NATIONAL ENERGY GROUP INC, S-3/A, 1996-05-03

NATIONAL ENERGY GROUP INC
S-3/A, 1996-05-03
CRUDE PETROLEUM & NATURAL GAS

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As filed with the Securities and Exchange Commission on May 2, 1996
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 1
TO

FORM S-3
Registration Statement
Under
The Securities Act of 1933

NATIONAL ENERGY GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 58-1922764
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

--------------
4925 Greenville Avenue, Suite 1400, Dallas, Texas 75206
(214) 692-9211
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

Miles D. Bender
President and
Chief Executive Officer
National Energy Group, Inc.
4925 Greenville Avenue, Suite 1400
Dallas, Texas 75206

(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

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: /X/

<PAGE>

Subject to Completion, dated May 2, 1996

PROSPECTUS NATIONAL ENERGY GROUP, INC.
3,613,533 SHARES OF CLASS A COMMON STOCK

Of the 3,613,533 shares (the "Shares") of Class A Common Stock, $.01 par
value ("Common Stock") of National Energy Group, Inc., a Delaware corporation
(the "Company") offered hereby, 2,728,533 shares are being offered by certain
Selling Stockholders (as defined herein) of the Company, and 885,000 shares
are to be offered for resale upon the exercise of options (the "Options") held
by certain officers, directors and employees of the Company (the "Option
Holders"). See "Selling Stockholders". The Shares will be sold by the Selling
Stockholders and, upon exercise of the Options, by the Option Holders, from
time to time at the then prevailing market prices or otherwise.

Since September 1, 1995, the Company's Common Stock has been trading on
the NASDAQ National Market System. The Common Stock previously traded on the
NASDAQ Small Cap Market. The Company's symbol is "NEGX". On April 30,
1996 the last sales price for the Company's Common Stock was $2.81

The Company will receive no portion of the proceeds of the sale of the
Shares offered hereby and will bear the expenses incident to their registration.

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

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Price to Proceeds
Public (1) to Selling
Stockholders(1)(2)
- -------------------------------------------------------------------------------

Per Share of Common Stock $ 2.88 $ 2.88

Maximum Offering $ 10,406,975 $ 10,406,975

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(1) Assumes that the shares of Common Stock are sold at $2.88 (the average of
the high and low sales prices as of April 30, 1996) and that all shares offered
hereby are sold.
(2) Before deducting expenses of the offering, estimated at $10,701 which are
payable by the Company.

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AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES VARIOUS RISKS. SEE
"RISK FACTORS" ON PAGES 9-15.

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY SHARES IN ANY JURISDICTION TO ANY PERSON TO
WHOM SUCH OFFER OR SOLICITATION IS UNLAWFUL.

The date of this Prospectus is May 2, 1996

<PAGE>

AVAILABLE INFORMATION

The Registrant is a reporting company and therefore files reports and
other information with the Securities and Exchange Commission (the
"Commission"). Reports and other information filed by the Registrant may be
inspected and copied at the public reference facilities of the Commission in
Washington, D.C. and copies of such material can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed
rates.

The Company has filed with the Commission a Registration Statement
on Form S-3 (herein, together will all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus omits certain
information, exhibits and undertakings contained in the Registration Statement.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto and the documents incorporated by reference therein. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or document filed or incorporated by reference as
an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference.

INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE

Incorporated by reference in this Prospectus as of the date of filing, and
subject in each case to information contained in this Prospectus, are the
following documents filed by the Company with the Commission pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"):

(i) Annual Report on Form 10-KSB for the fiscal year ended December 31,
1995; and Amendments No. 1 and No. 2 thereto on Form 10-KSB/A dated
April 29, 1996 and May 2, 1996, respectively.

(ii) Current Report on Form 8-K dated June 30, 1995, and Amendment No. 1
thereto on Form 8-K/A dated June 30, 1995.

In addition, all documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of Common Stock made
hereby 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 herein or in a document incorporated or deemed to be incorporated
by reference herein

<PAGE>

shall be deemed to be modified or superseded for the purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon oral or written request of such person, a copy of
any and all of the documents incorporated by reference herein (other than
exhibits and schedules to such documents, unless such exhibits or schedules are
specifically incorporated by reference into such documents). Such requests
should be directed to Joyce Fielder, Assistant Secretary, National Energy
Group, Inc., 4925 Greenville Avenue, Suite 1400, Dallas, Texas 75206 or by
telephone at (214) 692-9211.

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

As used in this Prospectus, the term "mcf" shall mean thousand cubic
feet, and the term "boe" shall mean barrels of oil equivalent (converting six
mcf of natural gas to one barrel of oil). The term "Standardized Measure"
shall mean the estimated future net cash flows from proved oil and gas
reserves computed using prices and costs, at the dates indicated, after income
taxes and discounted at 10%. The term "PV 10%" shall mean the discounted
future net cash flows for proved oil and gas reserves computed on the same
basis as the Standardized Measure, but without deducting income taxes, which
is not in accordance with generally accepted accounting principles. PV 10% is
an important financial measure for evaluating the relative significance of oil
and gas properties and acquisitions, but should not be construed as an
alternative to the Standardized Measure (as determined in accordance with
generally accepted accounting principles).

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and financial statements incorporated by reference in the
Registration Statement of which this Prospectus is a part.

The Company

National Energy Group, Inc. (the "Company") was incorporated under
the laws of the state of Delaware on November 20, 1990. Effective June 11,
1991, Big Piney Oil and Gas Company ("Big Piney") and VP Oil, Inc. ("VP")
merged with and into the Company.

The Company is engaged in oil and gas exploration, production and
development. At December 31, 1995, the Company's net proved developed and
undeveloped reserves were estimated by Netherland, Sewell & Associates, Inc.
to be 9,065,928 boe, consisting of 3,921,076 barrels of oil and 30,869,112 mcf
of gas; of such amounts, 1,632,404 barrels of oil and 13,304,031 mcf are proved
developed reserves. At December 31, 1995, the Standardized Measure of the
Company's oil and gas reserves was $32,127,101. The PV 10% of the
Company's oil and gas reserves at such date was $36,278,600. At April 30,
1996, the Company owned, managed or had interests in 204 producing wells,
of which 142 are operated by the Company. The Company's principal
properties are the Goldsmith Adobe Unit in Ector County, Texas (the"GAU"),
the Oak Hill field in Rusk County, Texas ("Oak Hill" or the "Oak Hill Field")
and the Mustang Island field in offshore Nueces County, Texas ("Mustang
Island"). The Company is actively pursuing various strategies for increasing
the Company's oil and gas reserves and production. The various strategies for
increasing reserves and production include additional development of the GAU,
Oak Hill, Mustang Island and certain other properties, the acquisition of
producing oil and gas properties and companies with oil and gas production, the
enhancement and exploitation of the Company's other existing properties and
exploratory drilling.

