PETROQUEST ENERGY INC, S-1, 1999-10-29

PETROQUEST ENERGY INC
S-1, 1999-10-29
CRUDE PETROLEUM & NATURAL GAS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999

REGISTRATION NUMBER 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PETROQUEST ENERGY, INC.
(Exact Name of Registrant as Specified in Charter)

<TABLE>
<S> <C> <C>
DELAWARE 1311 98-0115468
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>

625 E. KALISTE SALOOM ROAD
LAFAYETTE, LOUISIANA 70508
(318) 232-7028
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

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CHARLES T. GOODSON
CHIEF EXECUTIVE OFFICER
PETROQUEST ENERGY, INC.
625 E. KALISTE SALOOM ROAD
LAFAYETTE, LOUISIANA 70508
(318) 232-7028
(Name, address, including zip code, and telephone number, including
area code, of registrant's agent for service)

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Copies to:

ROBERT G. REEDY
PORTER & HEDGES, L.L.P.
700 LOUISIANA
HOUSTON, TEXAS 77002-2764
(713) 226-0674
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.

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, check the following box. [X]

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

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C> <C>
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------

Common stock, par value $.001 per share...... 5,000,000 $1.734 $ 8,670,000 $2,411
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Common stock, par value $.001 per share(2)... 3,000,000 $1.734 $ 5,202,000 $1,447
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TOTAL........................................ 8,000,000 -- $13,872,000 $3,858
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</TABLE>

(1) Pursuant to Rule 457(c), the registration fee for these shares is calculated
based upon the average of the high and low prices per share of the common
stock reported by the OTC Bulletin Board on October 25, 1999, or $1.734 per
share.

(2) Issuable upon exercise of warrants for that number of shares at an estimated
exercise price of $1.25 per share.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT IS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

SUBJECT TO COMPLETION, DATED OCTOBER , 1999

PROSPECTUS

8,000,000 SHARES

[PETROQUEST LOGO]

PETROQUEST ENERGY, INC.

COMMON STOCK

The selling stockholders identified in this prospectus are offering

- up to 5,000,000 shares of our common stock which are currently issued and
outstanding and

- up to 3,000,000 shares of our common stock issuable upon the exercise of
outstanding warrants to purchase shares of our common stock.

We are not offering any shares of our common stock for sale under this
prospectus and we will not receive any of the proceeds from the sale of shares
by the selling shareholders under this prospectus. However, we will receive
approximately $3,750,000 if the warrants representing shares of our common stock
in this offering are exercised.

Our common stock is traded on the Nasdaq Over-The-Counter Bulletin Board
under the symbol "PQUE" and on the Toronto Stock Exchange under the symbol
"PQU." The last reported sale price for our common stock on the OTC Bulletin
Board on October 25, 1999 was $1.75. The last reported sales price for our
common stock on the Toronto Stock Exchange on October 22, 1999 was $2.30.

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this prospectus is October , 1999
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary..................................................... 3
Risk Factors................................................ 7
Use of Proceeds............................................. 13
Capitalization.............................................. 13
Price Range of Our Common Stock............................. 14
Dividend Policy............................................. 14
Selected Financial Data..................................... 15
Selected Operating and Reserve Data......................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Business.................................................... 23
Management.................................................. 32
Certain Relationships and Related Transactions.............. 40
Principal Stockholders...................................... 44
Selling Stockholders........................................ 46
Plan of Distribution........................................ 48
Description of Our Capital Stock............................ 50
Shares Eligible for Future Sale............................. 54
Legal Matters............................................... 55
Experts..................................................... 55
Where You Can Find More Information......................... 55
Index to Financial Statements............................... F-1
</TABLE>

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You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. The selling shareholders are not making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate as
of the date on the front cover of this prospectus only. Our business, financial
condition, results of operations and prospects may have changed since that date.

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<PAGE> 4

SUMMARY

This summary highlights selected information from this prospectus and may
not contain all the information that may be important to you. You should read
the entire prospectus, especially "Risk Factors" and the financial data and
related notes, before deciding to invest in our common stock.

PETROQUEST ENERGY, INC.

We are an independent oil and gas company engaged in the generation,
exploration, development, acquisition and operation of oil and gas properties
onshore and offshore in the Gulf Coast Region. We and our predecessors have been
active in this area since 1986. Our business strategy is to increase production,
cash flow and reserves through generation, exploration, development and
acquisition of properties located in the Gulf Coast Region.

We conduct our exploration and development activities onshore and offshore
in the Gulf Coast Region. We have an inventory of projects and prospects that
are in varying stages of readiness for drilling. In the near term, exploration
and development will be focused on three areas:

- the Turtle Bayou Field,

- the Valentine Field, and

- High Island Block 494 in Federal outer continental shelf waters of the
Gulf of Mexico.

TURTLE BAYOU FIELD. The Turtle Bayou Field is located in Terrebonne Parish,
Louisiana approximately 75 miles southwest of New Orleans. It is within the
Houma Embayment, an area comprising ten significant fields that have produced
total reserves of more than six trillion cubic feet of gas equivalent.

We have a significant interest in this field and have produced more than 40
billion cubic feet of gas equivalent. We drilled our first well after the new
3-D was evaluated in late 1998. It was completed as a gas well with first
production in December 1998, producing at a rate of 3.4 MMcf per day. The second
well was drilled in the third quarter of 1999 and began producing in October
1999.

VALENTINE FIELD. The Valentine Field, also located in the Houma Embayment,
approximately 30 miles east of Turtle Bayou Field and approximately 45 miles
south of New Orleans, Louisiana, has produced to date more than one trillion
cubic feet of gas equivalent. We began this project in 1993. We and a major oil
and gas company acquired an 86 square mile 3-D survey in November 1998. We
bought the oil and gas company's interest in this field in August 1999. We are
in the process of evaluating this data and currently have a 35% to 50% working
interest in these prospects.

HIGH ISLAND BLOCK 494. We acquired a 1/3 interest in this property in 1996,
and the remaining 2/3 interest in late 1998. We sold approximately 58% of this
prospect and drilled the C-1 well in December 1998 and January 1999. The well
tested at 20.3 million cubic feet of natural gas per day. Production in this
well began in July 1999, and it is producing at a rate of 15 MMcf per day as of
August 1999. We are the operators of this well. Our year-end reserve report did
not include reserves for this discovery since it was logged and tested after
December 31, 1998.

MERGER WITH AMERICAN

On September 1, 1998, we completed the transaction to merge our wholly
owned subsidiary, Optima Energy (U.S.) Corporation, with American Explorer,
L.L.C. We also converted from a Canadian corporation to a Delaware corporation
and changed our name from Optima Petroleum Corporation to "PetroQuest Energy,
Inc."

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<PAGE> 5

became our officers and directors or their affiliates after the merger. The
contingent stock issue rights entitle the holders to receive 1,667,001 shares of
our common stock if the trading price of our common stock is $5.00 or higher for
20 consecutive trading days on or before September 1, 2001.

As part of the merger, a seven-member board of directors was elected
consisting of two of our then existing directors and five persons designated by
the owners of American. In addition, our management was replaced with the
management of American. The Canadian offices were closed and our headquarters
was moved to 625 E. Kaliste Saloom Road, Suite 400, Lafayette, Louisiana 70508.
Our telephone number is (318) 232-7028.

RECENT DEVELOPMENTS

August 1999 Private Placement. In August 1999, we completed a private
placement of 5 million units to accredited investors at a purchase price of
$1.00 per unit for a total consideration of $5,000,000 before fees and expenses.
Each unit sold in the private placement consisted of one share of our common
stock and one warrant to purchase one-half of a share of our common stock. Each
warrant is exercisable at any time for a period of four years after the date of
issuance to purchase one-half of a share of our common stock at a purchase price
of $1.25 per share. We also issued warrants to purchase 500,000 shares of our
common stock to the placement agents of the units. The warrants received by the
placement agents of the units are exercisable at any time for a period of five
years after the date of issuance to purchase one share of our common stock at an
initial purchase price of $1.25 per share. We agreed to file this registration
statement covering the resale of the shares of our common stock underlying the
units and the placement agent warrants within 60 days of the private placement
closing.

4
<PAGE> 6

SUMMARY FINANCIAL DATA

The summary financial data presented below as of and for the years ended
December 31, 1996, 1997 and 1998 were derived from our audited consolidated
financial statements contained in our annual report on Form 10-K. The summary
financial operating data as of and for the six months ended June 30, 1998 and
1999, and the balance sheet data as of June 30, 1999, were derived from the
unaudited consolidated financial statements contained in our quarterly report on
Form 10-Q. The following data is not necessarily indicative of our future
results. All amounts are stated in U.S. dollars unless otherwise indicated.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1998 1997 1996 1999 1998
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 3,377 $ 4,145 $ 7,982 $ 2,778 $ 1,235
Net income (loss)........................... $(16,240) $(2,914) $ 169 $(1,258) $(1,015)
Earnings (loss) per share................... $ (1.20) $ (0.26) $ 0.01 $ (0.06) $ (0.09)
Oil and gas properties, net................. $ 17,423 $12,862 $24,909 $19,838 $13,012
Total assets................................ $ 20,066 $20,163 $29,641 $22,511 $19,149
Long-term debt.............................. $ 1,300 $ 100 $ 4,488 $ 2,999 $ 100
Stockholders' equity........................ $ 13,336 $18,740 $22,314 $12,112 $26,601
</TABLE>

SUMMARY OPERATING AND RESERVE DATA

The following table sets forth certain operating data from our oil and gas
operations for the years ended December 31, 1998, 1997 and 1996 and for the six
months ended June 30, 1998 and 1999, and reserve data for the year ended
December 31, 1998:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1998 1997 1996 1999 1998
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls).................. 83,637 105,562 125,756 42,394 42,730
Gas (Mcf)................... 1,049,247 677,300 2,991,219 1,070,304 213,164
Total Production (Mcfe)..... 1,551,063 1,310,672 3,745,755 1,324,668 469,544
TOTAL SALES:
Total Oil sales............. $1,069,570 $2,116,193 $2,720,643 $ 560,188 $590,615
Total gas sales............. 2,173,620 1,848,069 5,243,085 2,150,274 516,768
AVERAGE SALES PRICES PER UNIT:
Oil (per Bbl)............... $ 12.79 $ 20.04 $ 21.63 $ 13.21 $ 13.84
Gas (per Mcf)............... 2.07 2.73 1.75 2.01 2.42
Per Mcfe.................... 2.09 3.02 2.13 2.15 2.36
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
OIL (MBBLS) GAS (MMCFS)
----------- -----------
<S> <C> <C>
ESTIMATED RESERVE DATA:
Proved developed............................................ 275 7,722
Proved undeveloped.......................................... 229 2,839
Total proved................................................ 504 10,561
</TABLE>

Our independent reserve engineers, Ryder Scott Company, prepared the
estimates of proved reserves for 1998. Estimated reserves were prepared in
accordance with Securities and Exchange Commission regulations regarding
disclosure of oil and gas reserve information. We have not filed any reports
with other federal agencies which contain an estimate of total proved net oil
and gas reserves.

5
<PAGE> 7

THE OFFERING

Common Stock............... 8,000,000 shares

Dividends.................. We have never declared or paid cash dividends on
our common stock and do not anticipate doing so in
the foreseeable future.

Voting Rights.............. The holders of our common stock are entitled to one
vote for each share held of record on all matters
submitted to vote of stockholders.

Use of Proceeds............ We will not receive any proceeds from the sale of
our common stock offered by the selling
stockholders. The net proceeds from the exercise of
any warrant is anticipated to be used to repay
indebtedness and for general corporate purposes.
See "Use of Proceeds" (page 13).

OTC Bulletin Board and
Toronto Stock Exchange
Symbols for our common
stock(1)................. PQUE (OTCBB); PQU (TSE)

Common Stock Outstanding
Prior to Offering(2)..... 23,577,347
- ---------------

(1) Effective May 5, 1999, our common stock was delisted from quotation on The
NASDAQ Stock Market for failure to satisfy NASDAQ's revised listing and
maintenance standards including a minimum bid price of $1.00 per share. Our
common stock was immediately eligible for listing on the Over-the-Counter
Bulletin Board under the symbol "PQUE." Our common stock's listing on the
Toronto Stock Exchange was not affected and continues to trade on that
exchange under the symbol "PQU."

(2) The information concerning our outstanding common stock above is as of
September 30, 1999 and does not include:

- 1,060,300 shares of our common stock issuable on the exercise of
outstanding options,

- 3,000,000 shares of our common stock issuable on the exercise of
outstanding warrants issued in the August 1999 private placement, or

- 1,667,001 shares of our common stock underlying contingent stock issue
rights issued in the merger with American.

See "Capitalization" (page 13) for a more detailed description of the
amount of our securities which are currently issued and outstanding.

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RISK FACTORS

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

INVESTING IN OUR THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN
"RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS.

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6
<PAGE> 8

RISK FACTORS

An investment in our common stock involves a high degree of risk.
Prospective investors should carefully consider the following factors before
investing.

WE MAY NOT BE ABLE TO REPLACE OUR RESERVES OR GENERATE CASH FLOWS IF WE ARE
UNABLE TO RAISE CAPITAL.

We make, and will continue to make, substantial capital expenditures for
the exploration, acquisition and production of oil and gas reserves.
Historically, we have financed these expenditures primarily with cash generated
by operations and proceeds from bank borrowings. If our revenues or our
borrowing base decrease as a result of lower oil and gas prices, operating
difficulties or declines in reserves, we may have limited ability to expend the
capital necessary to undertake or complete future drilling programs. Additional
debt or equity financing or cash generated by operations may not be available to
meet these requirements.

OUR FUTURE SUCCESS DEPENDS UPON OUR ABILITY TO FIND, DEVELOP AND ACQUIRE
ADDITIONAL OIL AND GAS RESERVES THAT ARE ECONOMICALLY RECOVERABLE.

