SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 8-K/A NO. 1
CURRENT REPORT
Filed Pursuant to Section 12, 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 30, 1995
NATIONAL ENERGY GROUP, INC.
(Name of small business issuer in its charter)
Delaware 58-1922764
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4925 Greenville Ave., Ste. 1400, Dallas, TX 75206
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (214) 692-9211
<PAGE>
The following is substituted in lieu of Item 7 as it appears
in the original of the Current Report on Form 8-K dated
June 30, 1995.
Item 7. Financial Statements and Exhibits: Page
(a) Financial Statements of Businesses Acquired:
Mustang Island Interest
Report of Ernst & Young LLP, Independent
Auditors F-8
Statements of Operating Revenues and Direct
Operating Expenses for the Three-Month Period
Ended March 31, 1995 (Unaudited) and the Years
Ended December 31, 1994 and 1993 F-9
Notes to Statements of Operating Revenues
and Direct Operating Expenses F-10
Oak Hill Interest
Report of Ernst & Young LLP, Independent
Auditors F-13
Statements of Operating Revenues and Direct
Operating Expenses for the Five-Month Period
Ended May 31, 1995 (Unaudited) and the Years
Ended December 31, 1994 and 1993 F-14
Notes to Statements of Operating Revenues and
Direct Operating Expenses F-15
Enron Interest
Report of Ernst & Young LLP, Independent
Auditors F-18
Statements of Operating Revenues and Direct
Operating Expenses for the Five-Month Period
Ended May 31, 1995 (Unaudited) and the Years
Ended December 31, 1994 and 1993 F-19
Notes to Statements of Operating Revenues
and Direct Operating Expenses F-20
<PAGE>
(b) Pro Forma Financial Information (Unaudited):
Pro Forma Statement of Operations F-2
Notes to Pro Forma Statement of Operations F-4
<PAGE>
NATIONAL ENERGY GROUP, INC.
PRO FORMA FINANCIAL STATEMENTS
The accompanying unaudited pro forma statements of
operations of National Energy Group, Inc. (the "Company")
for the six months ended June 30, 1995 and the year ended
December 31, 1994 have been prepared as if the acquisition
of the Mustang Island Interest, the Oak Hill Interest, and
the Enron Interest (as defined in the notes to pro forma
statement of operations) had occurred on January 1, 1994.
The historical financial information for the Mustang
Island Interest, the Oak Hill Interest, and the Enron
Interest has been derived from the respective historical
statements of operating revenues and direct operating
expenses contained elsewhere herein. The historical
financial information of the Company has been derived from
its historical financial statements included in its
Quarterly Report on Form 10-QSB for the six months ended
June 30, 1995 and in its Annual Report on Form 10-KSB for
the year ended December 31, 1994. The pro forma adjustments
are based upon available information and assumptions that
management of the Company believes are reasonable. The
unaudited pro forma statement of operations does not purport
to represent the results of operations that would have
occurred had such transaction been consummated on January 1,
1994 or the Company's results of operations for any future
period. The unaudited pro forma statement of operations
should be read in conjunction with the historical financial
statements contained elsewhere herein and in the Company's
Quarterly Report on Form 10-QSB for the six months ended
June 30, 1995 and in its Annual Report on Form 10-KSB for
the year ended December 31, 1994.
F-1
<PAGE>
National Energy Group, Inc.