During 1995 and the first quarter of 1996, the Company expanded its areas
of concentration to include offshore oil and gas properties and exploratory
drilling. In particular, the Company has recently purchased interests in 8
wells and 3 leases in offshore Nueces County, Texas in the Mustang Island
area, and, in early April 1996 the Company won exploration rights on 16
offshore tracts (covering 7,765 acres) in the Mustang Island area for
approximately $1.4 million through bids with the State of Texas. The Company
now has 13,815 total exploration and production acres in the Mustang Island
area. The Company expects to engage in development and exploratory drilling in
the Mustang Island area. In addition, during 1996, the Company has
participated in the drilling of 3 exploratory wells in Texas and Louisiana, 2
of which were dry and the third resulted in a junked hole after logging a
productive interval. This well will be redrilled during 1996. The Company
expects offshore and exploratory prospects to become a more important part of
its business in the future.

The Company's executive offices are located at 4925 Greenville Avenue,
Suite 1400, Dallas, Texas 75206, and the Company's phone number is (214)
692-9211.

<PAGE>

Recent Developments

In December 1993, the Company completed the acquisition of an
additional 63.8% working interest in the GAU from Bligh Petroleum, Inc.
("Bligh") for $2,775,000 in cash and 900,000 shares of Common Stock. During
1994, the Company acquired an additional 17.0% working interest in the GAU
for $584,095 in cash. As a result of the 1993 and 1994 acquisitions, the
Company now holds a 91.8% working interest in the GAU.

In April 1995, the Company completed the acquisition of a producing
oil and gas property in Mustang Island in offshore Nueces County, Texas
("Mustang Island") from Sierra Mineral Development, L.C. and LLOG
Production Company (the Company assumed Sierra Mineral Development, L.C.'s
contractual rights and obligations with LLOG). Consideration for Mustang
Island consisted of $900,000 in cash and 352,000 shares of Common Stock.

In June 1995, the Company completed the acquisition of producing gas
properties in the Oak Hill Field in Rusk County, Texas ("Oak Hill") from
Sierra 1994 I Limited Partnership ("Sierra") for $7,200,000 in cash and
612,311 shares of Common Stock and warrants to purchase 200,000 shares
of Common Stock at $2.00 per share.

In June 1995, the Company completed the acquisition of producing oil
and gas properties in Eddy County, New Mexico from Enron Oil and Gas
Company (the "Enron Properties"). Consideration for the Enron Properties
consisted of $2,119,295 in 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 advance of $12,500,000 was used to pay off the Company's
credit facility with Texas Gas Fund I, to purchase Oak Hill and the Enron
Properties and for closing fees. Subsequent advances have been used for
development of the GAU, other acquisitions of oil and gas properties and
exploratory drilling. At April 30, 1996, the Company had $22,243,000
outstanding under the Facility. The Facility is more fully described in
Note 3 of Notes to Financial Statements incorporated by reference herein.

Also, in June 1995, the Company consummated the sale of $4,000,000 of
the Company's 10-1/2% Cumulative Convertible Preferred Stock, Series C
("Series C"), which was privately placed with affiliates of Kayne, Anderson
Investment Management, Inc. of Los Angeles, California. Forty thousand
shares of Series C were sold by the Company at $100.00 per share, and the
Series C is convertible into shares of the Company's Common Stock at a
conversion price of $2.00 per share of Common Stock. See Note 5 of Notes
to Financial Statements incorporated by reference herein.

On December 29, 1995, the Company and Alexander Energy Corporation
("Alexander") signed a letter of intent providing for the merger of
Alexander and the Company. The letter of intent was subject to, among other
conditions, the execution of a definitive merger agreement by February 15,
1996. The Company and Alexander extended the time to sign a definitive
merger agreement to April 30, 1996. On March 25, 1996, the Company and
Alexander modified the terms of the letter of intent to reduce the original
exchange ratio from 1.8 to 1.7 shares of the Company's Common Stock for
each share of Alexander common stock. Although the letter of intent has
expired, the company expects to sign an additional extension of the letter
of intent.

Accordingly, the merger between the Company and Alexander is subject
to the execution of a definitive merger agreement, satisfactory due
diligence and other material conditions. Therefore, the merger may or may
not be consummated.

In January 1996, the Company completed the acquisition of oil and gas
properties in Mustang Island in offshore Nueces County, Texas from C/A
Limited, Chartex Petroleum Company and Petrotex Engineering Company (the
"CA Acquisition"). The acquisition includes interests in five wells, and a
pipeline and separation facility related to Mustang Island. The properties
have proved reserves with a PV10% of approximately $1,400,000. The
Company operates these properties. The consideration for this acquisition
consisted of 140,857 shares of the Company's Common Stock and $675,000 in
cash. The cash portion of the acquisition was funded out of the Company's
working capital and advances under the Facility.

In February 1996, the Company completed the acquisition of two oil and
gas wells on one offshore block, interests in five other offshore blocks,
and a related production platform and equipment in Mustang Island in
offshore Nueces County, Texas from UMC Petroleum Corporation (the "UMC
Acquisition"). The acquired interests have proved reserves with a present
value discounted at 10% (PV10%) of approximately $1,600,000. The Company
operates these properties. The Company paid UMC Petroleum Corporation
$1,500,000 in cash. The acquisition was funded primarily through borrowing
under the Facility.

The Offering

A total of 3,613,533 shares of Common Stock are offered by this
Prospectus, with 2,728,533 shares being offered by certain Selling Stockholders
of the Company, and 885,000 shares to be offered for resale upon the exercise
of the Options by the Option Holders . See "Selling Stockholders". The Shares
will be sold from time to time by the Selling Stockholders, and upon the
exercise of the Options by the Option Holders, as determined by each such
Selling Stockholder, and Option Holder, respectively, at the then current
market prices or otherwise. The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Stockholders or the Option
Holders. However, the Company will receive certain proceeds from the exercise
of the options by the Option Holders estimated to be $1,748,125, if all the
options are exercised.

Since September 1, 1995, the Company's Common Stock has been
trading on the NASDAQ National Market System. The Common Stock
previously traded on the NASDAQ Small Cap Market. The Company's symbol
is "NEGX". On April 30, 1996, the last sales price for the Company's Common
Stock was $2.81.

<PAGE>

RISK FACTORS

An investment in the Common Stock offered hereby involves various risks.

Investors should consider carefully all of the information set forth in
this Prospectus and the documents incorporated by reference herein and, in
particular, the following risk factors which have increased the risk associated
with, and may otherwise adversely affect the value of, the Common Stock
registered hereunder.

Nature of the Company's Business.
- --------------------------------

The Company is engaged in one industry segment: oil and natural gas
exploration, production and development. In recent years, prices for oil and
gas have been depressed. In addition, the oil and gas business is subject to
various economic and political factors and the significant dependence of the
United States and other countries on foreign oil. Therefore, oil and gas prices
appear dependent, to a significant degree, on the actions of major foreign
crude oil producers and governments and other factors beyond the Company's
control. As a result of such factors and the accompanying unstable market
conditions, future prices for oil and gas are unpredictable. Any significant
decline in the prices of oil or gas will have a material and adverse effect on
the Company's operating results.