As is generally the case in the Gulf Coast region, many of our producing
properties are characterized by a high initial production rate, followed by a
steep decline in production. As a result, we must locate and develop or acquire
new oil and gas reserves to replace those being depleted by production. We must
do this even during periods of low oil and gas prices when it is difficult to
raise the capital necessary to finance activities. Without successful
exploration or acquisition activities, our reserves and revenues will decline
rapidly. We may not be able to find and develop or acquire additional reserves
at an acceptable cost or have necessary financing for these activities.

OIL AND GAS PRICES ARE VOLATILE AND A SUBSTANTIAL AND EXTENDED DECLINE IN THE
PRICE OF OIL AND GAS WOULD HAVE A MATERIAL ADVERSE EFFECT ON US.

Our revenues, profitability and future growth and the carrying value of our
oil and gas properties depend to a large degree on prevailing oil and gas
prices. Our ability to maintain or increase our borrowing capacity and to obtain
additional capital on attractive terms also substantially depends upon oil and
gas prices. Prices for oil and gas are subject to large fluctuations in response
to relatively minor changes in the supply and demand for oil and gas,
uncertainties within the market and a variety of other factors beyond our
control. These factors include:

- weather conditions in the United States;

- the condition of the United States economy;

- the action of the Organization of Petroleum Exporting Countries;

- governmental regulation;

- political stability in the Middle East and elsewhere;

- the foreign supply of oil and gas;

- the price of foreign imports; and

- the availability of alternate fuel sources.

Any substantial and extended decline in oil or gas prices would have an adverse
effect on the carrying value of our proved reserves, borrowing capacity,
revenues, profitability and cash flows from operations.

7
<PAGE> 9

FACTORS BEYOND OUR CONTROL AFFECT OUR ABILITY TO MARKET OIL AND GAS.

Our ability to market oil and gas from our wells depends upon several
factors beyond our control. These factors include:

- the level of domestic production and imports of oil and gas;

- the proximity of gas production to gas pipelines;

- the availability of pipeline capacity;

- the demand for oil and gas by utilities and other end users;

- the availability of alternate fuel sources;

- the effect of inclement weather;

- state and federal regulation of oil and gas marketing; and

- federal regulation of gas sold or transported in interstate commerce.

If these factors were to change dramatically, our ability to market oil and gas
or obtain favorable prices for our oil and gas could be adversely affected.

OPERATING HAZARDS INCLUDING THOSE PECULIAR TO THE MARINE ENVIRONMENT MAY
ADVERSELY AFFECT OUR ABILITY TO CONDUCT BUSINESS.

Our operations are subject to risks inherent in the oil and gas industry,
such as:

- blowouts,

- cratering,

- explosions,

- uncontrollable flows of oil, gas or well fluids,

- fires,

- pollution and

- other environmental risks.

These risks could result in substantial losses to us from injury and loss of
life, damage to and destruction of property and equipment, pollution and other
environmental damage and suspension of operations. Our offshore operations are
also subject to a variety of operating risks peculiar to the marine environment,
such as hurricanes or other adverse weather conditions and more extensive
governmental regulation. These regulations may, in certain circumstances, impose
strict liability for pollution damage or result in the interruption or
termination of operations.

LOSSES AND LIABILITIES FROM UNINSURED OR UNDERINSURED DRILLING AND OPERATING
ACTIVITIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND
OPERATIONS.

We maintain several types of insurance to cover our operations, including
maritime employer's liability and comprehensive general liability. Amounts over
base coverages are provided by primary and excess umbrella liability policies
with maximum limits of $35 million. We also maintain operator's extra expense
coverage, which covers the control of drilled or producing wells as well as
redrilling expenses and pollution coverage for wells out of control.

We may not be able to maintain adequate insurance in the future at rates we
consider reasonable or losses may exceed the maximum limits under our insurance
policies. If a significant event that is not fully

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<PAGE> 10

insured or indemnified occurs, it could materially and adversely affect our
financial condition and results of operations.

YOU SHOULD NOT PLACE UNDUE RELIANCE ON RESERVE INFORMATION BECAUSE RESERVE
INFORMATION REPRESENTS ESTIMATES.

This prospectus contains estimates of oil and gas reserves, and the future
net cash flows attributable to those reserves, prepared by the Ryder Scott
Company, our independent petroleum and geological engineers. There are numerous
uncertainties inherent in estimating quantities of proved reserves and cash
flows from such reserves, including factors beyond our control and the control
of Ryder Scott. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
manner. The accuracy of an estimate of quantities of reserves, or of cash flows
attributable to these reserves, is a function of:

- the available data;

- assumptions regarding future oil and gas prices;

- expenditures for future development and exploitation activities; and

- engineering and geological interpretation and judgment.

Reserves and future cash flows may also be subject to material downward or
upward revisions based upon production history, development and exploitation
activities and oil and gas prices. Actual future production, revenue, taxes,
development expenditures, operating expenses, quantities of recoverable reserves
and the value of cash flows from those reserves may vary significantly from the
assumptions and estimates in this prospectus. In addition, reserve engineers may
make different estimates of reserves and cash flows based on the same available
data. In calculating reserves on a Mcfe basis, oil was converted to gas
equivalent at the ratio of six Mcf of gas to one Bbl of oil. While this ratio
approximates the energy equivalency of gas to oil on a Btu basis, it may not
represent the relative prices received by us from the sale of our oil and gas
production.

The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to those reserves included in this
prospectus were prepared by Ryder Scott in accordance with the rules of the
Securities and Exchange Commission, and are not intended to represent the fair
market value of such reserves.

OUR MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR OUTSTANDING COMMON STOCK
AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR STOCKHOLDERS.

Our directors and executive officers and their affiliates beneficially own
about 40.2% of our outstanding common stock at September 30, 1999. If these
persons were to act in concert, they will, as a practicable matter, be able to
effectively control the company's affairs, including the election of the entire
board of directors and, subject to Delaware law applicable to related party
transactions, any matter submitted to a vote of the stockholders. This
concentration of ownership could also have the effect of delaying or preventing
a change in control of or otherwise discouraging a potential acquiror from
attempting to obtain control of us. This could have a material adverse effect on
the market price of the common stock or prevent our stockholders from realizing
a premium over the then prevailing market prices for their shares of common
stock. See "Management" (page 32) and "Principal Stockholders" (page 44).

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<PAGE> 11

WE FACE STRONG COMPETITION FROM LARGER OIL AND GAS COMPANIES THAT MAY NEGATIVELY
AFFECT OUR ABILITY TO CARRY ON OPERATIONS.

We operate in the highly competitive areas of oil and gas exploration,
development and production. Factors which affect our ability to successfully
compete in the marketplace include:

- the availability of funds and information relating to a property;

- the standards established by us for the minimum projected return on
investment;

- the availability of alternate fuel sources; and

- the intermediate transportation of gas.

Our competitors include major integrated oil companies, substantial independent
energy companies, affiliates of major interstate and intrastate pipelines and
national and local gas gatherers, many of which possess greater financial and
other resources than we do.

COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATIONS COULD BE COSTLY
AND COULD NEGATIVELY IMPACT PRODUCTION.

Our operations are 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 from drilling and production
activities,

- limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas,

- require remedial measures to mitigate pollution from former operations,
such as plugging abandoned wells, and

- impose substantial liabilities for pollution resulting from our
operations.

The recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. The enactment of stricter legislation or the
adoption of stricter regulation could have a significant impact on our operating
costs, as well as on the oil and gas industry in general.

Our operations could result in liability for personal injuries, property
damage, oil spills, discharge of hazardous materials, remediation and clean-up
costs and other environmental damages. We could also be liable for environmental
damages caused by previous property owners. As a result, substantial liabilities
to third parties or governmental entities may be incurred which could have a
material adverse effect on our financial condition and results of operations. We
maintain insurance coverage for our operations, including limited coverage for
sudden and accidental environmental damages, but we do not believe that
insurance coverage for environmental damages that occur over time or complete
coverage for sudden and accidental environmental damages is available at a
reasonable cost. Accordingly, we may be subject to liability or may lose the
privilege to continue exploration or production activities upon substantial
portions of our properties if certain environmental damages occur.

The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on us.

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<PAGE> 12

THE LACK OF TRADING VOLUME AND THE DELISTING OF OUR COMMON STOCK COULD ADVERSELY
AFFECT THE PREVAILING MARKET FOR OUR COMMON STOCK.

Historically, there has been limited trading volume for our common stock.
Effective May 5, 1999, our common stock was delisted from quotation on The
NASDAQ Stock Market for failure to comply with NASDAQ's listing and maintenance
standards including a minimum bid price of $1.00 per share. Our common stock was
immediately eligible for listing on the Over-the-Counter Bulletin Board, subject
to applicable rules. Our common stock's listing on the Toronto Stock Exchange
was not affected. Analysts may not provide coverage with respect to our common
stock. These factors may affect the liquidity of our common stock and a
significant market may not develop for our common stock.

SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK MAY ADVERSELY AFFECT OUR STOCK
PRICE AND MAKE FUTURE OFFERINGS TO RAISE MORE CAPITAL DIFFICULT.

Sales of a large number of shares of our common stock in the market after
this offering or the perception that sales may occur could adversely affect the
trading price of our common stock. Assuming the exercise of warrants issued in
the August 1999 private placement, we would have had approximately 26.6 million
shares of our common stock outstanding as of September 30, 1999. Of these
shares, approximately 18,068,000 are freely tradeable with the remaining
constituting "restricted securities" within the meaning of Rule 144 adopted
under the Securities Act. These restricted securities may be resold publicly
only following their effective registration under the Securities Act, or based
upon an available exemption from the registration requirements of that Act, such
as Rule 144. Under Rule 144, those shares will be eligible for resale, subject
to certain volume limitations and other requirements. The holders of a
substantial number of those restricted shares have registration rights granted
in the August 1999 private placement and the merger with American.

At September 30, 1999, we have options outstanding to purchase 1,060,300
shares of our common stock. These options were granted under our 1998 incentive
plan. We have registered all the shares subject to options granted under our
1998 incentive plan under the Securities Act for public resale. See
"Management -- Incentive Plan" (page 39).

We may issue additional restricted securities or register additional shares
of common stock under the Securities Act in the future for its use in connection
with future acquisitions. Pursuant to Securities Act Rule 145, the volume
limitations and certain other requirements of Rule 144 would apply to resales of
these shares by affiliates of the businesses that we acquire for a period of one
year from the date of their acquisition, but otherwise these shares would be
freely tradable by persons not affiliated with us unless we contractually
restrict their resale.

The availability for sale, or sale, of the shares of common stock eligible
for future sale could adversely affect the market price of our common stock. See
"Shares Eligible for Future Sale" (page 54).

WE MAY ISSUE SHARES OF PREFERRED STOCK WITH GREATER RIGHTS THAN OUR COMMON
STOCK.

Our certificate of incorporation authorizes our board of directors to issue
one or more series of preferred stock and set the terms of the preferred stock
without seeking any further approval from you. Any preferred stock that is
issued may rank ahead of our common stock in terms of dividends priority and
liquidation premiums and may have greater voting rights than our common stock.
See "Description of Capital Stock -- Preferred Stock" (page 50).

11
<PAGE> 13

PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.

Certain provisions of our certificate of incorporation and bylaws may
delay, discourage, prevent or render more difficult an attempt to obtain control
of our company, whether through a tender offer, business combination, proxy
contest or otherwise. These provisions include:

- the charter authorization of "blank check" preferred stock;

- a limitation on the removal of directors only for cause, and then only on
approval of holders of two-thirds of the outstanding voting stock; and

- a restriction on the ability of stockholders to take actions by written
consent.

YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING INFORMATION.

This prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical facts included in this prospectus, including without
limitation statements under the "Summary," and "Business and Properties"
regarding increases in oil and gas production, our financial position, oil and
gas reserve estimates, business strategy and other plans and objectives for
future operations, are forward-looking statements. These expectations may not
prove to be correct. There are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves and in projecting future rates
of production and timing of development expenditures, including many factors
beyond our control. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one another.
Results of drilling, testing and production subsequent to the date of an
estimate may also justify revisions of such estimates and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from the
quantities of oil and natural gas that are ultimately recovered. Additional
important factors that could cause actual results to differ materially from our
expectations are disclosed under these "Risk Factors" and elsewhere in this
prospectus. Should one or more of these risks or uncertainties occur, or should
underlying assumptions prove incorrect, our actual results and plans for 1999
and beyond could differ materially from those expressed in the forward-looking
statements. All such forward-looking statements are expressly qualified in their
entirety by such factors.

12
<PAGE> 14

USE OF PROCEEDS

We will not receive any proceeds from the sale of our common stock by the
selling stockholders pursuant to this prospectus. The net proceeds from the
exercise of any warrant is anticipated to be used to repay indebtedness and for
general corporate purpose.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 1999. You
should read our capitalization information set forth below in conjunction with
our consolidated financial statements and notes included elsewhere in this
prospectus.

<TABLE>
<CAPTION>
JUNE 30,
1999
------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Accounts payable and current maturities of long-term
obligations................................................. $ 2,935
Accounts payable to be refinanced........................... $ 499
Long-term obligations, less current maturities.............. 3,250
--------
Total Debt........................................ $ 6,684
========
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share; 75,000,000 shares
authorized; 18,537,347 shares issued and
outstanding(1)......................................... 19
Additional paid-in capital................................ 43,829
Retained earnings (deficit)............................... (31,736)
--------
Total stockholders' equity........................ 12,112
--------
Total capitalization.............................. $ 18,796
========
</TABLE>

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

(1) Does not include:

- 1,060,300 shares of our common stock issuable on exercise of outstanding
options,

- 40,000 shares of our common stock issued after June 30, 1999 on the
exercise of outstanding options,

- 5,000,000 shares of our common stock issued in the August 1999 private
placement,

- 3,000,000 shares of our common stock issuable on exercise of outstanding
warrants issued in the August 1999 private placement, or

- 1,667,001 shares of our common stock underlying contingent stock issue
rights issued in the merger with American.