Pro Forma Statement of Operations
(Unaudited)
Six months ended June 30, 1995
<TABLE>
<CAPTION>
Mustang
The Island Oak Hill Enron
Company Interest Interest Interest
---------- ----------- ------------- ------------
Six Months Three-Month Five-Month Five-Month
Ended Period Ended Period Ended Period Ended
June 30, March 31, May 31, May 31,
1995 1995 1995 1995
---------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Oil and gas sales $2,653,741 $126,602 $868,306 $400,579
Costs and expenses:
Lease operating 712,965 56,474 212,387 144,398
Oil and gas production
taxes 149,193 7,224 3,193 30,043
Depreciation, depletion,
and amortization 874,249 - - -
General and administrative 524,243 - - -
---------- ---------- ------------ ---------
2,260,650 63,698 215,580 174,441
---------- ---------- ------------ ---------
Operating income 393,091 62,904 652,726 226,138
Other income (expense):
Interest expense (328,842) - - -
Interest income and other 48,877 - - -
Gain on sale of marketable
securities 223,713 - - -
---------- ---------- ------------ ---------
Income before income taxes 336,839 62,904 652,726 226,138
Provision for income taxes - - - -
---------- ---------- ------------ ---------
Income before extraordinary
item $ 336,839 $ 62,904 $ 652,726 $ 226,138
========== ========== ============ =========
Income (loss) before
extraordinary item per
common share $ 0.01
==========
Weighted average number of
common shares outstanding 9,524,574
==========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro
Adjustments Forma
----------- ----------
<S> <C> <C>
Oil and gas sales $ - $4,049,228
Costs and expenses:
Lease operating - 1,126,224
Oil and gas production
taxes - 189,653
Depreciation, depletion,
and amortization 869,688(1) 1,743,937
General and administrative - 524,243
----------- ---------
869,688 3,584,057
----------- ---------
Operating income (869,688) 465,171
Other income (expense):
Interest expense (277,946)(2) (606,788)
Interest income and other - 48,877
Gain on sale of marketable
securities - 223,713
---------- ---------
Income before income taxes (1,147,634) 130,973
Provision for income taxes - -
---------- ---------
Income before extraordinary
item $(1,147,634) $ 130,973
=========== =========
Income (loss) before
extraordinary item per
common share $ (0.01)(3)
=========
Weighted average number of
common shares outstanding 1,064,811(3) 10,589,385(3)
========= ==========
</TABLE>
See accompanying notes to pro forma statement of operations.
F-2
<PAGE>
National Energy Group, Inc.
Pro Forma Statement of Operations
(Unaudited)
Year ended December 31, 1994
<TABLE>
<CAPTION>
Mustang
The Island Oak Hill Enron
Company Interest Interest Interest
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Oil and gas sales $3,158,716 $358,785 $382,427 $1,151,294
Costs and expenses:
Lease operating 1,207,251 238,171 163,171 314,821
Oil and gas production
taxes 176,320 21,211 16,773 86,347
Depreciation, depletion,
and amortization 1,049,100 - - -
General and administrative 826,459 - - -
---------- ----------- ------------- ------------
3,259,130 259,382 179,944 401,168
---------- ----------- ------------- ------------
Operating income (loss) (100,414) 99,403 202,483 750,126
Other income (expense):
Interest expense (517,086) - - -
Interest income and other 128,131 - - -
---------- ----------- ------------- ------------
Income (loss) before income
taxes (489,369) 99,403 202,483 750,126
Provision for income taxes - - - -
---------- ----------- ------------- ------------
Income (loss) before
extraordinary item $ (489,369) $ 99,403 $202,483 $ 750,126
========== =========== ============= ============
Loss before extraordinary
item per common share $ (0.09)
==========
Weighted average number of
common shares outstanding 8,476,821
==========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro
Adjustments Forma
----------- ----------
<S> <C> <C>
Oil and gas sales $ - $5,051,222
Costs and expenses:
Lease operating - 1,923,414
Oil and gas production
taxes - 300,651
Depreciation, depletion,
and amortization 943,290(1) 1,992,390
General and administrative - 826,459
----------- ----------
943,290 5,042,914
----------- ----------
Operating income (loss) (943,290) 8,308
Other income (expense):
Interest expense (192,875)(2) (709,961)
Interest income and other - 128,131
----------- ----------
Income (loss) before income
taxes (1,136,165) (573,522)
Provision for income taxes - -
----------- ----------
Income (loss) before
extraordinary item $(1,136,165) $ (573,522)
=========== ==========
Loss before extraordinary
item per common share $ (0.06)(3)
==========
Weighted average number of
common shares outstanding 1,064,811(3) 9,541,632(3)
=========== ==========
</TABLE>
See accompanying notes to proforma statement of operations.
F-3
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(Unaudited)
Note A - Pro Forma Adjustments for the Acquisition of the
Mustang Island Interest, Oak Hill Interest and Enron
Interest
In April 1995, the Company acquired a producing oil and
gas property in the Mustang Island Field in offshore Nueces
County, Texas ("Mustang Island Interest") from Sierra
Mineral Development, L.C. and LLOG Production Company (the
Company assumed Sierra Mineral's contractual rights and
obligations with LLOG). In June 1995, the Company completed
the acquisition of producing gas properties in the Oak Hill
Field in Rusk County, Texas ("Oak Hill Interest") from
Sierra 1994 I Limited Partnership ("Sierra"). In June 1995,
the Company also completed the acquisition of producing oil
and gas properties in Eddy County, New Mexico, from Enron
Oil and Gas Company ("Enron Interest").