Potential Dilution.
- ---------------------

It should be noted that purchasers of Common Stock, upon becoming
stockholders of the Company, may be subject to significant dilution of their
proportionate ownership of the Company. On April 30, 1996, there were 12,096,532
shares of Common Stock outstanding. The Company currently has 1,413,200 shares
of Common Stock reserved for issuance pursuant to existing options and warrants
to purchase Common Stock (which include 885,000 shares registered hereunder).
In addition, if all of the shares of the Company's Series B and Series C are
converted to Common Stock, an additional 5,230,769 shares of Common Stock will
be issued. These issuances will reduce the proportionate ownership in the
Company of purchasers of the Common Stock offered hereby. In addition, if the
Company exercises its option to make six dividend payments on the Series B and
the Series C in shares of Series B and Series C instead of cash, then the
Company will issue 25,100 additional shares of Series B and Series C,
collectively, which shares would be convertible into 1,399,231 shares of Common
Stock. Additionally, shares of Series B and Series C, which would be
convertible into additional shares of Common Stock, may be issuable as
dividends upon such 25,100 shares of Series B and Series C. Furthermore, the
holders of the Series B and Series C have the option to continue to receive
dividends on the Series B and Series C in shares of Series B and Series C,
respectively, after the sixth dividend payment in shares of Series B or Series
C, which dividends would result in the issuance of additional shares of Series
B or Series C, which in turn would be convertible into additional shares of
Common Stock.

In addition, the Company may issue up to 10% of its outstanding shares of
Common Stock pursuant to its 1992 Stock Option Plan. As of April 30, 1996,
no options to purchase shares were outstanding pursuant to the 1992 Stock
Option Plan (the "Plan"). Although the Company has no current plans to issue
more options pursuant to the Plan, the Company has issued options outside of

<PAGE>

the Plan. In addition, the Company intends to propose a new option plan to its
Stockholders at the next meeting of Stockholders.

It should be noted that the Company's stated objective is to grow through
the acquisition of oil and gas producing properties and companies with oil and
gas production. Thus, further issuances of Common Stock and preferred stock in
connection with acquisitions can be expected, and such issuances will dilute
the proportional ownership of the Company held by Common Stock stockholders.
Issuances of authorized but unissued shares of Common Stock and preferred
stock could even change control of the Company. Furthermore, the Company will
generally not seek further authorization for the issuance of Common Stock and
preferred stock in acquisitions from the Company's stockholders prior to such
issuances.

Delay of Change in Control.
- --------------------------

An issuance of Common Stock, which could be effected without stockholder
approval, could also be used as an anti-takeover device by the Company by making
it more difficult for anyone to acquire control of the Company. Such an issuance
would permit the Company to dilute both the stock ownership of a stockholder
seeking control of the Company and the voting power of all other stockholders.
With respect to the preferred stock, the Board could use its authority to make
such designations and to issue preferred stock in a manner that would create
impediments to or otherwise discourage persons attempting to gain control of the
Company. Certain issuances of preferred stock could also seriously dilute the
proportionate ownership of the Company held by the Company's Common Stock
stockholders (in particular, subject to the NASDAQ Stock Market Shareholder
Voting Rights Rule, the Board can authorize preferred stock with voting rights
greater than one vote per share) and could even change control of the Company.

Viability of the Company; Development and Production Risks.
- ----------------------------------------------------------

Oil and gas reserves are depleting assets by their nature, and revenues
generated by oil and gas production will decline in the absence of
acquisitions, improvements to producing properties, successful exploration or
increases in the prices of oil and gas. It is anticipated that the Company
will seek to make acquisitions of oil and gas companies or production, drill
development and exploratory wells, and continue to rework, reenter and
complete wells in an effort to replace reserves. If such efforts are
unsuccessful, the Company's results of operations and financial condition will
be materially and adversely affected. Furthermore, there can be no assurance
that the Company will be successful in acquiring properties and/or companies
because successful acquisitions are subject to the availability of
satisfactory acquisition candidates and cash and credit facilities to the
Company, the relative costs of acquisitions as compared to drilling and the
market demand for oil and gas. Furthermore, the Company's business strategy
assumes that major integrated oil companies and independent oil companies will
continue to divest many of their domestic oil and natural gas properties.
There can be no assurance that such divestitures will continue or that the
Company will be able to acquire such properties with acceptable rates of
return. In addition, the Company could be under severe financial pressures if
prices for oil and gas decline substantially from present levels.

In addition, a substantial portion of the Company's oil and gas reserves
are proved undeveloped reserves. Successful development of such reserves
cannot be assured. Additional

<PAGE>

drilling will be necessary in future years both to maintain production levels
and to define the extent and recoverability of existing reserves. There is no
assurance that present oil and gas wells of the Company will continue to
produce at current or anticipated rates of production, that development, or
exploratory drilling will be successful, that production of oil and gas will
commence when expected, that there will be favorable markets for oil and gas
which may be produced in the future or that production rates achieved in early
periods can be maintained.

The Company's results of operations and cash flow will be significantly
affected by the outcome of its planned development of the GAU. For
information on the Company's GAU development plan, see "- Need for
Additional Capital" below. If the GAU development plan is not successful, the
Company's results of operations and financial condition will be materially and
adversely affected. Development of the GAU involves all of the risks inherent
in oil and gas exploration and development described above and in " -Risk of
Future Oil and Gas Exploration" below.

In addition, the Company recently acquired oil and gas properties in the
Oak Hill field and Mustang Island area and oil and gas properties from Enron.
See "Prospectus Summary - Recent Developments". In particular, the
Company's results of operations and cash flow will be significantly affected by
the outcome of the development of Oak Hill and Mustang Island A portion of
the development costs for Oak Hill and Mustang Island is expected to be
funded by existing working capital and additional advances under the Facility
with Bank One. To the extent the Company uses borrowed funds to develop
Oak Hill and Mustang Island the Company's interest expense will increase. The
Company's depreciation, amortization and depletion costs will increase as
Oak Hill and Mustang Island are developed, but the Company expects such
increases to be in proportion to the Company's other such costs. Due to the
greater depth of the expected drilling in the Oak Hill field, the Company's
development costs for the Oak Hill property are expected to be somewhat higher
than the average development costs for the the Company's other properties. The
development of Oak Hill and Mustang Island involves all of the risks inherent
in oil and gas exploration and development described above and in "- Risk of
Future Oil and Gas Exploration" below and such development may or may not
be successful. If the development of Oak Hill and Mustang Island is
unsuccessful, development costs will exceed revenues resulting from such
development and the Company's results of operations and cash flow will be
adversely affected.

Need for Additional Capital.
- ---------------------------

The Company's ability to develop its principal properties, the GAU, Oak
Hill and Mustang Island, and to otherwise expand its reserve base through
acquisition and development, is dependent upon the Company's ability to obtain
the necessary capital. In particular, the Company will need funding of
approximately $16.0 million, over the next twelve months to develop the GAU,
Oak Hill and Mustang Island in accordance with the Company's plan. Of the
$16.0 million, $5.7 million is expected to be incurred on the GAU, $8.6 million
on Oak Hill and $1.7 million on Mustang Island. Although the Company has
entered into the Facility with Bank One, there is no assurance that Bank One
will make additional advances under the Facility or that the Company will be
able to otherwise raise sufficient capital to implement its development plan for
the GAU, Oak Hill and Mustang Island or any other property, or to replace oil
and gas reserves as they are produced. To the extent the Company uses

<PAGE>

borrowed funds to develop the GAU, the Company's interest expense will
increase.

