; 80,000
shares issued and outstanding, liquidation amount $0.... --
1,000,000 shares designated as 1996 Series A
Convertible; 1,000,000 issued and outstanding,
liquidation amount $10,000,000......................... 1
Common stock -- $.002 par value; 50,000,000 shares
authorized, 14,271,975 shares issued.................... 29
Additional paid-in capital................................ 40,291
Accumulated deficit....................................... (8,416)
--------
31,905
Treasury stock (538,633 shares of common stock)........... (1)
--------
TOTAL STOCKHOLDERS' EQUITY.............................. 31,904
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $240,158
========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-32
<PAGE> 96

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales....................... $ 3,536 $ 11,002 $ 6,357 $ 22,793
Gas gathering, marketing and
processing........................... 1,615 2,438 3,143 7,721
Oil field services and international
sales................................ 184 186 385 3,792
---------- ---------- ---------- ----------
Total Operating Revenues........ 5,335 13,626 9,885 34,306
---------- ---------- ---------- ----------
Operating Costs and Expenses
Oil and gas production.................. 1,179 3,781 2,305 8,521
Gas gathering, marketing and
processing........................... 1,315 1,865 2,629 5,803
Oil field services and international
sales................................ 194 58 521 3,482
Depreciation and depletion.............. 804 4,147 1,888 8,607
General and administrative.............. 227 477 670 1,128
---------- ---------- ---------- ----------
Total Operating Costs and
Expenses...................... 3,719 10,328 8,013 27,541
---------- ---------- ---------- ----------
Operating Profit (Loss)................... 1,616 3,298 1,872 6,765
Other income............................ 28 453 214 608
Interest expense........................ (1,051) (4,540) (1,550) (9,298)
---------- ---------- ---------- ----------
Net Income (Loss) before income tax and
minority interest....................... 593 (789) 536 (1,925)
Benefit (Provision) for deferred income
tax.................................. (204) 300 (204) 731
---------- ---------- ---------- ----------
Net Income (Loss) before minority
interest................................ 389 (489) 332 (1,194)
Minority interest in subsidiary
earnings............................. -- (20) -- (40)
---------- ---------- ---------- ----------
Net Income (Loss) Before Extraordinary
Loss.................................... 389 (509) 332 (1,234)
Extraordinary Loss From Early
Extinguishment of Debt.................. -- -- -- (1,384)
---------- ---------- ---------- ----------
Net Income (Loss)......................... 389 (509) 332 (2,618)
Dividends Applicable to Preferred Stock... (42) (219) (382) (657)
---------- ---------- ---------- ----------
Income (Loss) Applicable to Common
Shares.................................. $ 347 $ (728) $ (50) $ (3,275)
========== ========== ========== ==========
Income (Loss) Before Extraordinary Loss
per Common Share........................ $ 0.03 $ (0.05) $ 0.00 $ (0.14)
Extraordinary Loss per Common Share....... $ -- $ -- $ -- $ (0.10)
---------- ---------- ---------- ----------
Income (Loss) per Common Share............ $ 0.03 $ (0.05) $ (0.00) $ (0.24)
========== ========== ========== ==========
Common Shares Used In Per Share
Calculation............................. 12,924,967 13,687,278 12,084,041 13,659,170
========== ========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-33
<PAGE> 97

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 332 $ (2,618)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Extraordinary loss..................................... -- 1,384
Depreciation and depletion............................. 1,888 8,607
Amortization of financing fees......................... -- 330
Deferred income taxes.................................. 204 (732)
Minority interest...................................... -- 40
(Gain) Loss on sale of assets.......................... (143) (333)
Other.................................................. -- 32
Change in certain assets and liabilities:
Accounts and notes receivables....................... (2,317) (9,717)
Other current assets................................. (160) (972)
Deposits and other assets............................ (376) --
Accounts payable and accrued liabilities............. 2,436 9,875
-------- ---------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES......... $ 1,864 $ 5,897
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets.......................... 188 953
Additions to property and equipment....................... (38,787) (148,429)
Loan made for promissory note receivable.................. -- (666)
Payments received on promissory note receivable........... -- 183
-------- ---------
NET CASH USED BY INVESTING ACTIVITIES....................... (38,599) (147,959)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production
payment................................................ 55,313 337,500
Fees paid related to financing activities................. -- (7,936)
Proceeds from short-term notes payable.................... -- 2,699
Payments of principal on long-term debt and production
payment................................................ (17,710) (188,364)
Payment of fees on issuance of preferred stock............ -- (505)
Proceeds from issuance of common and preferred stock, net
of offering costs...................................... -- 522
Redemption of preferred stock............................. (295) --
Dividends paid............................................ (438) (460)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 36,870 143,456
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 135 1,394
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,544 1,687
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,679 $ 3,081
======== =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-34
<PAGE> 98

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- MANAGEMENT'S REPRESENTATION

The consolidated balance sheet as of September 30, 1997, the consolidated
statements of operations for the nine months ended September 30, 1996 and 1997,
and the consolidated statements of cash flows for the nine month periods then
ended are unaudited. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) have been made to present
fairly the financial position, results of operations and changes in cash flows
for the nine month periods.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1996 annual report on Form 10-KSB for the
Company. The results of operations for the nine month and three month periods
ended September 30, 1997, are not necessarily indicative of the operating
results for the full year.

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation.

The Company is a holding company with no significant assets or operations
other than its investments in its subsidiaries. The wholly-owned subsidiaries of
the Company are direct guarantors of the Company's Notes and have fully and
unconditionally guaranteed the Notes on a joint and several basis. The
guarantors comprise all of the direct and indirect subsidiaries of the Company
(other than inconsequential subsidiaries), and the Company has not presented
separate financial statements and other disclosures concerning each guarantor
because management has determined that such information is not material to
investors. There is no restriction on the ability of consolidated or
unconsolidated subsidiaries to transfer funds to the Company in the form of cash
dividends, loans, or advances.

NOTE 2 -- RECENT EVENTS

In February, 1997, the Company entered into a definitive agreement with
Burlington Resources, Inc. to acquire for $143.5 million, subject to certain
purchase price adjustments, effective January 1, 1997, the Permian Basin
Properties consisting of 25 field areas in West Texas and 22 field areas in
Southeast New Mexico containing 1,852 producing oil and gas wells. In accordance
with the definitive acquisition agreement, the Company made a performance
deposit of $10 million against the purchase price.

On April 30, 1997, the Company closed on the purchase of the Permian Basin
Properties for a net purchase price of approximately $133 million, including,
but not limited to, certain adjustments for a January 1, 1997 effective date.

The Company financed the acquisition of the Permian Basin Properties with a
new $130.0 million credit facility (the "Credit Facility") and a senior
subordinated credit facility of $60.0 million (the "Bridge Loan Facility").
Borrowings of $119.5 million under the Credit Facility and $60.0 million under
the Bridge Loan Facility were used to pay the $123.0 million balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility and to pay the costs
associated with the Permian Basin acquisition and the related financings.

On May 28, 1997, the Company completed an offering of $140 million
aggregate principal amount of its 10% Senior Notes due 2007 (the "Notes").
Interest on the Notes will accrue from their date of original issuance and will
be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on December 1, 1997, at the rate of 10% per annum. The Notes will be
redeemable, in whole or in part, at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest

F-35
<PAGE> 99

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to the date of redemption. The Notes will be general unsecured obligations of
the Company and will rank pari passu with any unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company. The net proceeds from the offering were approximately $135.5
million after deducting estimated fees and expenses of $4.5 million payable by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding indebtedness under the Bridge Loan Facility and to reduce
indebtedness under the Credit Facility by approximately $75.0 million which
reduced the borrowing base to $60.0 million. Total long-term debt under the
Credit Facility at September 30, 1997 was $48.0 million. The Company recently
amended its Credit Facility with its lenders effective as of September 30, 1997,
to increase the amount of the Credit Facility to $125.0 million, to increase the
amount of the borrowing base to $65.0 million, and to modify a loan covenant.

The Company has called its publicly traded Warrants for redemption on
November 7, 1997 at a redemption price of $0.02 per Warrant. The Warrants are
presently exercisable for Common Stock at an exercise price of $5.50 per share.
The Company anticipates that substantially all the Warrants will be exercised,
and if so, the Company will receive cash proceeds in the amount of approximately
$4.7 million.

On October 30, 1997, the Company filed a registration statement with the
Securities and Exchange Commission to register 6.5 million shares of Common
Stock to be sold by the Company and an additional 150,000 shares of Common Stock
to be sold by a selling shareholder. The proceeds received from the sale of
shares by the Company will be used to repay substantially all of the outstanding
indebtedness under the Credit Facility.

F-36
<PAGE> 100

INDEPENDENT AUDITORS' REPORT

Board of Directors
Magnum Hunter Resources, Inc.
Irving, Texas

We have audited the accompanying historical summaries of revenue and direct
operating expenses of properties to be acquired April 30, 1997 (the "Permian
Basin Properties"), for the years ended December 31, 1996 and 1995. The
historical summaries are the responsibility of the Company's management. Our
responsibility is to express an opinion on the historical summaries 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 historical summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the historical summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall historical summary presentation.
We believe that our audit provides a reasonable basis for our opinion.

The accompanying historical summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form S-3 of Magnum Hunter Resources, Inc.) as
described in Note 1 and are not intended to be a complete presentation of the
properties' revenues and expenses.

In our opinion, the historical summaries referred to above present fairly,
in all material respects, the revenue and direct operating expenses of the
properties to be acquired April 30, 1997, in conformity with generally accepted
accounting principles.

HEIN + ASSOCIATES LLP

April 23, 1997
Dallas, Texas

F-37
<PAGE> 101

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

PERMIAN BASIN PROPERTIES

HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED FOUR MONTH PERIODS ENDED APRIL 30, 1996 AND 1997

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Oil and gas sales........................................... $ 30,098,000 $ 39,433,000
Direct operating expenses................................... (11,711,000) (11,646,000)
------------ ------------
Net revenue................................................. $ 18,387,000 $ 27,787,000
============ ============
</TABLE>

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
APRIL 30,
--------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Oil and gas sales........................................... $12,323,000 $12,627,000
Direct operating expenses................................... (3,891,000) (3,039,000)
----------- -----------
Net revenue................................................. $ 8,432,000 $ 9,588,000
=========== ===========
</TABLE>

See Notes to Historical Summaries of Revenues and Direct Operating Expenses
for the Years Ended December 31, 1995 and 1996 and for the Four Month Periods
Ended April 30, 1996 and 1997.

F-38
<PAGE> 102

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

PERMIAN BASIN PROPERTIES

NOTES TO HISTORICAL SUMMARIES OF REVENUES AND
DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE UNAUDITED FOUR MONTH PERIODS ENDED APRIL 30, 1996 AND 1997

NOTE 1 -- BASIS OF PREPARATION

The accompanying historical summaries of revenues and direct operating
expenses relate to the operations of the oil and gas properties to be acquired
by Magnum Hunter Resources, Inc. (the "Company") on April 30, 1997 from
Burlington Resources Oil and Gas Company (Burlington). The properties are to be
acquired for approximately $133,000,000, net of purchase adjustments.

Revenues are recorded when the Company's share of oil or gas and related
liquids are sold. Direct operating expenses are recorded when the related
liability is incurred. Direct operating expenses include lease operating
expenses, ad valorem taxes and production taxes. Depreciation and amortization
of oil and gas properties, general and administrative expenses and income taxes
have been excluded from operating expenses in the accompanying historical
summaries because the amounts would not be comparable to those resulting from
proposed future operations. Sales of gas and oil (until August 1996) have
generally been made to an affiliated entity of Burlington.

The historical summaries presented herein were prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form S-3 as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.

Unaudited Information

The historical summaries for the four month periods ended April 30, 1996
and 1997 were taken from Burlington's books and records without audit. However,
in the opinion of management, such information includes all adjustments
(consisting only of normal recurring accruals) which are necessary to properly
reflect the historical summaries of the Permian Basin Properties for the four
month periods ended April 30, 1996 and 1997.

NOTE 2 -- CONTINGENCIES

The properties to be acquired are subject to several lawsuits against
Burlington that have arisen from the ordinary course of operations. Burlington
has indemnified the Company in the Purchase and Sale Agreement against any
liability from those claims.

In the Purchase and Sale Agreement, Burlington agreed to indemnify the
Company against environmental claims relating to the acquired properties and
arising prior to January 1, 1997 provided that the Company notifies Burlington
of such claims by December 31, 1997. Burlington will provide indemnification
against such claims up to $10,762,500 and share the next $21,525,000 of claims
with the Company on an equal basis. Burlington represented in the Purchase and
Sale Agreement that no material environmental claims have been asserted; however
certain of these properties require remediation which, in the Company's opinion,
will not result in material costs.

NOTE 3 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)

F-39
<PAGE> 103

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

PERMIAN BASIN PROPERTIES

NOTES TO HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)

The following estimates of proved reserves have been made by independent
engineers. The estimated net interests in proved reserves are based upon
subjective engineering judgments and may be affected by the limitations inherent
in such estimation. The process of estimating reserves is subject to continual
revision as additional information becomes available as a result of drilling,
testing, reservoir studies and production history. There can be no assurance
that such estimates will not be materially revised in subsequent periods.

Estimated quantities of proved oil and gas reserves of the properties to be
acquired April 30, 1997 are as follows:

<TABLE>
<CAPTION>
OIL NATURAL GAS
(BARRELS) (THOUSAND CUBIC FEET)
---------- ---------------------
<S> <C> <C>
December 31, 1995
Proved reserves................................... 16,176,000 108,476,000
========== ===========
Proved developed reserves......................... 9,853,000 85,973,000
========== ===========
December 31, 1996
Proved reserves................................... 15,291,000 99,876,000
========== ===========
Proved developed reserves......................... 8,968,000 77,373,000
========== ===========
</TABLE>

The changes in proved reserves for the years ended December 31, 1995 and
1996 were as follows:

<TABLE>
<CAPTION>
OIL NATURAL GAS
(BARRELS) (THOUSAND CUBIC FEET)
---------- ---------------------
<S> <C> <C>
Reserves at December 31, 1994......................... 17,121,000 118,076,000
Revisions and other................................... 73,000 730,000
Production............................................ (1,018,000) (10,330,000)
---------- -----------

Reserves at December 31, 1995......................... 16,176,000 108,476,000
Revisions and other................................... 29,000 808,000
Production............................................ (914,000) (9,408,000)
---------- -----------

Reserves at December 31, 1996......................... 15,291,000 99,876,000
========== ===========
</TABLE>

The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1995 and 1996 were as
follows:

<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Future cash inflows.................................... $ 410,721,000 $ 769,681,000
Future development and production costs................ (275,252,000) (300,868,000)
------------- -------------
Future net cash flows, before income tax............... 135,469,000 468,813,000
Future income taxes.................................... -- (116,660,000)
------------- -------------
Future Net Cash Flows.................................. 135,469,000 352,153,000
10% annual discount.................................... (60,181,000) (169,385,000)
------------- -------------
Standardized Measure of Discounted Future Net Cash
Flows................................................ $ 75,288,000 $ 182,768,000
============= =============
</TABLE>

F-40
<PAGE> 104

MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES

PERMIAN BASIN PROPERTIES

NOTES TO HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)

The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1995 and 1996 were as
follows:

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Beginning of year...................................... $ 78,153,000 $ 75,288,000
Sales of oil and gas produced, net of production
costs................................................ (18,387,000) (27,787,000)
Net change in price and costs.......................... 6,800,000 182,919,000
Change in quantity estimates and other................. 432,000 933,000
Accretion of discount.................................. 7,800,000 7,528,000
Net change in income taxes............................. 490,000 (56,113,000)
------------ ------------
End of year............................................ $ 75,288,000 $182,768,000
============ ============
</TABLE>

Estimated future cash inflows are computed by applying year-end prices of
oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flow related to proved oil and gas reserves, less the tax basis of the
properties involved.

The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.

F-41
<PAGE> 105

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 106

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 107

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 108

============================================================

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL AFFAIRS OF THE COMPANY OR A SOLICITATION TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF OR THERE HAS BEEN NO CHANGE IN SUCH DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 11
Use of Proceeds............................. 17
Price Range of Common Stock and Dividend
Policy.................................... 18
Capitalization.............................. 19
Selected Consolidated Financial Data........ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 22
Business and Properties..................... 28
Management.................................. 44
Principal and Selling Shareholders.......... 48
Description of Capital Stock................ 49
Description of Indebtedness................. 53
Underwriting................................ 56
Legal Matters............................... 57
Experts..................................... 57
Available Information....................... 58
Incorporation of Certain Documents by
Reference................................. 59
Glossary.................................... 60
Index to Consolidated Financial
Statements................................ F-1
</TABLE>

============================================================

6,650,000 SHARES

MAGNUM LOGO

MAGNUM HUNTER
RESOURCES, INC.
COMMON STOCK
------------------------

PROSPECTUS
------------------------

RAUSCHER PIERCE REFSNES, INC.

CIBC OPPENHEIMER

JOHNSON RICE & COMPANY L.L.C.

VAN KASPER & COMPANY

, 1997

============================================================
<PAGE> 109

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Except for the SEC registration fee, NASD filing fee and American Stock
Exchange listing fee, all expenses are estimated. All such expenses will be paid
by the Registrant.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 15,063
NASD filing fee............................................. 5,471
American Stock Exchange listing fee......................... 17,500
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 55,000
Printing expenses........................................... 99,000
Blue sky fees and expenses (including legal fees)........... 5,000
Transfer agent fees and expenses............................ 1,000
Miscellaneous............................................... 31,966
--------
Total............................................. $280,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The General Corporation Law of Nevada permits provisions in the articles,
by-laws or resolutions approved by shareholders which limit liability of
directors for breach of fiduciary duty of certain specified circumstances. The
Articles of Incorporation, with certain exceptions, eliminate any personal
liability of a director to the Company or its shareholders for monetary damages
for the breach of a director's fiduciary duty, and therefore a director cannot
be held liable for damages to the Company or its shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
director. Nevada law permits indemnification if a director or officer acts in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation. A director or officer must be indemnified as to
any matter in which he successfully defends himself. Indemnification is
prohibited as to any matter in which the director or officer is adjudged liable
to the corporation. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling persons
of the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

The Company also maintains insurance to protect itself and its directors
and officers against expenses, liabilities and losses incurred by such persons
in connection with their service in the foregoing capacities.

ITEM 16. EXHIBITS.

The information required by this Item 16 is set forth in the Index to
Exhibits accompanying this Registration Statement.

ITEM 17. UNDERTAKINGS.

(b) Filings incorporating subsequent Exchange Act documents by reference.

The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-1
<PAGE> 110

(h) Acceleration of effectiveness.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

(i) Rule 430A.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE> 111

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Irving and State of Texas on the 17th
day of November, 1997.

MAGNUM HUNTER RESOURCES, INC.

By: GARY C. EVANS*

----------------------------------
Gary C. Evans
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act, this Amendment No. 2 to
the Registration Statement has been signed on November 17, 1997 by the following
persons in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

GARY C. EVANS* Director, President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Gary C. Evans

MATTHEW C. LUTZ* Chairman of the Board and Executive Vice
- ----------------------------------------------------- President of Exploration and Business
Matthew C. Lutz Development

CHRIS TONG* Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial officer)
Chris Tong

DAVID S. KRUEGER* Vice President and Chief Accounting Officer
- ----------------------------------------------------- (principal accounting officer)
David S. Krueger

GERALD W. BOLFING* Director
- -----------------------------------------------------
Gerald W. Bolfing

OSCAR C. LINDEMANN* Director
- -----------------------------------------------------
Oscar C. Lindemann

JOHN H. TRESCOT, JR.* Director
- -----------------------------------------------------
John H. Trescot, Jr.

JAMES E. UPFIELD* Director
- -----------------------------------------------------
James E. Upfield
</TABLE>

Morgan F. Johnston, by signing his name hereto, does sign and execute this
Amendment No. 2 to the Registration Statement on behalf of each of the
above-named officers and directors of the Registrant on this 17th day of
November, 1997, pursuant to powers of attorneys executed on behalf of the
Registrant and each of such officers and directors, and previously filed with
the Securities and Exchange Commission.