The consideration given for the acquisition of the
Mustang Island Interest consisted of $900,000 in cash and
352,500 shares of the Company's Class A Common Stock. The
Company funded the cash portion of the Mustang Island
acquisition with available cash balances. The consideration
paid by the Company to Sierra for the Oak Hill Interest
consisted of $7,200,000 in cash, 612,311 shares of the
Company's Class A Common Stock and warrants to purchase
200,000 shares of Class A Common Stock at a price per share
of $2.00. The cash portion of the acquisition was funded
primarily by the Company's new reducing, revolving credit
facility with Bank One, Texas, N.A. ("Bank One") (see
below). The consideration given for the acquisition of the
Enron Interest was $2,119,295 in cash. This acquisition was
funded by borrowings under the Company's new credit facility
with Bank One and available cash.
In June 1995, the Company consummated a $33,000,000
reducing revolving line of credit facility (the "Facility")
with Bank One, Texas, N.A. ("Bank One"). The initial funding
was $15,500,000, of which $12,500,000 was drawn upon. The
initial advance was used to purchase the Oak Hill Interest
and the Enron Interest described above, to pay off the
Company's credit facility with Texas Gas Fund I and for
closing fees. In addition, the Company issued 100,000 shares
of Class A common stock to Texas Gas Fund I to reduce their
Net Profits Interest in the Goldsmith Adobe Unit ("GAU"). In
the future, the Facility will be used for the further
development of the GAU in Ector County, Texas, and for
acquisitions and limited exploration.
The Facility consists of two parts: a Revolving Note of
up to $30,000,000, with an interest rate of prime plus 1%
(subject to reduction in certain circumstances) or LIBOR
plus 3.75% (subject to reduction in certain circumstances),
and an Advance Note of up to $3,000,000 (primarily for the
development of GAU) at a rate of prime plus 4%. Payments of
interest and principal will be made monthly. The Facility is
F-4
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS (Continued)
(Unaudited)
NOTE A - Pro Forma Adjustments for the Acquisition of the
Mustang Island Interest, Oak Hill Interest and Enron
Interest
secured by all of the Company's principal oil and gas
properties, related equipment, oil and gas inventory and
related revenues. Prepayments are allowed at any time.
F-5
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS (Continued)
(Unaudited)
Note A - Pro Forma Adjustments for the Acquisition of the
Mustang Island Interest, Oak Hill Interest and Enron
Interest (Continued)
The Revolving Note has a maturity date of June 30, 1999
and the Advance Note has a maturity date of June 30, 1996.
Payment of the Advance Note is subordinated to payment of
the Revolving Note. Beginning July 31, 1995, the Company is
required to make monthly payments of $175,000 (which amount
can be redetermined semi-annually by Bank One).
The accompanying unaudited pro forma statement of
operations for the six months ended June 30, 1995 and the
year ended December 31, 1994 have been prepared as if the
acquisition of the Mustang Island Interest, the Oak Hill
Interest, and the Enron Interest had occurred on January 1,
1994, and it reflects the following adjustments:
(1) To adjust depletion, depreciation, and amortization to
reflect the effect of the acquisition of the Mustang
Island Interest, the Oak Hill Interest, and the Enron
Interest. Depletion, depreciation, and amortization of
the oil and gas properties is computed using the unit-of-
production method.
(2) To adjust interest expense to reflect the additional
borrowings under the new Facility directly related to
the acquisition of the Oak Hill Interest and the Enron
Interest (the acquisition of the Mustang Island Interest
was funded with available cash).
(3) To adjust the weighted average number of common shares
outstanding for shares of common stock issued as a
result of the acquisition of the Mustang Island Interest
and the Oak Hill Interest and to reduce Texas Gas Fund
I's NPI interest in the GAU. The loss per common share
is computed by dividing net income (loss), adjusted for
preferred stock dividend requirements of $280,000 and
$264,705 for the six months ended June 30, 1995 and the
year ended December 31, 1994, respectively, by the
weighted average common shares outstanding.
Note B - Pro Forma Combined Supplemental Oil and Gas Reserve
and Standardized Measure Information
The following is a summary of pro forma combined
estimated quantities of proved reserves derived from
estimates prepared by the Company's independent engineers.