13
<PAGE> 15

PRICE RANGE OF OUR COMMON STOCK

COMMON STOCK TRADING

Our common stock is currently traded on the Over-the-Counter Bulletin Board
under the symbol "PQUE" and on the Toronto Stock Exchange under the symbol
"PQU." Our common stock formerly was listed on The NASDAQ Stock Market under the
symbol "PQUE," however, effective May 5, 1999, our common stock was delisted
from quotation on The NASDAQ Stock Market for failure to satisfy NASDAQ's
listing and maintenance standards including a minimum bid price of $1.00 per
share. At September 30, 1999, there were approximately 974 common stockholders
of record. We urge you to obtain current market quotations before making any
decision to invest in our common stock. The following table lists high and low
sales prices per share for the calendar quarters indicated (rounded to the
nearest cent):

<TABLE>
<CAPTION>
THE NASDAQ STOCK
MARKET/OTCBB TORONTO STOCK EXCHANGE
------------------ ----------------------
HIGH LOW HIGH LOW
(US $) (US $) (CND $) (CND $)
------ ------ -------- --------
<S> <C> <C> <C> <C>
1997
First Quarter...................................... 3.06 2.13 4.10 2.95
Second Quarter..................................... 2.56 2.00 3.50 2.75
Third Quarter...................................... 2.13 1.38 3.25 2.00
Fourth Quarter..................................... 2.31 1.50 3.85 1.50
1998
First Quarter...................................... 1.69 1.00 2.50 1.41
Second Quarter..................................... 1.69 0.88 2.25 1.35
Third Quarter...................................... 1.25 0.63 1.50 1.50
Fourth Quarter..................................... 1.13 0.56 1.55 1.00
1999
First Quarter...................................... 1.03 0.66 1.25 0.75
Second Quarter
(through May 5 for NASDAQ and TSE).............. 0.81 0.63 0.90 0.75
(May 6 through June 30 for OTCBB and TSE)....... 1.16 0.69 1.65 0.75
Third Quarter...................................... 1.69 0.91 2.50 1.20
Fourth Quarter (through October 25, 1999).......... 1.81 1.63 3.00 2.25
</TABLE>

DIVIDEND POLICY

We have never paid cash dividends and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain earnings to
finance the expansion of our business. Any future dividends will be at the
discretion of the board of directors after taking into account various factors,
including:

- our financial condition,

- our results of operations,

- our cash flows from operations,

- our current and anticipated cash needs and expansion plans,

- the income tax laws then in effect,

- the requirements of Delaware law, and

- the restrictions imposed by our future credit facilities.

Our existing credit facility requires compliance with various loan covenants,
including restrictions on the payment of dividends.

14
<PAGE> 16

SELECTED FINANCIAL DATA

The selected financial data presented below as of and for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements. The selected financial operating data as of
and for the six months ended June 30, 1998 and 1999, and the balance sheet data
as of June 30, 1999, have been derived from unaudited consolidated financial
statements. In the opinion of management, this unaudited interim financial data
contains all adjustments necessary to present fairly the six months ended June
30, 1998 and 1999. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and their related notes
included under this prospectus. The following data is not necessarily indicative
of our future results. All amounts are stated in U.S. dollars unless otherwise
indicated.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -----------------
1998 1997 1996 1995 1994 1999 1998
--------- -------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $ 3,377 $ 4,145 $ 7,982 $ 3,888 $ 2,448 $ 2,778 $ 1,235
Net income (loss)........ $ (16,240) $ (2,914) $ 169 $(2,002) $(3,157) $(1,258) $(1,015)
Earnings (loss) per
share.................. $ (1.20) $ (0.26) $ 0.01 $ (0.22) $ (0.41) $ (0.06) $ (0.09)
Oil and gas properties,
net.................... $ 17,423 $ 12,862 $24,909 $23,396 $15,880 $19,838 $13,012
Total assets............. $ 20,066 $ 20,163 $29,641 $27,558 $17,687 $22,511 $19,149
Long-term debt........... $ 1,300 $ 100 $ 4,488 $ 5,418 $ 1,319 $ 2,999 $ 100
Stockholders' equity..... $ 13,336 $ 18,740 $22,314 $20,360 $14,865 $12,112 $26,601
</TABLE>

15
<PAGE> 17

SELECTED OPERATING AND RESERVE DATA

The following table sets forth certain operating data with respect to our
oil and gas operations for the years ended December 31, 1998, 1997 and 1996 and
for the six months ended June 30, 1998 and 1999, and reserve data for the year
ended December 31, 1998:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1998 1997 1996 1999 1998
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls)...................... 83,637 105,562 125,756 42,394 42,730
Gas (Mcf)....................... 1,049,247 677,300 2,991,219 1,070,304 213,164
Total Production (Mcfe)......... 1,551,063 1,310,672 3,745,755 1,324,668 469,544
TOTAL SALES:
Total Oil sales................. $1,069,570 $2,116,193 $2,720,643 $ 560,188 $590,615
Total gas sales................. 2,173,620 1,848,069 5,243,085 2,150,274 516,768
AVERAGE SALES PRICES PER UNIT:
Oil (per Bbl)................... $ 12.79 $ 20.04 $ 21.63 $ 13.21 $ 13.84
Gas (per Mcf)................... 2.07 2.73 1.75 2.01 2.42
Per Mcfe........................ 2.09 3.02 2.13 2.15 2.36
</TABLE>

16
<PAGE> 18

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

GENERAL

PetroQuest Energy, Inc. is an independent oil and gas company engaged in
the development, exploration, acquisition and operation of oil and gas
properties onshore and offshore in the Gulf Coast Region. We and our
predecessors have been active in this area since 1986, which gives us extensive
geophysical, technical and operational expertise in this area. Our business
strategy is to increase production, cash flow and reserves through exploration,
development and acquisition of properties located in the Gulf Coast Region.

MERGER WITH AMERICAN EXPLORER, L.L.C.

On September 1, 1998, we completed the transaction to merge our wholly
owned subsidiary Optima Energy (U.S.) Corporation with American Explorer, L.L.C.
Concurrent with the transaction, we became a Delaware corporation and converted
each share of Optima common stock into one share of our common stock and changed
our name from Optima Petroleum Corporation to "PetroQuest Energy, Inc."

In the transaction, American merged with us in exchange for 7,335,001
shares of our common stock, issued to the three former members of American,
representing about 40% of the post-acquisition shares outstanding. Additionally,
we issued 1,667,001 contingent stock rights exchangeable for common shares
should the market share price of our common stock exceed $5 per share for 20
consecutive trading days during the three year term of the rights. The rights
terminate on September 1, 2001.

The transaction was treated as a purchase for accounting purposes. No value
was assigned to the contingent stock rights. The purchase price of approximately
$10.6 million was allocated to the assets and liabilities based on estimated
fair value. The operating results of American have been consolidated in our
statement of operations since September 1, 1998.

NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Standard
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for reporting and display of
comprehensive income in the financial statements. Comprehensive income is the
total of net income and all other non-owner changes in equity. SFAS No. 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. SFAS Nos. 130 and 131 were effective for 1998. We adopted these
standards in 1998 with no effect on our financial statements, financial position
or results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
establishes accounting and reporting standards that require every derivative
instrument, including certain derivative instruments embedded in other
contracts, to be recorded in the balance sheet as either an asset or liability
measured at its fair value.

SFAS No. 133 is effective for fiscal years beginning after June 15, 2000
and must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).

Because we do not currently use derivative instruments, the adoption of
SFAS No. 133 will not impact our financial statements.

17
<PAGE> 19

RESULTS OF OPERATIONS

The following table sets forth certain operating information with respect
to our oil and gas operations for the years ended December 31, 1998, 1997 and
1996 and the six-months ended June 30, 1999 and 1998.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1998 1997 1996 1999 1998
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls)...................... 83,637 105,562 125,756 42,394 42,730
Gas (Mcf)....................... 1,049,247 677,300 2,991,219 1,070,304 213,164
Total Production (Mcfe)......... 1,551,063 1,310,672 3,745,755 1,324,668 469,544
TOTAL SALES:
Total Oil sales................. $1,069,570 $2,116,193 $2,720,643 $ 560,188 $590,615
Total gas sales................. 2,173,620 1,848,069 5,243,085 2,150,274 516,768
AVERAGE SALES PRICES PER UNIT:
Oil (per Bbl)................... $ 12.79 $ 20.04 $ 21.63 $ 13.21 $ 13.84
Gas (per Mcf)................... 2.07 2.73 1.75 2.01 2.42
Per Mcfe........................ 2.09 3.02 2.13 2.15 2.36
</TABLE>

Comparison of Six Months Ended June 30, 1999 and 1998

Net Loss. Net loss for the six months ended June 30, 1999 was $1,258,000 as
compared to net loss of $1,015,000 for the first six months of 1998. The
increase in the loss for the second quarter is due primarily to the exchange
gain recognized in 1998. There was little Canadian activity in 1999, resulting
in nominal exchange activity.

Production Volumes. On a thousand cubic feet equivalent (Mcfe) basis, the
production volumes for the six months ended 1999 increased 182% over the
comparable 1998 period. This is due to the merger with American and the addition
of the CL&F #12 in the Turtle Bayou Field. The CL&F #12 discovery occurred in
the fourth quarter of 1998 and commenced production in December 1998. The
properties previously owned by American produced 693,000 Mcfe for the six months
ended June 30, 1999. The CL&F #12 produced 207,000 Mcfe for the six months ended
June 30, 1999.

Oil and Gas Sales. For the first six months of 1999, oil and gas sales
increased 147% to $2,738,000, compared to oil and gas revenues of $1,107,000
during the comparable 1998 period. These increases were caused by the production
increases discussed above. Stated on a Mcfe basis, unit prices received during
the first six months of 1999 were 13% lower than the prices received during the
comparable 1998 period.

Lease Operating Expenses. Operating expenses for the six months ended June
30, 1999 increased to $975,000 from $396,000 during the six months ended June
30, 1998 due primarily to the merger with American and the addition of the
related properties. On a Mcfe basis, operating expenses decreased from $.84 per
Mcfe for the first six months in 1998 to $ .74 for the same period in 1999.

General and Administrative Expenses. General and administrative expenses
increased $713,000 to $1,309,000 for the first six months in 1999 from $596,000
for the comparable 1998 period. The 1999 amount includes $598,000 which was
capitalized as related directly to our acquisition, exploration and development
efforts. Total general and administrative costs increased in 1999 due to the
additional staffing levels related to the generation and operation of
properties.

Interest Expense. Interest expense increased due to the addition of the
debt associated with the merger with American and the addition of the
non-recourse financing associated with the completion, flow line and facility
cost of High Island Block 494 property.

Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense for the six months ended June 30, 1999 increased 49% from
the 1998 period. This resulted from the additions to property cost on the
balance sheet for the American properties. On a Mcfe basis, which reflects the

18
<PAGE> 20

changes in production, the depreciation, depletion and amortization rate for the
first six months of 1999 was $1.52 per Mcfe compared to $2.88 per Mcfe for the
same period in 1998.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997.

Oil and Gas Revenues. Oil and gas revenue decreased from $3,964,000 in 1997
to $3,263,000 in 1998 or a decrease of 18%. This decrease was the result of both
a decrease in oil production volumes and product prices for both oil and gas.
Oil production volumes decreased as a result of normal depletion of our oil
properties partially offset by the additions of the American properties. Gas
production increased due to the addition of American. Product prices declined
30% on an Mcfe basis from 1997 to 1998, reflecting decreased product prices for
both oil and gas.

Lease Operating Expenses. Lease operating expenses increased from $735,000
in 1997 to $1,349,000 in 1998. This is due to the addition of the American
properties at September 1, 1998 and several large workovers performed during
1998. This was partially offset by a decrease in the number of producing
properties in 1998.

Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization, before the full cost ceiling write-downs in each year, did not
change significantly from $3,133,000 in 1997 to $2,801,000 in 1998. On a Mcfe
basis, the depreciation, depletion and amortization rate for 1998 was $1.81 per
Mcfe compared to $2.39 per Mcfe for 1997.

Full Cost Ceiling Write-Down. The full cost ceiling write-down in 1998 of
$13,431,000 was primarily attributable to cost in excess of net book value
recorded in the merger with American and significant declines in oil and gas
prices in 1998.

General and Administrative Expenses. General and administrative expenses
increased from $1,222,000 in 1997 to $1,779,000 in 1998. The increase is
primarily related to non-recurring costs of $450,000 associated with closing our
Vancouver office and termination of Canadian consultants and employees.

Interest Expense. Interest expense decreased due to a lower outstanding
debt during 1998 compared to 1997.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996.

We reported a loss for 1997 of $2,914,000 as compared to earnings of
$169,000 in 1996. The decline of $3,083,000 is due to a combination of
production volume declines, a $1,820,000 full cost ceiling test write-down of
U.S. oil and gas properties and a $740,000 provision for revenue dispute. The
79% reduction in natural gas volume from 2,991,000 Mcf in 1996 to 677,000 mcf
was primarily due to the sale of Canadian petroleum and natural gas assets
effective January 1, 1997. Canadian operations represented between 55% to 60%
total entity production over the previous 12 to 18 months. Although oil
production was also impacted by the Canadian asset sale, new production at Back
Ridge, Louisiana resulted in only a 16% decline in oil production volume. Oil
prices declined in 1997 by 7% whereas natural gas prices were 56% higher than
1996.

Operating Expense. Oil and natural gas operating expenses decreased from
$1,209,000 in 1996 to $735,000 in 1997. On a Mcfe basis, operating expenses
increased to $0.56 as compared to $0.32 in 1996. The increase is due to
workovers at Valentine and declining gas productivity at Lake Boeuf.

Interest Expense. Proceeds from the sale of Canadian assets were utilized
to pay off the Canadian bank loan. Additionally, we reduced our U.S. bank loan
to $100,000 in 1997. As a result, the interest and bank charges fell to $136,000
in 1997 as compared to $502,000 a year earlier.