*By: /s/ MORGAN F. JOHNSTON

-------------------------------
Morgan F. Johnston
Attorney-in-fact

II-3
<PAGE> 112

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement
4.1 -- Articles of Incorporation, as Amended
4.2 -- By-Laws, as Amended (Incorporated by reference to
Registration Statement on Form SB-2, File No. 33-66190)
4.3 -- Indenture dated May 29, 1997 between Magnum Hunter
Resources, Inc., the subsidiary guarantors named therein
and First Union National Bank of North Carolina, as
Trustee (Incorporated by reference to Registration
Statement on Form S-4, File No. 333-31149)
4.4 -- Form of 10% Senior Notes due 2007 (Incorporated by
reference to Registration Statement on Form S-4, File No.
333-31149)
5.1* -- Opinion of Thompson & Knight, A Professional Corporation,
regarding legality
23.1* -- Consent of Thompson & Knight, A Professional Corporation
(in its opinion filed as Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Hein + Associates LLP
23.4* -- Consent of James J. Weisman, Jr.
23.5* -- Consent of Glenn Harrison Petroleum Consultants, Inc.
23.6* -- Consent of Gaffney, Cline & Associates
23.7* -- Consent of Ryder Scott Co.
24* -- Power of Attorney (a power of attorney pursuant to which
amendments to the Registration Statement may be filed is
included on the signature page of the initial filing)
</TABLE>

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

* Previously filed

<PAGE> 1

ARTICLES OF INCORPORATION

MASTER VENTURES, INC.

THE UNDERSIGNED natural person of the age of twenty-one (21) years or
more, acting as incorporator of a corporation under the Nevada Business
Corporation Act, adopts the following Articles of Incorporation for such
corporation.

ARTICLE I - NAME

The name of the Corporation is Mater Ventures, Inc.

ARTICLE II - DURATION

The duration of the corporation is perpetual.

ARTICLE III - PURPOSES

The purpose or purposes for which this corporation is engaged are:

(a) To engage in the specific business of making investments,
including investment in, purchase and ownership of any and all
kinds of property, assets or business, whether alone or in
conjunction with others. Also, to acquire, develop, explore
and otherwise deal in and with all kinds of real and personal
property and all related activities, and for any and all other
lawful purposes.

(b) To acquire by purchase, exchange, gift, bequest, subscription,
or otherwise; and to hold, own, mortgage, pledge, hypothecate,
sell, assign, transfer, exchange, or otherwise dispose of or
deal in or with its own corporate securities or stock or other
securities including, without limitations, any shares of
stock, bonds, debentures, notes, mortgages, or other
obligations, and any certificates, receipts or other
instruments representing rights or interests therein on any
property or

1
<PAGE> 2
assets created or issued by any person, firm, associate, or
corporation, or instrumentalities thereof; to make payment
therefor in any lawful manner or to issue in exchange therefor
its unreserved earned surplus for the purchase of its own
shares, and to exercise as owner or holder of any securities,
any and all rights, powers, and privileges in respect thereof.

(c) To do each and everything necessary, suitable, or proper for
the accomplishment of any of the purposes or the attainment of
any one or more of the subjects herein enumerated, or which
may, at any time, appear conducive to or expedient for the
protection or benefit of this corporation, and to do said acts
as fully and to the same extent as natural persons might, or
could do in any part of the world as principals, agents,
partners, trustees, or otherwise, either alone or in
conjunction with any other person, association, or
corporation.

(d) The foregoing clauses shall be construed both as purposes and
powers and shall not be held to limit or restrict in any
manner the general powers of the corporation, and the
enjoyment and exercise thereof, as conferred by the laws of
the State of Nevada; and it is the intention that the purposes
and powers specified in each of the paragraphs of this Article
III shall be regarded as independent purposes and powers.

ARTICLE IV - STOCK

The aggregate number of shares which this corporation shall have
authority to issue is 100,000,000 shares of Common Stock having a par value of
$.001 per share. All stock of the corporation shall be of the same class,
common, and shall have the same rights and preferences. Fully-paid stock of
this corporation shall not be liable to any further call or assessment.

2
<PAGE> 3
ARTICLE V - AMENDMENT

These Articles of Incorporation may be amended by the affirmative vote
of "a majority" of the shares entitled to vote on each such amendment.

ARTICLE VI - SHAREHOLDERS RIGHTS

The authorized and treasury stock of this corporation may be issued at
such time, upon such terms and conditions and for such consideration as the
Board of Directors shall determine. Shareholders shall not have pre- emptive
rights to acquire unissued shares of the stock of this corporation.

ARTICLE VII - CAPITALIZATION

This corporation will not commence business until consideration of a
value of at least $1,000 has been received for the issuance of said shares.

ARTICLE VIII - INITIAL OFFICE AND AGENT

The Corporate Trust Company of Nevada
One East First Street
Reno, NV 89501

ARTICLE IX - DIRECTORS

The directors are hereby given the authority to do any act on behalf
of the corporation by law and in each instance where the Business Corporation
Act provides that the directors may act in certain instances where the Articles
of Incorporation authorize such action by the directors, the directors are
hereby given authority to act in such instances without specifically numerating
such potential action or instance herein.

The directors are specifically given the authority to mortgage or
pledge any or all assets of the business without stockholders' approval.

3
<PAGE> 4
The number of directors constituting the initial Board of Directors of
this corporation is one. The name and address of the person who is to serve as
the initial Director until the first annual meeting of stockholders or until
his successor is elected and qualify, is:

NAME ADDRESS

Paul R. Millard 421 Raygene Way
North Salt Lake, UT 84054

ARTICLE X - INCORPORATOR

The name and address of the incorporator is:

NAME ADDRESS

Thomas G. Kimble, Attorney 311 South State, Suite 440
Salt Lake City, UT 84111

ARTICLE XI

COMMON DIRECTORS - TRANSACTIONS BETWEEN CORPORATIONS

No contract or other transaction between this corporation and any one
or more of its directors or any other corporation, firm, association, or entity
in which one or more of its directors or officers are financially interested,
shall be either void or voidable because of such relationship or interest, or
because such director or directors are present at the meeting of the Board of
Directors, or a committee thereof, which authorizes, approves, or ratifies such
contract or transaction, or because his or their votes are counted for such
purpose if: (a) the fact of such relationship or interest is disclosed or known
to the Board of Directors or committee which authorizes, approves, or ratifies
the contract or transaction by vote or consent sufficient for the purpose
without counting the votes or consents of such interested director; or (b) the
fact of such relationship or interest is disclosed or known to the stockholders
entitled to vote and they

4
<PAGE> 5
authorize, approve, or ratify such contract or transaction by vote or written
consent, or (c) the contract or transaction is fair and reasonable to the
corporation.

Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or committee
thereof which authorizes, approves, or ratifies such contract or transaction.

ARTICLE XII

LIABILITY OF DIRECTORS AND OFFICERS

No director or officer shall be personally liable to the Corporation
or its stockholders for monetary damages for any breach of fiduciary duty by
such person as a director of officer. Notwithstanding the foregoing sentence,
a director or officer shall be liable to the extent provided by applicable law,
(i) for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or (ii) for the payment of dividends in violation of
NRS 78.300.

The provisions hereof shall not apply to or have any effect on the
liability or alleged liability of any officer or director of the Corporation
for or with respect to any acts or omissions of such person occurring prior to
such amendment.

ARTICLE XIII

ACQUISITIONS OF CONTROLLING INTEREST

The provisions of NRS78.378-78.3793 shall not apply to any acquisition
of a controlling interest in this corporation.

Under penalties of perjury, I declare that these Articles of
Incorporation have been examined by me and are, to the best of my knowledge and
belief, true, correct and complete.

5
<PAGE> 6
DATED this 9th day of February, 1989.

/s/ Thomas G. Kimble
------------------------------
Thomas G. Kimble

STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

On the 9th day of February, 1989, personally appeared before me,
Thomas G. Kimble, who duly acknowledged to me that he signed the foregoing
Articles of Incorporation.

My Commission Expires: /s/ Jody York
------------------------------
NOTARY PUBLIC

Residing at:
- ----------------------------------- ------------------

6
<PAGE> 7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
MASTER VENTURES, INC.

Pursuant to the applicable provisions of the Nevada Business
Corporations Act, the undersigned Corporation adopts the following Articles of
Amendment to its Articles of Incorporation by stating the following:

FIRST: The present name of the Corporation is Master Ventures, Inc.

SECOND: The following amendment to its Articles of Incorporation was
adopted by majority vote of shareholders of the Corporation on September 26,
1990 in the manner prescribed by Nevada law.

1. Article I, is amended as follows:

ARTICLE I - CORPORATE NAME

The name of the corporation (hereinafter called the Corporation) is
Magnum Petroleum, Inc.

2. Article IV is replaced as follows:

ARTICLE IV - STOCK

A. Common Stock.

The aggregate number of shares of Common Stock which the corporation
shall have authority to issue is 100,000,000 shares at a par value of $.001 per
share. All stock when issued shall be fully paid and non-assessable.

No holder of shares of Common Stock of the corporation shall be
entitled, as such, to any pre-emptive or preferential rights to subscribe to
any unissued stock or any other securities which

1
<PAGE> 8
the corporation may now or thereafter be authorized to issue. The Board of
Directors of the corporation may, however, at its discretion, by resolution
determine that any unissued securities of the corporation shall be offered for
subscription solely to the holders of common stock of the corporation or solely
to the holders of any class or classes of such stock, in such proportions based
on stock ownership as said board at its discretion may determine.

Each share of common stock shall be entitled to one vote at
stockholders meetings, either in person or by proxy. Cumulative voting in
elections of Directors and all other matters brought before stockholders
meetings, whether they be annual or special, shall not be permitted.

B. Preferred Stock.

The aggregate number of shares of Preferred Stock which the
Corporation shall have authority to issue is 1,400,000 shares, $.001 par value,
which may be issued in such series, with such designations, preferences, stated
values, rights, qualifications or limitations as determined solely by the Board
of Directors of the Corporation.

THIRD: The number of shares of the Corporation outstanding and
entitled to vote at the time of the adoption of said amendment was 2,413,125
shares.

FOURTH: The number of shares voted for such amendments was 1,824,285
and the number voted against such amendments was -0-.

DATED this 27 day of September, 1990.

MASTER VENTURES, INC.

By: /s/ [signature illegible]
-----------------------------------
President and Secretary

2
<PAGE> 9
VERIFICATION

STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

The undersigned being first duly sworn, deposes and states: that the
undersigned is the Secretary of Master Ventures, Inc. that the undersigned has
read the Articles of Amendment and knows the contents thereof and that the same
contains a truthful statement of the amendment duly adopted by the stockholders
of the Corporation.

/s/ [signature illegible]
------------------------------------
Secretary

STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

Before me the undersigned Notary Public in and for the said County and
State, personally appeared the President and Secretary of Master Ventures,
Inc., a Nevada corporation, and signed the foregoing Articles of Amendment as
his own free and voluntary act and deed pursuant to a corporate resolution for
the uses and purposes set forth.

IN WITNESS WHEREOF, I have hereunto set my hand and seal this 27 day of
September, 1990.

My Commission Expires: /s/ Van L. Butler
----------------------------------
NOTARY PUBLIC, residing at

N. Salt Lake, UT
- ------------------------------- ----------------------------------

3
<PAGE> 10
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
PREFERRED SHARES BY RESOLUTION OF THE BOARD OF
DIRECTORS PROVIDING FOR ISSUE OF PREFERRED SHARES
DESIGNATED AS SERIES B PREFERRED STOCK

MAGNUM PETROLEUM, INC. (hereinafter referred to as the "Corporation"),
a corporation organized and existing under the laws of the state of Nevada in
accordance with the Private Corporations Law of the State of Nevada, does
hereby certify:

THAT the Board of Directors of the Corporation, by unanimous consent
dated September 25, 1992, adopted a resolution providing for the issuance of
"Series B Preferred Stock" with resolutions as follows:

RESOLVED: That 925,000 shares of preferred stock may be issued
from time to time in Series B.

FURTHER RESOLVED: The Series B Preferred Stock is
non-assessable. Each Series B share shall be distinctly designated so
as to distinguish the shares thereof from all other series or classes.
All shares of the Series B Preferred Stock shall be alike in every
particular. The holders of record of shares of the Series B Preferred
Stock outstanding shall be entitled to receive an annual, cumulative
cash dividend equal to 7% of the original purchase price or $.35 per
share, per year pro-rated as to the length of time each certificate
was issued and outstanding during the year. The annual cash dividend
of $.35 per share shall be paid quarterly at the rate of $.0875 per
share of Series B Preferred Stock on March 31, June 30, September 30
and December 31. The shareholder record date shall be the date
immediately preceding the above stated payment date by ten (10) days.
The Company shall pay the dividend only to record owners as of the
record date. No dividend shall be paid on the common stock until the
dividends set forth above have been paid in full on the preferred
stock. Once the cumulative dividend has been paid in full no further
dividends will be paid on the series.

FURTHER RESOLVED: No share of Preferred Stock shall entitle
the holder thereof to vote individually or as a class or otherwise,
except on those matters in which the consent of the holders of the
Preferred Stock is specifically required by the provisions of the law
of the State of Nevada, as now existing or as hereafter amended.

FURTHER RESOLVED: All other terms, conditions, preferences,
rights and designations of the Series B Preferred Stock as set forth
in the attached form of the attached Series B Preferred Stock
certificate are hereby adopted and approved.

1
<PAGE> 11
FURTHER RESOLVED: That the proper officers of the Corporation
be, and they hereby are, authorized, empowered and directed to execute
and file on behalf of the Corporation a statement designating the
rights, preferences and privileges of the Series B Preferred Stock if
the same is deemed to be required under Nevada law.

FURTHER RESOLVED: that the following are the terms,
conditions, rights, preferences and designations of the Series B
Preferred Stock:

1. Shares in Series. The Company shall have 925,000
shares of authorized stock designated as "Series B Preferred Stock"
(the "Series B Preferred Stock"). The shares of Series B Preferred
Stock have a par value of $.001 per share.

2. Voting Rights. The holders of record of said shares
of Series B Preferred Stock shall not be entitled to any voting rights
except as specifically required under Nevada law.

3. Liquidation Rights. In case of the dissolution,
liquidation or winding-up of the Company, whether voluntary or
involuntary, or in any instance, the holders of record of shares of
the Series B Preferred Stock then outstanding shall be entitled to
participate in the distributions, either in cash or in kind, of the
assets of the Company on a priority basis, prior to distributions to
common shareholders or holders of any other class of stock, but only
to the extent of outstanding shares of Series B Preferred Stock
multiplied by a par value of $.001 per share.

4. Dividends. The holders of record of shares of the
Series B Preferred Stock outstanding shall be entitled to receive an
annual, cumulative cash dividend equal to 7% of the original purchase
price of $.35 per share, per year pro-rated as to the length of time
each certificate was issued and outstanding during the year.

The annual cash dividend of $.35 per share shall be paid
quarterly at the rate of $.0875 per share of Series B Preferred Stock
on March 31, June 30, September 30 and December 31. The shareholder
record date shall be the date immediately preceding the above stated
payment date by ten (10) days. The Company shall pay the dividend
only to record owners as of the record date.

The Series B Preferred stock shall not be entitled to
participate in any dividends declared over and above the stated
dividend rights.

5. Automatic Redemption and Conversion to Common Stock.
The Series B Preferred Stock will automatically be redeemed by the
Company and deemed converted into shares of Common Stock on a share
for share basis at such time as the Company has paid to the Series B
Unit holders an aggregate of 200% of the total funds originally
received by the Company as payment for the Series B Units. In
calculating the 200% return to the Series B Unit holders, the Company
shall include all distributions or payments made to the Series B Unit
holders including all payments made either as

2
<PAGE> 12
dividends on the Series B Preferred Stock or production payments on
the Series B Production Certificates.

6. Optional Conversion. All conversion rights described
herein shall be automatically adjusted to reflect any common stock
splits. The Series B Preferred Stock will be convertible, at the
option of the holder thereof, into Common Stock in all or in part,
into Common Stock upon surrender to the Company of a complete Series B
Unit including the Series B Preferred Stock and Series B Production
Certificates which were originally issued as a part of said Unit. The
Company shall issue 1,000 shares of Common Stock for each Unit
converted. Application for conversion must be made during the month
of April in any given year. Assuming at least a minimum of 50 Series
B Units have been surrendered for conversion, the Company will
register the shares of common stock issued in the conversion as soon
as practicable after April 30 of said year for the year 1993 and again
in 1994.

7. Other Matters. The Series B Preferred Stock is
non-assessable. The holders of the shares of Series B Preferred Stock
will have no other rights other than as established by applicable
corporation law, and no pre-emptive, redemption or other rights.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be executed in its corporate name by its President and Secretary
effective as of 25th day of September, 1992.

ATTEST: MAGNUM PETROLEUM, INC.

Virden L. Parker /s/ By: /s/ Lloyd T. Rochford
- ---------------------------------- ---------------------------------
Virden L. Parker, Secretary Lloyd T. Rochford, President

3
<PAGE> 13
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

I, Thomas G. Kimble, a notary public, hereby certify that on this 21st
day of January, 1993, personally appeared before me Lloyd T. Rochford, the
President of Magnum Petroleum, Inc., who being by me first duly sworn, declared
that he is the person who signed the foregoing document, and that the
statements therein contained are true.

/s/ Thomas G. Kimble
-----------------------------------------
NOTARY PUBLIC

My Commission Expires: Residing at Salt Lake City, Utah
-----------------------------
Nov. 1, 1993
- -------------------------

4
<PAGE> 14
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
MAGNUM PETROLEUM, INC.

Pursuant to the applicable provisions of the Nevada Business
Corporations Act, Magnum Petroleum, Inc. (the "Corporation") adopts the
following Articles of Amendment to its Articles of Incorporation by stating the
following:

FIRST: The present name of the Corporation is Magnum Petroleum, Inc.

SECOND: The following amendments to its Articles of Incorporation
were adopted by majority vote of shareholders of the Corporation on May 18,
1993 in the manner prescribed by Nevada law.

1. Article IV is hereby amended to read as follows:

ARTICLE IV - STOCK

A. COMMON STOCK.

The aggregate number of shares of Common Stock which the corporation
shall have authority to issue is 50,000,000 shares at a par value of $.002 per
share. All stock when issued shall be fully paid and non-assessable.

No holder of shares of Common Stock of the corporation shall be
entitled, as such, to any pre-emptive or preferential rights to subscribe to
any unissued stock or any other securities which the corporation may now or
thereafter be authorized to issue. The Board of Directors of the corporation
may, however, at its discretion, by resolution determine that any unissued
securities of the corporation shall be offered for subscription solely to the
holders of common stock of the corporation or solely to the holders of any
class or classes of such stock, in such proportions based on stock ownership as
said board at its discretion may determine.

1
<PAGE> 15
Each share of common stock shall be entitled to one vote at
stockholders meetings, either in person or by proxy. Cumulative voting in
elections of Directors and all other matters brought before stockholders
meetings, whether they be annual or special, shall not be permitted.

B. PREFERRED STOCK.

The aggregate number of shares of Preferred Stock which the
Corporation shall have authority to issue is 10,000,000 shares $.001 par value,
which may be issued in series, with such designations, preferences, stated
values, rights, qualifications or limitations as determined solely by the Board
of Directors of the Corporation.

2. The Corporation shall effectuate a 1 for 2 reverse stock split
of its shares of common stock outstanding as of May 28, 1993, decreasing said
outstanding shares from 4,980,975 shares to 2,490,487 shares. Said reverse
stock split to be effective with the commencement of business on June 1, 1993.

THIRD: The number of shares of the Corporation outstanding and
entitled to vote at the time of the adoption of said amendment was 4,980,975.

FOURTH: The number of shares voted for such amendments by written
consent was 2,688,441 (53.9%).

DATED this 18th day of May, 1993

MAGNUM PETROLEUM, INC.

By: /s/ Virden L. Parker By: /s/ Lloyd T. Rochford
---------------------------------- ---------------------------------
Virden L. Parker, Secretary Lloyd T. Rochford, President

2
<PAGE> 16
VERIFICATION

STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

The undersigned being first duly sworn, deposes and states: that the
undersigned is the Secretary of Magnum Petroleum Inc. that the undersigned has
read the Articles of Amendment and knows the contents thereof and that the same
contains a truthful statement of the Amendment duly adopted by the sole
director and stockholders of the Corporation.

/s/ Virden L. Parker
-----------------------------------
Virden L. Parker, Secretary

3
<PAGE> 17
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

On this 18th day of May, 1993, personally appeared before me, Lloyd T.
Rochford as President of Magnum Petroleum, Inc., the signer of the foregoing
instrument, whose identity is personally known to me or proven on the basis of
satisfactory evidence, who voluntarily signed the document in my presence on
behalf of said corporation and has taken an oath or affirmation before me duly
attesting to the truthfulness of its contents.

/s/ Patricia B. Haslam
- --------------------------------- -----------------------------------
Official Seal Notary Public

STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

On this 18th day of May, 1993, personally appeared before me, Virden
L. Parker as Secretary of Magnum Petroleum, Inc., the signer of the foregoing
instrument, whose identity is personally known to me or proven on the basis of
satisfactory evidence, who voluntarily signed the document in my presence on
behalf of said corporation and has taken an oath or affirmation before me duly
attesting to the truthfulness of its contents.