Recent Operating Losses.
- -----------------------

The Company incurred losses from operations for the three years prior to
1995 and had an accumulated deficit of $3,674,466 at December 31, 1995, which
deficit includes a deficit from the Company's predecessor companies. Although
the Company reported operating income of $926,432 for 1995, no assurance can
be made that the Company will operate profitably in the future. The likelihood
of future profitability of the Company must be considered in light of the
problems, expenses, difficulties, complications and delays frequently
encountered in connection with the oil and gas exploration, development and
production business in which the Company is engaged.

Risk of Future Oil and Gas Exploration.
- --------------------------------------

To the extent the Company engages, directly or indirectly, in exploratory
and other drilling activities in the future, it will be subject to certain
risks inherent in this phase of the oil and gas business. Exploration for oil
and gas is a speculative business and, therefore, involves a high degree of
risk. No proven techniques exist with which to predict whether the drilling of
a particular well will result in the discovery of oil and/or gas in commercial
quantities. There can therefore be no assurance that the drilling of any wells
will result in production in commercial quantities, or that production will be
profitable. Moreover, once a well is drilled and completed, the completion may
still fail to produce a commercial well for various geological or mechanical
reasons. Abandonment of a well may result in the loss of both drilling and
completion costs, which will then be non-recoverable. Also, there exist several
natural hazards in the drilling of oil and gas wells, such as unusual or
unexpected formation pressure, infiltration of salt water, swelling of the
formation, lost fluid circulation, or other unanticipated conditions, which
could adversely affect profitability even in the event of a successful well.
The risks of oil and gas exploration may be even greater offshore, and the
Company has recently purchased offshore properties and participated in the
drilling of an offshore well.

Dependence on Management.
- ------------------------

The Company is dependent on the judgment, experience and expertise of its
current Management, particularly with respect to its development activities
and the acquisition of properties and/or companies. In particular, Miles D.
Bender is under no contractual obligation to serve in his present positions,
and the Company has no "key man" life insurance policy on Mr. Bender. The loss
of members of current Management could materially and adversely affect the
Company and its business, operations and prospects.

Limitation on Accuracy of Reserve Estimates.
- -------------------------------------------

This Prospectus contains and/or incorporates by reference, estimates of
reserves and of future net revenue which have been prepared by petroleum
engineers. Estimates of reserves and of future net revenue prepared by
different petroleum engineers may vary substantially depending, in part, on
the assumptions made and may be subject to adjustment in the future. The
actual amounts of

<PAGE>

production, revenue, taxes, development expenditures, operating expenses, and
quantities of recoverable oil and gas reserves to be encountered may vary
substantially from the engineers' estimates. Oil and gas reserve estimates are
necessarily inexact and involve matters of subjective engineering judgment. In
addition, any estimates of future net revenue and the present value thereof
are based on price and cost assumptions made by the Company which only
represent its best estimate. If these estimates of quantities, prices and
costs prove inaccurate, the Company is unsuccessful in expanding its oil and
gas reserve base with its capital expenditure program, and/or declines in and
instability of oil and gas prices occur, then write-downs in the capitalized
costs associated with the Company's oil and gas assets may be required.

Competition.
- -----------

The oil and gas industry is intensely competitive in all of its phases,
particularly with respect to the acquisition of desirable producing oil and
gas properties and oil and gas companies with production. The Company, which
is a minor competitive factor in the industry, encounters strong competition
from major oil companies, large independent oil and gas concerns, and
individual producers and operators, most of which have financial resources,
staffs, facilities and experience substantially greater than those of the
Company. Furthermore, in times of high drilling activity, exploration for and
production of oil and gas may be affected by the availability of equipment,
labor and supplies and by competition for drilling rigs. The Company cannot
predict the effect these factors will have on its operations. The Company owns
no drilling rigs, and it is anticipated that its drilling will be conducted by
third parties. Furthermore, the oil and gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.

Sale of Shares.
- --------------

Sales of substantial amounts of Common Stock in the public market
following this Offering could adversely affect the market price for the Common
Stock. In particular, sales of Shares registered hereunder by the Selling
Stockholders may significantly and adversely affect the prevailing market
price for Common Stock, and if any of the Company's other principal
stockholders were to sell a significant number of their shares, the prevailing
market price of the Common Stock may also be significantly and adversely
affected. For more information on the sale of the Shares offered hereby, see
"Plan of Distribution".

Governmental Regulation and Environmental Matters.
- -------------------------------------------------

<PAGE>

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 interpreted, the
Company is unable to predict the future cost or impact of complying with such
laws.

Many state authorities 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 the unitization or pooling of oil and gas properties, the establishment of
maximum rates of production from oil and gas wells and the regulation of
spacing, plugging and abandonment of such wells. The statutes and regulations
of the federal authorities, as well as many state authorities, limit the rates
at which oil and gas can be produced from the Company's properties.

The Natural Gas Wellhead Decontrol Act of 1989 eliminated, effective
January 1, 1993, most price controls set out in the Natural Gas Policy Act of
1978. Neither law has a material impact on the prices received by the Company
for its natural gas. The sale of oil and gas is not currently subject to
governmental price controls.

Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") from 1985 to the present that affect
the economics of natural gas production, transportation and sales. In addition,
the FERC continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction. The stated purpose of many of these
regulatory changes is to promote competition among the various sectors of the
gas industry. The ultimate impact of the complex and overlapping rules and
regulations issued by the FERC since 1985 cannot be predicted. In addition,
many aspects of these regulatory developments have not become final but are
still pending judicial and FERC final decisions.

The Company is subject to numerous laws and regulations governing the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations may require the
acquisition of a permit before drilling commences, restrict the types,
quantities and concentration of various substances that can be released into
the environment in connection with drilling and production activities, limit
or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas and impose substantial liabilities for
pollution resulting from operations. Moreover, the recent trend toward
stricter standards in

<PAGE>

environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas production wastes as "hazardous wastes", which
reclassification would make such wastes subject to much more strigent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general.

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons who are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances and under
CERCLA such persons or companies would be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources. It is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous
substance released into the environment.

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 expenditure
program by reason of environmental laws and regulations, but because such laws
and regulations are frequently changed, the Company is unable to predict the
ultimate cost and effects of such compliance

Control by Management
- ---------------------

The executive officers and directors of the Company collectively own
22.1% of the Company's currently outstanding Common Stock. As a result,
until the conversion of the Series B and Series C, management will in all
likelihood control the Company by virtue of their voting power and ownership
of voting stock and will in all likelihood be able to determine the outcome of
elections of the Company's directors. The Company, however, needs, subject
to certain exceptions, approval of a majority of the outstanding shares of each
of the Series B and Series C to effect extraordinary actions which require the
consent of the Company's stockholders.