F-6
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS (Continued)
(Unaudited)
Note B - Pro Forma Combined Supplemental Oil and Gas Reserve
and Standardized Measure Information (Continued)
Pro Forma Combined Estimated Quantities of Proved Reserves
<TABLE>
<CAPTION>
Oil Gas
(Bbl) (Mcf)
---------- -----------
<S> <C> <C>
January 1, 1994 3,921,940 40,840,161
Purchase of reserves in place 1,035,137 1,858,271
Extensions 906,526 1,996,771
Revisions of previous estimates (387,840) (879,838)
Production (138,776) (1,564,962)
---------- -----------
December 31, 1994 5,336,987 42,250,403
========== ===========
</TABLE>
Pro Forma Combined Estimated Quantities of Proved Developed
Reserves
<TABLE>
<CAPTION>
Oil Gas
(Bbl) (Mcf)
---------- -----------
<S> <C> <C>
January 1, 1994 1,769,870 19,151,553
December 31, 1994 1,640,745 21,913,433
</TABLE>
The following is a summary of a pro forma combined
standardized measure of discounted future net cash flows
related to the Company's pro forma combined proved oil, gas,
and natural gas liquids reserves. Such information has been
derived from valuations of proved reserves using discounted
cash flows estimated by the Company's internal and
independent engineers. The additions to proved reserves from
new discoveries and extensions could vary significantly from
year to year; additionally, the impact of changes to reflect
current prices and costs of reserves proved in prior years
could also be significant. Accordingly, the information
presented below should not be viewed as an estimate of the
fair value of the Company's oil and gas properties following
the acquisition of the Mustang Island Interest, the Oak Hill
Interest, and the Enron Interest, nor should it be
considered indicative of any future trends.
F-7
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS (Continued)
(Unaudited)
Note B - Pro Forma Combined Supplemental Oil and Gas Reserve
and Standardized Measure Information (Continued)
Pro Forma Combined Standardized Measure of Discounted Future
Net Cash Flows
<TABLE>
<CAPTION>
December 31
1994
-------------
<S> <C>
Future cash inflows $161,160,015
Future production and development costs (80,912,115)
Future income tax expense (17,665,154)
-------------
Future net cash flows 62,582,746
10% annual discount for estimated timing
of cash flows (26,988,430)
-------------
Standardized measure of discounted future
net cash flows $ 35,594,316
=============
</TABLE>
During recent years, there have been significant
fluctuations in prices paid for crude oil in world markets.
This situation has had a destabilizing effect on crude oil's
posted prices in the United States, including the posted
prices paid by purchasers of the Company's crude oil. The
weighted average prices at January 1, 1994 and December 31,
1994 of oil and gas, used in the above table were $17.77,
and $16.89 per barrel, respectively, and $1.67 and $1.82 per
Mcf, respectively.
The following are the principal sources of change in the
pro forma combined standardized measure of discounted future
net cash flows:
<TABLE>
<CAPTION>
Year ended
December 31
1994
-------------
<S> <C>
Sales and transfers of oil and gas produced, net
of production costs $ (2,827,157)
Net changes in prices and production cost 10,677,716
Purchases of reserves in place 3,414,926
Extensions and discoveries, less related costs 4,605,206
Revisions of previous quantity estimates (1,985,978)
Sales of reserves in place (30,585)
Accretion of discount 3,520,074
Net change in income taxes (8,462,081)
Changes in production rates and other (1,832,668)
F-8
<PAGE>
NATIONAL ENERGY GROUP, INC.
NOTES TO PRO FORMA STATEMENT OF OPERATIONS (Continued)
(Unaudited)
-------------
Net change $7,079,453
=============
</TABLE>
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating
revenues and direct operating expenses for the Mustang
Island Interest (as defined in Note A to the accompanying
statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993.
These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the accompanying statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose
of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to
be a complete presentation of the revenues and expenses of
the Mustang Island Interest.