/s/ Thomas G. Kimble
- --------------------------------- -----------------------------------
Official Seal Notary Public

4
<PAGE> 18
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
PREFERRED SHARES OF RESOLUTION OF THE BOARD OF
DIRECTORS PROVIDING FOR ISSUE OF PREFERRED SHARES
DESIGNATED AS SERIES A PREFERRED STOCK

THAT the Board of Directors of the Corporation, by unanimous consent
dated February 6, 1991 and May 17, 1993 adopted corporate resolutions providing
for the issuance of "Series A Preferred Stock" and a Certificate of Designation
as follows:

RESOLVED: That 216,000 shares of preferred stock may be
issued from time to time in Series A.

FURTHER RESOLVED: The Series A Preferred Stock is
non-assessable. Each Series A share shall be distinctly designated so
as to distinguish the shares thereof from all other series or classes.
All shares of the Series A Preferred Stock shall be alike in every
particular.

FURTHER RESOLVED: No share of Series A Preferred Stock shall
entitle the holder thereof to vote individually or as a class or
otherwise, except on those matters in which the consent of the holders
of the Preferred Stock is specifically required by the provisions of
the law of the State of Nevada, as now existing or as hereafter
amended.

FURTHER RESOLVED: All other terms, conditions, preferences,
rights and designations of the Series A Preferred Stock as set forth
in the attached form of the attached Series A Preferred Stock
certificate are hereby adopted and approved.

FURTHER RESOLVED: That the proper officers of the Corporation
be, and they hereby are, authorized, empowered and directed to execute
and file on behalf of the Corporation a statement designating the
rights, preferences and privileges of the Series A Preferred Stock if
the same is deemed to be required under Nevada law.

FURTHER RESOLVED: that the following are the terms,
conditions, rights, preferences and designations of the Series A
Preferred Stock:

1
<PAGE> 19
SERIES A PREFERRED STOCK

1. Shares in Series. The Corporation shall have 216,000 shares
of $.001 par value share stock designated as Series "A" Preferred Stock
("Series "A" Stock").

2. Voting Rights. The holders of record of said shares of the
Series "A" Stock shall be entitled to one vote per share. However, the holders
of record of said shares of the Series "A" Stock shall not be entitled to vote
except on those matters in which the consent of the holders of preferred stock
is specifically required by Nevada law.

3. Liquidation Rights. In case of the dissolution, liquidation
or winding-up of the Corporation prior to payment of the full dividend on the
Series "A" Stock, whether voluntary or involuntary, the holders of record of
the shares of the Series "A" Stock then outstanding would receive a liquidation
preference from the liquidation proceeds of the West Dilley Prospect and the
Hope Prospect in an amount equal to the lesser of such proceeds or the
remaining unpaid dividend. On liquidation, the Series "A" Stock shall not
participate in any other liquidation proceeds other than from the West Dilley
Prospect and the Hope Prospect, except that the Series "A" Stock shall be
entitled to receive its par value per share in preference to distributions to
the common stock. For purposes of this paragraph 3, a consolidation or merger
of the Corporation with any other corporation, whether or not the Corporation
is the surviving corporation of such transaction, or a sale, lease, mortgage,
pledge, exchange, transfer or other disposition by the Corporation of all or
substantially all of its assets, shall not be deemed a liquidation, dissolution
or winding up of the Corporation.

4. Quarterly dividends. The holders of record of shares of the
Series "A" Stock outstanding shall be entitled to receive dividends to the
extent funds from the West Dilley Prospect and the Hope Prospect as set forth
below are available until such dividends reach the cumulative limit of $7.50
per share. The Corporation's share of Net Operating Revenue includes a
production payment of 5% of Net Operating Revenue assigned to the Corporation
for a limited period of time. The funds available for the payment of dividends
shall only be derived from the West Dilley Prospect and from the Hope Prospect.
Funds available from the generation of any revenue other than from the West
Dilley Prospect and the Hope Prospect shall not be subject to the allocation of
any amounts for the payment of dividends. No dividends shall be paid to the
common stockholders from proceeds from the West Dilley Prospect and the Hope
Prospect until the $7.50 per share dividend has been paid in full to the
preferred stockholders. Once the cumulative $7.50 per share dividend has been
paid in full, no further dividends will be paid.

a. Fifty percent (50%) of the Net Operating Revenue received by
the working interest owners (5% of the Net Operating Revenue received by the
Corporation) from the West Dilley Prospect shall be paid as a dividend to the
preferred stockholders until the $7.50 of cumulative dividend, from both the
West Dilley Prospect and the Hope Prospect has been paid on each share of
Series "A" Stock.

b. The first $500,000 of Net Operating Revenue from the Hope
Prospect shall be excluded from funds available for preferred stock dividends.
Thereafter, sixty percent (60%) of the then remaining Net Operating Revenue
received by the working interest owners (75%) of the Net Operating Net
Operations Revenue received by the Corporation) from the Hope Prospect shall be
paid as dividends to preferred stockholders until one-half of the $7.50
cumulative dividend from both the Hope Prospect and the West Dilley has been
paid on each share of Series "A" Preferred Stock. After one-half of the
cumulative dividend has been paid to preferred stockholders of Series "A"
Stock, fifty percent (50%) of the then remaining Net Operating Revenue received
by the working interest owners (62.5% of the Net Operating Revenue received by
the Corporation) from the Hope Prospect shall be paid as dividends to preferred
stockholders until all of the $7.50 cumulative dividend has been paid on each
share.

5. Redemption. The Series "A" Stock shall not be subject to
redemption unless agreed upon by the Corporation and the holders thereof.

6. Other Matters. The holders of the shares of Series "A" Stock
will has no pre-emptive or other rights other than as established by Nevada
law.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be executed in its corporate name by its President and Secretary
effective as of 18th day of May, 1992.

ATTEST MAGNUM PETROLEUM, INC.

/s/ Virden L. Parker By: /s/ Lloyd T. Rochford
- ------------------------------- -------------------------------------
Virden L. Parker, Secretary Lloyd T. Rochford, President

2
<PAGE> 20
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )

On this 18th day of May, 1993, personally appeared before me, Virden
L. Parker as Secretary and Lloyd T. Rochford as President of Magnum Petroleum,
Inc., the signers of the foregoing instrument, whose identity is personally
known to me or proven on the basis of satisfactory evidence, who voluntarily
signed the document in my presence on behalf of said corporation and have taken
an oath or affirmation before duly attesting to the truthfulness of its
contents.

/s/ Thomas G. Kimble
- ----------------------------------- -----------------------------------
Official Seal Notary Public

3
<PAGE> 21
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF
PREFERRED SHARES BY RESOLUTION OF THE BOARD OF
DIRECTORS PROVIDING FOR ISSUE OF PREFERRED SHARES
DESIGNATED AS SERIES C PREFERRED STOCK

MAGNUM PETROLEUM, INC. (hereinafter referred to as the "corporation"),
a corporation organized and existing under the laws of the state of Nevada in
accordance with the Private Corporations Law of the State of Nevada, does
hereby certify:

THAT the Board of Directors of the Corporation, by unanimous written
consent dated November 1, 1993, adopted resolutions providing for the issuance
of "Series C Preferred Stock" as follows:

I. Designation and Amount, Priority, Units

There shall be a series of Preferred Stock designated as Series C
Convertible Preferred Stock ("Series C Preferred Stock") and the number of
shares constituting such series shall be 625,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors, provided that
no decrease shall reduce the number of Series C Preferred Stock to a number
less than the number of shares then outstanding or reserved for issuance in
certain events.

The Company has previously designated Series A and Series B Preferred
Stock, and issued shares of each series. Series A Preferred Stock is entitled
to receive dividends, until such dividends reach the cumulative limit of $7.50
per share, payable only from an allocation of 50% of the net operating
revenues received by the working interest owners from the West Dilley Prospect,
in which the Company owns a 90% working interest. Series A Preferred Stock is
entitled to receive the proceeds of such prospect upon liquidation, dissolution
or winding up of the Company. To the extent of the assets and revenues
allocated, Series C Preferred Stock is junior to Series A Preferred Stock with
respect to dividends and liquidating distributions. Series B Preferred Stock
is entitled to receive cumulative annual dividends of $.35 per share, and a
liquidation preference of $.001 per share. To the extent of the stated
dividend and liquidation preference, Series B Preferred Stock will have
priority over Series C Preferred Stock in the payment of dividends and
liquidating distributions.

The Company also previously authorized Series B Production
Certificates which are entitled to receive production payments from an
allocation of 50% of the net operating revenues from the Company's interest in
all properties acquired or wells drilled after September 5, 1992, until the sum
of production payments made with respect to each Series B Production
Certificate plus dividends paid with respect to the shares of Series B
Preferred Stock issued as a unit with such certificate equals 200% of the
amount originally invested in such unit. Until such payout,

1
<PAGE> 22
revenues so allocated will not be available to pay dividends with respect to
Series C Preferred Stock.

Each share of Series C Preferred Stock shall be issued as part of a
Unit ("Unit") consisting of one share of Series C Preferred Stock and three
warrants (each, a "warrant"), each Warrant representing the right to purchase
one share of Common Stock of the Corporation. The Series C Preferred Stock may
not be transferred separately from the Warrants included in a Unit for ninety
(90) days from the first date of sale of the Units of such shorter period as
may be determined by the representative of the underwriters of such offering of
Units.

II. Dividends

The holders of the then outstanding Series C Preferred Stock shall be
entitled to receive, when, as, and if declared by the Board of Directors, out
of any funds legally available therefor, dividends at an annual rate of $1.10
per share of Series C Preferred Stock (appropriately adjusted for stock splits
and combinations), payable in preference and priority to any payment of any
dividend on the Corporation's Common Stock. Dividends shall accrue without
interest and be cumulative from the date of first issuance and shall be payable
in cash, when, and if declared by the Board of Directors of the Corporation,
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, beginning on December 31, 1993 (except that if any such date is a
Saturday, Sunday or legal holiday then such dividend shall be payable on the
next day that is not a Saturday, Sunday or legal holiday) to holders of record
on such record dates as are fixed by the Board of Directors to the extent funds
are legally available for payment thereof. Subject to the following paragraph,
dividends in arrears for any past dividend period may be declared and paid at
any past time. The amount of dividends payable per share of Series C Preferred
Stock for each quarterly period will be computed by dividing the annual
Dividend amount by four. The amount of dividends payable for the initial
dividend period and any period shorter than a full quarterly dividend period
shall be computed on the basis of a 365-day year. No interest will be payable
in respect of any dividend on the Series C Preferred Stock which may be in
arrears.

The Series C Preferred Stock will be junior as to dividends to any
series or class of the Company's stock hereafter issued that ranks senior as to
dividends to the Series C Preferred Stock ("senior dividend stock") and, if at
any time the Company has failed to pay or declare and set apart for payment
accrued and unpaid dividends on any senior dividend stock, the Company may not
pay any dividend on the Series C Preferred Stock. The Series C Preferred Stock
will have priority as to dividends over the Common Stock and any series or
class of the Company's stock hereafter issued that ranks junior as to dividends
to the Series C Preferred Stock ("junior dividend stock"), and no dividend
(other than dividends payable solely in Common Stock or any other series or
class of the Company's stock hereafter issued that ranks junior as to dividends
to the Series C Preferred Stock) may be declared, paid or set apart for payment
on, and no purchase, redemption or other acquisition may be made by the Company
of, any Common Stock or junior dividend stock unless all accrued and unpaid
dividends on the Series C Preferred Stock have been paid or declared and set
apart for payment, except for the repurchase of shares of Common Stock from
employees upon termination of their employment with the Company. The Company
may

2
<PAGE> 23
not pay dividends on any class or series of the Company's stock having parity
with the Series C Preferred Stock as to dividends, if any such stock is
hereafter issued ("parity dividend stock"), unless it has paid or declared and
set apart for payment, or contemporaneously pays or declares and sets apart for
payment, all accrued and unpaid dividends for all prior periods on the Series C
Preferred Stock; and the Company may not pay dividends on the Series C
Preferred Stock unless it has paid or declared and set apart for payment, or
contemporaneously pays or declares and sets apart for payment, all accrued and
unpaid dividends for all prior periods on the parity dividend stock. Whenever
all accrued dividends are not paid in full on the Series C Preferred Stock or
any parity dividend stock, all dividends declared on the Series C Preferred
Stock and such parity dividend stock will be declared or made pro rata so that
the amount of dividends declared per share on the Series C Preferred Stock and
such parity dividend stock will bear the same ratio that accrued and unpaid
dividends per share on the Series C Preferred Stock and such parity dividend
stock bear to each other.

III. Liquidation Rights

In the event of any liquidation, dissolution, or winding up of the
Corporation, the holders of shares of Series C Preferred Stock shall be
entitled to receive, out of the assets of the Corporation legally available
therefor, a sum equal to $10.00 per share of Series C Preferred Stock, as
appropriately adjusted for stock splits or combinations, plus dividends, if
any, then accrued and unpaid to the distribution date, and no more, before any
payment shall be made or any assets distributed to the holders of Common Stock
or other class or series of capital stock ranking junior to the Series C
Preferred Stock in liquidation rights, provided that such rights shall accrue
to the holders of Series C Preferred Stock only in the event that payments with
respect to the liquidation preferences of the holders of capital stock of the
Corporation ranking senior as to liquidation rights ("Senior Liquidation
Stock") to the Series C Preferred Stock are paid in full. The holders of
Series C Preferred Stock and all classes of stock hereafter issued that rank on
a parity as to liquidation rights with the Series C Preferred Stock are
entitled to share ratably, in accordance with the respective preferential
amounts payable on such stock, in any distribution (after payment of the
liquidation preference of the Senior Liquidation Stock) which is not sufficient
to pay in full the aggregate of the amounts payable thereon. After payment in
full of the liquidation preference of the shares of Series C Preferred Stock,
the holders of such shares will not be entitled to any further participation in
any distribution of assets by the Corporation.

A consolidation, merger or other business combination of the
Corporation with or into any other corporation or entity or a sale or transfer
of all or part of the assets of the Corporation for cash, securities or other
property shall not be deemed to be a liquidation, dissolution or winding up for
purposes of this Section III.

V. Voting Rights

The holders of Series C Preferred Stock shall have no voting rights
except as set forth herein or as required by law. In connection with any such
vote, each outstanding share of Series C Preferred Stock shall be entitled to
one vote, except that any such shares held by the

3
<PAGE> 24
Corporation or any entity controlled by the Corporation, shall have no voting
rights and shall not be counted in determining the presence of a quorum.

In the event a default is incurred in the payment of any dividend
declared by the Board of Directors on the Series C Preferred Stock and such
default shall not have been cured by the date of any annual (or special in lieu
of annual) meeting of shareholders at which directors are to be elected
occurring at least one year but less than two years after the date of such
default, the holders of Series C Preferred Stock shall have the right, voting
as a class at such meeting, to elect two members to the Company's board of
directors.

So long as any Series C Preferred Stock is outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least
two-thirds of all outstanding shares of Series C Preferred Stock, voting
separately as a class, whether or not a vote of the shareholders would
otherwise be required by law, (i) amend, alter or repeal any provision of the
Articles of Incorporation or the Bylaws of the Corporation so as to affect
adversely the relative rights, preferences, qualifications, limitations or
restrictions of the Series C Preferred Stock, (ii) authorize or issue, or
increase the authorized amount of, any additional class or series of stock of
the Corporation, or any security convertible into stock of such class or
series, having rights senior to or on a parity with the Series C Preferred
Stock as to dividends or upon liquidation, distribution or winding up of the
Corporation, (iii) effect any reclassification of the Series C Preferred Stock,
or (iv) effect a merger of the Corporation with another corporation or a sale
of all or substantially all of the assets of the Corporation if the
shareholders of the Corporation immediately prior to such merger or sale will
own less than 50% of the shares of the surviving (in the case of a merger) or
acquiring (in the case of a sale of assets) corporation immediately following
such merger or sale.

V. Redemption

The Corporation may, at its option, redeem all or part of the Series C
Preferred Stock then outstanding on any date set by the Board of Directors at
any time after two years from the effective date of the Company's public
offering. The redemption price, to be paid in cash, for each share of Series C
Preferred Stock shall be $10.50 plus any accrued and unpaid dividends, whether
or not declared.

At least 30 but not more than 60 days prior to the date fixed for
redemption of any of the Series C Preferred Stock ("Redemption Date"), written
notice shall be mailed, first class postage prepaid, to each holder of record
of the Series C Preferred Stock to be redeemed at the close of business on the
business day next preceding the day on which notice is given (the Redemption
Record Date") at the address last shown on the records of the Corporation for
such holder or given by the holder to the Corporation for the purpose of
notice, notifying such holder of the redemption to be effected and specifying
the Redemption Date; the redemption price; the place or places at which payment
may be obtained; the method used in determining what shares are to be redeemed
in the event that less than all shares are to be redeemed: that on and after
the Redemption Date, dividends will cease to accrue on such shares; the then
effective conversion rate of the shares to be redeemed; the date on which such
holder's conversion rights as to such shares

4
<PAGE> 25
terminate and calling upon such holder to surrender to the Corporation, in the
manner and at the place designated, his certificate or certificates
representing the shares to be redeemed (the "Redemption Notice").

Any notice that is mailed as herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives such
notice; and failure to give such notice by mail, or any defect in such notice,
to the holders of any shares designated for redemption shall not affect the
validity of the proceedings for the redemption of any other shares of Series C
Preferred Stock. On or after the date fixed for redemption as stated in such
notice, each holder of the shares called for redemption shall surrender the
certificate or certificates evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive
payment of the redemption price. If less than all the shares represented by
any such surrendered certificate or certificates are redeemed, a new
certificate shall be issued representing the unredeemed shares.

From and after the Redemption Date, unless there shall have been a
default in payment of the redemption price, all rights of the holders of the
Series C Preferred Stock so redeemed (except the right to receive the
redemption price without interest upon surrender of their certificate or
certificates) shall terminate with respect to such shares, and such shares
shall not thereafter be transferred on the books of the Corporation or be
deemed to be outstanding for any purpose whatsoever. The shares of Series C
Preferred Stock not redeemed, if any, shall remain outstanding and entitled to
all the rights and preferences provided herein.

At its option the corporation may elect to deposit the redemption
price of all Series C Preferred Stock to be redeemed with a bank or trust
company in the United States of America as a trust fund for the benefit of the
holders of the shares designated for redemption. Simultaneously, the
Corporation shall deposit irrevocable instruction and authority to such bank or
trust company to pay, on and after the Redemption Date, the redemption price of
the Series C Preferred Stock to the holders thereof upon surrender of their
certificates. Any monies deposited by the Corporation for the redemption of
shares that are thereafter converted into shares of Common Stock no later than
the close of business on the day preceding the Redemption Date shall be
returned to the Corporation forthwith upon such conversion. The balance of any
monies deposited by the Corporation remaining unclaimed at the expiration of
one year following the Redemption Date shall thereafter be returned to the
Corporation, provided that the stockholder to which such monies would be
payable hereunder shall be entitled, upon proof of ownership of the Series C
Preferred Stock and payment of any bond requested by the Corporation, to
receive such monies without interest from the Redemption Date.

If fewer than all of the outstanding shares of Series C Preferred
Stock are to be redeemed, the Corporation shall designate those shares to be
redeemed pro rata or by lot. There shall be no mandatory redemption,
retirement or sinking fund obligation of the Corporation with respect to the
Series C Preferred Stock. In the event that the Corporation is in arrears on
the payment of accrued and unpaid dividends on the Series C Preferred Stock, it
may not redeem any of the then outstanding shares of the Series C Preferred
Stock until all such accrued dividends and the then current quarterly dividend
have been paid in full on all shares of Series C Preferred Stock.

5
<PAGE> 26
VI. Conversion

(a) Automatic Conversion. If, during the twenty consecutive
trading days immediately prior to one year from the close of the Company's
public offering or any twenty consecutive trading days thereafter, the closing
bid price for the Company's Common Stock as quoted by any market maker in the
over-the-counter market bulletin board or on NASDAQ or any national securities
exchange, shall equal or exceed $5.00 per share, then, effective as of the
close of trading on the twentieth such trading day, all of the then outstanding
shares of Series C Preferred Stock shall be automatically converted into Common
Stock, as provided in Section VI (c), below, at the then effective Conversion
Rate (as described below).

(b) Optional Conversion. Each share of the Series C Preferred
Stock shall be convertible, at the option of the holder thereof at any time
prior to the close of business on the business day prior to the Redemption Date
relating to such share, into Common Stock, as provided in Sections VI (c) and
(d), below.