Depletion, Depreciation and Amortization. Depletion and depreciation
decreased to $3,133,000 in 1997 from $4,202,000 in 1996 or 25%. On a Mcfe basis
in 1997, the expense was $2.39 per Mcfe versus $1.12 per Mcfe in 1996.

19
<PAGE> 21

General and Administrative Expense. General and administrative expense did
not change significantly from 1996 to 1997.

Full Cost Ceiling Write-Down. Under the full cost method of accounting, we
are required to meet certain ceiling tests in respect of the carrying value of
petroleum and natural gas interests on the balance sheet as of December 31,
1997. A ceiling test write-down of $1,820,000 of petroleum and natural gas
interests was reflected in the consolidated statements of operations.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital and Cash Flow. Working capital (before considering the
current portion of debt) decreased from $0.1 million deficit at December 31,
1998 to a deficit of $1.6 million at June 30, 1999. This was caused primarily by
funds expended for principal payments on debt and oil and gas properties.

We have borrowed the maximum amount under our reducing revolving line of
credit. The borrowing base of this facility is set to be redetermined on
September 1, 1999. Currently, the line will reduce $250,000 per month. The next
redetermination is scheduled for September 1, 1999. Interest under the loan is
payable monthly at prime plus 1/2% (8 1/4% at June 30, 1999).

On April 21, 1999, we entered into a loan agreement for non-recourse
financing to fund completion, flow line and facility costs of our High Island
Block 494 property. Interest is payable at 12% and the lender receives a 2 1/2%
overriding royalty interest in the property which serves as security for the
loan. For the first three production months, all of the cash flow from the
property will be dedicated to payment of principal and interest on the loan.
Subsequently, 85% of the cash flow from the property, assuming certain
production levels, will be dedicated to debt service. The well began producing
during the first part of July 1999. At June 30, 1999, $449,446 of vendor
payables related to the completion, flow line, and facilities of the well at
High Island 494 are classified as long-term since they were subsequently funded
through this facility.

For the first six months of 1999, net cash flow from operations before
working capital changes increased from $340,000 in 1998 to $754,000 in 1999.
This was the result of the addition of the American properties and the CL&F #12
discovery in the Turtle Bayou Field.

In August 1999, we completed a private placement of 5 million units at a
purchase price of $1.00 per unit for a total consideration of $5,000,000 before
fees and expenses. The proceeds from the private placement will be used for
drilling and exploration costs, delay rentals on oil and gas leases, and working
capital and general corporate purposes. Each unit sold in the private placement
consists of one share of our common stock and one warrant exercisable to
purchase one-half a share of our common stock. Each warrant is exercisable at
any time through the fourth year after issuance to purchase one-half of a share
of our common stock at an initial purchase price of $1.25 per share.

Management believes the funds received from the private placement will be
sufficient in the near term to fund exploration activities, operations and debt
service. Future activities will depend on the success of current exploration and
potential additional financing which may be obtained including the sale of
additional equity and debt securities and additional bank financing. Additional
financing may not be available on acceptable terms, if at all.

Year 2000 Compliance. During 1998, our executive management and board of
directors implemented a program to identify, evaluate and address our year 2000
risks to ensure that all its information technology systems and non-information
technology systems will be able to process dates from and after January 1, 2000
without critical systems failure. In addition to evaluating its own systems, we
will also assess the year 2000 risks associated with its significant customers
and suppliers.

We are currently evaluating our information technology systems for year
2000 compliance. As part of this evaluation, we have contracted third-party
consultants to assist in the identification and replacement of non-compliant
information technology systems. During 1998, we began modification of our
information

20
<PAGE> 22

technology systems for year 2000 compliance. The modifications are planned to be
completed in the third quarter of 1999.

The non-information technology systems are currently being assessed to
determine which systems would be affected by year 2000 issues. Once assessment
is complete, any necessary replacements or modifications will be performed.
Management believes that any non-information technology issues are minor and
will be corrected by third quarter of 1999.

The assessment of third parties has the primary purpose of determining any
disruptions in operations due to non-compliance by an outside organization. This
was determined by contacting our suppliers and customers to determine their
level of year 2000 compliance and the steps they are taking towards compliance.
These assessment and corrective measures are scheduled for completion during the
third quarter of 1999.

Total costs incurred to-date and estimated remaining costs for consultants
software and hardware applications for year 2000 compliance are approximately
$35,000. We do not separately account for the internal costs incurred for our
year 2000 compliance efforts. The costs of these projects and the dates on which
we plan to complete modifications and replacements are based on managements'
best estimates, the estimates of third-party specialists assisting us, the
modification plans of third-parties and other factors. These estimates may not
be achieved and actual results could differ materially from those plans.

Based on preliminary risk assessments, we believe the most likely year 2000
related failure would be a temporary disruption in certain materials and
services provided by third-parties, which would not be expected to have a
material adverse effect on our financial condition or results of operations. If
during our assessment it is determined that a year 2000 related failure would
have a material adverse effect on us, contingency plans will be developed. We
cannot assure you that we will not be materially adversely affected by year 2000
problems.

FULL COST CEILING WRITE-DOWN

We use the full cost method of accounting for investment in oil and natural
gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and natural gas reserves are
capitalized into a "full cost pool" (the pool) as incurred, and the properties
in the pool are depleted and charged to operations using the units of production
method based on the ratio of current production to total proved future
production. Additionally, the cost in excess of the net book value of the assets
and liabilities acquired in the merger with American of $7.9 million, discussed
above, is recorded in the pool at December 31, 1998, and is subject to depletion
or write down. To the extent that costs capitalized in the pool (net of
accumulated depreciation, depletion and amortization) exceed the present value
(using a 10% discount rate) of estimated future net cash flow from proved oil
and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations.

Once incurred, a write-down of oil and natural gas properties is not
reversible at a later date even if oil or natural gas prices increase. We were
required to write-down our asset base in 1998 due primarily to the cost in
excess of net book value recorded in the merger with American and significant
declines in oil prices during 1998.

ACCOUNTANTS

On December 16, 1998, our board of directors replaced KPMG as our principal
accountant with Arthur Andersen LLP. Arthur Andersen was the principal
accountant for American Explorer, L.L.C., which we acquired on September 1,
1998.

KPMG's report on our financial statements for each of the last two fiscal
years did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified to uncertainty, audit scope, or accounting principles.
During our two most recent fiscal years and subsequent interim periods preceding
the replacement of KPMG, there were no disagreements with KPMG on any matters of
accounting
21
<PAGE> 23

principles or practices, financial statement disclosure or auditing scope or
procedure. We have authorized KPMG to respond fully to any inquiries by Arthur
Andersen.

MARKET RISK

Our indebtedness under our line of credit is variable rate financing. We
believe that our exposure to market risk relating to interest rate risk is not
material. We believe that our business operations are not exposed to market
risks relating to foreign currency exchange risk or equity price risk.

Price Risk. Our revenues are derived from the sale of our crude oil and
natural gas production. Based on projected annual sales volumes for the
remaining six months of 1999, a 10% decline in the prices received from our
crude oil and natural gas production would have about a $450,000 impact on our
revenues.

22
<PAGE> 24

BUSINESS

GENERAL

Under the terms of the merger, we acquired 100% of the ownership interests
of American in exchange for 7,335,001 shares of our common stock and 1,667,001
contingent stock issue rights. The shares of common stock and the contingent
stock issue rights were issued to the former owners of American, who became our
officers and directors or their affiliates after the merger. The contingent
stock issue rights entitle the holders to receive 1,667,001 shares of our common
stock if the trading price of our common stock is $5.00 or higher for 20
consecutive trading days on or before September 1, 2001.

Under the merger, a seven-member board of directors was elected consisting
of two of our then existing directors and five persons designated by the owners
of American. In addition, our management was replaced with the management of
American. The Canadian offices were closed and our headquarters was moved to 625
E. Kaliste Saloom Road, Suite 400, Lafayette, Louisiana 70508. Our telephone
number is (318) 232-7028.

EXPLORATION AND DEVELOPMENT ACTIVITIES

We currently conduct our exploration and development onshore and offshore
in the Gulf Coast Region. Through the merger with American, we have an inventory
of projects and prospects that are in varying stages of readiness for drilling.
In the near term, exploration and development will be focused on three areas:

- the Turtle Bayou Field,

- the Valentine Field, and

- High Island Block 494 in Federal outer continental shelf waters of the
Gulf of Mexico.

TURTLE BAYOU FIELD. The Turtle Bayou Field is located in Terrebonne Parish,
Louisiana approximately 75 miles southwest of New Orleans. It is within the
western portion of the Houma Embayment, a large structural down-warping of the
continental shelf where a thick sequence of sand and shale was deposited during
middle Miocene time. Within the Houma Embayment are ten significant fields that
have produced total reserves of more than six trillion cubic feet of gas
equivalent. These fields have seen recent 3-D seismic activity, resulting in
renewed drilling and increased production.

We have significant interest in this field and have produced to date more
than 40 billion cubic feet of gas equivalent. The previous exploration and
development was based on an existing 2-D and a 3-D seismic survey acquired in
1993. A new 3-D survey that was shot by Gecko-Prakla/Schlumberger in 1998
indicated numerous untested fault blocks and up-dip reserves. We drilled our
first well after the new 3-D was evaluated in late 1998. It was completed as a
gas well with first production in December 1998, producing at a rate of 3.4 MMcf
per day. The second well was drilled in the third quarter of 1999 and began
producing in October 1999.

VALENTINE FIELD. The Valentine Field, also located in the Houma Embayment,
approximately 30 miles east of Turtle Bayou Field and approximately 45 miles
south of New Orleans, Louisiana, has to date

23
<PAGE> 25

produced in excess of one trillion cubic feet of gas equivalent. We began this
project in 1993. Due to various landowner and partner problems, only three 2-D
seismic lines were ever shot over this south Louisiana salt dome structure and
thus virtually no deep exploration ever occurred. We and our partner, a major
oil and gas company, acquired an 86 square mile 3-D survey that was delivered on
November 1, 1998 and we are in the process of evaluating the data. We bought our
partner's interest in this field in August 1999. We currently have a 35% to 50%
working interest in these prospects.

HIGH ISLAND BLOCK 494. We acquired a 1/3 interest in this property in 1996
and the remaining 2/3 interest in late 1998. We sold approximately 58% of this
prospect and drilled the C-1 well in December 1998 and January 1999. It was
drilled to a total vertical depth of 8,800 feet and encountered 207 feet of
gross hydrocarbon column with 80 feet of natural gas pay in the objective Cris.
S. Sand. The well tested at 20.3 million cubic feet of natural gas per day.
Production in this well began in July 1999 and it is producing at a rate of 15
MMcf per day as of August 1999. We are the operators of this well. Our year-end
reserve report did not include reserves for this discovery since it was logged
and tested after December 31, 1998.

MARKETS

Our ability to market oil and gas from our wells depends upon numerous
factors beyond the Company's control, including the following:

- the extent of domestic production and imports of oil and gas;

- the proximity of the gas production to gas pipelines;

- the availability of capacity in such pipelines;

- the demand for oil and gas by utilities and other end users;

- the availability of alternative fuel sources;

- the effects of inclement weather;

- state and federal regulation of oil and gas production; and

- federal regulation of gas sold or transported in interstate commerce.

We cannot assure you that we will be able to market all of the oil or gas we
produce or that we can obtain favorable prices for our oil and gas production.

Because of the uncertainties affecting the supply and demand for oil, gas
and refined petroleum products, we are unable to predict future oil and gas
prices and demand or the overall effect such prices and demand will have on us.
The following companies purchased at lease 10% of our total production for the
periods indicated:

<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PRODUCTION
------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Creole Gas Co........................................ 18% 25%
El Paso Energy Marketing Co.......................... 17% 15%
The Meridian Resource & Exploration Co............... 16% 15%
</TABLE>

We do not believe that the loss of any of our oil purchasers would have a
material adverse effect on our operations. Since all of our gas sales are on the
spot market, the loss of one or more gas purchasers should not materially and
adversely affect our financial condition. Our marketing of oil and gas can be
affected by a number of factors which are beyond our control, the exact effects
of which cannot be accurately predicted.

24
<PAGE> 26

PROPERTIES

Our oil and gas properties are located onshore and offshore in the Gulf
Coast Region. At December 31, 1998, our estimated proved reserves totaled 504
thousand barrels of oil and 10.6 billion cubic feet of natural gas, with pre-tax
present value of the estimated future net revenues of $11.7 million based on
constant prices in effect at year-end and a discount factor of 10%. Gas
constituted approximately 78% of our total estimated proved reserves and
approximately 69% of our reserves are proved developed reserves. At December 31,
1998, we operated 18 wells representing approximately 56% of the total
discounted cash flow attributable to estimated proved reserves.

SIGNIFICANT PROPERTIES

Valentine Field, Lafourche Parish, LA. The Valentine Field has to date
produced in excess of one trillion cubic feet of gas equivalent. We began this
project in 1993. Due to various landowner and partner problems, only three 2-D
seismic lines were shot over this south Louisiana salt dome structure, and thus,
virtually no deep exploration ever occurred. We and a major oil and gas company,
acquired an 86 square mile 3-D survey in November 1998. We bought the oil and
gas company's interest in this field in August 1999. We are in the process of
evaluating the data and have a 35% to 50% working interest in these prospects as
of .

Turtle Bayou Field, Terrebonne Parish, LA. We have participated in the
drilling of ten wells in Turtle Bayou Field. As of August 31, 1999, there are 6
producing wells in the field in which we hold a working interest. Collectively,
the 6 producing wells averaged 6,800 Mcf of natural gas and 65 barrels of
condensate per day for the month of August 1999. Our working interest varies
between 46.19% and 16.98% with a weighted average working interest of 38.34%.

We shot and acquired a 3-D regional seismic survey shot in 1998 which
incorporates the Turtle Bayou Field. At the present time, three prospects with
multiple objectives have been identified. The first two wells have been
completed and the third well is expected to begin drilling in the fourth quarter
of 1999.