In addition, one of the Company's directors, Robert V. Sinnott, is the
representative of the holders of the Series B and Series C. If all 52,500
shares of Series B and all 40,000 shares of Series C were converted into
5,230,769 shares of Common Stock (and assuming no additional shares of Common
Stock are issued), then the holders of Series B and Series C would hold 30.2%
of the then outstanding shares of Common Stock. If such holders were to vote
such shares of Common Stock in accordance with the Board of Director's
recommendations, then management of the Company would exercise control over
the Company.

<PAGE>

USE OF PROCEEDS

The net proceeds from the sale of 2,728,533 shares of Common Stock
registered hereunder by the Selling Stockholders will be received by the
Selling Stockholders, and the Company will not receive any portion of such
proceeds. The net proceeds from the sale of 885,000 additional shares of
Common Stock, if and when the Options are exercised, will be received by the
Option Holders, and the Company will not receive any portion of such proceeds.
The Company will use the proceeds from the exercise, if any, of the Options
for general corporate purposes and to enhance and exploit the Company's
existing properties, at the time of such exercises. If the Options are
exercised in full, the Company will receive $1,748,125 in proceeds.

<PAGE>

SELLING STOCKHOLDERS

C/A Limited, a Texas limited partnership ("CA"), Chartex Petroleum
Company, a Texas Corporation ("Chartex"), Sierra Mineral Development,
L.C., a Texas limited liability company ("Sierra"), Miles D. Bender, Norman
C. Miller, George B. McCullough, Robert H. Kite, Randall A. Carter, Robert
A. Imel, George N. McDonald, William T. Jones, Melissa H. Rutledge,
Leonard McCarty and Joyce Fielder are the Selling Stockholders hereunder (the
"Selling Stockholders").

CA, Sierra and Chartex acquired the shares of Common Stock that they
are registering hereunder through the Company's acquisition of interests in the
Mustang Island area and a related pipeline and separation facility, in January
1996. CA is registering 91,703 shares; Sierra is registering 26,300 shares; and
Chartex is registering 22,854 shares.

Miles D. Bender is President, Chief Executive Officer, Treasurer, and
a Director of the Company. Norman C. Miller is Chairman of the Executive
Committee and a Director of the Company. George B. McCullough is
Chairman of the Board of Directors of the Company. Robert H. Kite is a
Director of the Company. Randall A. Carter is the Company's General Counsel
and Secretary. Robert A. Imel is the Company's Chief Financial Officer.
George N. McDonald is a Director of the Company. William T. Jones is the
Company's Vice President - Production and Engineering. Melissa H. Rutledge
is the Company's Controller and Chief Accounting Officer. Leonard McCarty
is Land Manager for the Company. Joyce Fielder is Production Analyst and
Assistant Secretary for the Company.

Miles D. Bender, Norman C. Miller, George B. McCullough, Robert H.
Kite, Randall A. Carter, George N. McDonald, Robert A. Imel, William T.
Jones, Melissa H. Rutledge, Robert V. Sinnott, Elwood W. Schafer, R. Thomas
Fetters, Jr., Leonard G. McCarty, Darryl Wright and Bill Bledsoe are the
Option Holders hereunder (the "Option Holders" or, individually, the "Option
Holder"). Collectively, the Option Holders are registering hereunder 885,000
shares of Common Stock which are subject to various options. The exercise
price for various portions of the options are $.625, $1.625, and $3.25. Robert
V. Sinnott and Elwood W. Schafer are Directors of the Company and have been
appointed by the holders of the Company's Series B and Series C Preferred
Stock Mr. Sinnott is Senior Vice President and Senior Investment Officer of
Kayne, Anderson Investment Management, Inc. ("Kayne"). The Series B and
Series C are held by investment partnerships associated with Kayne. Mr.
Schafer is a consultant to Kayne. R. Thomas Fetters, Jr. is Senior Vice
President - Offshore Operations and Exploration for the Company. Darryl
Wright is Production Superintendent for the Company. Bill Bledsoe is the
Company's Senior Petroleum Engineer.

The following table sets forth, as of April 30, 1996, the name and address
of each Selling Stockholder and Option Holder, their respective current
beneficial stockholdings and option holdings, and the number of shares that are
being offered hereby by each such stockholder and option holder, and their
respective stockholdings after the offering.

<PAGE>

<TABLE>
<CAPTION>
Holdings Prior to Sale Holdings After Sale(1)

% of % of
Outstanding Shares Outstanding
No. of Common to be No. of standin
Shares Stock(2) Sold(1) Shares Stock(2)

<S> <C> <C> <C> <C> <C>
Miles D. Bender 1,398,144(3) 10.8% 1,398,144 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

George B. McCullough 421,852(4) 3.3% 421,852 0 0%
6510 Pauma Drive
Houston, Texas 77069

Robert H. Kite 384,455(5) 3.0% 384,455 0 0%
5415 East Piping Rock
Scottsdale, Arizona 85254

Norman C. Miller 354,860(6) 2.7% 354,860 0 0%
19 Stillwater Trace
Griffin, Georgia 30223

Robert A. Imel 215,500(7) 1.7% 215,500 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Randall A. Carter 184,882(8) 1.4% 184,882 0 0%
234 Columbine, Suite 240
Denver, Colorado 80206

William T. Jones 160,000(9) 1.2% 160,000 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

George N. McDonald 138,023(10) 1.1% 138,023 0 0%
3656 Macintosh Lane
Salt Lake City, Utah 84121

C/A Limited 91,703 (19) 91,703 0 0%
4200 Westheimer, Suite 230
Houston, Texas 77027

R. Thomas Fetters, Jr. 50,000(11) (19) 50,000 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Melissa H. Rutledge 40,000(12) (19) 40,000 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Robert V. Sinnott 35,000(13) (19) 35,000 0 0%
c/o Kayne Anderson
Investments
1800 Avenue of Stars
Ste. 1424
Los Angeles, California
90067

Leonard G. McCarty 31,890(14) (19) 31,890 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Darryl Wright 30,000(15) (19) 30,000 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Sierra Mineral Development 26,300 (19) 26,300 0 0%
Developoment, L.C.
1201 Louisiana, Suite 3125
Houston, Texas 77002

Chartex Petroleum Company 22,854 (19) 22,854 0 0%
12777 Jones Road, Suite 360
Houston, Texas 77070

Elwood W. Schafer 15,000(16) (19) 15,000 0 0%
7018 Blackwood Drive
Dallas, Texas 75231

Bill Bledsoe 10,000(17) (19) 10,000 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206

Joyce Fielder 3,070 (19) 3,070 0 0%
1400 One Energy Square
4925 Greenville Avenue
Dallas, Texas 75206
- ------------------------ ------------- ------------ ---------- ------ -------------
Total 3,613,533(18) 27.8% 3,613,533 0 0%
</TABLE>

(1) Assumes all of the shares offered hereby are sold by the Selling
Stockholders and all options are exercised and the underlying shares are
sold by the Option Holders. See "Plan of Distribution".