(c) Effect of Conversion. The number of shares of Common Stock
issuable upon conversion of a share of Series C Preferred Stock (the
"Conversion Rate"), as provided in Sections VI (a) or (b) above, is three. Any
accrued and unpaid dividends through the date of conversion, at the option of
the Company will be paid in cash upon conversion or will be converted into
Common Stock at the rate of $3.33 per share (the "Conversion Price"). The
Conversion Price is subject to adjustment as provided in Section VI (e), below.
From and after any conversion of Series C Preferred Stock, all rights of the
holders of converted Series C Preferred Stock shall cease, except the right to
receive Common Stock and cash (if the Company decides to pay any accrued and
unpaid dividends in cash upon conversion) as provided in this Section VI (c).

(d) Conversion Procedures. Any holder of shares of Series C
Preferred Stock desiring to convert such shares shall surrender the certificate
or certificates for such shares of Series C Preferred Stock at the office of
the transfer agent for the Series C Preferred Stock, which certificate or
certificates, if the Corporation shall so require, shall be duly endorsed to
the Corporation or in blank, or accompanied by proper instruments of transfer
to the Corporation or in blank, accompanied by irrevocable written notice to
the Corporation that the holder elects so to convert such shares of Series C
Preferred Stock and specifying the name or names (with address) in which a
certificate or certificates for Common Stock are to be issued.

Upon automatic conversion of Series C Preferred Stock as provided in
Section VI (a), above, certificates that, until such conversion, represented
Series C Preferred Stock ("Former Series C Certificates") shall thereafter
represent solely the right to receive the securities and/or other property to
which the holders of such certificates become entitled upon such conversion.
However, such holders shall not be entitled to certificates representing any
such securities or to receive any such other property except upon surrender of
such Former Series C Certificates at the office of the transfer agent for the
Series C Preferred Stock or such successor transfer agent as the Corporation
shall reasonably appoint for that purpose and give notice to the holders of
Former Series C Certificates of such appointment.

6
<PAGE> 27
The Corporation will, as soon as practicable after receipt of
certificates for Series C Preferred Stock accompanied by any required written
notice and compliance with any of the conditions herein contained, deliver at
such office of such transfer agent to the person for whose account such shares
of Series C Preferred Stock were so surrendered, or to his nominee or nominees,
certificates for the number of full shares of Common Stock to which he shall be
entitled as aforesaid together with a cash adjustment for any fraction of a
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Series C Preferred Stock to be converted, and
the person or persons entitled to receive the Common Stock deliverable upon
conversion of such Series C Preferred Stock shall be treated for all purposes
as the record holder or holders of such Common Stock on such date; provided,
however, that the Corporation shall not be required to convert any shares of
Series C Preferred Stock while the stock transfer books of the Corporation are
closed for any purpose, but the surrender of Series C Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon reopening of such books as if the
surrender had been made on the date of such reopening, and the conversion shall
be at the conversion rate in effect of such date. In all events, the
Corporation shall keep its stock transfer books open on the business day
immediately prior to any Redemption Date.

(e) Adjustment of Conversion Price. The Conversion Price shall be
subject to adjustment from time to time as follows:

(i) In case the Corporation shall (1) pay a dividend or make a
distribution on its Common Stock that is paid or made in other shares of Common
Stock of the Corporation, (2) subdivide its outstanding shares of Common Stock
into a greater number of shares or (3) combine its outstanding shares of Common
Stock into a smaller number of shares, then in each case the Conversion Price
in effect immediately prior thereto shall be proportionately adjusted so that
the holder of any shares of Series C Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common Stock of
the Corporation which such holder would have owned or have been entitled to
receive after the happening of any of the events described above had such
shares of Series C Preferred Stock been converted immediately prior to the
happening of such event assuming that all accrued dividends had been paid
through the date of such event. Any adjustment made pursuant to this Section
VI (e)(i) shall become effective immediately after the record date in the case
of a dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination.

(ii) Whenever the Conversion Price is adjusted as provided
in any provision of this Section VI:

(1) the Corporation shall compute the adjusted
Conversion Price in accordance with this Section VI
and shall prepare a certificate signed by the
principal financial officer of the Corporation
setting forth the adjusted Conversion Price and
showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall
forthwith be filed with the transfer agent for the
Series C Preferred Stock; and

7
<PAGE> 28
(2) a notice stating that the Conversion Price
has been adjusted and setting forth the Conversion
Price shall forthwith be required, and as soon as
practicable after it is required, such notice shall
be mailed by the Corporation to each holder of record
of Series C Preferred Stock at such holder's address
as it shall appear on the stock transfer books of the
Corporation.

(f) No Fractional Shares. No fractional shares or scrip
representing fractional shares of Common Stock shall be issued upon conversion
of Series C Preferred Stock. If more than one certificate representing shares
of Series C Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Series C
Preferred Stock so surrendered. Instead of any fractional share of Common
Stock that would otherwise be issuable upon conversion of any shares of Series
C Preferred Stock, the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to the same fraction of the last
reported sale price per share of Common Stock on any national securities
exchange or automated interdealer quotation system on the trading day prior to
the date of conversion.

(g) Reservation of Shares; Transfer Taxes; Etc. The Corporation
shall at all times reserve and keep available, out of its authorized and
unissued stock, solely for the purpose of effecting the conversion of the
Series C Preferred stock, such number of shares of its Common Stock and such
other securities free of preemptive rights as shall from time to time be
sufficient to effect the conversion of all shares of Series C Preferred Stock
from time to time outstanding. The Corporation shall from time to time, in
accordance with the laws of the State of Nevada, increase the authorized number
of shares of Common Stock and other securities if at any time the number of
shares of Common Stock and other securities not outstanding shall not be
sufficient to permit the conversion of all the then outstanding shares of
Series C Preferred Stock.

If any shares of Common Stock required to be reserved for purposes of
conversion of the Series C Preferred Stock hereunder require registration with
or approval of any governmental authority under any Federal or State law before
such shares may be issued upon conversion or exercise, the Corporation will in
good faith and as expeditiously as possible endeavor to cause such shares to be
duly registered or approved, as the case may be. If the Common Stock is listed
on the American Stock Exchange or any other national securities exchange, the
Corporation will, if permitted by The rules of such exchange, list and keep
listed on such exchange, upon official notice of issuance, all shares of Common
Stock issuance upon conversion of the Series C Preferred Stock and the exercise
of Warrants.

The Corporation will pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of Series C Preferred Stock. The Corporation shall not, however, be
required to pay any tax that may be payable in respect of any transfer involved
in the issue or delivery of Common Stock (or other securities or assets) in a
name other than that in which the shares of Series C Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such

8
<PAGE> 29
issue has paid to the Corporation the amount of such tax has established, to
the satisfaction of the Corporation, that such tax has been paid.

The Corporation shall not take any action that would cause any Common
Stock issuable upon conversion of Series C Preferred Stock immediately
following such action to be other than fully paid and nonassessable.

VII. Prior Notice of Certain Events

In case:

(a) the Corporation shall authorize the granting to all
holders of Common Stock of rights to subscribe for or purchase any shares of
stock of any class or of any other rights; or

(b) of any reclassification of the Common Stock, any
consolidation of the Corporation with, or merger of the Corporation into, any
other person, any merger of any person into the Corporation other than a merger
that does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock), or any sale or transfer of
all or substantially all of the assets of the Corporation; the Corporation
shall cause to be filed with the transfer agent for the Series C Preferred
Stock and shall cause to be mailed to each holder of record of the outstanding
Series C Preferred Stock, at such holder's address as it appears upon the stock
transfer books of the Corporation, at least 10 days prior to the applicable
record date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such granting of rights or, if Record
is not to be taken, the date as of which the holders of Common Stock of record
to be entitled to such rights are to be determined, or (y) the date on which
such reclassification, consolidated, merger or sale, is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock or
securities or other property deliverable upon such reclassification,
consolidation, merger or sale (but neither the failure so to mail such notice
nor any defect therein or in the mailing thereof, shall affect the validity of
the corporate action required to be specified in such notice).

VIII. Reacquired Shares

Any shares of Series C Preferred Stock redeemed, converted, purchased
or otherwise acquired by the corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
upon their cancellation shall become authorized but unissued shares of
Preferred Stock without designation as to series and may thereafter be reissued
as part of a new series of Preferred Stock to be created by resolution of the
Board of Directors, but not as shares of Series C Preferred Stock.

IX. Outstanding Shares

For purposes of this Certificate of Designation, all issued shares of
Series C Preferred Stock shall be deemed outstanding except (i) from any
Redemption Date as defined in Section V,

9
<PAGE> 30
all shares of Series C Preferred Stock that have been called for redemption on
that Redemption Date; (ii) from the date of surrender of certificates
representing shares of Series C Preferred Stock, all shares of Series C
Preferred Stock voluntarily converted into Common Stock; (iii) from the
effective date of any automatic conversion, all shares of Series C Preferred
Stock; and (iv) from the date of registration of transfer, all shares of Series
C Preferred Stock held of record by the Corporation or any subsidiary of the
Corporation.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be executed in its corporate name by its President and Secretary
effective as of 2nd day of November, 1993.

ATTEST: MAGNUM PETROLEUM, INC.

/s/ Virden L. Parker By: /s/ Lloyd T. Rochford
- ------------------------------- -------------------------------------
Virden L. Parker, Secretary Lloyd T. Rochford, President

STATE OF )
: ss.
COUNTY OF )

I, _______________________________ , a notary public, hereby
certify that on this _________ day of ____, 1993, personally appeared before me
Lloyd T. Rochford, the President of Magnum Petroleum, Inc., who being by me
first duly sworn, declared that he is the person who signed the foregoing
document, and that the statements therein contained are true.

See Attached
--------------------------------------
NOTARY PUBLIC

My Commission Expires: Residing at
--------------------------

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

10
<PAGE> 31
CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT
STATE OF CALIFORNIA )
COUNTY OF RIVERSIDE )
On November 2, 1993 before me [illegible] , Notary Public, personally
appeared

Lloyd T. Rochford personally known to me - OR - x proved to me on the basis of
satisfactory evidence to be the
person(s) whose name(s) is
subscribed to the within
instrument and acknowledged to me
that he executed the same in his
authorized capacity(ies), and that
by his signature(s) on the
instrument the person(s) or the
entity upon behalf of which the
person(s) acted, executed the
instrument.

WITNESS my hand and official seal.

/s/ [signature illegible]
---------------------------------
Signature of notary

CALIFORNIA ALL-PURPOSE ACKNOWLEDGMENT
STATE OF CALIFORNIA )
COUNTY OF RIVERSIDE )
On November 2, 1993 before me [illegible] , Notary Public, personally
appeared

Virden L. Parker personally known to me - OR - x proved to me on the basis of
satisfactory evidence to be the
person(s) whose name(s) is
subscribed to the within
instrument and acknowledged to me
that he executed the same in his
authorized capacity(ies), and that
by his signature(s) on the
instrument the person(s) or the
entity upon behalf of which the
person(s) acted, executed the
instrument.

WITNESS my hand and official seal.

/s/ [signature illegible]
---------------------------------
Signature of notary

11
<PAGE> 32
MAGNUM PETROLEUM, INC.

Certificate of Voting Powers, Designations,
Preferences, and Relative, Participating,
Optional or Other Special Rights of
1996 Series A Convertible Preferred Stock

We, Gary C. Evans, President and Chief Executive Officer, and
Morgan Johnston, Secretary, of Magnum Petroleum, Inc. (the "Company"), a
corporation organized and existing under the General Corporation Law of the
State of Nevada, in accordance with the provisions of Section 78.195 of the
Nevada Revised Statutes thereof, DO HEREBY CERTIFY:

That, pursuant to authority conferred upon the Board of
Directors by the Articles of Incorporation, as amended, of the Company, said
Board of Directors, at a meeting of the Board of Directors held pursuant to the
General Corporation Law of the State of Nevada, duly adopted a resolution
providing for the issuance of one million (1,000,000) shares of a new series of
preferred stock designated as 1996 Series A Convertible Preferred Stock, which
resolution is as follows:

RESOLVED, that pursuant to the Articles of Incorporation of
the Company, there be and hereby is authorized and created a series of
preferred stock, to consist of 1,000,000 shares with a par value of $.001 per
share and a stated value of $10.00 per share and that the voting powers,
designations, preferences, and relative, participating, optional or other
special rights of the 1996 Series A Convertible Preferred Stock (the "1996
Series A Preferred Stock") and the qualifications, limitations or restrictions
thereof be as follows:

1. Certain Definitions.

The following terms shall have the following meanings:

"5-Day Average Price" per share of Common Stock, for purposes
of any provisions herein at the date specified in such provision, shall mean
the average closing price of the Common Stock on the securities exchange or
other national market system on which the Common Stock is then listed over the
5-trading day period immediately prior to such date.

"60-Day Average Price" per share of Common Stock, for purposes
of any provision herein at the date specified in such provision, shall mean the
average closing price of the Common Stock on the securities exchange or other
national market system on which the Common Stock is then listed over the
60-trading day period immediately prior to such date.

1
<PAGE> 33
"10-Day Average Price" per share of Common Stock, for purposes
of any provision herein at the date specified in such provision, shall mean the
average closing price of the Common Stock on the securities exchange or other
national market system on which the Common Stock is then listed over the
10-trading day period immediately prior to such date.

"30-Day Average Price" per share of Common Stock, for purposes
of any provision herein at the date specified in such provision, shall mean the
average closing price of the Common Stock on the securities exchange or other
national market system on which the Common Stock is then listed over the
30-trading day period immediately prior to such date.

"Act" shall mean the Securities Act of 1933, as amended.

"Additional Shares of Nonpreferred Stock" shall mean all
shares of Nonpreferred Stock issued by the Company after the Closing Date other
than (i) the shares of Common Stock issued to a holder of the 1996 Series A
Preferred Stock upon conversion or redemption of, or dividends on, the 1996
Series A Preferred Stock, (ii) any shares of Common Stock issued pursuant to
the outstanding warrants listed on Attachment 1 hereto, (iii) any shares of
Common Stock issued pursuant to options, rights or warrants to purchase Common
Stock issued pursuant to the Company's Incentive Stock Option Plan provided,
that (a) such issuances do not exceed in the aggregate 1,200,000 shares
(including those options previously issued and listed on Attachment 2 hereto)
and (b) the exercise price under such options, rights and warrants (other than
those listed on Attachment 2 hereto) shall be payable in cash and shall be not
less than the greater of $4.70 per share or the Fair Market Price on the date
of issuance of the option, right or warrant, (iv) the issuance of up to
5,750,000 shares of Common Stock in the aggregate (a) in one or more
underwritten public offerings after the Closing Date and on or before June 30,
1997 at a price per share less than the Conversion Price but not less than
$4.00 and/or (b) pursuant to the exercise of the IPO Warrants at a price of
$5.50 per share on or before November 12, 1998 and (v) shares of Common Stock,
either sold to employees of the Company or contributed as a matching
contribution at a price not less than the then current Fair Market Price
pursuant to the Company's 401(k) plan.

"Business Day" means any day other than a Saturday, a Sunday,
any day on which the New York Stock Exchange is closed or any other day on
which banking institutions in New York or California are authorized or required
by law to be closed.

"Cash Equivalent Amount" means, with respect to any cash
amount which may, in accordance with the terms of this Certificate, be paid to
the holders of the 1996 Series A Preferred Stock by way of dividend, redemption
or other distribution, the number of shares (or fraction thereof) of Common
Stock equal in value to such cash amount. For purposes of determining the Cash
Equivalent Amount, the shares of Common Stock shall be valued at 80% multiplied
by the lower of (i) the 30-Day Average Price of the Common Stock or (ii) the
5-Day

2
<PAGE> 34
Average Price of the Common Stock; provided, that if the Cash Equivalent Amount
cannot be ascertained by such methods, then the Common Stock shall be valued at
80% multiplied by the lower of (i) the net book value per share of Common
Stock, determined in accordance with generally accepted accounting principles,
or (ii) the fair value per share of Common Stock determined pursuant to the
Valuation Procedure. The Cash Equivalent Amount shall be determined as of the
date immediately prior to the date of issuance of any such Common Stock.

"Closing Date" means the date of the closing of the first sale
of the 1996 Series A Preferred Stock.

"Commission" shall mean the Securities and Exchange Commission
or any other similar or successor agency of the federal government
administering the Act.

"Common Stock" shall mean the Company's common stock, $.002
par value per share.

"Conversion Price" shall initially be $5.875 and shall be
adjusted and readjusted from time to time as provided in Section 8.

"Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable
for Additional Shares of Nonpreferred Stock, either immediately or upon the
arrival of a specified date or the happening of a specified event.

"Coverage Deficiency" shall mean the failure of the Company to
maintain a Coverage Ratio of at least 150% at any time.

"Coverage Ratio" shall mean, at any time in question the
quotient obtained by dividing:

(i) The sum of (A) working capital (as defined in
GAAP) net of or reduced by funds allocated to the payment of
outstanding debt or sinking fund obligations, (B) 100% of the
NPV10 of all Proved Reserves attributable to the interests of
the Company in oil and gas properties as determined from the
Independent Engineering Report most recently prepared as of
such time (which report shall be adjusted to reduce the
projected cash flow and production volumes of oil and gas by
the volumes of oil and gas actually produced since the
effective date of such report) and (c) 100% of the NPV10 of
Projected Operating Profits

3
<PAGE> 35
(ii) the Gross Liabilities at such time.

"Development Plan" shall mean the plan of development attached
to the Secretary's Certificate pursuant to Section 3.1.7(a) of the Stock
Purchase Agreement relating to the 1996 Series A Preferred Stock, as such
Development Plan may be amended from time to time with the consent of the
holders of the 1996 Series A Preferred Stock pursuant to Section 6.5(f) hereof.

"Direct Taxes" means production, severance, ad valorem,
excise, franchise or other taxes or governmental charges or assessments on the
oil and gas properties of the Company or the production therefrom or the
proceeds of such production, but excluding any federal, state or local income
taxes.

"Fair Market Price" per share of Common Stock, for purposes of
any provision herein at the date specified in such provision, shall mean the
greater of (i) the 30-Day Average Price of the Common Stock or (ii) the 5- Day
Average Price of the Common Stock; provided, that if the Fair Market Price per
share of Common Stock cannot be ascertained by such methods, then the Fair
Market Price per share of Common Stock shall be deemed to be the greater of (i)
the net book value per share of Common Stock, determined in accordance with
generally accepted accounting principles, or (ii) the fair value per share of
Common Stock determined pursuant to the Valuation Procedure.

"Freely Tradeable Common Stock" shall mean Common Stock (A)
for which a registration statement with respect to the sale of such Common
Stock shall have become effective under the Act and all of such Common Stock
may be disposed of from time to time in transactions on the principal exchange
or market where such Common Stock is publicly traded or in negotiated
transactions, (B) all of which may be distributed immediately to the public
pursuant to Rule 144 (or any successor provision) under the Act, or (C) all of
which is represented by certificates not bearing a legend restricting transfer
and the disposition of which Common Stock does not require registration or
qualification under the Act or any state securities laws then in force.

"GAAP" means with respect to the Company and any Affiliate
domiciled in the United States, those generally accepted accounting principles
and practices which are recognized as such by the Financial Accounting
Standards Board (or any generally recognized successor) in the United States.

"Gross Liabilities" shall mean all liabilities of the Company
determined in accordance with GAAP plus the Liquidation Value.

"Incentive Stock Option Plan" shall mean that certain
Incentive Stock Option Plan, to be adopted by the Board of Directors on or
before December 31, 1996, which shall be consistent with the summary of
principal terms delivered to purchasers of the 1996 Series A

4
<PAGE> 36
Preferred Stock prior to the Closing Date, as the same may be amended from time
to time with the prior approval of the holders of a majority of the 1996 Series
A Preferred Stock.

"Independent Engineer" shall mean Gaffney, Cline & Associates,
Inc. or such other independent engineering consultant selected by the Company
from those on the approved list of TCW (as defined in the Stock Purchase
Agreement), attached hereto as Exhibit A.

"Independent Engineering Report" shall mean the engineering
reports prepared by the Independent Engineer (i) covering all of the material
oil and gas properties of the Company, (ii) prepared at the Company's expense,
(iii) reporting on the Proved Developed Producing Reserves, Proved Developed
Non-Producing Reserves and Proved Undeveloped Reserves of the oil and gas
properties of the Company, and separately calculating the NPV10 of each such
category of Reserves, and (iv) using pricing specified in the definition of
NPV10 of Proved Reserves.

"IPO Warrants" shall mean those certain warrants for the
purchase of not more than 854,176 shares of Common Stock at a price of $5.50
per share expiring November 12, 1998 and issued pursuant to that certain
Warrant Agreement dated as of October 1, 1995 between the Company and
Securities Transfer Corporation, a Texas corporation.

"Junior Stock" shall have the meaning set forth in Section 2.

"Limited Voting Events" shall mean each of the events
specified in Section 6.2.2.