Bully Camp Field, Lafourche Parish, LA. We acquired a 100% working interest
in this property in 1993. In August 1999, six wells in this field were producing
at a combined rate of 1,380 MMcf of gas per day and 150 barrels of oil per day.

Meridian Resources Joint Venture, LA. Under the master participation
agreement with Meridian Resource Corporation dated October 1, 1993, we have
evaluated ten prospect areas, of which five have been drilled, four rejected
after geological and geophysical review and one prospect at Stella to be drilled
at a later date not yet determined. At August 31, 1999, drilling resulted in
five currently producing wells at a combined rate of 2,850 barrels of oil per
day and 5,900 Mcf of gas per day. Our working interest averages 8% in these
wells.

Brazos Block 446, Texas Offshore State Waters. We acquired a 44% working
interest in this property in early 1997. During 1998, the platform was
refurbished, a compressor installed and a well acidized resulting in production
increases of 1,000 Mcf of gas per day. At August 1999, production was
approximately 3,500 Mcf of gas per day from one well.

Galveston Block 303, Federal Outer Continental Shelf Waters. We generated
and drilled the discovery well on this property in 1996. We have a 21.875%
working interest in this field. In addition to drilling and completing three
wells, one well and a production platform were acquired. The initial phase of
exploration and development of this field has been completed. At August 1999,
production was 3,125 Mcf per day from three wells.

High Island Block 494, Federal Outer Continental Shelf Waters. We and our
partners acquired a 1/3 interest in this property in 1996 and the remaining 2/3
interest in late 1998. We sold approximately 58% of this prospect and drilled
the C-1 well in December 1998 and January 1999. The well encountered 207 feet of
gross hydrocarbon column with 80 feet of net natural gas pay. The well tested at
20.3 Mcf of natural gas per day. Since the well was logged and tested subsequent
to year end, it has not been included

25
<PAGE> 27

in our December 31, 1998 reserve report. Production to the sales line began in
July 1999 with production in August 1999 averaging 15 MMcf of gas per day.

OIL AND GAS RESERVES

The following table sets forth certain information about our estimated
proved reserves at December 31, 1998.

<TABLE>
<CAPTION>
OIL (MBbls) GAS (MMcfs)
----------- -----------
<S> <C> <C> <C>
Proved developed:......................................... 275 7722
Proved undeveloped:....................................... 229 2839
Total proved:............................................. 504 10561
Estimated pre-tax future net cash flows (000's)........... $14,750
Discounted pre-tax future net cash flows (000's).......... $11,676
</TABLE>

Our independent reserve engineers, Ryder Scott Company, prepared the
estimates of proved reserves and future net cash flows, and present value
thereof, attributable to such proved reserves for 1998. Reserves were estimated
using oil and gas prices and production and development costs in effect at
December 31, 1998 without escalation, and were otherwise prepared in accordance
with Securities and Exchange Commission regulations regarding disclosure of oil
and gas reserve information. The average product prices used in developing the
above estimates were $9.84 per Bbl of oil and $2.00 per MMBtu of gas. Because of
the high btu content of our Gulf Coast gas, this equates to an average price
realized of approximately $2.25 per Mcf.

We have not filed any reports with other federal agencies which contain an
estimate of total proved net oil and gas reserves.

OIL AND GAS DRILLING ACTIVITY

The following table sets forth the wells we drilled and completed during
the periods indicated. All the wells in 1997 and 1998 were drilled in the
continental United States. Wells drilled in 1996 include both the United States
and Canada.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ ------------
GROSS NET GROSS NET GROSS NET
----- --- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Exploration:
Productive.......................................... 2 .74 4 0.72 5 0.6
Non-Productive...................................... -- -- 2 0.33 6 1.28
-- --- -- ---- -- ----
Total....................................... 2 .74 6 1.05 11 1.88
== === == ==== == ====
Development:
Productive.......................................... -- -- 2 0.33 2 0.23
Non-Productive...................................... -- -- -- -- -- --
-- --- -- ---- -- ----
Total....................................... -- -- -- 0.33 2 0.23
== === == ==== == ====
</TABLE>

We owned working interests in 36 gross, 15.3 net, producing oil and gas
wells at December 31, 1998.

26
<PAGE> 28

LEASEHOLD ACREAGE

The following table shows our approximate developed and undeveloped, gross
and net, leasehold acreage as of August 31, 1999:

<TABLE>
<CAPTION>
LEASEHOLD ACREAGE
--------------------------------
DEVELOPED UNDEVELOPED
-------------- ---------------
GROSS NET GROSS NET
------ ----- ------ ------
<S> <C> <C> <C> <C>
Mississippi (leasehold onshore)..................... -- -- 10,298 6,866
Louisiana (leasehold onshore)....................... 8,069 2,268 10,945 5,987
Louisiana (offshore) Federal........................ -- -- 18,521 12,126
Texas (offshore) State.............................. 1,440 660 -- --
Texas (offshore) Federal............................ 11,520 3,679 -- --
------ ----- ------ ------
Total..................................... 21,029 6,607 39,764 24,979
====== ===== ====== ======
</TABLE>

At September 1999, we had 7,409 gross acres and 6,946 net acres under
option in Louisiana and 809 gross acres and 539 net acres under option in
Mississippi.

TITLE TO PROPERTIES

We believe that the title to our oil and gas properties is good and
defensible based on with standards generally accepted in the oil and gas
industry, subject to such exceptions which, in our opinion, are not so material
as to detract substantially from the use or value of those properties. Our
properties are typically subject, in one degree or another, to one or more of
the following:

- royalties and other burdens and obligations, express or implied, under
oil and gas leases;

- overriding royalties and other burdens created by us or predecessors in
title;

- a variety of contractual obligations including development obligations
arising under operating agreements, farmout agreements, production sales
contracts and other agreements that may affect the properties or their
titles;

- back-ins and reversionary interests existing under purchase agreements
and leasehold assignments;

- liens that arise in the normal course of operations, such as those for
unpaid taxes, statutory liens securing obligations to unpaid suppliers
and contractors and contractual liens under operating agreements;

- pooling, unitization and communitization agreements, declarations and
orders; and

- easements, restrictions, rights-of-way and other matters that commonly
affect property.

If these burdens and obligations affect our rights to production revenues, they
have been taken into account in calculating our net revenue interests and in
estimating the size and value of our reserves. We believe that the burdens and
obligations affecting our properties are conventional in the industry for
similar properties.

EMPLOYEES

We had 26 employees at September 30, 1999. We believe that our
relationships with our employees is satisfactory. None of our employees are
covered by a collective bargaining agreement. From time to time, we utilize the
services of independent contractors to perform certain services.

FEDERAL REGULATIONS

SALES OF NATURAL GAS. Effective January 1, 1993, the Natural Gas Wellhead
Decontrol Act deregulated prices for all "first sales" of natural gas. Thus, all
of our sales of gas may be made at market prices, subject to applicable contract
provisions.

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<PAGE> 29

TRANSPORTATION OF NATURAL GAS. The rates, terms and conditions applicable
to the interstate transportation of natural gas by pipelines are regulated by
the Federal Energy Regulatory Commission under the Natural Gas Act, as well as
under section 311 of the Natural Gas Policy Act. Since 1985, the commission has
implemented regulations intended to make natural gas transportation more
accessible to gas buyers and sellers on an open-access, non-discriminatory
basis.

Most recently, in Order No. 636, et seq., the commission promulgated an
extensive set of new regulations requiring all interstate pipelines to
"restructure" their services. The most significant provisions of Order No. 636:

- require that interstate pipelines provide firm and interruptible
transportation solely on an "unbundled" basis, separate from their sales
service, and convert each pipeline's bundled firm city-gate sales service
into unbundled firm transportation service;

- issue blanket certificates to pipelines to provide unbundled sales
service;

- require that pipelines provide firm and interruptible transportation
service on a basis that is equal in quality for all natural gas supplies,
whether purchased from the pipeline or elsewhere;

- require that pipelines provide a new non-discriminatory "no-notice"
transportation service;

- establish two new, generic programs for the reallocation of firm pipeline
capacity;

- require that pipelines offer access to their storage facilities on a firm
and interruptible, open access, contract basis;

- provide pregranted abandonment of unbundled sales and interruptible and
short-term firm transportation service and conditional pregranted
abandonment of long-term transportation service; and

- modify transportation rate design by requiring all fixed costs related to
transportation to be recovered through the reservation charge under the
straight fixed variable method.

The order also recognized that eliminating city-gate sales service and
implementing unbundled transportation service would result in considerable costs
to the pipelines. Therefore, Order No. 636 provided mechanisms for the recovery
by pipelines from present, former and future customers of certain types of
"transition" costs likely to occur due to these new regulations.

In subsequent orders, the commission substantially upheld the requirements
imposed by Order No. 636. Under Order No. 636, pipelines and their customers
engaged in extensive negotiations in order to develop and implement new service
relationships under Order No. 636. Tariffs instituting these new restructured
services were placed into effect on all pipelines by November 1, 1993. Numerous
petitions for judicial review of Order No. 636 have been filed and consolidated
for review in the United States Court of Appeals for the D.C. Circuit. Numerous
parties have also sought review of separate commission orders implementing Order
No. 636 on individual pipeline systems. Since the restructuring requirements
that emerge from this lengthy administrative and judicial review process may be
materially different from those of Order No. 636 as originally adopted, we
cannot predict what effect, if any, the final rule resulting from Order No. 636
will have on us.

SALES AND TRANSPORTATION OF CRUDE OIL. Sales of crude oil and condensate
can be made at market prices not subject now to price controls. The price that
we receive from the sale of these products will be affected by the cost of
transporting the products to market. As required by the Energy Policy Act of
1992, the Federal Energy Regulatory Commission has revised its regulations
governing the rates that may be charged by oil pipelines. The new rules
simplified the method of regulating rates through use of an index for setting
rate ceilings. In certain circumstances, the new rules permit oil pipelines to
establish rates using traditional cost of service and other methods of
ratemaking. The effect that these new rules may have on moving our products to
market cannot yet be determined. At the same time as it issued the new rules,
the commission also issued notices of inquiry regarding market-based pricing for
oil pipeline rates and the

28
<PAGE> 30

information required to be filed for ratemaking and reporting purposes. We
cannot predict what rules, if any, the commission will ultimately adopt as a
result of these inquiry proceedings or the effect that any rules that are
adopted might have on the cost of moving our products to market.

LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the
area of natural gas regulation. There are legislative proposals pending in
various state legislatures which, if enacted, could significantly affect the
petroleum industry. We cannot predict what proposals, if any, might actually be
enacted by Congress or the various state legislatures and what effect, if any,
such proposals might have on our operations.

FEDERAL, STATE OR AMERICAN INDIAN LEASES. If we conduct operations on
federal, state or Indian oil and gas leases, these operations must comply with
numerous regulatory restrictions, including various nondiscrimination statutes,
and some of these operations must be conducted based on certain on-site security
regulations and other appropriate permits issued by the Bureau of Land
Management or Minerals Management Service or other appropriate federal or state
agencies.

The Mineral Leasing Act of 1920 prohibits direct or indirect ownership of
any interest in federal onshore oil and gas leases by a foreign citizen of a
country that denies "similar or like privileges" to citizens of the United
States. These restrictions on citizens of a "non-reciprocal" country include
ownership or holding or controlling stock in a corporation that holds a federal
onshore oil and gas lease. If this restriction is violated, the corporation's
lease can be canceled in a proceeding instituted by the United States Attorney
General. Although the regulations of the Bureau of Land Management, which
administers the Mineral Leasing Act, provide for agency designations of
non-reciprocal countries, there are presently none of these designations in
effect. We own interests in numerous federal onshore oil and gas leases. It is
possible that our equity interest holders may be citizens of foreign countries,
which at some time in the future might be determined to be non-reciprocal under
the Mineral Leasing Act.

STATE REGULATIONS

Most states regulate the production and sale of oil and natural gas,
including:

- requirements for obtaining drilling permits,

- the method of developing new fields,

- the spacing and operation of wells, and

- the prevention of waste of oil and gas resources.

The rate of production may be regulated and the maximum daily production
allowable from both oil and gas wells may be established on a market demand or
conservation basis or both.

We may enter into agreements relating to the construction or operation of a
pipeline system for the transportation of natural gas. If this gas is produced,
transported and consumed wholly within one state, those operations may, in some
cases, be subject to the jurisdiction of such state's administrative authority
charged with the responsibility of regulating intrastate pipelines. In that
case, the rates which we could charge for gas, the transportation of gas, and
the construction and operation of such pipeline would be subject to the rules
and regulations governing such matters, if any, of such administrative
authority.

ENVIRONMENTAL REGULATIONS

GENERAL. Our activities are subject to existing federal, state and local
laws and regulations governing environmental quality and pollution control. We
believe that, absent the occurrence of an extraordinary event, compliance with
existing federal, state and local laws, regulations and rules regulating the
release of materials in the environment or otherwise relating to the protection
of the environment will not have a material effect upon our capital
expenditures, earnings or competitive position with respect to our existing
assets and operations. We cannot predict what effect additional regulation or
legislation, enforcement

29
<PAGE> 31

policies thereunder, and claims for damages to property, employees, other
persons and the environment resulting from our operations could have on our
activities.

Our activities with respect to natural gas facilities, including the
operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing natural gas and other products,
are subject to stringent environmental regulation by state and federal
authorities including the United States Environmental Protection Agency. These
regulations can increase the cost of planning, designing, installation and
operation of such facilities. In most cases, the regulatory requirements relate
to water and air pollution control measures. Although we believe that we are in
substantial compliance with environmental regulations, risks of substantial
costs and liabilities associated with these regulations are inherent in oil and
gas production operations, and may be incurred. Moreover, it is possible that
other developments, such as stricter environmental laws and regulations, and
claims for damages to property or persons resulting from oil and gas production,
could result in substantial costs and liabilities.