In our opinion, the statements referred to above present
fairly, in all material respects, the operating revenues and
direct operating expenses of the Mustang Island Interest for
the years ended December 31, 1994 and 1993 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-10
<PAGE>
Mustang Island Interest
Statements of Operating Revenues and Direct Operating
Expenses
(Note A)
<TABLE>
<CAPTION>
Three-Month
Period Ended
March 31, Year Ended December 31,
1995 1994 1993
--------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Oil and gas sales $126,602 $358,785 $401,309
Direct operating expenses:
Lease operating 56,474 238,171 173,871
Oil and gas production taxes 7,224 21,211 23,127
--------------- ------------ ------------
63,698 259,382 196,998
--------------- ------------ ------------
Excess of operating revenues
over direct operating expenses $ 62,904 $ 99,403 $204,311
=============== ============= ============
</TABLE>
See accompanying notes to statements of operating revenues and
direct operating expenses.
F-11
<PAGE>
MUSTANG ISLAND INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
Note A - Basis of Presentation
In April 1995, the Company acquired a producing oil and
gas property in the Mustang Island Field in offshore Nueces
County, Texas ("Mustang Island Interest") from Sierra
Mineral Development, L.C. and LLOG Production Company (the
Company assumed Sierra Mineral's contractual rights and
obligations with LLOG).
The consideration given for the acquisition of the
Mustang Island Interest consisted of $900,000 in cash and
352,500 shares of the Company's Class A Common Stock. The
Company funded the cash portion of the Mustang Island
Interest acquisition with available cash balances.
The operating revenues and direct operating expenses
presented herein relate only to the interest in the
producing oil and gas properties acquired and do not
represent all of the oil and gas operations of the sellers.
Direct operating expenses include the actual costs of
maintaining the producing properties and their production,
but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or
general and administrative expenses, including well overhead
charges. Presentation of complete historical financial
statements for the three-month period ended March 31, 1995
and the years ended December 31, 1994 and 1993 is not
practicable since the Mustang Island Interest was not
accounted for as a separate entity; and therefore, such
statements are not available. The operating revenues and
direct operating expenses for the periods presented may not
be representative of future operations.
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited)
The Company retained an independent engineering firm to
provide an estimate of the future net oil and gas reserves
of the Mustang Island Interest as of April 1, 1995. The
reserve quantity information has been derived from this
report.
Estimated quantities of proved net reserves include only
those quantities that can be expected to be commercially
recoverable at prices and costs in effect at the effective
date of the acquisition, under existing regulatory practices
and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves
expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped
reserves include those reserves expected to be recovered
from new wells on undrilled acreage or from existing wells
on which a relatively major expenditure is required for
recompletion.
F-12
<PAGE>
MUSTANG ISLAND INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited) (Continued)
<TABLE>
<CAPTION>
Estimated Quantities of Proved Reserves
Oil Gas
(Bbl) (Mcf)
------- ---------
<S> <C> <C>
January 1, 1993 154,786 3,064,568
Production 13,989 16,555
------- ---------
December 31, 1993 140,797 3,048,013
Production 19,812 44,253
------- ---------
December 31, 1994 120,985 3,003,760
</TABLE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Developed Reserves
Oil Gas
(Bbl) (Mcf)
------- ---------
<S> <C> <C>
January 1, 1993 108,230 211,568
December 31, 1993 94,241 195,013
December 31, 1994 74,429 150,760
</TABLE>
The following is a summary of a standardized measure of
discounted future net cash flows related to the proved oil
and gas reserves of the Mustang Island Interest. For these
calculations, estimated future cash flows from estimated
future production of proved reserves were computed using oil
and gas prices as of the end of each period presented.
Future development and production costs attributable to the
proved reserves were estimated assuming that existing
conditions would continue over the economic life of the
properties, and costs were not escalated for the future. The
Mustang Island Interest is not a separate tax paying entity.
Accordingly, the standardized measure of discounted future
net cash flows from proved reserves is presented before
deduction of federal income taxes. The information presented
below should not be viewed as an estimate of the fair value
of the Mustang Island Interest, nor should it be considered
indicative of any future trends.
F-13
<PAGE>
MUSTANG ISLAND INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited) (Continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Future cash inflows $ 7,475,215 $ 7,058,775
Future production and development costs (3,819,609) (4,078,991)
Discount of future net cash flows at 10% per annum (716,104) (641,910)
----------- ------------
Discounted future net cash flows before income taxes $ 2,939,502 $ 2,337,874
=========== ===========
</TABLE>
The weighted average prices of oil and gas at
December 31, 1994 and December 31, 1993 used in the above
table were $18.50 and $14.54 per barrel, respectively, and
$1.75 and $1.71 per Mcf, respectively.