"Liquidation Amount" means $10.00, plus a sum equal to all
accumulated but unpaid dividends and interest thereon, if any, through the date
of any determination thereof, per share of 1996 Series A Preferred Stock.

"Liquidation Value" shall mean the Liquidation Amount with
respect to all issued and outstanding 1996 Series A Preferred Stock plus any
unreimbursed costs and expenses payable to the holders of the 1996 Series A
Preferred Stock pursuant to the terms hereof or the Stock Purchase Agreement.

"Net Cash Receipts" means the sum per share of the 1996 Series
A Preferred Stock of (i) any net cash received by the Holders of the 1996
Series A Preferred Stock as dividends or distributions on the 1996 Series A
Preferred Stock and (ii) any net cash proceeds received by the Holders of the
1996 Series A Preferred Stock from the sale of any Dividend Shares less any and
all expenses and costs incurred in connection with the issuance, holding, sale
or transfer of such Dividend Shares.

5
<PAGE> 37
"Nonpreferred Stock" shall mean the Common Stock and shall
also include stock of the Company of any other class which is not preferred as
to dividends or assets over any other class of stock of the Company and which
is not subject to redemption.

"NPV10 of Proved Reserves" shall mean with respect to any
Proved Reserves expected to be produced from the oil and gas properties of the
Company, the net present value of the future net revenues expected to accrue to
the Company's interests in such reserves during the remaining expected economic
lives of such Reserves, discounted at 10% per annum. Each calculation of such
expected future net revenues shall be made as of the date when requested in
accordance with the then existing standards of the Society of Petroleum
Engineers and Society of Petroleum Evaluation Engineers and using all
assumptions, estimates and projections, including without limitation estimated
product prices, capital expenditures, lease and well operating expenses and
taxes (other than income taxes in accordance with applicable provisions of item
302 of Regulation S-K of the Commission and Statement of Financial Accounting
Standards No. 69), as in effect from time to time, for the purpose of preparing
reports on Form 10-K of Persons subject to the reporting requirements of the
Exchange Act.

"NPV10 of Projected Operating Profits" shall mean with respect
to any net profits reasonably projected to be received by the Company from the
operation of gathering and processing facilities owned by the Company under
contracts which are in effect with respect to such gathering and processing
facilities, the net present value of such future net profits expected to accrue
to the Company during the remaining terms of any contracts to provide gathering
or processing services with respect to production of Proved Developed Producing
Reserves (which in any event shall not extend beyond either (a) the first date
any party to such contract other than the Company may terminate such contract
without cause or (b) the expected economic lives of the Reserves the production
of which is being gathered or processed under such contracts), discounted at
10% per annum. Each calculation of such future net profits shall be made by
the Independent Engineer as of the date when requested in accordance with the
then existing standards of the Society of Petroleum Engineers and Society of
Petroleum Evaluation Engineers, provided, that in any event:

(i) appropriate deductions shall be made for (A) Direct
Taxes and existing burdens, (B) direct operating expenses, (C) third
party transportation, gathering and processing costs, if any, (D)
capital expenditures, and (E) any direct general, administrative, and
overhead costs, all consistent with the most recent actual costs and
expenses and, as to the items described in clauses (B), (C), (D) and
(E) above only, escalated at three percent (3%) per annum commencing
with the calendar year immediately following the date of calculation;
and

(ii) the pricing assumptions and escalations used in
determining NPV10 for any net profits expected to be received under
contracts with respect to such gathering and

6
<PAGE> 38
processing facilities shall be the contract price, if any, during the
term of any written gathering or processing contract between the
Company and unrelated Persons escalated as provided in the particular
contract but not otherwise.

"NPV30 Amount" means the aggregate amount per share of the
1996 Series A Preferred Stock of the net present values, as of the date of the
first issuance of shares of the 1996 Series A Preferred Stock, of all Net Cash
Receipts discounted quarterly from the date actually received by the Holders of
the 1996 Series A Preferred Stock at an annual discount rate of 30% using the
discount factors set forth on Schedule 1 attached hereto.

"Proved Developed Non-Producing Reserves" are Proved Reserves
comprised of Shut-in Reserves" and Behind-pipe Reserves" as determined in
accordance with the then existing standards of the Society of Petroleum
Engineers and Society of Petroleum Evaluation Engineers.

"Proved Developed Producing Reserves" means Proved Reserves
that are expected to be recovered from completion intervals open and producing
at the time of the estimate.

"Proved Reserves" means those Reserves which are "Proved Oil
and Gas Reserves" without the meaning of Rule 4-10 of Regulation S-X, 17 C.F.R.
Section 210.4-10 of the Commission and as determined in accordance with the
then existing standards of the Society of Petroleum Engineers and Society of
Petroleum Evaluation Engineers.

"Proved Undeveloped Reserves" means those Reserves which are
"Proved Undeveloped Reserves" within the meaning of Rule 4-10 of Regulation
S-X, 17 C.F.R. Section 210.4-10 of the Commission and as determined in
accordance with the then existing standards of the Society of Petroleum
Engineers and Society of Petroleum Evaluation Engineers.

"Reserves" means estimated volumes of crude oil, condensate,
natural gas, natural gas liquids, and associated substances anticipated to be
commercially recoverable from known accumulations from a given date forward,
under then existing economic conditions, by established operating practices,
and under current government regulations. Reserve estimates are based on
interpretation of geologic and/or engineering data available at the time of the
estimate. Reserve do not include volumes of crude oil, condensate, natural gas
(including storage gas), or natural gas liquids being held in inventory.

"Special Voting Events" shall mean each of the events
specified in Section 6.2.1.

"Valuation Procedure shall have the meaning set forth in
Section 8.3(b).

"Voting Events" shall mean the Special Voting Events and the
Limited Voting Events.

7
<PAGE> 39
"1993 Series A Preferred Stock" shall mean the preferred stock
of the Company with a par value of $.001, issued pursuant to a Certificate of
Designation filed with the Nevada Secretary of State on May 21, 1993.

2. Ranking of the 1996 Series A Preferred Stock.

So long as any shares of 1996 Series A Preferred Stock shall
be outstanding, the 1996 Series A Preferred Stock shall rank senior with
respect to the right to receive dividends or assets upon liquidation,
dissolution or winding up of the Company to the Common Stock and to all other
series of preferred stock, except with respect to the rights of the 1993 Series
A Preferred Stock to receive a liquidation preference from the liquidation
proceeds of the interests of the Company the West Dilley Prospect, Frio County,
Texas and the Hope Prospect, Gonzales County, Texas in an amount equal to the
lesser of such proceeds or the remaining unpaid dividends on such 1993 Series A
Preferred Stock or classes or series of capital stock hereafter or heretofore
established by the Board of Directors (collectively, the "Junior Stock").

3. Dividends; Restricted Payments.

3.1. Dividend Payment Dates. The holders of the 1996
Series A Preferred Stock shall be entitled to receive when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
cumulative dividend payments, payable quarterly in accordance with this Section
3, on March 31, June 30, September 30 and December 31 of each year commencing
on December 31, 1996. Dividends on the 1996 Series A Preferred Stock shall be
cumulative from the date of original issue of the 1996 Series A Preferred
Stock. Accumulations of dividends, whether or not declared, shall bear
interest at a rate of 8.75% per annum, compounded quarterly, which interest
shall be deemed accrued dividends payable in the same manner and at the same
time as dividends and redemptions shall be paid on the 1996 Series A Preferred
Stock.

3.2 Form of Payment. Dividends on the 1996 Series A
Preferred Stock shall be paid in cash at a quarterly rate of $.21875 per share;
provided, however, that if any such dividend shall not be declared on or before
the fifth Business Day of the month after the quarterly payment date on which
it accrues or paid by the penultimate Business Day of such calendar month (the
"Dividend Payment Date"), the holders shall have the option to require the
Company to pay such accumulated dividends in shares (the "Dividend Shares")
(whether whole or fractional) of Freely Tradeable Common Stock valued at the
Cash Equivalent Amount for the purposes of determining the number of shares (or
fraction thereof) of Freely Tradeable Common Stock to be issued, provided,
further, that with respect to the first time any such dividend is not both
declared and paid in cash on or before the Dividend Payment Date, the Company
shall, within thirty (30) days of the Dividend Payment Date, prepare and file
with the Commission a "shelf" registration statement (a "Shelf Registration")
on any appropriate form pursuant to Rule 415 under the Act (or similar rule
that may be adopted by the Commission) with respect to the Dividend Shares

8
<PAGE> 40
having a Cash Equivalent Amount equal to the projected dividends over a one
year period, and use best efforts to cause such Shelf Registration to become
and remain continuously effective until the first to occur of two years after
the date of such Shelf Registration or the sale of all Dividend Shares covered
thereby; and prepare and file with the Commission such amendments and
supplements to the Shelf Registration and the prospectus used in connection
therewith as may be necessary to keep the Shelf Registration continuously
effective and to comply with the provisions of the Act with respect to the
transfer of all securities covered by the Shelf Registration whenever the
holder or holders of the 1996 Series A Preferred Stock shall desire to sell or
otherwise dispose of the same; provided, that no amendment to the Shelf
Registration naming any holder of the 1996 Series A Preferred Stock as selling
shareholders shall be filed with the Commission until such holder shall have
had at least seven (7) days to review the Shelf Registration as originally
filed and theretofore amended and to approve or disapprove any portion of the
Shelf Registration describing or referring to such holder. The Company shall
file a new Shelf Registration, pursuant to the same procedures and subject to
the same rights of the 1996 Series A Preferred Stock as set forth above with
respect to the prior Shelf Registration, covering a like number (ie: having a
Cash Equivalent Amount equal to the projected dividends over a one year period)
of Dividend Shares at such time that the Cash Equivalent Amount (determined on
the date of calculation) of the unissued Dividend Shares covered by the prior
Shelf Registration filed under this Section 3.3 shall be less than an amount
equal to one quarter (1/4) of the dividends projected to accrue on the
outstanding 1996 Series A Preferred Stock. At any time from and after any
holder of the 1996 Series A Preferred Stock shall be entitled to exercise the
option to require the Company to pay accumulated accrued dividends in Dividend
Shares, any such holder may notify the Company of its intent to exercise its
option to require the Company to pay accumulated dividends in shares of Freely
Tradeable Common Stock no later than the fifteenth Business Day of any month
and the Company shall issue the Freely Tradeable Common Stock to the holders of
the 1996 Series A Preferred Stock within ten (10) Business Days after such
notification by TCW. Any holder receiving Dividend Shares shall submit to the
Company no less frequently than once each calendar quarter written notice of
the amount and date of receipt of any Net Cash Receipts as described in clause
(ii) of the definition thereof received by such holder in the prior calendar
quarter.

3.3 Record Date. The Board of Directors shall fix a
record date for the determination of holders of the 1996 Series A Preferred
Stock entitled to receive payment of a dividend declared thereon, which record
date shall be not more than sixty (60) days prior to the date fixed for the
payment thereof.

3.4 Restricted Payments. Unless full cumulative
dividends on the 1996 Series A Preferred Stock have been paid, no dividends
shall be declared or paid or set apart for payment or other distribution upon
any Junior Stock nor shall any Junior Stock be redeemed, purchased or otherwise
acquired by the Company for any consideration (or any payment made to or
available for a sinking fund for the redemption of any shares of such stock) by
the Company except that the Company shall be permitted to redeem, purchase or
otherwise acquire any existing outstanding

9
<PAGE> 41
shares of the 1993 Series A Preferred Stock and the warrants described in
Attachment 1 hereto provided that the aggregate consideration paid by the
Company in connection therewith shall not exceed $100,000.

4. Redemption.

4.1 Mandatory Redemption. In the event that the Company
has not received before June 30, 1997 at least $15,000,000 of net cash proceeds
from the issuance and sale by the Company of Common Stock which was not issued
and outstanding on the Closing Date, the Company shall redeem annually on each
of June 30, 2006, June 30, 2007 and June 30, 2008, 333,333 shares of the 1996
Series A Preferred Stock. Redemptions pursuant to this Section 4.1 shall be
paid, at the option of the Company, (i) in cash for a price per share of the
1996 Series A Preferred Stock equal to the Liquidation Amount, (ii) with shares
(whether whole or fractional) of Freely Tradeable Common Stock having a Cash
Equivalent Amount equal to the Liquidation Amount or (iii) by combination of
cash and such shares; provided, that if such redemption shall be paid in a
combination of cash and shares of Common Stock, all holders of the 1996 Series
A Preferred Stock shall receive cash and shares of Common Stock in the same
ratio, except that the Company, at its option, may pay cash in lieu of
fractional shares of Common Stock valued at the Cash Equivalent Amount. In the
event that at any time less than all of the shares of 1996 Series A Preferred
Stock outstanding are to be redeemed pursuant to this Section 4.1, the Company
shall effect such redemption pro rata according to the number of shares of 1996
Series A Preferred Stock held by each holder thereof.

4.2 Redemption Upon Change of Control. Upon the sale,
conveyance or disposition of all or substantially all of the assets of the
Company, the net proceeds of which, after making provisions for all liabilities
(contingent or otherwise) of the Company, exceed the amount required to pay the
full Liquidation Amount to which each holder of the 1996 Series A Preferred
Stock is entitled upon liquidation of the Company, or a sale, conveyance or
disposition of a majority of the outstanding shares of Common Stock in a
transaction or series of related transactions (except for a merger or
consolidation after the consummation of which the stockholders of the Company
own a majority of the voting securities of the surviving corporation or its
parent corporation), each holder of the 1996 Series A Preferred Stock shall
have the right to require that the Company redeem all or any part of such
holder's 1996 Series A Preferred Stock for cash out of legally available funds
at a price per share equal to the Liquidation Amount.

If on the date of such sale, conveyance or disposition funds
legally available for such redemption shall be insufficient to redeem all of
the outstanding shares of 1996 Series A Preferred Stock held by holders who
have elected to have their shares redeemed, funds to the extent legally
available shall be used for such purpose and the Company shall effect such
redemption pro rata according to the number of shares of 1996 Series A
Preferred Stock held by each holder thereof. The redemption requirements
provided hereby shall be continuous, so that

10
<PAGE> 42
if on the date of such sale, conveyance or disposition such requirements cannot
be fully discharged, without further action by any holder of the 1996 Series A
Preferred Stock funds legally available shall be applied therefor until such
requirements are fulfilled.

Upon payment in full of the amounts owing under this Section
4.2 to any holder of 1996 Series A Preferred Stock who has elected to have its
shares redeemed, then notwithstanding that the certificate or certificates
evidencing such shares shall not have been surrendered, the dividends with
respect to such shares shall cease to accrue after the date of such payment in
full and all rights with respect to such shares shall forthwith terminate.

4.3 Optional Redemption. The shares of the 1996 Series A
Preferred Stock may be redeemed, in whole but not in part, at the option of the
Company, if (i) the Board of Directors of the Company has approved a bona fide
merger, consolidation or acquisition opportunity of the Company which is
evidenced by a duly executed letter of intent or agreement between all
applicable parties and which would require the affirmative vote or consent of
the holders of at least 70% of the outstanding shares of the 1996 Series A
Preferred Stock pursuant to Section 6.5(b) below, (2) the Company has made a
detailed presentation to the holders of the 1996 Series A Preferred Stock
regarding the proposed merger or acquisition, and (3) within five (5) Business
Days of such presentation such holders (A) do not provide their consent to such
transaction or (B) do not convert the 1996 Series A Preferred Stock to Common
Stock.

Redemption pursuant to this Section 4.3 shall be paid, in
immediately available funds for a price per share of 1996 Series A Preferred
Stock equal to $21.50.

4.4 Redemption Notice. The Company shall give written
notice (the "Redemption Notice") to each holder of the 1996 Series A Preferred
Stock at least 20 Business Days prior to the date (the "Redemption Date") of
any redemption required or permitted under this Section 4, such notice to be
addressed to each holder at the address as it appears on the stock transfer
books of the Company. Such notice shall specify (i) the Redemption Date, (ii)
the number of all shares of the 1996 Series A Preferred Stock of each holder to
be redeemed and (iii) the amount and form or forms of payment therefor and the
method of calculation thereof (the "Redemption Amount"). On or after each such
Redemption Date, each holder of the 1996 Series A Preferred Stock shall
surrender a certificate or certificates representing the number of shares of
the 1996 Series A Preferred Stock to be redeemed as stated in the Redemption
Notice provided by the Company. If the Redemption Notice shall have been duly
given, and if on the Redemption Date the Redemption Amount is either paid or
made reasonably available for payment in immediately available funds, Freely
Tradeable Common Stock or a combination thereof as provided herein to the
holders of the 1996 Series A Preferred Stock being redeemed, then
notwithstanding that the certificates evidencing any of the 1996 Series A
Preferred Stock so called for redemption shall not have been surrendered, the
dividends with respect to such shares shall cease to accrue after the
Redemption Date and all rights with respect to such shares shall forthwith

11
<PAGE> 43
terminate after the Redemption Date, except only the right of the holders to
receive the Redemption Amount without interest upon surrender of their
certificate or certificates. Notwithstanding anything to the contrary
contained herein, with respect to any shares of 1996 Series A Preferred Stock
scheduled for redemption pursuant to a Redemption Notice, the holders of such
shares may at any time prior to the Redemption Date, upon written notice to the
Company as provided herein, exercise their right to convert all or any portion
of such shares into Common Stock at the Conversion Price.

5. Liquidation Rights.

Upon any liquidation, dissolution or winding up of the affairs
of the Company, no distribution shall be made to the holders of any Junior
Stock unless, prior to the first such distribution, the holders of the 1996
Series A Preferred Stock shall have received the Liquidation Amount. If the
assets distributable in any such event to the holders of the 1996 Series A
Preferred Stock are insufficient to permit the payment to such holders of the
full preferential amounts to which they may be entitled, such assets shall be
distributed ratably among the holders of the 1996 Series A Preferred Stock in
proportion to the full preferential amount each such holder would otherwise be
entitled to receive.

6. Voting Rights of 1996 Series A Preferred Stock.

6.1. Voting Rights. The holders of the 1996 Series A
Preferred Stock shall be entitled, on all matters submitted for a vote of the
holders of shares of Common Stock, whether pursuant to law or otherwise, to a
number of votes per share of the 1996 Series A Preferred Stock equal to the
number of shares of Common Stock issuable upon conversion of one share of the
1996 Series A Preferred Stock on the date of such vote, and on all such matters
shall vote together as one class with the holders of Common Stock and the
holders of all other shares of stock entitled to vote with the holders of
Common Stock on such matters. Notwithstanding the foregoing, the holders of
the 1996 Series A Preferred Stock shall at all times have the right, as a
class, to elect at least one member of the Board of Directors of the Company;
provided, that in the event that the holders of the 1996 Series A Preferred
Stock do not exercise their right to elect a board member, they may appoint an
observer who may attend and participate in all meetings (including committee
meetings) of the Board of Directors of the Company and who shall be entitled to
the same expense reimbursement as Directors of the Company.

6.2 Special Venture Rights. In addition to the voting
rights described in Section 6.1 above, the holders of the 1996 Series A
Preferred Stock shall have the voting powers provided for by law and the
further voting powers provided for below:

6.2.1 Special Voting Events. If one or more of the Special
Voting Events (as defined below) occurs and remains outstanding and has not
been specifically waived in writing

12
<PAGE> 44
by holders of 70% or more of the shares of the 1996 Series A Preferred Stock,
then, to the extent permitted by law as relating to directorships, the holders
of such 1996 Series A Preferred Stock shall have the right, voting separately
from all other classes and series, to call a special meeting of all
Shareholders and to elect a total of 75% of the directors of the Company. The
remaining directors shall be elected by the other classes or series of stock
entitled to vote therefor. If and when such right of the holders of the 1996
Series A Preferred Stock becomes operative, the maximum authorized number of
members of the Board of Directors of the Company shall automatically be
increased to the extent necessary to create any vacancy or vacancies to be
filled only by vote of the holders of the 1996 Series A Preferred Stock then
outstanding as hereinafter set forth. Whenever such right of the holders of
the 1996 Series A Preferred Stock shall become operative, such right shall be
exercised initially either at a special meeting of the holders of the 1996
Series A Preferred Stock called as provided in Section 6.3 below or at any
annual meeting of stockholders held for the purpose of electing directors, and
thereafter at such annual meetings. In electing the directors to be elected by
the holders of the 1996 Series A Preferred Stock, each holder of such stock
shall have one vote for each share thereof held. The right of the holders of
the 1996 Series A Preferred Stock, voting separately from all other classes and
series, to elect 75% of the members of the Board of Directors of the Company as
aforesaid shall continue until such Special Voting Event is cured or waived as
set forth above, at which time the right of the holders of the 1996 Series A
Preferred Stock to vote separately and as a class as provided in this Section
6.2.1 shall terminate (subject to becoming operative again in the event of a
subsequent Special Voting Event) and the maximum authorized number of members
of the Board of Directors of the Company shall automatically be reduced if such
number was increased at the time when the terminated voting right of the
holders of the 1996 Series A Preferred Stock became operative. Notwithstanding
the foregoing, in no event shall the Company increase the number of members of
the Board of Directors above nine, plus those members of the Board of Directors
elected by the holders of the 1996 Series A Preferred Stock.