SOLID AND HAZARDOUS WASTE. We own or lease several properties that have
been used for production of oil and gas for many years. Although we have
utilized operating and disposal practices standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under these properties. In addition, many of these properties have been operated
by third parties. We had no control over these entities' treatment of
hydrocarbons or other solid wastes or in the manner in which these substances
may have been disposed or released. State and federal laws applicable to oil and
gas wastes and properties have gradually become stricter over time. Under these
new laws, we could be required

- to remove or remediate previously disposed wastes, including wastes
disposed or released by prior owners or operators,

- to remove or remediate property contamination, including groundwater
contamination by prior owners or operators, or

- to perform remedial plugging operations to prevent future contamination.

We generate wastes, including hazardous wastes, that are subject to the
Federal Resource Conservation and Recovery Act and comparable state statutes.
The Environmental Protection Agency has limited the disposal options for certain
hazardous wastes and is considering the adoption of stricter disposal standards
for nonhazardous wastes. Furthermore, certain wastes currently exempt from
treatment as "hazardous wastes" generated by our oil and gas operations may in
the future be designated as "hazardous wastes" under the Resource Conservation
and Recovery Act or other applicable statutes, and therefore, subject us to more
rigorous and costly disposal requirements.

SUPERFUND. The Comprehensive Environmental Response, Compensation and
Liability Act, also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons for the release of a "hazardous substance" into the environment. These
persons include the owner and operator of a site and persons that dispose or
arrange for the disposal of hazardous substances at a site. The Act also
authorizes the Environmental Protection Agency and, in some cases, third parties
to take actions in response to threats to the public health or the environment
and to seek to recover from the responsible classes of persons the costs of the
action. We have not been designated as a potentially responsible party by the
Environmental Protection Agency under the Act with respect to any site.

OIL POLLUTION ACT. The Oil Pollution Act of 1990 and related regulations
impose a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages from spills in United States
waters. A "responsible party" includes the owner or operator of a facility or
vessel, or the lessee or permittee of the area in which an offshore facility is
located. The Oil Pollution Act assigns liability to each responsible party for
oil removal costs and a variety of public and private damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction

30
<PAGE> 32

or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. Few defenses exist
to the liability imposed by the Oil Pollution Act.

The Oil Pollution Act also imposes ongoing requirements on a responsible
party, including proof of financial responsibility to cover at least some costs
in a potential spill. On August 25, 1993, an advance notice of intent to adopt a
rule under the Oil Pollution Act was published that would require owners and
operators of offshore oil and gas facilities to establish $150 million in
financial responsibility. Under the proposed rule, financial responsibility
could be established through insurance, guaranty, indemnity, surety bond, letter
of credit, qualification as a self-insurer or a combination of the foregoing. It
is unlikely that insurance companies or underwriters will be willing to provide
coverage under the Oil Pollution Act because the statute provides for direct
lawsuits against insurers who provide financial responsibility coverage, and
most insurers have strongly protested this requirement. The financial tests or
other criteria that will be used to judge self-insurance are also uncertain. A
number of bills are pending in the United States Congress to amend or modify the
financial responsibility requirements under the Oil Pollution Act. We cannot
predict the final form of the financial responsibility rule that will be
adopted. If the original requirements under the Oil Pollution Act are not
amended, we could incur substantial additional costs on us or otherwise
materially adversely affect us. Pending adoption of final regulations, we have
not taken any steps to establish financial responsibility under the Oil
Pollution Act.

AIR EMISSIONS. Our operations are subject to local, state and federal
regulations for the control of emissions from air pollution sources.
Administrative enforcement actions for failure to comply strictly with air
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require us to forego construction or operation of certain air emission
sources, which could have a material adverse effect on a particular producing
field.

OSHA. We are subject to the requirements of the Federal Occupational Safety
and Health Act and comparable state statutes. The Occupational Safety and Health
Act hazard communication standard, the Environmental Protection Agency community
right-to-know regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act and similar state statutes require us to organize or
disclose information about hazardous materials used or produced in our
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens.

Management believes that we are in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on us.

LEGAL PROCEEDINGS

There are no legal proceedings to which we are a party or by which any of
our property is subject, other than ordinary and routine litigation due to the
business of producing and exploring for oil and natural gas, except as follows:

S.W. HOLMWOOD. On July 12, 1999, the United States Court of Appeals for the
Fifth Circuit rendered its decision affirming in part and reversing in part the
decision of the United States District Court for the Western District of
Louisiana, Lake Charles Division, in the matter Amoco Production Company v. The
Meridian Resource & Exploration Company, No. 98-30724, which involves our
Southwest Holmwood Prospect, Cameron Parish, Louisiana. We hold a beneficial
four percent working interest in the prospect through a participation agreement
with the defendant. The proceeding in the trial court, which was instituted on
July 11, 1996, resulted in judgment against the defendant dissolving the oil and
gas lease and the associated joint exploration agreement. The trial judge also
terminated the defendant's interest in two wells effective July 26, 1996 and
awarded post-termination production revenues to the plaintiff. The Fifth Circuit
Court of Appeals disallowed plaintiff's legal interest claim, but otherwise
affirmed the judgment of the trial court. Since the eventual outcome of the
litigation is indeterminable, we have recorded 100% of the cumulative net
operating income of $700,000 in other liabilities in our consolidated financial
statements.
31
<PAGE> 33

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The names, ages, as of June 30, 1999, and positions of our directors and
executive officers are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William C. Leuschner............................... 70 Chairman of the Board of Directors
Charles T. Goodson................................. 44 President, Chief Executive Officer and
Director
Alfred J. Thomas, II............................... 62 Chief Operating Officer and Director
Ralph J. Daigle.................................... 51 Senior Vice President of Exploration and
Director
Robert R. Brooksher................................ 48 Chief Financial Officer, Secretary and
Director
Robert L. Hodgkinson(1)(2)......................... 49 Director
Daniel G. Fournerat(1)(2).......................... 45 Director
William W. Rucks, IV............................... 41 Director
Francisco A. Garcia(1)............................. 47 Director
</TABLE>

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

(1) Member, Compensation Committee of the board of directors.

(2) Member, Audit Committee of the board of directors.

William C. Leuschner has been chairman of the board of directors since May
1989. Mr. Leuschner served as a director of Skyline Natural Resources, a
publicly-traded company on the Alberta Stock Exchange, from 1985 to 1995. He was
president of Arenosa Resource Corporation, a private oil and gas company we
subsequently acquired, from 1982 to 1992. In 1982, he founded Leuschner
International Resources Ltd., a private hydrocarbon consulting and independent
oil and gas producing firm, of which he is president. Mr. Leuschner is a
professional geologist with a Bachelor of Geology from Texas A&M University in
1950.

Charles T. Goodson has served as our president and chief executive officer
and as a member of the board of directors since September 1998. From 1995 to
1998, Mr. Goodson was president of American Explorer, L.L.C., a private oil and
gas exploration and production company we subsequently acquired. Since 1985, he
has served as president and 50% owner of American Explorer, Inc., an oil and gas
operating company which formerly operated properties for us and is currently
inactive. From 1980 to 1985, Mr. Goodson worked for Callon Petroleum Company,
first as a landman, then district land manager and then regional land manager.
He began his career in 1978 as a landman for Mobil Oil Corporation.

Alfred J. Thomas, II has served as our chief operating officer of and as a
member of the board of directors since September 1998. From 1995 to 1998, Mr.
Thomas was chief executive officer of American Explorer, L.L.C., a private oil
and gas exploration and production company we subsequently acquired. Since 1985,
he has served as chief executive officer and 50% owner of American Explorer,
Inc., an oil and gas operating company which formerly operated properties for us
and is currently inactive. From 1976 through 1984 he was a partner in Petitfils,
Thomas and Associates, an oil and gas engineering consulting firm. He worked for
the Superior Oil Company as a petroleum engineer from 1959 until 1976.

Ralph J. Daigle has served as our senior vice president of exploration and
as a member of the board of directors since September 1998. From 1995 to 1998,
Mr. Daigle was senior vice president of exploration of American Explorer,
L.L.C., a private oil and gas exploration and production company we subsequently
acquired. Since 1989, he has served as the senior vice president of exploration
of American Explorer, Inc., an oil and gas operating company which formerly
operated properties for us and is currently inactive. From 1984 to 1989, Mr.
Daigle worked as an independent geophysical consultant. From 1979 to 1984, he
was employed by X-Plor, an exploration and production consulting group. Mr.
Daigle worked for Texas Pacific Oil Company as a geophysical interpreter of
seismic data from 1977 until 1979 and served in the same capacity with Union Oil
Company from 1973 to 1977. He began his career as a field observer, party
manager and party chief for Seismic Delta, Inc.

32
<PAGE> 34

Robert R. Brooksher has served as our chief financial officer and secretary
and has served as a member of the board of directors since September 1998. From
1997 to 1998, Mr. Brooksher was chief financial officer of American Explorer,
L.L.C., a private oil and gas exploration and production company we subsequently
acquired. Since the beginning of 1997, he has served as the chief financial
officer of American Explorer, Inc., an oil and gas operating company which
formerly operated properties for us and is currently inactive. From 1994 to
1997, Mr. Brooksher served as a financial consultant to energy related
companies. From 1988 to 1994, he was vice president of acquisitions and chief
financial officer of Espero Energy Corporation. Mr. Brooksher was an investment
manager with Graham Resources, Inc. from 1987 to 1988 and chief financial
officer of Crescent Exploration Company from 1985 to 1987. From 1983 to 1985, he
was a financial consultant for an individual with interests in oil and gas and
real estate. Mr. Brooksher began his career with Arthur Andersen & Co. in 1973
and worked in its audit division until 1983.

Robert L. Hodgkinson has served as a member of the board of directors since
April 1989. Mr. Hodgkinson has served as director of Equatorial Energy, Inc.,
formerly Australian Oilfields Pty. Ltd., since February 1996. From April 1993 to
September 1995, he was director of Roxbury Capital Corp., an oil and gas
exploration and production company we acquired in September 1995. From 1982 to
November 1990, Mr. Hodgkinson was vice president of L.O.M. Western Securities
Ltd., a securities firm in Vancouver, British Columbia.

Daniel G. Fournerat has served as our outside counsel and as a member of
the board of directors since September 1998. Mr. Fournerat is an attorney-at-law
practicing since 1977 with the Lafayette, Louisiana law firm of Onebane,
Bernard, Torian, Diaz, McNamara & Abell with an oil and gas transactional
practice.

William W. Rucks, IV has served as our director since October 1999. Mr.
Rucks has been a private venture capitalist-investor since September 1996. He
has served as a director of OMNI Energy Services, Inc. since 1997. He served as
president and vice chairman of Ocean Energy, Inc., formerly Flores & Rucks,
Inc., from July 1995 until September 1996 and as its president and chief
executive officer from its inception in 1992 until July 1995. From 1985 to 1992,
Mr. Rucks served as president of FloRuxco, Inc. Before then, Mr. Rucks worked as
a petroleum landman with Union Oil Company of California in its Southwest
Louisiana District, serving as area land manager from 1981 to 1984.

Francisco A. Garcia has served as our director since September 1999. Since
January 1, 1999, Mr. Garcia has been the Director of Corporate Finance for
Cramer Rosenthal McGlynn, LLC, an investment management firm. Since July 1997,
Mr. Garcia has been a director at Logimetrics, Inc., a broadband wireless
equipment and component manufacturer and seller. From 1987 to December 1997, he
served as chairman of the board of Neptune Management Company, Inc., a manager
of funds and accounts investing in distressed securities, obligations and
consumer receivables. From 1991 until December 1998, Mr. Garcia served as
president of Nethuns, Inc., a firm engaged in financial advisory, consumer
finance and investment activities. Mr. Garcia is a citizen of Spain.

COMMITTEES OF THE BOARD OF DIRECTORS

In accordance with Delaware corporate law, our business is managed under
the direction of our board of directors. There are currently two standing
committees of the board of directors, the audit committee and the compensation
committee. Committee membership and the functions of those committees are
described below.

AUDIT COMMITTEE. The current members of the audit committee are Robert L.
Hodgkinson and Daniel G. Fournerat. The committee is responsible for:

- recommending to the entire board of directors engagement and discharge of
independent auditors of our financial statements,

- reviewing the professional service provided by the independent auditors,

33
<PAGE> 35

- reviewing the independence of independent auditors,

- reviewing with the auditors the plan and results of the auditing
engagement,

- considering the range of audit and non-audit fees, and

- reviewing the adequacy of our system of internal audit controls.

In addition, the committee directs and supervises special investigations as
deemed necessary by the committee.

COMPENSATION COMMITTEE. The current members of the compensation committee
are Robert L. Hodgkinson, Daniel G. Fournerat and Francisco A. Garcia. The
committee recommends to the board of directors the compensation to be paid to
our officers and key employees and the compensation of the board of directors.
Except as otherwise provided in any board-adopted plan, the committee
administers executive compensation plans, stock option plans and other forms of
direct or indirect compensation of officers and key employees. Each member of
the committee has the power and authority to execute on behalf of the company
documents, agreements and instruments related to these plans and compensation as
are approved by the committee. Alternatively, the committee may authorize any
officers to execute such documents, agreements and instruments on behalf of the
company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Before the merger with American, Robert L. Hodgkinson, Emile D. Stehelin
and Martin G. Abbott were members of the compensation committee. The current
members of the committee are Robert L. Hodgkinson, Daniel G. Fournerat and
Francisco A. Garcia. Mr. Hodgkinson had served as our president and chief
executive officer from 1989 until the merger with American.

In the merger with American, Mr. Hodgkinson entered into severance and
consulting agreements with the company. See "Certain Relationships and Related
Transactions -- Merger with American -- Hodgkinson Consulting and Termination
Agreements" (page 42). We also entered into an agreement to purchase a working
interest in the Valentine Prospect from 7804 Yukon, Inc. At the time of the
merger with American, Yukon was owned 51% by Mr. Stehelin and 49% by Mr.
Hodgkinson. As of September 1998, Yukon is owned 100% by Mr. Hodgkinson. See
"Certain Relationships and Related Transactions -- Merger with
American -- Acquisition of Working Interest in Valentine" (page 41).