(2) Based upon 12,096,532 shares of Common Stock outstanding as of April
30, 1996 and 885,000 shares subject to options, for a total of 12,981,532
shares.

(3) Includes 1,148,144 shares held by Mr. Bender and 250,000 shares
subject to options held by Mr. Bender.

(4) Includes 351,852 shares held by Mr. McCullough and 70,000 shares
subject to options held by Mr. McCullough.

<PAGE>

(5) Includes 153,158 shares held by Mr. Kite and 176,297 shares held by
KFT, Ltd. (of which Mr. Kite is Chief Operating Officer and 29.0%
beneficial owner) and 55,000 shares subject to options held by Mr. Kite.

(6) Includes 234,860 shares held by Mr. Miller, 50,000 shares held by
Incorp, Inc. (of which Mr. Miller is owner) and 70,000 shares subject
to options held by Mr. Miller.

(7) Includes 105,500 shares held by Mr. Imel and 110,000 shares subject
to options held by Mr. Imel.

(8) Includes 164,882 shares held by Mr. Carter and 20,000 shares subject
to options held by Mr. Carter.

(9) Includes 50,000 shares held by Mr. Jones and 110,000 shares subject to
options held by Mr. Jones.

(10) Includes 123,023 shares held by Mr. McDonald and 15,000 shares subject
to options held by Mr. McDonald.

(11) Includes 50,000 shares subject to an option held by Mr. Fetters.

(12) Includes 10,000 shares held by Ms. Rutledge and 30,000 shares subject
to options held by Ms. Rutledge.

(13) Includes 35,000 shares subject to options held by Mr. Sinnott.

(14) Includes 16,890 shares held by Mr. McCarty and 15,000 shares subject
to options held by Mr. McCarty.

(15) Includes 30,000 shares subject to options held by Mr. Wright. Does not
include 2,750 shares which Mr. Wright purchased on the open market.

(16) Includes 15,000 shares subject to an option held by Mr. Schafer; does
not include 2,000 shares held by Mr. Schafer which he purchased on the
open market.

(17) Includes 10,000 shares subject to an option held by Mr. Bledsoe.

(18) Includes 2,728,533 shares held by the Selling Stockholders and 885,000
shares subject to options held by the Option Holders.

(19) Less than 1%.

<PAGE>

PLAN OF DISTRIBUTION

The shares of Common Stock of the Company owned by each Selling
Stockholder, and the shares of Common Stock to be offered for resale by the
Option Holders, upon exercise of the Options, and included in this Prospectus
may be offered and sold by such Selling Stockholder or Option Holder, from
time to time, as determined by such Selling Stockholder or Option Holder, at
any time while the Registration Statement, of which this Prospectus is a part,
is effective. The Company will not receive any proceeds from the sales of such
shares of Common Stock. All expenses related to the registration of the Shares
hereunder will be borne by the Company.

Each Selling Stockholder or Option Holder may from time to time elect to
sell shares in the over-the-counter market and in other market transactions or
to sell shares directly in negotiated transactions, at prices and on terms
related to the respective then-current market prices or otherwise. Such shares
may be offered or sold with or without the participation of underwriters,
brokers or dealers. Each Selling Stockholder or Option Holder may also from
time to time offer shares to underwriters, brokers or dealers, who may receive
underwriting discounts, concessions or commissions from such Selling
Stockholder or Option Holder and/or the purchasers of shares for whom they act
as agent or to whom they sell as principal or both (which discounts,
concessions or commissions will not exceed those customary in the types of
transactions involved). Such offers or sales may be made: by a block trade in
which a broker or dealer, engaged for the purpose, will attempt to sell the
shares as agent, but may position and resell a portion of the block as
principal, to facilitate the transaction; by purchase by a broker or dealer as
principal and resale by such broker or dealer for its own account; by ordinary
brokerage transactions or transactions in which the broker solicits
purchasers; or otherwise. In effecting sales, brokers or dealers engaged by
the Selling Stockholders or Options Holders may arrange for other brokers or
dealers to participate, who in turn may receive underwriting discounts,
concessions or commissions. In addition, any shares of Common Stock held by
the Selling Stockholders or Option Holders that qualify for sale pursuant to
Rule 144 under the Securities Act of 1933 (the "Act") may be sold under Rule
144 rather that pursuant to the Registration Statement of which this
Prospectus is a part.

Each Selling Stockholder or Option Holder and any brokers or dealers
who participate in the distribution of shares of Common Stock of the Company
may be deemed to be "underwriters" as defined in the Act, and the excess of the
price received over the amount paid for such shares and any discounts,
commissions or concessions received by any such brokers or dealers may be
deemed to underwriting compensation, discounts or commissions under the Act.

At the time each Selling Stockholder or Option Holder makes a particular
offer of shares of Common Stock, such Selling Stockholder or Option Holder
will provide the Company with information, to the extent required, sufficient
to prepare a supplement to this Prospectus which will set forth the aggregate
amount of shares being offered and the terms of the offering, including the name
or names of any underwriters, brokers or dealers, any discounts, commissions
and other items constituting compensation from such Selling Stockholder or
Option Holder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.

<PAGE>

DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 50,000,000
shares of Class A Common Stock, par value $.01 per share ("Common Stock"),
200,000 shares of Class B Common Stock, par value $.01 per share ("Class B")
and 1,000,000 shares of Preferred Stock, par value $1.00 per share ("Preferred
Stock"). Shares of Common Stock only are offered by this Prospectus.

The following summary description of the Company's capital stock is not
intended to be complete and is subject to, and is qualified in its entirety by
reference to, the Company's Certificate of Incorporation, as amended, and the
Certificate of Designations of National Energy Group, Inc. of 10% Cumulative
Convertible Preferred Stock, Series B (the "Series B Certificate of
Designation") and the Certificate of Designations of National Energy Group,
Inc. of 10 1/2% Cumulative Convertible Preferred Stock, Series C ("Series C
Certificate of Designation") incorporated by reference as exhibits to the
Registration Statement of which this Prospectus forms a part.

Description of Class A Common Stock.
- -----------------------------------

At April 30, 1996, the Company had 12,096,532 shares of Common Stock
outstanding. Holders of Common Stock are entitled to one vote for each share
held of record on all matters voted on by stockholders. The shares of the
capital stock of the Company do not have cumulative voting rights, which means
that the holders of more than 50% of the shares of the capital stock voting
for the election of Directors can elect all of the Directors to be elected by
holders of the capital stock, in which event the holders of the remaining
shares of capital stock will not be able to elect any Director. Subject to the
Company's Facility with Bank One and the rights of the holders of the Series B
and Series C, holders of Common Stock would be entitled to receive dividends
when, as, and if declared by the Board of Directors out of funds of the
Company legally available for the payment of dividends. The Facility, however,
prohibits the payment of dividends or other distributions on the Common Stock
and limits the dividends on the Series B and Series C and, under the terms of
the Series B and Series C, no dividend or distribution may be paid on the
Common Stock unless all accrued and unpaid dividends on the Series B and
Series C, respectively, have been paid. Upon any liquidation, dissolution or
winding-up of the affairs of the Company, holders of Common Stock would be
entitled to receive, pro-rata all of the assets of the Company available for
distribution to stockholders after payment of any liquidation preference of
the Series B and Series C and any other preferred stock that may be issued and
outstanding at the time. Holders of Common Stock have no subscription,
redemption, sinking fund, conversion or preemptive rights.