Such "Special Voting Events" are:

(a) the failure by the Company to redeem the 1996
Series A Preferred Stock when such redemption is required hereunder;

(b) the occurrence of any event or condition in
respect of any debt or security of the Company or any of its
subsidiaries, or under any agreement securing or relating to such debt
or security the effect of which is to cause or to permit any holder of
such debt or other security or trustee to cause (whether or not such
holder or trustee elects to cause) such debt or security, or a portion
thereof, to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment provided, that, with respect to
any debt other than the Company's senior bank or other credit
facility, such debt exceeds $3,000,000; and the Company is given
notice of the acceleration of such debt or other security;

13
<PAGE> 45
(c) the commencement of an involuntary case or
other proceeding against the Company or any of its subsidiaries, which
seeks liquidation, reorganization or other relief with respect to it
or its debtor, other liabilities under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or the
entry of an order for relief against the Company or any of its
subsidiaries in any such case under the United States Bankruptcy Code;

(d) the commencement by the Company or any of its
subsidiaries of or the approval by a majority of the Board of
Directors of the Company or any of its subsidiaries of the
commencement of a voluntary case or other proceeding, seeking
liquidation, reorganization or other relief with respect to itself or
its debts or other liabilities under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or
consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or the making by the Company or any
of its subsidiaries of a general assignment for the benefit of
creditors, or failure by the Company or any of its subsidiaries
generally to or written admission of its inability to pay its debts
generally as they become due, or the taking of any corporate action to
authorize or effect any of the foregoing;

(e) the dissolution of the Company or the
discontinuation of its usual business;

(f) a breach by the Company of any covenant, term
or condition of this Certificate of Designation or the Stock Purchase
Agreement, which breach is continuing and uncured for a period of at
least 60 days after delivery of written notice thereof to the Company;
or

(g) the failure by the Company to declare
accumulated dividends or issue Freely Tradeable Common Stock upon the
request of any holder of the 1996 Series A Preferred Stock where the
Company has accumulated dividends and where such breach is continuing
and uncured for a period of at least 60 days after delivery of written
notice thereof to the Company;

In the event at any time after January 1, 1999 that the
average closing price of the Company's Common Stock (as adjusted for stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like) on the securities exchange or other national market system
on which the Common Stock is then listed over a period of at least 60
continuous trading days commencing after December 31, 1998 shall be in excess
of 120% of the Required Forced

14
<PAGE> 46
Conversion Market Price described in Section 8.3 below in effect on each of
such trading days, the Special Voting Events set forth above shall become
Limited Voting Events.

6.2.2 Limited Voting Events. If one or more of the
Limited Voting Events occurs and remains outstanding and has not been
specifically waived in writing by the holders of 70% or more of the shares of
the 1996 Series A Preferred Stock, then, to the extent permitted by law as
relating to directorships, the holders of such 1996 Series A Preferred Stock
shall have the right, voting separately from all other classes and series, to
elect one additional director of the Company every 60 days until such time as
the Limited Voting Event no longer remains outstanding, provided, however, that
if the Board of Directors shall increase above seven (7) persons, excluding
those directors appointed by the holders of the 1996 Series A Preferred Stock,
the holders of the 1996 Series A Preferred Stock shall have the right, voting
separately from all other classes and series, to elect one additional director
of the Company every 45 days until such time as the Limited Voting Event no
longer remains outstanding. The remaining directors shall be elected by the
other classes or series of stock entitled to vote therefor, including the 1996
Series A Preferred Stock as set forth in Section 6.1. If and when such right
of the holders of the 1996 Series A Preferred Stock becomes operative, the
maximum authorized number of members of the Board of Directors of the Company
shall automatically be increased to the extent necessary to create any vacancy
or vacancies to be filled only by vote of the holders of the 1996 Series A
Preferred Stock then outstanding as hereinafter set forth. Whenever such right
of the holders of the 1996 Series A Preferred Stock shall become operative,
such right shall be exercised initially either at a special meeting of the
holders of the 1996 Series A Preferred Stock called as provided in Section 6.3
below or at any annual meeting of stockholders held for the purpose of electing
directors, and thereafter at such annual meetings. In electing the directors
to be elected by the holders of the 1996 Series A Preferred Stock pursuant to
this Section 6.2.2, each holder of such stock shall have one vote for each
share thereof held. The right of the holders of the 1996 Series A Preferred
Stock, voting separately from all other classes and series, to elect the
members of the Board of Directors of the Company as aforesaid shall continue to
accrue and increase until such Limited Voting Event is cured or waived as set
forth above, at which time the right of the holders of the 1996 Series A
Preferred Stock to vote separately and as a class as provided in this Section
6.2.2 shall terminate (subject to becoming operative again in the event of a
subsequent Limited Voting Event) and the maximum authorized number of members
of the Board of Directors of the Company shall automatically be reduced if such
number was increased at the time when the terminated voting right of the
holders of the 1996 Series A Preferred Stock became operative. Notwithstanding
the foregoing, in no event shall the Company increase the number of members of
the Board of Directors above nine, plus those members of the Board of Directors
elected by the holders of the 1996 Series A Preferred Stock.

Such "Limited Voting Events" are:

(a) the occurrence of a Coverage Deficiency;

15
<PAGE> 47
(b) a breach by the Company of any material covenant,
term or condition in respect of any debt of the Company in excess of $2,000,000
which breach is continuing and uncured; or

6.3 Procedures Relating to Special Voting Rights.

(a) At any time when the special voting rights of the
holders of the 1996 Series A Preferred Stock provided in Section 6.2
above shall have become operative and not have been exercised, a
proper officer of the Company shall, upon the written request of the
holders of record of at least 20% of the shares of 1996 Series A
Preferred Stock then outstanding addressed to the Secretary of the
Company, call a special meeting of the holders of the 1996 Series A
Preferred Stock for the purpose of electing the allotted directors to
be elected by the 1996 Series A Preferred Stock. Such meeting shall
be held at the earliest practicable date upon the notice required for
annual meetings of stockholders at such place in the continental
United States as may be specified in such written request. If such
meeting shall not be called by the proper officer of the Company
within twenty (20) days after the personal service of such written
request upon the Secretary of the Company, or within twenty (20) days
after mailing the same within the United States by registered or
certified mail enclosed in a postpaid envelope addressed to the
Secretary of the Company at its principal office, then the holders of
record of at least 20% of the shares of 1996 Series A Preferred Stock
then outstanding may designate in writing one of their number to call
such meeting at the expense of the Company, and such meeting may be
called by the person so designated upon the notice required for annual
meetings of stockholders and shall be held at such place in the
continental United States as may be specified in such notice.
Notwithstanding the provisions of this Section 6.3, no such special
meeting shall be called during the period of sixty (60) days
immediately preceding the date fixed for any annual or special meeting
of stockholders if the staff of the Securities and Exchange Commission
shall have advised the Company that the calling of any such meeting
shall require the Company to amend or supplement its proxy soliciting
materials relating to such annual or special meeting of stockholders;
and no such special meeting shall be called if in connection with such
meeting a proxy solicitation conforming to the rules and regulations
issued under the Securities Exchange Act of 1934, as amended, shall be
required, but in such event the election of directors by the holders
of the 1996 Series A Preferred Stock shall take place at the next
annual meeting of stockholders, unless the right of the holders of the
1996 Series A Preferred Stock to elect directors shall in the meantime
have terminated.

16
<PAGE> 48
(b) Upon any termination of the right of the
holders of the 1996 Series A Preferred Stock to elect directors as
hereinabove provided, the term of office of any director then in
office elected by the 1996 Series A Preferred Stock shall terminate
immediately. If the office of any director elected by the holders of
the 1996 Series A Preferred Stock becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or
otherwise, then the procedure provided for in Section 6.3(a) above
shall be used to fill the vacancy.

(c) Subject to the provisions of Section 6.2, the
By-Laws of the Company shall automatically be deemed amended from time
to time to provide for the increase or reduction in the maximum
authorized number of members of the Board of Directors and for the
election procedure as hereinabove in this Section 6.3 provided.

6.4. Rights Relating to Board of Directors.

The Company will promptly execute and deliver to any
individual elected to the Board of Directors, pursuant to Section 6.2,
an agreement by the Company to indemnify and hold harmless such
individual for any and all actions taken by such individual in his
capacity as a member of the Board of Directors to the fullest extent
permitted by the laws of the state of incorporation of the Company.
Unless waived or modified by the holders of a majority of the 1996
Series A Preferred Stock, the Company will also use its best efforts
to promptly provide for such individual such amount of director's
liability insurance as is normal and customary for corporations which
have common stock that is publicly traded on the American Stock
Exchange.

6.5. Certain Actions by the Company. So long as any
shares of the 1996 Series A Preferred Stock are outstanding, the Company will
not, without the affirmative vote or consent of all of the holders of the
outstanding shares of 1996 Series A Preferred Stock, voting as a separate
class, amend or repeal any provision of, or add any provision to, the Company's
Articles of Incorporation which affect the dividend rate, Liquidation Amount,
liquidation preference, conversion price, dividend and liquidation priority,
voting rights, or mandatory redemption rights and terms of the 1996 Series A
preferred Stock.

Unless the vote or consent of the holders of a greater number
of shares shall then be required by law or as provided in the immediately
preceding paragraph, and so long as any shares of the 1996 Series A Preferred
Stock are outstanding, the Company will not, without the affirmative vote or
consent of the holders of at least seventy percent (70%) of the outstanding
shares of 1996 Series A Preferred Stock, voting as a separate class:

17
<PAGE> 49
(a) amend or repeal any provision of, or add any
provision to, the Company's Articles of Incorporation which affect the
other rights, powers, preferences or terms of the 1996 Series A
preferred Stock;

(b) consolidate or merge with or into any other
corporation where (1) the Company is not the surviving corporation or
(2) the Company shall issue to any person as consideration in respect
of such consolidation or merger any capital stock of the Company
representing 50% or more of the Company's outstanding capital stock
prior to such consolidation or merger;

(c) sell, transfer or convey all or substantially
all of the assets of the Company, or dissolve or liquidate the
Company;

(d) reclassify any Common Stock into shares
having any preference or priority as to the payment of dividends or
the distribution of assets superior to or on a parity with any such
preference or priority of the 1996 Series A Preferred Stock;

(e) declare or pay any dividend, or make any
distribution, or purchase, redeem or otherwise acquire for value any
capital stock or other interest in the Company now or hereafter
outstanding, or make any other distribution of its assets, to the
holders of any Junior Stock, unless (i) no Voting Events shall have
occurred and be continuing immediately prior to and after such
distributions, and (ii) all accumulated dividends with respect to the
1996 Series A Preferred Stock have been paid in full immediately prior
to such distribution; or

(f) amend or otherwise modify in any material
respect the Company's Development Plan.

Subsection (b) of this Section 6.5 shall be of no further
force or effect at such time that the total number of the Conversion Shares
issuable upon conversion of all outstanding shares of the 1996 Series A
Preferred Stock at the Conversion Price in effect from time to time, is equal
to or less than five percent (5%) of the Company's total issued and outstanding
shares of Common stock.

7. Covenants of the Company. The failure by the Company
to comply with any of the covenants set forth below, unless specifically waived
in writing by holders of a majority or more of the 1996 Series A Preferred
Stock, shall be a Special Voting Event. The holders of the 1996 Series A
Preferred Stock shall have no remedies for violation of the covenants set forth
below other than (i) election of directors as provided in Section 6.2 and (ii)
a right to specific performance or other equitable remedies.

18
<PAGE> 50
7.1. Board of Directors. So long as the 1996 Series A
Preferred Stock shall remain outstanding, the Company shall not increase the
number of directors above nine except in connection with the right of the
holders of the 1996 Series A Preferred Stock to appoint directors.

7.2. Financial Statements. Whether or not the Company
remains subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, the Company will furnish or cause to be furnished to any
holder of the 1996 Series A Preferred Stock:

(a) As soon as available and in any event within
120 days after the close of each fiscal year of the Company, the
audited balance sheet of the Company as of the end of such fiscal year
and the audited statements of operations and cashflow of the Company
for such fiscal year prepared in accordance with generally accepted
accounting principles which fairly present the information included
therein (showing any material change in the consistency of the
application of such principles from the prior period), accompanied by
an opinion of a nationally recognized independent certified public
accountant, together with a certificate by the President or the Chief
Financial Officer of the Company certifying that no Voting Event has
occurred in such year;

(b) As soon as available and in any event prior
to the close of each fiscal year of the Company, a budget for the
consolidated operations of the Company and its subsidiaries for the
subsequent fiscal year, broken down by months, certified by the Chief
financial Officer of the Company;

(c) As soon as available and in any event prior
to 50 days after the end of each quarterly period of each fiscal year
of the Company, a written report discussing the results of operations
and activities described in the Development Plan and explaining any
material variations in the results of such operations from the
Development Plan, certified by the Chief Financial Officer of the
Company;

(d) As soon as available and in any event prior
to 50 days after the end of each quarter of each fiscal year of the
Company, the unaudited balance sheet of the Company at the end of such
quarter, the unaudited statements of operations of the Company for
such quarter and for the period from the beginning of the fiscal year
to the close of such quarter, and unaudited statements of cash flow of
the Company from the beginning of the fiscal year to the close of such
quarter, all prepared in accordance with generally accepted accounting
principles which fairly present the information included therein
(showing any material change in the consistency of the application of
such principles from the prior quarter) and certified by the Chief
Financial Officer of the Company;

19
<PAGE> 51
(e) Promptly upon written request, any monthly
financial statements prepared by the Company in the ordinary course of
business of the Company;

(f) Promptly upon receipt thereof, one copy of
each other report submitted to the Company by independent accountants
in connection with any annual, interim or special audit made by them
of the books of the Company or any of its subsidiaries;

(g) As soon as available and in any event within
90 days after each January 1, an Independent Engineering Report
covering all of the oil and gas properties of the Company; and

(h) Promptly upon the occurrence of a Voting
Event and in no event later than 15 calendar days after the occurrence
of such event, a certificate of the Chief Financial Officer of the
Company stating that such Voting Event has occurred and specifying the
material facts related to such Voting Event and steps being taken or
contemplated to be taken to cure such Voting Event.

7.3. Inspection of Property. In addition to any rights of
the holders of the 1996 Series A Preferred Stock under applicable law to
inspect the property of the Company, the Company will permit any representative
designated by any holder of the 1996 Series A Preferred Stock, upon reasonable
notice and during normal business hours, to (i) visit and inspect any of the
properties of the Company and its subsidiaries, (ii) at the expense of the
Company (not to exceed $2,000 per year), examine the corporate and financial
records of the Company and its subsidiaries and make copies thereof or extracts
therefrom and (iii) discuss the affairs, finances and accounts of the Company
and its subsidiaries with the directors, officers, key employees and
independent accountants of the Company and its subsidiaries.

7.4. Development of Company's Properties. The Company
shall take all actions necessary to develop its properties in accordance with
the Development Plan.

7.5. Change in Control/Management. Gary C. Eveans shall
remain the President and Chief Executive Officer of the Company with the
customary authority and in the full time employment and active involvement in
the operations and affairs of the Company as Mr. Evans is involved on the
Closing Date.

7.6. Conduct of Business. The Company shall carry on and
conduct, and cause each of its subsidiaries to carry on and conduct, its
business in substantially the same manner and in substantially the same fields
of enterprise as it is conducted on the Closing Date; and do, and, unless
merged into the Company, cause each of its subsidiaries to do, all things
necessary to remain duly incorporated, validly existing and in good standing as
a domestic corporation in its

20
<PAGE> 52
jurisdiction of incorporation and maintain all requisite authority to conduct
its business in each jurisdiction in which its business is conducted.

7.7. Insurance. The Company shall maintain, and cause
each of its subsidiaries to maintain (a) insurance with financially sound and
responsible insurance carriers of the kinds, against the risks and in the
relative proportions and amounts usually carried by companies engaged in
similar businesses and (b) from and after the earlier of (i) ninety (90) days
after the Closing Date; or (ii) the election by the holders of the 1996 Series
A Preferred Stock of any director, Directors and Officers Liability insurance,
in an amount not less than ten million dollars ($10,000,000), with insurance
carriers and covering such risks as approved in writing by the holders of a
majority of the 1996 Series A preferred Stock, naming as insured any directors
of the Company elected by the holders of the 1996 Series A Preferred Stock.

7.8. Maintenance of Property; Development and Maintenance.
The Company shall maintain, and cause each of its subsidiaries to maintain, all
of its tangible property in good condition and repair and make all necessary
replacements thereof and operate the same properly and efficiently and shall
develop and maintain, or cause to be developed and maintained (by the prompt
payment of all royalties, delay rentals and other sums due thereunder or
otherwise), the leases, wells, units and acreage constituting proven property
owned or leased by the Company and its subsidiaries as of the Closing date in a
prudent manner, and as may be reasonably necessary for the prudent and
economical operation of such leases, wells, units and acreage in compliance
with all proration and conservation laws and all applicable rules, regulations
and orders of any governmental authority. In addition, the Company shall cause
all work and development described in the Development Plan to be performed by
or before the dates specified for completion thereof in the Development Plan.

7.9. Common Stock Reserved; Legality. The Company shall
at all times reserve and keep available out of its authorized but unissued
Common Stock such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of the 1996
Series A Preferred Stock; all of such shares of the Common Stock which are
issuable to the holders of the 1996 Series A Preferred Stock by way of
conversion, redemption or dividend will, when issued, be duly authorized and
validly issued, fully paid and nonassessable, and free from all taxes, liens
and charges.

8. Conversion. The 1996 Series A Preferred Stock shall
be convertible as follows:

8.1. Right of Holder to Convert. Each share of the 1996
series A Preferred Stock shall be convertible, without the payment of any
additional consideration by the holder thereof and at the option of the holder
thereof, at any time after December 31, 1996, in whole or in part, at the
office of the Company or any transfer agent for the 1996 Series A Preferred
Stock,

21
<PAGE> 53
into the whole number of fully paid and nonassessable shares of Common Stock
determined by dividing the Liquidation Value by the Conversion Price in effect
at the time of conversion, plus, in lieu of any fractional share to which such
holder would otherwise be entitled, cash equal to such fraction multiplied by
the Conversion Price.

8.2. Mechanics of Conversion by Holder. In order for any
holder of the 1996 Series A Preferred Stock to convert the same into Common
Stock, he shall surrender to the Company at the office of the Company or of any
transfer agent for the 1996 Series A Preferred Stock, the certificate or
certificates representing such 1996 Series A Preferred Stock, accompanied by
written notice to the Company that he elects to convert all or a specified
number of such shares and stating therein his name or the name or names of his
nominees in which he wishes the certificate or certificates for Common Stock to
be issued. The Company shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of the 1996 Series A preferred Stock, or
to his nominee or nominees, a certificate or certificates representing the
number of shares of Common Stock to which he shall be entitled as aforesaid
and, if less than the full number of shares of the 1996 Series A Preferred
Stock evidenced by such surrendered certificate or certificates are being
converted, a new certificate or certificates, of like tenor, for the number of
shares of the 1996 Series A Preferred Stock evidenced by such surrendered
certificate less the number of such shares being converted. Any conversion
made at the election of a holder of the 1996 Series A Preferred Stock shall be
deemed to have been made immediately prior to the close of business on the
date of such surrender of the 1996 Series A Preferred Stock to be converted,
and the person or persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on such date.