Mr. Fournerat, who practices law with the Lafayette, Louisiana law firm of
Onebane, Bernard, Torian, Diaz, McNamara & Abell, has served as our outside
counsel since September 1998. See "Certain Relationships and Related
Transactions -- Outside Counsel" (page 43).

DIRECTOR COMPENSATION

During the year ended December 31, 1998, our employee and non-employee
directors received no compensation for their services as directors. We are in
the process of formulating our compensation policy that will be put in place for
our employee and non-employee directors.

EXECUTIVE COMPENSATION

Summary Compensation Table. The following table provides information
concerning compensation paid or accrued during the fiscal years ended December
31, 1998, 1997 and 1996 to our chief executive

34
<PAGE> 36

officer and each of our other four most highly-paid executive officers
determined at the end of the last fiscal year:

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
NAME AND --------------------- OTHER ANNUAL NUMBER OF ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- ------------------ ---- ------ ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Hodgkinson(2)........ 1998 -- -- CDN 100,000(3) 90,000(4) (5)
President and Chief 1997 -- -- CDN 150,000(3) 200,000(4) --
Executive Officer 1996 -- -- CDN 150,000(3) -- --
William C. Leuschner........... 1998 -- -- (6) 90,000(7) (8)
Chairman of the Board 1997 -- -- CDN 150,000(9) -- --
1996 -- -- CDN 150,000(9) 125,000(7) --
Ronald P. Bourgeois(2)......... 1998 -- -- (10) 90,000(11) (12)
Chief Financial Officer and 1997 -- -- CDN 118,000(13) -- --
Secretary 1996 -- -- CDN 118,000(13) 75,000(11) --
Charles T. Goodson(14)......... 1998 70,000 -- -- 66,000(15) --
President and Chief Executive 1997 -- -- -- -- --
Officer 1996 -- -- -- -- --
Alfred J. Thomas, II(16)....... 1998 70,000 -- -- 66,000(15) --
Chief Operating Officer 1997 -- -- -- -- --
1996 -- -- -- -- --
Ralph J. Daigle(17)............ 1998 60,000 -- -- 60,000(15) --
Senior Vice President of 1997 -- -- -- -- --
Exploration 1996 -- -- -- -- --
Robert R. Brooksher(18)........ 1998 60,000 -- -- 38,000(15) --
Chief Financial Officer and 1997 -- -- -- -- --
Secretary 1996 -- -- -- -- --
</TABLE>

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

(1) See "Option Grants in Last Fiscal Year" for certain information with
respect to options granted during the fiscal year ended December 31, 1998.

(2) Mr. Hodgkinson and Mr. Bourgeois resigned their respective positions
effective September 1, 1998.

(3) These monies were paid to Hodgkinson Equities Corporation, a private
company of which Mr. Hodgkinson is the principal shareholder, under a now
terminated consulting agreement. See "Certain Relationships and Related
Transactions -- Merger with American -- Hodgkinson Consulting and
Termination Agreements" (page 42).

(4) In connection with the merger with American, 110,000 of 200,000 option
shares outstanding under our 1995 and 1996 stock option plans were
canceled, and the remaining 90,000 were amended as to exercise price and
expiry date and are governed under our 1998 incentive plan. See "Certain
Relationships and Related Transactions -- Merger with American -- Amendment
of Stock Options" (page 41).

(5) In connection with the merger with American, Mr. Hodgkinson received CDN
$150,000 in severance and received CDN $100,000 and will retain the
furnishings from our Vancouver office in consideration for assuming the
office and equipment leases for our Vancouver office. See "Certain
Relationships and Related Transactions -- Merger with
American -- Hodgkinson Consulting and Termination Agreements" (page 42).

(6) In connection with a now terminated consulting agreement, CDN $100,000 was
paid to Leuschner International Resources Ltd., a private company of which
Mr. Leuschner is the chairman and principal shareholder. In connection with
a current consulting agreement, US $50,000 was paid to Leuschner
International Resources Ltd., a private company of which Mr. Leuschner is
the chairman

35
<PAGE> 37

and principal shareholder. See "Certain Relationships and Related
Transactions -- Merger with American -- Leuschner Consulting and
Termination Agreements" (page 42).

(7) In connection with the merger with American, 35,000 of 125,000 option
shares outstanding under our 1995 and 1996 stock option plans were
canceled, and the remaining 90,000 were amended as to exercise price and
expiry date and are governed under our 1998 incentive plan. See "Certain
Relationships and Related Transactions -- Merger with American
-- Amendment of Stock Options" (page 41).

(8) In connection with the merger with American, Mr. Leuschner received CDN
$150,000 in severance and received CDN $100,000 in consideration for
terminating the Calgary consultants and closing our Calgary office. See
"Certain Relationships and Related Transactions -- Merger with American --
Leuschner Consulting and Termination Agreements" (page 42).

(9) These monies were paid to Leuschner International Resources Ltd., a private
company of which Mr. Leuschner is the chairman and principal shareholder,
under a now terminated consulting agreement. See "Certain Relationships and
Related Transactions -- Merger with American -- Leuschner Consulting and
Termination Agreements" (page 42).

(10) In connection with a now terminated consulting agreement, CDN $100,000 was
paid to Mr. Bourgeois. In connection with a current consulting agreement,
Mr. Bourgeois was paid US $30,000. See "Certain Relationships and Related
Transactions -- Merger with American -- Bourgeois Consulting and
Termination Agreements" (page 42).

(11) In connection with the merger with American, 75,000 option shares under our
1995 and 1996 stock option plans were amended as to exercise price and
expiry date and are governed under our 1998 incentive plan. Also in
connection with the merger with American, Mr. Bourgeois was granted an
additional 15,000 option shares under our 1998 incentive plan. See "Certain
Relationships and Related Transactions -- Merger with American -- Amendment
of Stock Options and -- Grant of Stock Options" (page 41).

(12) In connection with the merger with American, Mr. Bourgeois received CDN
$120,000 in severance and CDN $5,000 for a disability plan premium. See
"Certain Relationships and Related Transactions -- Merger with
American -- Bourgeois Consulting and Termination Agreements" (page 42).

(13) These monies were paid to Mr. Bourgeois under a now terminated consulting
agreement. See "Certain Relationships and Related Transactions -- Merger
with American -- Bourgeois Consulting and Termination Agreements" (page
41).

(14) Mr. Goodson joined the Company on September 1, 1998 and is compensated at
an annual rate of $210,000.

(15) Options vest in 1/3 installments on each of December 31, 1998, December 31,
1999 and December 31, 2000.

(16) Mr. Thomas joined the Company on September 1, 1998 and is compensated an at
annual rate of $210,000.

(17) Mr. Daigle joined the Company on September 1, 1998 and is compensated at an
annual rate of $180,000.

(18) Mr. Brooksher joined the Company on September 1, 1998 and is compensated at
an annual rate of $180,000.

Option Grants in Last Fiscal Year. The following table provides information
concerning stock options granted to the named persons in the Summary
Compensation Table during the year ended December 31, 1998:

36
<PAGE> 38

INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM(1)
UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION ----------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- --------------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Hodgkinson........ 90,000(2) 8.9% $.8479 9/1/01 $12,029 $25,259
William C. Leuschner........ 90,000(2) 8.9% $.8479 9/1/01 $12,029 $25,259
Ronald P. Bourgeois......... 75,000(2) 7.4% $.8479 9/1/01 $10,024 $21,049
15,000(3) 1.5% $.8479 9/1/01 $ 2,005 $ 4,210
Charles T. Goodson.......... 66,000(4) 6.5% $.8479 9/1/08 $35,194 $89,188
Alfred J. Thomas............ 66,000(4) 6.5% $.8479 9/1/08 $35,194 $89,188
Ralph J. Daigle............. 60,000(4) 5.9% $.8479 9/1/08 $31,994 $81,080
Robert R. Brooksher......... 38,000(4) 3.8% $.8479 9/1/08 $20,263 $51,351
</TABLE>

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

(1) Based on actual option term (three years for options granted to Messrs.
Hodgkinson, Leuschner and Bourgeois, and ten years for options granted to
Messrs. Goodson, Thomas, Daigle and Brooksher ) and annual compounding at
rates shown. Because the exercise prices of options granted equaled the fair
market value of our common stock on the date of grant, the potential
realizable value at 0% is nil.

(2) These are incentive stock options, to the extent allowed by tax law,
previously granted under our 1995 and 1996 plans that, in connection with
the merger with American, have been amended as to exercise price and expiry
date and are now governed under our 1998 incentive plan. See "Certain
Relationships and Related Transactions -- Merger with American -- Amendment
of Stock Options" (page 41).

(3) These are incentive stock options, to the extent allowed by tax law, granted
under our 1998 incentive plan in connection with the merger with American.
These options vested immediately upon grant. See "Certain Relationships and
Related Transactions -- Merger with American -- Grant of Stock Options"
(page 41).

(4) These are incentive stock options, to the extent allowed by tax law, granted
under our 1998 incentive plan, and vest and become exercisable in
approximately equal annual installments over a three-year period beginning
December 31, 1998. See "Certain Relationships and Related Transactions --
Merger with American -- Grant of Stock Options" (page 41).

Aggregated Option Exercises In Last Fiscal Year and Year-End Option
Values. The following table provides information concerning the number of
unexercised options and the value of in-the-money options held by the named
persons in the Summary Compensation Table as of December 31, 1998:

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FY-END IN-THE-MONEY OPTIONS (1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert L.
Hodgkinson............ -- -- 90,000 -- -- --
William C.
Leuschner........... -- -- 90,000 -- -- --
Ronald P. Bourgeois... -- -- 90,000 -- -- --
Charles T. Goodson.... -- -- 22,000 44,000 -- --
Alfred J. Thomas...... -- -- 22,000 44,000 -- --
Ralph J. Daigle....... -- -- 20,000 40,000 -- --
Robert R. Brooksher... -- -- 12,667 25,333 -- --
</TABLE>

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

(1) Value of in-the-money options calculated based on the closing price per
share of our common stock at December 31, 1998 ($0.813 per share) as
reported by the Nasdaq National Market System.

37
<PAGE> 39

Employment Contracts. On September 1, 1998, we entered into employment
agreements with the following directors and executive officers providing for the
following annual salaries:

<TABLE>
<CAPTION>
NAME SALARY
- ---- --------
<S> <C>
Charles T. Goodson....................................... $210,000
Alfred J. Thomas......................................... $210,000
Ralph T. Daigle.......................................... $180,000
Robert R. Brooksher...................................... $180,000
</TABLE>

Each of the employment agreements:

- has a term of three years with automatic one-year renewals thereafter
unless terminated,

- provides for termination with or without cause, with 12 months severance
provided in the event of termination without cause, and

- contains a non-competition agreement prohibiting the executive from
competing with the company during his employment and for one year after
termination of the agreement for cause or by the executive for any
reason.

In January 1999, Messrs. Goodson, Thomas, Daigle and Brooksher agreed to
temporarily reduce their annual salaries payable under the employment agreements
by one-third for an undetermined period of time due to the then economic
conditions in the oil and gas exploration and production industry.

Termination Agreements. In December 1998, we entered into agreements with
Messrs. Goodson, Thomas, Daigle and Brooksher providing for the payment of
severance benefits upon a "change in control" and termination of the executive's
employment. Each of the agreements continues until December 31, 2001; provided,
however, that beginning on January 1, 2002 and each January 1 thereafter, the
term of each of the agreements is automatically extended for one additional year
unless, not later than September 30 of the preceding year, we give notice of our
intent not to extend any of the agreements. Even if we timely give the notice,
each of the agreements will automatically be extended for 24 months beyond its
term if a "change in control" occurred during the term of any of the agreements.
If an executive's employment is terminated following a "change in control" other
than for cause or by an executive for good reason, the executive will be
entitled to:

- a lump sum cash payment equal to two multiplied by the sum of the
executive's then annual base salary and the executive's most recent
annual bonus;

- life insurance, health, disability and other welfare benefits for a
twenty-four month period; and

- if an executive becomes entitled to any severance benefits or other
payments or benefits under the agreements by reason of accelerated
vesting of stock options thereunder, and if any of the total benefits
will be subject to the excise tax, an additional cash payment to make the
executive whole for the excise tax liabilities such that the net amount
retained by the executive, after the deduction of any excise tax on the
total benefits and any federal, state and local income tax, excise tax
and FICA and Medicare withholding taxes upon the payment provided
hereunder, is equal to the total benefits.

The executive is not entitled to any benefits under each of the agreements if
the executive's employment terminates due to:

- executive's retirement at age 65,

- executive's total and permanent disability, or

- executive's death.

38
<PAGE> 40

In July 1999, the termination agreements were amended to exclude from the
definition of "change in control" designated transactions resulting in
consideration to the company or our stockholders having a value of less than a
$1.00 per share, unless the designated transaction is approved by two-thirds of
our voting securities.

INCENTIVE PLAN

We have adopted the 1998 Incentive Plan. The incentive plan is administered
by the compensation committee of our board of directors, currently consisting of
Robert L. Hodgkinson, Daniel G. Fournerat and Francisco A. Garcia. Subject to
the express provisions of the incentive plan, the committee is authorized to,
among other things, select grantees under the incentive plan and determine the
size, duration and type, as well as the other terms and conditions of each
incentive award. Key employees, including officers, consultants and outside
directors are eligible to participate in the incentive plan.

Under the incentive plan, the committee may grant incentive awards, which
can be any of the following:

- incentive stock options, as defined in Section 422 of the Internal
Revenue Code,

- "nonstatutory" stock options,

- reload options, and

- stock appreciation rights.

We may issue incentive awards under the incentive plan covering at any one
time an aggregate of 1,800,000 shares of our common stock. No more than
1,800,000 shares of our common stock will be available for incentive stock
options. As of September 30, 1999, options covering 1,060,300 shares of our
common stock were outstanding leaving 699,700 shares available for grant of
future incentive awards.