The following are the principal sources of change in the
standardized measure of discounted future net cash flows of
the Mustang Island Interest:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1994 1993
------------------------
<S> <C> <C>
Sales and transfers of oil and gas
produced, net of production costs $ (99,403) $ (204,311)
Net changes in prices and production costs 467,244 (1,412,443)
Accretion of discount 233,787 359,512
------------ ------------
Net change $601,628 $(1,257,242)
============ ============
</TABLE>
F-14
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating
revenues and direct operating expenses for the Oak Hill
Interest (as defined in Note A to the accompanying
statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993.
These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the accompanying statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose
of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to
be a complete presentation of the revenues and expenses of
the Oak Hill Interest.
In our opinion, the statements referred to above present
fairly, in all material respects, the operating revenues and
direct operating expenses of the Oak Hill Interest for the
years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-15
<PAGE>
Oak Hill Interest
Statements of Operating Revenues and Direct Operating
Expenses
(Note A)
<TABLE>
<CAPTION>
Five-Month
Period Ended Year Ended December 31,
May 31, -----------------------
1995 1994 1993
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
Oil and gas sales $868,306 $382,427 $323,182
Direct operating expenses:
Lease operating 212,387 163,171 70,128
Oil and gas production taxes 3,193 16,773 24,239
----------- ---------- -----------
215,580 179,944 94,367
----------- ---------- -----------
Excess of operating revenues over
direct operating expenses $652,726 $202,483 $228,815
=========== ========== ===========
</TABLE>
See accompanying notes to statements of operating revenues
and
direct operating expenses.
F-16
<PAGE>
OAK HILL INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
Note A - Basis of Presentation
In June 1995, the Company completed the acquisition of
producing gas properties in the Oak Hill Field in Rusk
County, Texas ("Oak Hill Interest") from Sierra 1994 I
Limited Partnership ("Sierra").
The consideration paid by the Company to Sierra for the
Oak Hill Interest acquisition consisted of $7,200,000 in
cash, 612,311 shares of the Company's Class A Common Stock
and warrants to purchase 200,000 shares of Class A Common
Stock at a price per share of $2.00. The cash portion of the
acquisition was funded primarily by the Company's new
Facility with Bank One (See discussion in Note A to the Pro
Forma Statement of Operations).
The operating revenues and direct operating expenses
presented herein relate only to the interest in the
producing oil and gas properties acquired and do not
represent all of the oil and gas operations of Sierra.
Direct operating expenses include the actual costs of
maintaining the producing properties and their production,
but do not include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or
general and administrative expenses, including well overhead
charges. Presentation of complete historical financial
statements for the five-month period ended May 31, 1995 and
the years ended December 31, 1994 and 1993 is not
practicable since the Oak Hill Interest was not accounted
for as a separate entity; and therefore, such statements are
not available. The operating revenues and direct operating
expenses for the periods presented may not be representative
of future operations.
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited)
The Company retained an independent engineering firm to
provide an estimate of the future net oil and gas reserves
of the Oak Hill Interest as of April 1, 1995. The reserve
quantity information has been derived from this report.
Estimated quantities of proved net reserves include only
those quantities that can be expected to be commercially
recoverable at prices and costs in effect at the effective
date of the acquisition, under existing regulatory practices
and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves
expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped
reserves include those reserves expected to be recovered
from new wells on undrilled acreage or from existing wells
on which a relatively major expenditure is required for
recompletion.
F-17
<PAGE>
OAK HILL INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
<TABLE>
<CAPTION>
Estimated Quantities of Proved Reserves
Oil Gas
(Bbl) (Mcf)
------- ----------
<S> <C> <C>
January 1, 1993 43,773 22,312,163
Production 338 183,646
------- ---------
December 31, 1993 43,435 22,128,517
Production 433 239,292
------ ----------
December 31, 1994 43,002 21,889,225
====== ==========
</TABLE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Developed Reserves
Oil Gas
(Bbl) (Mcf)
====== ==========
<S> <C> <C>
January 1, 1993 17,543 5,742,163
December 31, 1993 17,205 5,558,517
December 31, 1994 20,111 8,601,225
</TABLE>
The following is a summary of a standardized measure of
discounted future net cash flows related to the proved oil
and gas reserves of the Oak Hill Interest. For these
calculations, estimated future cash flows from estimated
future production of proved reserves were computed using oil
and gas prices as of the end of each period presented.