8.3. Right of the Company to Convert. The shares of 1996
Series A Preferred Stock may be converted, in whole but not in part, at the
option of the Company, into Freely Tradeable Common Stock at any time after
December 31, 1998 if (i) there shall not have occurred within the six months
prior to the date of delivery of the Conversion Notice described in Section 8.4
below or be outstanding on the date of conversion any event or condition that
would give rise to or constitute a Voting Event and (ii) the Common Stock of
the Company has traded on a recognized securities exchange or national market
system more than an average of 50,000 shares per day (as adjusted for stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like) over the 20-trading-day period prior to the date of the
Conversion Notice at an average closing price (the "Required Forced Conversion
Market Price") equal to or greater than the difference of

(a) the following percentage of the Conversion Price per share
than in effect (i.e., as adjusted for stock dividends, split-ups,
mergers, recapitalizations, combinations, exchanges of shares or the
like but without adjustment as provided in either Section 8.5 or
Section 8.6 or Section 8.7 below):

22
<PAGE> 54
<TABLE>
<CAPTION>
Date of Percentage of
Calculation: Conversion Price:
----------- ----------------
<S> <C>
On or after December 31, 1998
but prior to March 31, 1999 170%

On or after March 31, 1999
but prior to June 30, 1999 181.25%

On or after June 30, 1999
but prior to September 30, 1999 192.50%

On or after September 30, 1999
but prior to December 31, 1999 203.75%

On or after December 31, 1999 215%
</TABLE>

minus

(b) the NPV30 Amount per share of 1996 Series A Preferred Stock
actually received by the holders of outstanding shares of 1996 Series
A Preferred Stock with respect to such shares

provided, however, that with respect to any calculation of Required Forced
Conversion Market Price on or after January 1, 2000, the NPV30 Amount to be
deducted pursuant to clause (b) shall be deemed to be zero (0). Such
conversion shall be without the payment of any additional consideration by the
holder and shall be into the whole number of fully paid and nonassessable
shares of Freely Tradeable Common Stock determined by dividing (i) the
aggregate Liquidation Value relating to all outstanding shares of the 1996
Series A Preferred Stock by (ii) the Conversion Price in effect at the time of
conversion, plus, in lieu of any fractional share to which such holder would
otherwise be entitled, cash equal to such fraction multiplied by the Conversion
Price.

8.4. Mechanics of Conversion by the Company. In order for
the Company to convert the 1996 Series A Preferred Stock into Freely Tradeable
Common Stock pursuant to Section 8.3 above, the Company shall deliver written
notice to the holders of the 1996 Series A Preferred Stock that it elects to
convert all of such shares (the "Conversion Notice"). Such Conversion Notice
shall set forth the effective date of such conversion (the "Conversion Date")
which shall be not less than five (5) Business Days after the date the
Conversion Notice is delivered to the holders of the 1996 Series A Preferred
Stock and the Company's calculation of the number of shares of Freely Tradeable
Common Stock to be issued to the holders of the 1996

23
<PAGE> 55
series A Preferred Stock upon such conversion including without limitation the
component calculations of the Liquidation Value NPV30 and Net Cash Receipts.
Such calculations by the Company shall not be binding upon the holders of the
1996 Series A Preferred Stock and if the holders of the 1996 Series A Preferred
Stock shall dispute the accuracy of such calculations the holders shall not be
obligated to surrender the certificate or certificates representing the 1996
Series A Preferred Stock to be converted as provided in the immediately
following sentence and the conversion of the 1996 Series A Preferred Stock
shall not be effective until such dispute is resolved pursuant to the
arbitration procedure described in Section 6.9 of the Stock Purchase Agreement
and the Conversion Date shall be automatically extended to the date such
dispute shall be resolved. Prior to the Conversion Date, the holders of the
1996 Series A Preferred Stock shall continue to have all rights and benefits
with respect thereto as set forth herein. Upon the Conversion Date, the
holders shall surrender to the Company at the office of the Company or of any
transfer agent for the 1996 Series A Preferred Stock, the certificate or
certificates representing the 1996 Series A Preferred Stock to be converted.
The Company shall, as soon as practicable thereafter, issue and deliver at such
office to such holders of the 1996 Series A Preferred Stock, or to their
nominee or nominees, certificates representing the number of shares of Freely
Tradeable Common Stock to which they shall be entitled as aforesaid. Any
conversion made at the election of the Company pursuant to Section 8.3 above
shall be deemed to have been made immediately prior to the close of business on
the second Business Day after the date the Conversion Notice has been received
by the holder of the 1996 Series A Preferred Stock, and the person or persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such Common Stock on such
date.

8.5. Adjustments to Conversion Price for Voting Events.
In the event that a Voting Event shall occur and is occurring, the Conversion
Price in effect shall be adjusted to that number determined by multiplying the
Conversion Price then in effect by 80%.

8.6. Adjustment to Conversion Price on June 30, 1997. In
the event that the Company has not received on or before June 30, 1997 at least
$15,000,000 of net cash proceeds from the issuance and sale by the Company of
Common Stock which was not issued and outstanding on the Closing date, the
Conversion Price in effect on June 30, 1997 shall be reduced to the lower of
(i) $4.875 (as reduced or increased, for stock dividends, split-ups, mergers,
recapitalizations, combinations, exchanges of shares or the like) or (ii) 25%
above the lower of , as calculated on June 30, 1997, (A) the 10-Day Average
Price or (B) the 60-Day Average Price.

8.7. Adjustment to Conversion Price on July 1, 1997. In
the event that the man average price per share (the "7/1/97 Average Price")
received by the Company upon the issuance of Common Stock in connection with
the public offerings described in clause (iv) of the definition of "Additional
Shares of Nonpreferred Stock" shall be less than the amount set forth in the
column entitled "7/1/97 Average Price" below, then the Conversion Price in
effect on July 1, 1997 shall be reduced (but not increased) to an amount equal
to the product of the percentage set

24
<PAGE> 56
forth in the column entitled "Applicable Percentage" below opposite the
applicable 7/1/97 Average Price multiplied by the 7/1/97 Average Price.

<TABLE>
<CAPTION>
7/1/97 Average Price: Applicable Percentage:
-------------------- ---------------------
<S> <C>
$4.6999 to $4.60 125%

$4.5999 to $4.50 124%

$4.4999 to $4.40 123%

Below $4.40 122%
</TABLE>

8.8. Adjustments to Conversion Price for Diluting Issues:

(a) Stock Dividends, Subdivisions and
Combinations. In case at any time or from time to time the Company
shall:

(1) take a record of the holders of its
Nonpreferred Stock for the purpose of entitling them to
receive a dividend payable in, or other distribution of,
Nonpreferred Stock;

(2) subdivide its outstanding shares of
Nonpreferred Stock into a larger number of shares of
Nonpreferred Stock; or

(3) combine its outstanding shares of
Nonpreferred Stock into a smaller number of shares of
Nonpreferred Stock;

then the Conversion Price in effect, immediately after the happening of any
such event shall be proportionately decreased, in case of the happening of
events described in subparagraphs (1) or (2) above, or proportionately
increased, in case of the happening of events described in subparagraph (3)
above.

(b) Certain Other Dividends and Distributions. In case
at any time or from time to time the Company shall take a record of the holders
of its Nonpreferred Stock for the purpose of entitling them to receive any
dividend or other distribution of:

(1) cash (other than a cash distribution made as
a dividend and payable out of earnings or earned surplus legally
available for the payment of dividends under the laws of the
jurisdiction of incorporation of the Company, to the extent, but only
to the extent, that the aggregate of all such dividends paid or
declared after the date hereof, does

25
<PAGE> 57
not exceed the consolidated net income, net of consolidated net
losses, of the Company and its consolidated subsidiaries earned
subsequent to the date hereof determined in accordance with generally
accepted accounting principles);

(2) any evidence of its indebtedness (other than
Convertible Securities), any shares of its stock (other than
Additional Shares of Nonpreferred Stock) or any other securities or
property of any nature whatsoever (other than cash and other than
Convertible Securities or Additional Shares of Nonpreferred Stock); or

(3) any warrants or other rights to subscribe for
or purchase any evidences of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Nonpreferred Stock) or any other securities or property of any nature
whatsoever (other than cash and other than Convertible Securities or
Additional Shares of Nonpreferred Stock);

then the Conversion Price in effect shall be adjusted to that number determined
by multiplying the Conversion Price then in effect by a fraction (x) the
numerator of which shall be the Fair Market Price per share of Common Stock
immediately prior to the date of taking such record minus the portion
applicable to one share of Common Stock of any such cash so distributable and
of the fair value of any and all such evidence of indebtedness, shares of
stock, other securities or property, or warrants or other subscription or
purchase rights, so distributable and (y) the denominator of which shall be the
Fair Market Price per share of Common Stock immediately prior to the date of
taking such record. Such fair value shall be determined pursuant to the
Valuation Procedure. The "Valuation Procedure" is a determination of fair
value of any property made in good faith by the Board of Directors; provided,
that if the holders of a majority of the 1996 Series A Preferred Stock object
to such determination within 10 days of receipt of written notification
thereof, then the fair value of such property shall be determined in good faith
by a recognized national investment bank selected by unanimous vote or consent
of the Board of Directors, which investment bank is not reasonably objected to
by the holders of a majority of the 1996 Series A Preferred Stock. The fees
and expenses of such investment bank shall be paid by the Company. A
reclassification of the Nonpreferred Stock into shares of Nonpreferred Stock
and shares of any other class of stock shall be deemed a distribution by the
Company to the holders of its Nonpreferred Stock of such shares of such other
class of stock within the meaning of this Section 8.3(b) and, if the
outstanding shares of Nonpreferred Stock shall be changed into a larger or
smaller number of shares of Nonpreferred Stock as a part of such
reclassification, shall be deemed a subdivision or combination, as the case may
be, of the outstanding shares of Nonpreferred Stock within the meaning of
Section 8.3(a).

(c) Issuance of Additional Shares of Nonpreferred Stock.
In case at any time or from time to time after the Closing Date, the Company
shall (except as hereinafter provided) issue, whether in connection with the
merger of a corporation into the Company or otherwise, any

26
<PAGE> 58
Additional Shares of Nonpreferred Stock for a consideration per share less than
either the Conversion Price or the Fair Market Price per share of Common Stock
on the Computation Date (determined as set forth in the last sentence of this
Section 8.3(c)), then the Conversion Price shall be adjusted to the lower of
either:

(i) that number determined by multiplying the
Conversion Price in effect immediately prior to such adjustment by a
fraction (x) the numerator of which shall be the number of shares of
Nonpreferred Stock, plus the number of shares of Nonpreferred Stock
which the aggregate consideration for the total number of such
Additional Shares of Nonpreferred Stock so issued would purchase at
the Fair Market Price per share of Common Stock and (y) the
denominator of which shall be the number of shares of Nonpreferred
Stock plus the number of such Additional Shares of Nonpreferred Stock
so issued; or

(ii) the value of the consideration per share for
which such Additional Shares of Nonpreferred Stock were issued (or, in
the case of adjustments under Sections 8.3(d) or 8.3(e), are
issuable).

No adjustment of the Conversion Price shall be made under this Section 8.3(c)
upon the issuance of any Additional Shares of Nonpreferred Stock which are
issued pursuant to the exercise of any warrants or other subscription or
purchase rights or pursuant to the exercise of any conversion or exchange
rights in any Convertible Securities, if any such adjustment shall previously
have been made upon the issuance of such warrants or other rights or upon the
issuance of such Convertible Securities (or upon the issuance of any warrant or
other rights therefor) pursuant to Section 8.3(d) or 8.3(e). For purposes of
this Section 8.3(c), the Computation Date shall be the earlier of (i) the date
on which the Company shall enter into a firm contract for the issuance of such
Additional Shares of Nonpreferred Stock, or (ii) the date of actual issuance of
such Additional Shares of Nonpreferred Stock.

(d) Issuance of Warrants, Options or Other Rights. In
case at any time or from time to time after the Closing Date, the Company shall
take a record of the holders of its Nonpreferred Stock for the purpose of
entitling them to receive a distribution of, or shall otherwise issue, any
warrants, options or other rights to subscribe for or purchase any Additional
Shares of Nonpreferred Stock or any Convertible Securities and the
consideration per share for which Additional Shares of Nonpreferred Stock may
at any time thereafter be issuable pursuant to such warrants, options or other
rights or pursuant to the terms of such Convertible Securities shall be less
than either the Conversion Price or the Fair Market Price per share of Common
Stock on the Computation Date (determined as set forth in the last sentence of
this Section 8.3(d), then the Conversion Price shall be adjusted as provided in
Section 8.3(c). Such adjustment shall be made on the basis that (i) the
maximum number of Additional Shares of Nonpreferred Stock issuable pursuant to
all such warrants, options or other rights are necessary to effect the

27
<PAGE> 59
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of the Computation Date (determined as set forth in the
last sentence of this Section 8.3(d), and (ii) the aggregate consideration for
such maximum number of Additional Shares of Nonpreferred Stock shall be deemed
to be the minimum consideration received and receivable by the Company for the
issuance of such Additional Shares of Nonpreferred Stock pursuant to such
warrants, options or other rights or pursuant to the terms of such Convertible
Securities. For purposes of this Section 8.3(d), the Computation Date shall be
the earliest to occur of (a) the date on which the Company shall take a record
of the holders of its Nonpreferred Stock for the purpose of entitling them to
receive any such warrants, options or other rights, (b) the date on which the
Company shall enter into a firm contract for the issuance of such warrants,
options or other rights, and (c) the date of actual issuance of such warrants,
options or other rights.

(e) Issuance of Convertible Securities. In case at any
time or from time to time after the Closing Date, the Company shall take a
record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive a distribution of, or shall otherwise issue, any Convertible
Securities and the consideration per share for which Additional Shares of
Nonpreferred Stock may at any time thereafter be issuable pursuant to the terms
of such Convertible Securities shall be less than either the Conversion Price
or the Fair Market Price per share of Common Stock on the Computation Date
(determined as set forth in the last sentence of this Section 8.3(e)), then the
Conversion Price shall be adjusted as provided in Section 8.3(c). Such
adjustments shall be made on the basis that (i) the maximum number of
Additional Shares of Nonpreferred Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been issued
as of the Computation Date (determined as set forth in the penultimate sentence
of this Section 8.3(e)), and (ii) the aggregate consideration for such maximum
number of Additional Shares of Nonpreferred Stock shall be deemed to be the
minimum consideration received and receivable by the Company for the issuance
of such Additional shares of Nonpreferred Stock pursuant to the terms of such
Convertible Securities. No adjustment of the Conversion Price shall be made
under this Section 8.3(e) upon the issuance of any warrants or other
subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights
pursuant to Section 8.3(d). For purposes of this Subsection, the Computation
Date shall be the earliest of (a) the date on which the Company shall take a
record of the holders of its Nonpreferred Stock for the purpose of entitling
them to receive any such Convertible Securities, (b) the date on which the
Company shall enter into a firm contract for the issuance of such Convertible
Securities, and (c) the date of actual issuance of such Convertible Securities.

(f) Superseding Adjustment of Conversion Price. If, at
any time after any adjustment of the Conversion Price shall have been made
pursuant to the foregoing Section 8.3(d) or 8.3(i) on the basis of the issuance
of warrants or other rights or the issuance of other Convertible Securities, or
after any new adjustment of the Conversion Price shall have been made pursuant
to this Section 8.3(f):

28
<PAGE> 60
(1) all of such warrants, options or rights or
the right of conversion or exchange in such other Convertible
Securities shall expire, and none of such warrants options or rights,
or the right of conversion or exchange in respect of such other
Convertible Securities, as the case may be, shall have been exercised;
or

(2) the consideration per share, for which
Additional Shares of Nonpreferred Stock are issuable pursuant to all
of such warrants, options or rights or the terms of all of such other
Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such
consideration per share upon the arrival of a specified date or the
happening of a specified event, and none of such warrants, options or
rights, or the right of conversion or exchange in respect of such
other Convertible Securities, as the case may be, shall have been
exercised;

such previous adjustment shall be rescinded and annulled and the Additional
Shares of Nonpreferred Stock which were deemed to have been issued by virtue of
the computation made in connection with the adjustment so rescinded and
annulled shall no longer be deemed to have been issued by virtue of such
computation. Thereupon, a recomputation shall be made of the effect of such
warrants, rights or options or other Convertible Securities on the basis of
treating any such warrants, options or rights or any such other Convertible
Securities which then remain outstanding as having been granted or issued
immediately after the time of such increase of the consideration per share for
such Additional Shares of Nonpreferred Stock are issuable under such warrants
or rights or other Convertible Securities; and, if and to the extent called for
by the foregoing provisions of this Section 8.3 on the basis aforesaid, a new
adjustment of the Conversion Price shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.

(g) Other Provisions Applicable to Adjustments Under this
Section. The following provisions shall be applicable to the making of
adjustments of the Conversion Price hereinbefore provided for in this Section
8.3:

(1) Treasury Stock. The sale or other
disposition of any issued shares of Nonpreferred Stock owned or held
by or for the account of the Company shall be deemed an issuance
thereof for purposes of this Section 8.3.

(2) Computation of Consideration. To the extent
that any Additional Shares of Nonpreferred Stock or any Convertible
Securities or any warrants, options or other rights to subscribe for
or purchase any Additional Shares of Nonpreferred Stock or any
Convertible Securities shall be issued solely for cash consideration,
the consideration received by the Company therefor shall be deemed to
be the amount of cash received by the Company therefor, or, if such
Additional Shares of Nonpreferred Stock or Convertible Securities are
offered by the Company for subscription, the subscription price, or,
if such

29
<PAGE> 61
Additional Shares of Nonpreferred Stock or Convertible Securities are
sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price, in any such
case excluding any amounts paid or receivable for accrued interest or
accrued dividends and without deduction of any compensation, discounts
or expenses paid or incurred by the Company for and in the
underwriting of, or otherwise in connection with, the issue thereof.
The consideration for any Additional Shares of Nonpreferred Stock
issuable pursuant to any warrants, options or other rights to
subscribe for or purchase the same shall be the consideration received
or receivable by the Company for issuing such warrant, options or
other rights, plus the additional consideration payable to the Company
upon the exercise of such warrants, options or other rights. The
consideration for any Additional Shares of Nonpreferred Stock issuable
pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by the Company for issuing any
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to the Company in
respect of the subscription for or purchase of such Convertible
Securities, plus the additional consideration, if any, payable to the
Company upon the exercise of the right of conversion or exchange in
such Convertible Securities. To the extent that any issuance shall be
for a consideration other than solely for cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall
be deemed to be the fair value of such consideration at the time of
such issuance as determined pursuant to the Valuation Procedure.

(3) When Adjustments to be made. The adjustments
required by the preceding subsections of this Section 8.3 shall be
made whenever and as often as any specified event requiring an
adjustment shall occur, except that no adjustment of the Conversion
Price that would otherwise be required shall be made (except in the
case of a subdivision or combination of shares of the Nonpreferred
Stock as provide for in Section 8.3(a)) unless and until such
adjustment, either by itself or with other adjustments not previously
made, adds or subtracts at least $0.05 to the Conversion Price, as
determined in good faith by the Board of Directors of the Company.
Any adjustment representing a change of less than such minimum amount
shall be carried forward and made as soon as such adjustment, together
with other adjustments required by this Section 8.3 and not previously
made, would result in a minimum adjustment. For the purpose of any
adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.

(4) Fractional Interests. In computing
adjustments under this Section 8.3, fractional interests in
Nonpreferred Stock shall be taken into account of the nearest
one-thousandth of a share.

30
<PAGE> 62
(5) When Adjustment Not Required. If the Company
shall take a record of the holders of its Nonpreferred Stock for the
purpose of entitling them to receive a dividend or distribution or
subscription or purchase rights and shall, thereafter and before the
distribution thereof to shareholders, legally abandon its plan to pay
or deliver such dividend, distribution, subscription or purchase
rights, then thereafter no adjustment shall be required by reason of
the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.

(h) Merger, Consolidation or Disposition of
Assets. In case the Company shall merge or consolidate into another
corporation, or shall sell, transfer or otherwise dispose of all or
substantially all of its property, assets or business to another
corporation and pursuant to the terms of such merger, consolidation or
disposition, shares of common stock of the successor or acquiring
corporation are to be received by or distributed to the holders of
Nonpreferred Stock of the Company, then each holder of a share of the
1996 Series A Preferred Stock shall have the right thereafter to
receive, upon exercise of such share of the 1996 Series A Preferred
Stock, shares of common stock each comprising the number of shares of
common stock of the successor or acquiring corporation receivable upon
or as a result of such merger, consolidation or disposition of assets
by a hold of the number of shares of Common Stock into which one share
of the 1996 Series A Preferred Stock could be converted immediately
prior to such event. If, pursuant to the terms of such merger,
consolidation or disposition of assets, any cash, shares of stock or
other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) are to be received
by or distributed to the holders of Nonpreferred Stock of the Company
in addition to common stock of the successor or acquiring corporation,
then the Conversion Price in effect shall be adjusted to that number
determined by multiplying the Conversion Price then in effect by a
fraction (x) the numerator which shall be the Fair Market Price per
share of Common Stock immediately prior to the closing of such merger,
consolidation or disposition minus the portion applicable to one share
of Common Stock of any such cash so distributable and of the fair
value of any such shares of stock or other securities or property so
received or distributed and (y) the denominator of which shall be the
Fair Market Price per share of Common Stock immediately prior to the
closing of such merger, consolidation or disposition. The fair value
of any such shares of stock or other securities or property shall be
determined pursuant to the Valuation Procedure. In case of any such
merger, consolidation or disposition of assets, the successor
acquiring corporation shall expressly assume the due and punctual
observance and performance of each and every covenant and condition
thereof to be performed and observed by the Company and all of the
obligations and liabilities hereunder, subject to such modification as
shall be necessary to provide for adjustments to the Conversion Price
which shall be as nearly equivalent as practicable to the adjustments
provided for in this Section. For the purposes of this Section
"common stock of the successor or acquiring corporation" shall include
stock of such corporation

31
<PAGE> 63
of any class, which is not preferred as to dividends or assets over
any other class of stock of such corporation and which is not subject
to redemption, and shall also include any evidence of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the
arrival of a specified date or the happening of a specified event, and
any warrants or other rights to subscribe for or purchase any such
stock. The foregoing provisions of this Section 8.3(h) shall
similarly apply to successive mergers, consolidations or dispositions
of assets.