Description of Class B Common Stock.
- -----------------------------------

At April 30, 1996, the Company had no shares of Class B outstanding.
All of the Class B has been converted into Common Stock and by the terms of
Class B, cannot be reissued. Management of the Company plans to recommend
to the Company's stockholders, at the next meeting of Stockholders, that the
Company's Certificate of Incorporation be amended to eliminate the Class B.

<PAGE>

Description of Preferred Stock.
- ------------------------------

The Company's Certificate of Incorporation creates the preferred stock
and authorizes the Board of Directors of the Company to designate by
resolution the relative rights, preferences and limitations, and the number of
shares, of each series thereof. The Board of Directors has the authority to
create terms for the preferred stock so that, upon issuance, the preferred
stock may seriously dilute the holders of Common Stock and possibly even
change control of the Company. See "Risk Factors - Potential Dilution; Delay
of Change in Control". The Company currently has two outstanding series of
Preferred Stock: Series B and Series C.

52,500 shares of Series B were issued and outstanding as of April 30, 1996.
The Series B is convertible into shares of Common Stock at a conversion price
of $1.625 per share of Common Stock. The Series B has a liquidation and
dividend preference over Common Stock. The Series B has a 10% dividend,
payable semi-annually. The Company has the option to make dividend payments in
shares of Series B; after the sixth such payment, the holders of the Series B
have the option to receive additional dividends in shares of Series B or to
accrue such dividends in cash. If the Company makes four dividend payments in
shares of Series B, the holders of the Series B have the right to appoint
one-third of the members of the Company's Board of Directors. The Series B
would be redeemable until June 3, 1997 at $110.00 per share and, thereafter,
at $100.00 per share, plus accrued and unpaid dividends; provided, however,
that the Company cannot redeem any shares of the Series B unless and until all
outstanding shares of the Series C have been redeemed by the Company, which in
effect means no shares of Series B can be redeemed before June 14, 1997. The
holders of Series B have the right to appoint one member to the Company's
Board of Directors while the Series B is outstanding.

Dividends on the Series B are required to be paid before any dividends
are paid on Common Stock. The holders of Series B are entitled to one vote for
each share as to matters upon which by law they are entitled to vote as a
class, and the approval of a majority of the Series B, voting separately as a
class, is required to make changes to the Company's Certificate of
Incorporation or By-Laws which adversely affect the Series B, to authorize or
issue additional shares of Series B or to issue preferred stock equal to or
senior to the Series B as to dividends or liquidation, or, subject to certain
exceptions, to effect an extraordinary transaction that requires a vote of the
Company's stockholders. As a result, a class vote of the holders of Series B
would be required for the Company to merge or be acquired and may therefore
delay, deter, or prevent a change in control of the Company.

40,000 shares of Series C were issued and outstanding as of April 30,
1996. The Series C is convertible into shares of Common Stock at a conversion
price of $2.00 per share of Common Stock. The Series C has a liquidation and
dividend preference over Common Stock and it is parity stock to the previously
issued Series B. The Series C has a 10 1/2% dividend, payable semi-annually.
The Company has the option to make dividend payments in shares of Series C;
after the sixth such payment, the holders of the Series C have the option to
receive additional dividends in shares of Series C or to accrue such dividends
in cash. If the Company makes four dividend payments in shares of Series C,
the holders of the Series C (voting as a class with other affected series of
preferred stock with similar voting rights) have the right to appoint
one-third of the members of the Company's Board of Directors; provided,
however, that if the holders of Series B are presently

<PAGE>

entitled to a similar right, then the holders of the Series C shall have no
such right until the right of the holders of Series B terminates. The Series C
is redeemable by the Company between June 14, 1997 and June 14, 1998 at
$110.00 per share and, thereafter, at $100.00 per share, plus accrued and
unpaid dividends. No shares of Series B shall be redeemed by the Company
unless and until all outstanding shares of Series C have been redeemed by the
Company. The holders of Series C have the right to appoint one member to the
Company's Board of Directors while the Series C is outstanding.

Dividends on the Series C are required to be paid before dividends can be
paid on the Common Stock. The holders of Series C are entitled to one vote for
each share as to matters upon which by law they are entitled to vote as a
class, and the approval of a majority of the Series C, voting separately as a
class, is required to make changes to the Company's Certificate of
Incorporation or By-Laws which adversely affect the Series C, to authorize or
issue additional shares of Series C or to issue preferred stock equal to or
senior to the Series C as to dividends or liquidation, or, subject to certain
exceptions, to effect an extraordinary transaction that requires a vote of the
Company's stockholders. As a result, a class vote of the holders of Series C,
as well as the Series B, would be required for the Company to merge or be
acquired and may therefore delay, deter, or prevent a change in control of the
Company.

LEGAL MATTERS

Randall A. Carter, who is General Counsel and Secretary of the
Company, is handling certain legal matters for the Company concerning this
registration. At April 30, 1996, Mr. Carter owned 164,882 shares of Common
Stock and held options to purchase 20,000 shares of Common Stock, which
shares are included in this Prospectus.

DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

The Company's Certificate of Incorporation and By-Laws provide that the
Company shall indemnify, to the fullest extent authorized by law, any person
made or threatened to be made a party to any action, suit or proceeding,
whether criminal, civil, administrative or investigative, by reason of the
fact that such person or such person's testator or intestate is or was a
Director, officer, employee or agent of the Company or serves or served at the
request of the Company any other enterprise as a Director, officer, employee
or agent.

The Company has agreed to indemnify the officers and Directors of the
Company against any and all damages to which such indemnified individuals
may become subject, pursuant to any securities, corporate or other laws, which
damages arise in connection with this Registration Statement or any amendment
thereto, or from the inaccuracy or omission of any information in connection
with this Prospectus and related Registration Statement. In the event that the
foregoing indemnity is unavailable or insufficient, then the indemnifying party
shall contribute to amounts paid or payable by the indemnified party in respect
to the damages of the indemnified party in such proportion as is appropriate to
reflect the relative fault of the indemnified and indemnifying parties.

<PAGE>

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "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.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company 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 Company 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 Securities Act and will be governed by the final
adjudication of such issue.

EXPERTS

The financial statements of the Company appearing in the 1995 Form 10-KSB
and the statements of operating revenues and direct operating expenses of the
Mustang Island Interest, the Oak Hill Interest and the Enron Interest appearing
in the Company's Current Report on Form 8-K/A No. 1 dated June, 30, 1995, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and incorporated herein by reference. Such
financial statements and statements of operating revenues and direct operating
expenses are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.