Future development and production costs attributable to the
proved reserves were estimated assuming that existing
conditions would continue over the economic life of the
properties, and costs were not escalated for the future. The
Oak Hill Interest is not a separate tax paying entity.
Accordingly, the standardized measure of discounted future
net cash flows from proved reserves is presented before
deduction of federal income taxes. The information presented
below should not be viewed as an estimate of the fair value
of the Oak Hill Interest, nor should it be considered
indicative of any future trends.
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows
December 31, December 31,
1994 1993
------------ -------------
<S> <C> <C>
Future cash inflows $ 40,338,294 $ 43,770,703
Future production and development costs (21,056,247) (21,236,191)
Discount of future net cash flows at 10% per anum (8,027,752) (9,130,408)
------------ -------------
Discounted future net cash flows before income taxes $ 11,254,295 $ 13,404,104
============ ============
</TABLE>
F-18
<PAGE>
OAK HILL INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
The weighted average prices of oil and gas at
December 31, 1994 and December 31, 1993 used in the above
table were $18.50 and $19.86 per barrel, respectively, and
$1.82 and $1.96 per Mcf, respectively.
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited) (Continued)
The following are the principal sources of change in the
standardized measure of discounted future net cash flows of
the Oak Hill Interest:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1994 1993
------------ ------------
<S> <C> <C>
Sales and transfers of oil and gas produced,
net of production costs $ (202,483) $ (228,815)
Net changes in prices and production costs (3,287,736) 1,908,944
Accretion of discount 1,340,410 1,065,816
------------ -----------
Net change $(2,149,809) $2,745,945
============ ===========
</TABLE>
F-19
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Energy Group, Inc.
We have audited the accompanying statements of operating
revenues and direct operating expenses for the Enron
Interest (as defined in Note A to the accompanying
statements) purchased by National Energy Group, Inc. (the
"Company") for the years ended December 31, 1994 and 1993.
These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the accompanying statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the accompanying statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the
overall statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose
of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to
be a complete presentation of the revenues and expenses of
the Enron Interest.
In our opinion, the statements referred to above present
fairly, in all material respects, the operating revenues and
direct operating expenses of the Enron Interest for the
years ended December 31, 1994 and 1993 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
September 12, 1995
F-20
<PAGE>
Enron Interest
Statements of Operating Revenues and Direct Operating Expenses
(Note A)
<TABLE>
<CAPTION>
Five-Month
Period Ended
May 31, Year Ended December 31,
1995 1994 1993
----------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Oil and gas sales $400,579 $1,151,294 $2,178,702
Direct operating expenses:
Lease operating 144,398 314,821 206,368
Oil and gas production taxes 30,043 86,347 163,403
----------- ---------- ------------
174,441 401,168 369,771
Excess of operating revenues over
direct operating expenses $226,138 $ 750,126 $1,808,931
=========== ========== ============
</TABLE>
See accompanying notes to statements of operating revenues and
direct operating expenses.
F-21
<PAGE>
ENRON INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES
Note A - Basis of Presentation
In June 1995, the Company completed the acquisition of
producing oil and gas properties in Eddy County, New Mexico,
for Enron Oil and Gas Company ("Enron Interest"), pursuant
to a Purchase and Sale Agreement dated as of March 29, 1995
between the Company and Enron. The acquisition consists of
six gas wells and two oil wells, which contain approximately
4 billion cubic feet of gas equivalent. The Company will be
the operator of a majority of the properties. The
consideration given for the acquisition was $2,119,295 in
cash. This acquisition was funded by the Company's new
credit Facility with Bank One (see discussion in Note A to
the Pro Forma Statement of Operations) and available cash
balances.
The operating revenues and direct operating expenses
presented herein relate only to the interest in the
producing oil and gas properties acquired and do not
represent all of the oil and gas operations of Enron. Direct
operating expenses include the actual costs of maintaining
the producing properties and their production, but do not
include charges for depletion, depreciation, and
amortization; federal and state income taxes; interest; or
general and administrative expenses, including well overhead
charges. Presentation of complete historical financial
statements for the five-month period ended May 31, 1995 and
the years ended December 31, 1994 and 1993 is not
practicable since the Enron Interest was not accounted for
as a separate entity; and therefore, such statements are not
available. The operating revenues and direct operating
expenses for the periods presented may not be representative
of future operations.