(i) Other Action Affecting Nonpreferred Stock.
In case at any time or from time to time the Company shall take any
action affecting its Nonpreferred Stock, other than an action
described in any of the foregoing Sections 8.3(a) through (h),
inclusive, then, unless in the opinion of the Board of Directors such
action will not have a materially adverse effect upon the rights of
the holders of the 1996 Series A Preferred Stock, the Conversion Price
shall be adjusted in such manner and at such time as the Board of
Directors may in good faith determine to be equitable in the
circumstances.

8.9. No Impairment. Other than in connection with the
amendment of its Articles of Incorporation approved by the requisite number of
stockholders, the Company will not, through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Company but will at all times in
good faith assist in the carrying out of all the provisions of this Section 8
and in the taking of all such action as may be necessary or appropriate in
order to protect the conversion rights of the holders of the 1996 Series A
Preferred Stock against impairment. Without limiting the generality of the
foregoing, the Company (i) will not permit the par value of any shares of stock
at the time receivable upon the conversion of the 1996 Series A Preferred Stock
to exceed the Conversion Price then in effect, (ii) will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid nonassessable shares of stock on the conversion of the
1996 Series A Preferred Stock, and (iii) will not issue any Additional Shares
of Nonpreferred Stock or Convertible Securities or take any action which
results in any adjustment of the Conversion Price if the total number of shares
of Common Stock issuable after such issuance or action upon the conversion or
redemption of, or payment of all outstanding dividends on, all of the then
outstanding shares of 1996 Series A Preferred Stock will exceed the total
number of shares of Common Stock then authorized by the Company's Articles of
Incorporation and available for the purpose of issue upon such conversion or
redemption or payment of such dividend.

8.10. Certificate as to Adjustments. Upon the occurrence
of each adjustment or readjustment of the Conversion Price pursuant to this
Section 8, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
the 1996 Series A Preferred Stock a certificate setting forth such

32
<PAGE> 64
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (i) the
consideration received or to be received by the Company for any Additional
Shares of Nonpreferred Stock issued or sold or deemed to have been issued, (ii)
the number of shares of Nonpreferred Stock outstanding or deemed to be
outstanding, and (iii) the Conversion Price in effect immediately prior to such
issue or sale and as adjusted and readjusted on account thereof, showing how it
was calculated. The Company shall, upon the written request at any time of any
holder of the 1996 Series A Preferred Stock furnish or cause to be furnished to
such holder a like certificate setting forth (i) the Conversion Price at the
time in effect, showing how it was calculated, and (ii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of the 1996 Series A Preferred Stock.

8.11 Notices of Record Date. In the event of any taking
by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each holder
of the 1996 Series A Preferred Stock at least ten days prior to the date
specified therein, a notice specifying the date on which such record is to be
taken for the purpose of such dividend or distribution.

IN WITNESS WHEREOF, MAGNUM PETROLEUM, INC. has caused a corporate seal
to be hereunto affixed and this certificate to be signed by Gary C. Evans, its
President and Chief Executive Officer and Morgan F. Johnston, Secretary, this
6th day of December, 1996.

By: /s/ Gary C. Evans
----------------------------------------
Gary C. Evans
President and Chief Executive Officer

By: /s/ Morgan F. Johnston
----------------------------------------
Morgan F. Johnston
Secretary

COUNTY OF DALLAS )
)
STATE OF TEXAS )

33
<PAGE> 65
Before me, the undersigned authority, personally appeared GARY C. EVANS, known
to me to be the identical person who signed the name of the maker thereof to
the within and foregoing instrument as President and Chief Executive Officer of
Magnum Petroleum, Inc. and that he acknowledged to me that he executed the same
as his free and voluntary act and deed and as the free and voluntary act and
deed of said corporation, for the uses and purposes therein expressed.

Subscribed and sworn to before me on this 6th day of December, 1996.

MY COMMISSION EXPIRES: NOTARY PUBLIC

[SEAL] /s/ Brenda M. Yerian
- ---------------------------------- --------------------------------
In and for the State of Texas

34
<PAGE> 66
EXHIBIT A

Approved List of Engineering Consultants

1. Gaffney, Cline & Associates Inc.

2. Ryder, Scott

3. Netherland, Sewell & Associates

4. Cawley Gillespie

5. DeGolyer & MacNaughton

35
<PAGE> 67
Schedule 1
Discount Factors for the
"NPV30 Amount"

<TABLE>
<CAPTION>
- -------------------------------------------------------------
Period Quarter 30% Disc.
(Quarter) Ending Factor
- -------------------------------------------------------------
<S> <C> <C>
0.0 At Funding 1.000000
- -------------------------------------------------------------
0.3 Dec-96 0.978537
- -------------------------------------------------------------
1.3 Mar-97 0.910267
- -------------------------------------------------------------
2.3 Jun-97 0.846760
- -------------------------------------------------------------
3.3 Sep-97 0.787684
- -------------------------------------------------------------
4.3 Dec-97 0.732729
- -------------------------------------------------------------
5.3 Mar-98 0.681609
- -------------------------------------------------------------
6.3 Jun-98 0.634055
- -------------------------------------------------------------
7.3 Sep-98 0.589818
- -------------------------------------------------------------
8.3 Dec-98 0.548668
- -------------------------------------------------------------
9.3 Mar-99 0.510389
- -------------------------------------------------------------
10.3 Jun-99 0.474780
- -------------------------------------------------------------
11.3 Sep-99 0.441656
- -------------------------------------------------------------
12.3 Dec-99 0.410843
- -------------------------------------------------------------
13.3 Mar-2000 0.382180
- -------------------------------------------------------------
14.3 Jun-2000 0.355516
- -------------------------------------------------------------
15.3 Sep-2000 0.330712
- -------------------------------------------------------------
16.3 Dec-2000 0.307639
- -------------------------------------------------------------
17.3 Mar-2001 0.286176
- -------------------------------------------------------------
18.3 Jun-2001 0.266210
- -------------------------------------------------------------
19.3 Sep-2001 0.247638
- -------------------------------------------------------------
20.3 Dec-2001 0.230361
- -------------------------------------------------------------
21.3 Mar-2002 0.214289
- -------------------------------------------------------------
22.3 Jun-2002 0.199339
- -------------------------------------------------------------
23.3 Sep-2002 0.185431
- -------------------------------------------------------------
24.3 Dec-2002 0.172494
- -------------------------------------------------------------
25.3 Mar-2003 0.160460
- -------------------------------------------------------------
26.3 Jun-2003 0.149265
- -------------------------------------------------------------
27.3 Sep-2003 0.138851
- -------------------------------------------------------------
28.3 Dec-2003 0.129164
- -------------------------------------------------------------
29.3 Mar-2004 0.120152
- -------------------------------------------------------------
30.3 Jun-2004 0.111770
- -------------------------------------------------------------
31.3 Sep-2004 0.103972
- -------------------------------------------------------------
32.3 Dec-2004 0.096718
- -------------------------------------------------------------
33.3 Mar-2005 0.089970
- -------------------------------------------------------------
</TABLE>

36
<PAGE> 68
<TABLE>
- -------------------------------------------------------------
<S> <C> <C>
34.3 Jun-2005 0.083693
- -------------------------------------------------------------
35.3 Sep-2005 0.077854
- -------------------------------------------------------------
36.3 Dec-2005 0.072422
- -------------------------------------------------------------
</TABLE>

37
<PAGE> 69
ATTACHMENT 1

Outstanding Warrants

1. Whitestone Group Limited - 25,000 shares at $4.50 per share. Expire
October 16, 1997.

2. Dean Dumont - 37,500 shares at $3.00 per share. Expire December 31,
1997.

3. Frank Girardi - 100,000 shares at $4.125 per share. Expire June 30,
1997.

4. American Founders Life Insurance - 75,000 shares in the aggregate at
various exercise prices (25,000 at $5.18, 25,000 at $5.65, and 25,000
at $6.13 per share). Expire three to five years from October 31,
1996.

5. Research Works, Inc. - total of 60,000 shares (of which 45,000 have
been earned as of December 6, 1996) at $3.375 per share. Expire
January 16, 1999.

38
<PAGE> 70
ATTACHMENT 2

Outstanding Options

1. R. Renn Rothrock, Jr. - 10,215 shares
2. Richard R. Frazier - 10,215 shares
3. David Keglovits - 8,938 shares
4. Francis Evans - 7,661 shares
5. Jon Kolstad - 2,554 shares
6. Bob Jackson - 2,554 shares
7. Vicki Newman - 2,043 shares
8. Nicki J. Lutz - 1,660 shares
9. Ursula Kuehn - 1,660 shares

All of the above options were granted at an exercise price of $.73425 per
share. The board of Hunter authorized the granting of these options on
November 20, 1991. These options are reported after adjustment for the Hunter
Magnum transaction as these options were substituted for Hunter options upon
consummation of the Hunter Magnum transaction.

Options granted to Directors:

1. Matthew C. Lutz - 51, 073 shares
2. James Upfield - 25,536 shares
3. Gerland Bolfing - 25,536 shares
4. Oscar Lindemann - 25,536 shares
5. Gary C. Evans - 89,377 shares

All of the above options were granted, with the exceptions noted above, at an
exercise price of $.73425 per share, except for Oscar Lindemann's whose
exercise price is $1.65 per share. The board of Hunter authorized the granting
of these options at the time the individual person became a board member.
These options are reported after adjustment for the Hunter Magnum transaction
as these options were substituted for Hunter options upon consummation of the
Hunter Magnum transaction.

39
<PAGE> 71
EXECUTION ORIGINAL

CERTIFICATE OF VOTING POWERS, DESIGNATIONS,
PREFERENCES, AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF
1996 SERIES A CONVERTIBLE PREFERRED STOCK

Dated as of December 6, 1996

<PAGE> 72
TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Ranking of the 1996 Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3. Dividends; Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1. Dividend Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.2. Form of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.3. Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.4. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

4. Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1. Mandatory Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2. Redemption Upon Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.3. Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.4 Redemption Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

5. Liquidation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

6. Voting Rights of 1996 Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1. Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2. Special Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2.1 Special Voting Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2.2 Limited Voting Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.3. Procedures Relating to Special Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.4. Rights Relating to Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.5. Certain Actions by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

7. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.1. Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.2. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.3. Inspection of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.4. Development of Company's Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.5. Change in Control/Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.6. Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.7. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.8. Maintenance of Property; Development and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.9. Common Stock Reserved; Legality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

8. Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>

<PAGE> 73
<TABLE>
<S> <C> <C>
8.1. Right of Holder to Convert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.2. Mechanics of Conversion by Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.3. Right of the Company to Convert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.4. Mechanics of Conversion by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.5. Adjustments to Conversion Price for Voting Events . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.6. Adjustment to Conversion Price on June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.7. Adjustment to Conversion Price on July 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.8. Adjustments to Conversion Price for Diluting Issues . . . . . . . . . . . . . . . . . . . . . . . . . 28
8.9. No Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.10. Certificate as to Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
8.11. Notices of Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>

<PAGE> 74
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
MAGNUM PETROLEUM, INC.

First: The present name of the Corporation is Magnum
Petroleum, Inc.

Second: That the Board of Directors of said Corporation at a
meeting duly convened and held on the 20th day of February, 1997, adopted a
resolution to amend the articles as follows:

Article I is hereby amended to read as follows:

ARTICLE I - CORPORATE NAME

The name of the corporation (hereinafter called the
"Corporation") is Magnum Hunter Resources, Inc.

Third: The number of shares of the Corporation outstanding
and entitled to vote on an amendment to the Articles of Incorporation are
13,708,327, that the said change and amendment has been consented to and
approved by a majority vote of the stockholders holding at least a majority of
each class of stock outstanding to vote thereon.

Dated: March 11, 1997.

MAGNUM PETROLEUM, INC.

By: /s/ Matthew C. Lutz
----------------------------------------
Matthew C. Lutz, Vice-Chairman and Vice
President of Exploration and Development

By: /s/ Morgan F. Johnston
----------------------------------------
Morgan F. Johnston
Secretary

1
<PAGE> 75
COUNTY OF DALLAS )
)
STATE OF TEXAS )

Before me, the undersigned authority, personally appeared Matthew C. Lutz,
known to me to be the identical person who signed the name of the maker thereof
to the within and foregoing instrument as Vice Chairman and Exploration and
Development Manager of Magnum Petroleum, Inc. and that he acknowledged to me
that he executed the same as his free and voluntary act and deed and as the
free and voluntary act and deed of said corporation, for the uses and purposes
therein expressed.

Subscribed and sworn to before me on this 10th day of March, 1997.

MY COMMISSION EXPIRES: NOTARY PUBLIC

3-9-99 /s/ Brenda M. Yerian
- ---------------------------------- ---------------------------------
(SEAL)

COUNTY OF DALLAS )
)
STATE OF TEXAS )

Before me, the undersigned authority, personally appeared Morgan F. Johnston,
known to me to be the identical person who signed the name of the maker thereof
to the within and foregoing instrument as Secretary Magnum Petroleum, Inc. and
that he acknowledged to me that he executed the same as his free and voluntary
act and deed and as the free and voluntary act and deed of said corporation,
for the uses and purposes therein expressed.

Subscribed and sworn to before me on this 11th day of March, 1997.

MY COMMISSION EXPIRES: NOTARY PUBLIC

3-9-99 /s/ Brenda M. Yerian
- ---------------------------------- ---------------------------------
(SEAL)

2
<PAGE> 76
EXECUTION ORIGINAL

FIRST AMENDMENT OF CERTIFICATE OF VOTING POWERS,
DESIGNATIONS, PREFERENCES, AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF
1996 SERIES A CONVERTIBLE PREFERRED STOCK

We, Gary C. Evans, President and Chief Executive Officer, and
Morgan Johnston, Secretary, of Magnum Hunter Resources, Inc., formerly known as
Magnum Petroleum, Inc. (the "Company"), a corporation organized and existing
under the General Corporation Law of the State of Nevada, in accordance with
the provisions of Section 78.195 of the Nevada Revised Statutes thereof, DO
HEREBY CERTIFY:

WHEREAS, the Company executed that certain Certificate of
Voting Powers, Designations, Preferences, and Relative, Participating, Optional
or Other Special Rights of Series A Convertible Preferred Stock dated as of
December 6, 1996 (the "Certificate of Designations");

WHEREAS, the Company issued one million (1,000,000) shares of
preferred stock designated as 1996 Series A Convertible Preferred Stock
pursuant to the Certificate of Designations;

WHEREAS, pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation, as amended, of the Company, such
Board of Directors, at a meeting of the Board of Directors held pursuant to the
General Corporation Law of the State of Nevada, duly adopted a resolution
providing for the amendment of the Certificate of Designations (this
"Amendment"); and

WHEREAS, the Company has received the consent of at least
seventy percent (70%) of the holders of the 1996 Series A Convertible Preferred
Stock to execute this Amendment.

NOW THEREFORE, the Company does hereby amend the Certificate
of Designations as follows:

1. The clause (iv) (a) of definition of "Additional
Shares of Nonpreferred Stock" heretofore providing "(a) in one or more
underwritten public offerings after the Closing Date and on or before June 30,
1997 at a price per share less than the Conversion Price but not less than
$4.00 and/or" shall be amended to read as follows:

(a) in one or more underwritten public offerings
after the Closing Date and on or before December 31,
1997 at a price per share less than the Conversion
Price but not less than $4.40 and/or

<PAGE> 77

2. Section 4.1 of the Certificate of Designations shall
be amended by deleting the first sentence thereof and replacing it with the
following:

In the event that the Company has not received before December
31, 1997 net cash proceeds from the issuance and sale by the
Company of Common Stock which (a) was not issued and
outstanding on the Closing Date and (b) shall be issued and
sold for cash consideration received by the Company including
without limitation pursuant to the exercise of the IPO
Warrants at a price of $5.50 per share or more but otherwise
not upon the conversion of any debt, equity or other
securities of the Company in an amount equal to or more than
$15,000,000, the Company shall redeem annually on each of June
30, 2006, June 30, 2007 and June 30, 2008, 333,333 shares of
the 1996 Series A Preferred Stock.

3. Section 8.6 of the Certificate of Designations shall
be amended by deleting it in its entirety and replacing it with the following:

8.6 Adjustment to Conversion Price on December
31, 1997. In the event that the Company has not received on
or before December 31, 1997 at least $15,000,000 of net cash
proceeds from the issuance and sale by the Company of Common
Stock which (a) was not issued and outstanding on the Closing
Date and (b) shall be issued and sold for cash consideration
received by the Company including without limitation pursuant
to the exercise of the IPO Warrants at a price of $5.50 per
share or more but otherwise not upon the conversion of any
debt, equity or other securities of the Company, the
Conversion Price in effect on December 31, 1997 shall be
reduced to the lower of (i) $4.875 (as reduced or increased,
for stock dividends, split-ups, mergers, recapitalizations,
combinations, exchanges of shares or the like), or (ii) 125%
of the lower of, as calculated on December 31, 1997, (A) the
10-Day Average Price or (B) the 60-Day Average Price.

4. Section 8.7 of the Certificate of Designations shall
be amended by deleting it in its entirety and replacing it with the following:

8.7 Adjustment to Conversion Price on January 1,
1998. In the event that the mean average price per share (the
"1/1/98 Average Price") received by the Company upon the
issuance of Common Stock in connection with the public
offerings described in clause (iv) of the definition of
"Additional Shares of Nonpreferred Stock" shall be less than
$4.70 (as reduced or increased, for stock dividends,
split-ups, mergers, recapitalizations, combinations, exchanges
of shares or the like), then the Conversion Price in effect on
January 1, 1998 shall be reduced (but not increased) to an
amount equal to the product of the percentage set forth in

2
<PAGE> 78
the column entitled "Applicable Percentage" below opposite the
applicable 1/1/98 Average Price multiplied by the 1/1/98
Average Price.

<TABLE>
<CAPTION>
1/1/98 Average Price: Applicable Percentage:
-------------------- ---------------------
<S> <C>
$4.6999 to $4.60 125%

$4.5999 to $4.50 124%

$4.4999 to $4.40 123%

Below $4.40 122%
</TABLE>

5. The Certificate of Designation shall remain in full
force and effect as amended hereby and the Company hereby ratifies and affirms
the Certificate of Designations as so amended.

IN WITNESS WHEREOF, MAGNUM HUNTER RESOURCES, INC. has caused its corporate
seal to be hereunto affixed and this Amendment to be signed by Gary C. Evans,
its President and Morgan Johnston, its Secretary, this 30th day of April, 1997.

By /s/ Gary C. Evans
-----------------------------------
Gary C. Evans
President and Chief Executive
Officer

By /s/ Morgan Johnston
-----------------------------------
Morgan Johnston
Secretary

3
<PAGE> 79
COUNTY OF DALLAS )
)
STATE OF TEXAS )

Before me, the undersigned authority, personally appeared GARY C. EVANS, known
to me to be the identical person who signed the name of the maker thereof to
the within and foregoing instrument as President and Chief Executive Officer of
Magnum Hunter Resources, Inc. and that he acknowledged to me that he executed
the same as his free and voluntary act and deed and as the free and voluntary
act and deed of said corporation, for the uses and purposes therein expressed.

Subscribed and sworn to before me on this 30th day of April, 1997.

MY COMMISSION EXPIRES: NOTARY PUBLIC

(SEAL)
----------------------------------
In and for the State of Texas

<PAGE> 1
EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the use in Amendment No. 2 to Registration Statement No.
333-39073 of Magnum Hunter Resources, Inc. of our report dated March 14, 1997
(April 30, 1997 as to Note 16) appearing in the Prospectus, which is a part of
such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
November 17, 1997

<PAGE> 1
EXHIBIT 23.3

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 2 to the Form S-3 Registration
Statement No. 333-39073 of Magnum Hunter Resources, Inc. (the "Company") of our
reports dated April 23, 1997 and April 3, 1996, respectively, accompanying the
historical summaries of revenues and direct operating expenses of the Permian
Basin Properties and the consolidated financial statements of the Company as of
and for the fiscal year ended December 31, 1995 contained in such Registration
Statement; and to the use of our name and the statements with respect to us, as
appearing under the heading "Experts" in the Registration Statement.

/s/ HEIN + ASSOCIATES LLP
Certified Public Accountants

November 14, 1997
Dallas, Texas