Information incorporated by reference in this Prospectus relating to the
Company's estimated proved oil and natural gas reserves at December 31, 1994,
the related estimated calculations of future net revenue and the net present
value thereof have been derived from an independent petroleum engineering
report prepared by Roebuck & Associates of Dallas, Texas. Such information has
been incorporated by reference herein in reliance on such firm as experts in
petroleum engineering.

Information included and/or incorporated by reference in this Prospectus
relating to the Company's estimated proved oil and natural gas reserves at
December 31, 1995, the related estimated calculations of future net revenue and
the net present value thereof have been derived from an independent petroleum
engineering report prepared by Netherland, Sewell & Associates, Inc. of Dallas,
Texas. Such information has been incorporated by reference herein in reliance
on such firm as experts in petroleum engineering.

<PAGE>

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

Item
- -----

Filing Fee - Securities and Exchange Commission $ 3,701
*Blue Sky Filing fees 1,000
Printing 0
*Legal Fees 2,500
*Accounting Fees and Expenses 2,500
Miscellaneous 1,000
--------

Total $10,701
========
*Estimate

The Company is paying the expenses of the offering.

Item 15. Indemnification of Directors and Officers.

The Company is incorporated in Delaware, and the General Corporation Law
of Delaware ("Delaware Law") provides that the Company may provide the
indemnification provided in the preceding paragraph against expenses
(including attorney's fee), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the Director, officer, employee or agent
in connection with an action, suit or proceeding if he/she acted in good faith
and in a manner he/she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or
proceeding, he/she had no reasonable cause to believe his/her conduct was
unlawful. According to Delaware Law, the Company may also indemnify a
Director, officer, employee or agent against threatened, pending or completed
actions or suits by or in the right of the Company, against expenses
(including attorney's fees) actually and reasonably incurred by him/her in
connection with the defense or settlement of such action or suit if he/she
acted in good faith and in a manner he/she reasonably believed to be in or not
opposed to the best interests of the Company; provided that no indemnification
shall be made with respect to any claim as to which such person shall have
been adjudged to be liable to the Company unless the appropriate court
determines such person is fairly and reasonably entitled to an indemnity.
Under Delaware Law, the Company may also pay expenses incurred by officers and
Directors (and employees and agents if the Board of Directors deems
appropriate) in connection with a suit or proceeding in advance of the final
disposition of such suit or proceeding, if the Director or officer undertakes
to repay such amount if it is ultimately

<PAGE>

determined that he/she is not entitled to such indemnification. Under Delaware
Law, the Company may also purchase and maintain insurance for officers,
Director, employees or agents against any liability related to their capacity or
status, whether or not the Company would have the power to indemnify such
person under Delaware Law. The Company, however, has not purchased such
insurance.

Item 16. Exhibits.

The following is a list of all of the exhibits filed or incorporated by
reference as part of this Registration Statement:

(b) Exhibits
--------

Exhibit
No. Description and Incorporation By Reference
----- ----------------------------------------------------

4.1 Instrument defining the Rights of Class A Common Stock. (1)

4.2 Certificate of Designations of National Energy Group, Inc. of
10% Cumulative Convertible Preferred Stock, Series B. (2)

4.3 Certificate of Designations of National Energy Group, Inc. of
10 1/2% Cumulative Convertible Preferred Stock, Series C. (3)

5.1 Opinion of Randall A. Carter, General Counsel, re legalit. (4)

23.1 Consent of Randall A. Carter, General Counsel, of the Company.
(5)

23.2 Consent of Ernst & Young LLP. (7)

23.3 Consent of Roebuck & Associates. (4)

23.4 Consent of Netherland, Sewell & Associates, Inc. (7)

24.1 Power of Attorney. (6)

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

<PAGE>

(1) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-81172), dated July 27, 1994.

(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 17, 1994.

(3) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 30, 1995.

(4) Previously filed with the Registration Statement which this Amendment
No. 1 amends.

(5) Included in Exhibit 5.1 which has been previously filed with the
Registrtion Statement which this Amendment No. 1 amends.

(6) Filed on the signature page, page 29 of the Registration Statement which
this Amendment No. 1 amends..

(7) Filed herewith..

<PAGE>

Item 17. Undertakings.

1. Rule 415 Offering.
-----------------

The undersigned Registrant hereby undertakes:

a. To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to
include any additional or changed material information on the plan
of distribution; and

b. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
treated as a new registration statement of the securities offered,
and the offering of the securities at that time shall be treated
as the initial bona fide offering;

c. To remove from registration by means of a post-effective amendment
any of the securities which remain unsold at the termination of the
offering.

2. Request for Acceleration of Effective Date.
------------------------------------------

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act"), 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 officer, Director 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.

<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, 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.
1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on May 2,
1996.

NATIONAL ENERGY GROUP, INC.

By: /s/ Miles D. Bender
-----------------------------
Miles D. Bender
President and Chief Executive Officer

By: /s/ Robert A. Imel
-----------------------------
Robert A. Imel
Chief Financial Officer

By: /s/ Melissa H. Rutledge
-----------------------------
Melissa H. Rutledge
Controller and
Chief Accounting Officer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

Signature Capacity Date
--------- -------- ----

By: /s/ Miles D. Bender President,
--------------------------
Miles D. Bender Chief Executive Officer, May 2, 1996
Director and Treasurer

By: /s/ * Chairman of the Board May 2, 1996
--------------------------
George B. McCullough and Director

<PAGE>

Signature Title Date
--------- -------- ----

By: /s/ * Chairman, Executive
------------------------
Norman C. Miller Committee and Director May 2, 1996

By: /s/ * Director
------------------------
Robert H. Kite May 2, 1996

By: /s/ * Director
------------------------
George N. McDonald May 2, 1996

By:/s/ Director
-------------------------
Robert V. Sinnott May 2, 1996

By:/s/ Director
-------------------------
Elwood W. Schafer May 2, 1996

- -------------------------------------------------------------------------------
* By Miles D. Bender, Attorney-in-fact

<PAGE>

Exhibit 23.2
------------

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the incorporation by reference of our report dated March 27, 1996 with
respect to the financial statements of National Energy Group, Inc. included
in its Form 10-KSB/A No. 2 dated May 2, 1996, and our reports dated
September 12, 1995 with respect to the statements of operating revenues and
direct operating expenses of the Mustang Island Interest, the Oak Hill
Interest and the Enron Interest appearing in the Company's Current Report
(Form 8-K/A No. 1) dated June 30, 1995, in the Registration Statement (Form
S-3) and related Prospectus of National Energy Group, Inc. dated May 2,
1996.

ERNST & YOUNG
LLP

Dallas, Texas
May 2, 1996

<PAGE>

Exhibit 23.4
------------

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

We hereby give consent to the references to our firm in "Experts" and
to the use of our report, dated February 15, 1996, presenting estimated reserves
and future revenue for the oil and gas properties of National Energy Group,
Inc., in National Energy Group's Amendment No. 1 to Registration Statement
on Form S-3.

NETHERLAND, SEWELL & ASSOCIATES, INC.

Dallas, Texas
May 2, 1996