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited)
The Company's internal reserve engineers prepared an
estimate of the future net oil and gas reserves of the Enron
Interest as of May 1, 1995. The reserve quantity information
has been derived from this estimate.
Estimated quantities of proved net reserves include only
those quantities that can be expected to be commercially
recoverable at prices and costs in effect at the effective
date of the acquisition, under existing regulatory practices
and with conventional equipment and operating methods.
Proved developed reserves represent only those reserves
expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped
reserves include those reserves expected to be recovered
from new wells on undrilled acreage or from existing wells
on which a relatively major expenditure is required for
recompletion.
F-22
<PAGE>
ENRON INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
Note A - Basis of Presentation (Continued)
<TABLE>
<CAPTION>
Estimated Quantities of Proved Reserves
Oil Gas
(Bbl) (Mcf)
------- ---------
<S> <C> <C>
January 1, 1993 20,505 5,720,454
Production 3,881 1,104,216
------- ---------
December 31, 1993 16,624 4,616,238
Production 2,889 660,574
------- ---------
December 31, 1994 13,735 3,955,664
======= =========
</TABLE>
<TABLE>
<CAPTION>
Estimated Quantities of Proved Developed Reserves
Oil Gas
(Bbl) (Mcf)
-------- ---------
<S> <C> <C>
January 1, 1993 20,505 5,720,454
December 31, 1993 16,624 4,616,238
December 31, 1994 13,735 3,955,664
</TABLE>
The following is a summary of a standardized measure of
discounted future net cash flows related to the proved oil
and gas reserves of the Enron Interest. For these
calculations, estimated future cash flows from estimated
future production of proved reserves were computed using oil
and gas prices as of the end of each period presented.
Future development and production costs attributable to the
proved reserves were estimated assuming that existing
conditions would continue over the economic life of the
properties, and costs were not escalated for the future. The
Enron Interest is not a separate tax paying entity.
Accordingly, the standardized measure of discounted future
net cash flows from proved reserves is presented before
deduction of federal income taxes. The information presented
below should not be viewed as an estimate of the fair value
of the Enron Interest, nor should it be considered
indicative of any future trends.
F-23
<PAGE>
ENRON INTEREST
NOTES TO STATEMENTS OF OPERATING REVENUES AND
DIRECT OPERATING EXPENSES (Continued)
Note B - Supplemental Oil and Gas Reserve and Standardized
Measure Information (Unaudited) (Continued)
<TABLE>
<CAPTION>
Standardized Measure of Discounted Future Net Cash Flows
December 31, December 31,
1994 1993
------------ ------------
<S> <C> <C>
Future cash inflows $6,137,850 $8,383,973
Future production and development costs (986,357) (1,368,349)
Discount of future net cash flows at 10% per anum (1,623,848) (1,956,358)
----------- ------------
Discounted future net cash flows before income taxes $3,527,645 $5,059,266
=========== ============
</TABLE>
The weighted average prices of oil and gas at
December 31, 1994 and December 31, 1993 used in the above
table were $17.50 and $20.13 per barrel, respectively, and
$1.50 and $1.73 per Mcf, respectively.
The following are the principal sources of change in the
standardized measure of discounted future net cash flows of
the Enron Interest:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993
------------ -------------
<S> <C> <C>
Sales and transfers of oil and gas produced,
net of production costs $ (750,126) $(1,808,931)
Net changes in prices and production costs (1,287,422) (2,567,101)
Accretion of discount 505,927 857,754
------------ -------------
Net change $(1,531,621) $(3,518,278)
============ =============
</TABLE>
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment
to be signed on its behalf by the undersigned, thereunto
duly authorized.
NATIONAL ENERGY GROUP, INC.
By:
/s/ Miles D. Bender
President and Chief Executive Officer
DATE: September 14, 1995
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------------- ------------------------
23.2 Consent of Ernst & Young LLP
filed herewith.
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 33 81172 and Form S-3 No. 33-88008) of
National Energy Group, Inc., and in the related Prospectuses of
our reports dated September 12, 1995, with respect to the
statements of operating revenues and direct operating expenses
of the Mustang Island Interest, Oak Hill Interest, and the Enron
Interest included in this Current Report (Form 8-K/A No. 1)
dated June 30, 1995, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Dallas, Texas
September 14, 1995