39
<PAGE> 41

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MERGER WITH AMERICAN

The Merger. On September 1, 1998, we completed the transaction to merge our
wholly owned subsidiary, Optima Energy (U.S.) Corporation, with American
Explorer, L.L.C. We also converted from a Canadian corporation to a Delaware
corporation and changed our name from Optima Petroleum Corporation to
"PetroQuest Energy, Inc."

Under the terms of the merger, we acquired 100% of the ownership interests
of American in exchange for 7,335,001 shares of our common stock and 1,667,001
contingent stock issue rights. The contingent stock issue rights entitle the
holders to receive 1,667,001 shares of our common stock if the trading price of
our common stock is $5.00 or higher for 20 consecutive trading days on or before
September 1, 2001. All of the shares of our common stock and common stock issue
rights issued in the merger were issued to the following persons who became our
officers and directors upon completion of the merger:

<TABLE>
<CAPTION>
CONTINGENT
SHARES OF STOCK ISSUE
NAME COMMON STOCK RIGHTS
- ---- ------------ -----------
<S> <C> <C>
Charles T. Goodson.......................................... 2,567,250 583,450
Alfred J. Thomas II(1)...................................... 1,309,298 297,560
Ralph J. Daigle............................................. 2,200,500 500,000
</TABLE>

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

(1) Does not include 487,778 shares or our common stock and 110,856 common stock
issue rights issued to Mr. Thomas' spouse and an aggregate of 770,175 shares
of our common stock and 175,035 common stock issue rights issued to Mr.
Thomas' adult children.

Robert R. Brooksher, who became a director and our chief financial officer
and secretary upon completion of the merger, holds a three year option from
Charles T. Goodson, Alfred J. Thomas, II, Janell B. Thomas, Alfred J. Thomas,
III, Blaine A. Thomas, Natalie A. Thomas and Ralph J. Daigle to acquire 5% of
the shares of our common stock and common stock issue rights issued in the
merger.

Election of Directors and Executive Officers. In the merger, the following
individuals were elected by the stockholders as additional directors and also
serve as our executive officers as explained below. William C. Leuschner and
Robert L. Hodgkinson continued to serve as our directors after the merger.

<TABLE>
<S> <C>
Charles T. Goodson -- President, Chief Executive Officer and
Director
Alfred J. Thomas, II -- Chief Operating Officer and Director
Ralph J. Daigle -- Senior Vice President -- Exploration
and Director
Robert R. Brooksher -- Chief Financial Officer, Secretary and
Director
Daniel G. Fournerat -- Director
</TABLE>

As a result of the merger, Messrs. Leuschner, Hodgkinson, Goodson, Thomas,
Daigle and Brooksher beneficially owned 10,585,384 shares, or 57.1%, of our
outstanding common stock. Before the merger, the former directors and executive
officers as a group beneficially owned 2,541,718 shares, or 23.1%, of our
outstanding common stock.

40
<PAGE> 42

Grant of Stock Options. In the merger, we granted incentive stock options
to certain of our directors, officers and employees under to the 1998 incentive
plan as follows:

<TABLE>
<CAPTION>
PERSON OR ENTITY SHARES OF OUR COMMON STOCK
- ---------------- --------------------------
<S> <C>
Ronald P. Bourgeos........................... 15,000(1)
Martin Abbot................................. 15,000(1)
Starbrite Developments, Ltd.................. 5,000(1)
Charles T. Goodson........................... 66,000(2)
Alfred J. Thomas, II......................... 60,000(2)
Ralph J. Daigle.............................. 60,000(2)
Robert R. Brooksher.......................... 38,000(2)
Daniel G. Fournerat.......................... 50,000(2)
Other employees as a group................... 232,300(2)
</TABLE>

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

(1) These options vested immediately on grant, have a term of three years and an
option price equal to the higher of (a) the weighted average trading price
of our common stock for the five business days immediately preceding the
amendment and (b) the closing price of our common stock on the business day
immediately prior to the amendment.

(2) These options vest one-third on each of December 31, 1998, 1999 and 2000,
have a term of 10 years and an option price equal to the higher of (a) the
weighted average trading price of our common stock from the five business
days immediately prior to the grant and (b) the closing price of our common
stock on the business day immediately prior to the grant.

Amendment of Stock Options. In the merger, options that were held by
optionees under the 1995 and 1996 stock option plans and were exercisable into
an aggregate of 465,000 shares of our common stock were amended to change the
exercise price and expiration date. The optionees holding these options included
the following:

<TABLE>
<CAPTION>
PERSON OR ENTITY SHARES OF OUR COMMON STOCK
- ---------------- --------------------------
<S> <C>
William C. Leuschner......................... 90,000
Robert L. Hodgkinson......................... 90,000
Ronald P. Bourgeois.......................... 75,000
Emile Stehelin............................... 65,000
Martin Abbott................................ 50,000
</TABLE>

These amended options vested immediately on amendment, have a term of three
years and an option price equal to the higher of (a) the weighted average
trading price of our common stock for the five business days immediately
preceding the amendment and (b) the closing price of our common stock on the
business day immediately prior to the amendment.

Acquisition of Working Interest in Valentine. In the merger, we acquired a
5% working interest in the Valentine Prospect from Colima Oil Company and 7804
Yukon, Inc. Colima is wholly owned by William C. Leuschner, our chairman of the
board and a director. Yukon was owned 51% by Emile D. Stehelin, our former
director, and 49% by Robert L. Hodgkinson, a current director. The total
purchase price for the 5% working interest was $675,300 with $270,120 paid to
Colima and $405,180 paid to Yukon. A portion of the purchase price, $325,300,
was paid with 200,000 shares of our common stock at a price of $1.6265 per
share. The shares are subject to a one-year holding period under Rule 144 of the
Securities Act of 1933. As of September 1998, Yukon is owned 100% by Mr.
Hodgkinson.

Termination of Employees and Management by American Explorer, Inc. In the
merger, the employees and consultants of Optima Petroleum Corporation were
terminated. American, which was acquired in the merger, has no employees. It was
managed, and its and certain of Optima's properties were operated by American
Explorer, Inc., a corporation owned by Charles T. Goodson, our president and
chief executive officer and a director, and Alfred J. Thomas, II, our chief
operating officer and a director, and

41
<PAGE> 43

both former members of American Explorer, L.L.C. From September 1, 1998 through
December 31, 1998, our properties were operated and certain management functions
were performed by American Explorer, Inc. The officers of American Explorer,
Inc. are also our officers. American Explorer, Inc. charges PetroQuest a
management fee to cover its costs of services ($600,000 for period from
September 1, 1998 to December 31, 1998). At December 31, 1998, we owed American
Explorer, Inc. approximately $1,053,000. This amount is included in our accounts
payable. After the transition period, we will assume the operating and
management functions from American Explorer, Inc. and their employees will
become our employees.

Hodgkinson Consulting and Termination Agreements. Under this consulting
agreement, we paid Hodgkinson Equities Corporation CDN $12,500 per month during
the year ended December 31, 1998 through the date of the merger for executive
services. The principal shareholder of Hodgkinson is Robert L. Hodgkinson, our
former president and chief executive officer and a current director. In the
merger, the agreement was terminated and we entered into a termination agreement
and a consulting agreement with Mr. Hodgkinson in August 1998. Under the
termination agreement, Mr. Hodgkinson received CDN $150,000 in severance and
received an additional CDN $100,000 and furnishings from our Vancouver office in
consideration for assuming the office and equipment leases for the Vancouver
office. Under the consulting agreement, Mr. Hodgkinson, through Hodgkinson
Equities Corporation, may provide consulting services at our request for a
three-year period after the merger at a rate of CDN $575 per day. The consulting
agreement may be terminated on 30 days' notice by either party.

Leuschner Consulting and Termination Agreements. Under this consulting
agreement, we paid Leuschner International Resources Ltd. CDN $12,500 per month
during the year ended December 31, 1998 through the date of the merger for
executive services. The chairman and principal shareholder of Leuschner is
William S. Leuschner, our chairman of the board. In the merger, the agreement
was terminated and we entered into a termination agreement and a consulting
agreement with Mr. Leuschner in August 1998. Under the termination agreement,
Mr. Leuschner received CDN $150,000 in severance and received an additional CDN
$100,000 in consideration for terminating the Calgary consultants and closing
the Calgary office. Under the consulting agreement, Mr. Leuschner, through
Leuschner International Resources Ltd., may provide consulting services at our
request for a three-year period following the date of the merger at a rate of
CDN $575 per day. The consulting agreement may be terminated on 30 days' notice
by either party. In the merger, we entered into a second consulting agreement
whereby Mr. Leuschner provides consulting services for a one-year period after
the merger for a total compensation of US $150,000. For the next two years, Mr.
Leuschner may provide consulting services at our request at a rate of US $1,000
per day. Under the second consulting agreement, Mr. Leuschner is reimbursed for
all reasonable traveling and other out-of-pocket expenses incurred in the
performance of his duties. The second consulting agreement may be terminated
only for cause following notice to Mr. Leuschner and expiration of a 30 day cure
period.

Bourgeois Consulting and Termination Agreements. Under this consulting
agreement, we paid Ronald P. Bourgeois,our former chief financial officer,
secretary and director, CDN $10,000 per month during the year ended December 31,
1998 through the date of the merger for executive services. In the merger, the
agreement was terminated and we entered into a termination agreement and a
consulting agreement with Mr. Bourgeois in August 1998. Under the termination
agreement, Mr. Bourgeois was paid a severance fee of CDN $120,000 and CDN $5,000
for a disability plan premium. Under the consulting agreement, Mr. Bourgeois may
provide consulting services at our request for a three-year period after the
merger at a rate of CDN $460 per day. The consulting agreement may be terminated
on 30 days' notice by either party. In the merger, we entered into a second
consulting agreement whereby Mr. Bourgeois provided consulting services for a
six-month period after the merger for compensation of US $7,500 per month. For
the next two-and-half years, Mr. Bourgeois may provide consulting services at
our request at a rate of US $460 per day. Under the second consulting agreement,
Mr. Bourgeois is reimbursed for all reasonable traveling and other out-of-pocket
expenses incurred in the performance of his duties. The second consulting
agreement may be terminated only for cause following notice to Mr. Bourgeois and
expiration of a 30 day cure period.

42
<PAGE> 44

OUTSIDE COUNSEL

Before the merger with American, Daniel G. Fournerat, who practices law
with the Lafayette, Louisiana law firm of Onebane, Bernard, Torian, Diaz,
McNamara & Abell, served as outside counsel to American Explorer, L.L.C., which
we acquired in the merger. After the merger, Mr. Fournerat has served as our
outside counsel.

TURTLE BAYOU FIELD INTEREST

On October 8, 1998, Messrs. Goodson Thomas, and Daigle contributed their
interests in a lease at the Turtle Bayou Field to the company in return for a
30% interest after payout of 100% of the related well cost. Messrs. Goodson,
Thomas and Daigle had previously acquired this lease in June 1995. We promoted
this interest to industry partners thereby reducing our cost in the well. A
producing well was drilled and completed on the lease. No amounts are currently
payable to Messrs. Goodson, Thomas and Daigle under this farmout agreement. No
cost was recorded for the contribution of this lease in our financial statements
because it was treated as an ordinary farmout agreement.

43
<PAGE> 45

PRINCIPAL STOCKHOLDERS

The following table presents certain information as of September 30, 1999,
as to

- each stockholder known by us to be the beneficial owner of more than five
percent of our shares of our common stock,

- each of our directors and executive officers, and

- all of our directors and executive officers as a group:

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
-----------------------------
NUMBER PERCENT OF CLASS
-------- ----------------
<S> <C> <C>
Charles T. Goodson(3)....................................... 3,202,700 13.2%
Cramer Rosenthal McGlynn, LLC(4)............................ 2,904,000 11.8%
707 Westchester Avenue
White Plains, New York 10604
Ralph J. Daigle(5).......................................... 2,720,600 11.3%
Alfred J. Thomas, II(6)..................................... 2,257,492 9.4%
William W. Rucks, IV(7)..................................... 705,000 3.0%
First National Bank Towers, Box 11
600 Jefferson Street, Suite 701
Lafayette, Louisiana 70505
William C. Leuschner(8)..................................... 702,779 3.0%
Robert L. Hodgkinson(9)..................................... 590,000 2.5%
Robert R. Brooksher(10)..................................... 494,367 2.1%
Francisco A. Garcia(11)..................................... 60,000 *
Daniel G. Fournerat(12)..................................... 16,667 *
All directors and executive officers as a group (9
persons)(3)(5)(6)(7)(8)(9)(10)(11) and (12)............... 10,299,505 40.2%
</TABLE>

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

* Less than 1%

(1) Except as otherwise indicated, all shares are beneficially owned, and the
sole investment and voting power is held, by the person named. This table
is based on information supplied by officers, directors and principal
stockholders and reporting forms, if any, filed with the Securities and
Exchange Commission on behalf of such persons.

(2) Unless otherwise indicated, the address of all beneficial owners of more
than five percent of the outstanding shares of common stock set forth above
is 625 E. Kaliste Saloom Road, Suite 400, Lafayette, Louisiana 70508.

(3) Includes (i) 2,567,250 shares of common stock directly held by Mr. Goodson,
(ii) 583,450 shares of common stock which may be directly held by Mr.
Goodson pursuant to contingent stock issue rights, (iii) 30,000 shares of
common stock indirectly held by American Explorer, Inc., a company in which
Mr. Goodson has 50% ownership, and (iv) 22,000 shares of common stock
issuable on the exercise of vested options. See "Certain Relationships and
Related Transactions -- Merger with American" (page 40).

(4) The beneficial owners of these shares of common stock have shared voting
and shared investment power to all of the shares of common stock are
reflected on Schedule 13G filed by Cramer Rosenthal McGlynn, LLC with the
Securities Exchange Commission on August 12, 1999. Includes four-year
warrants to purchase 968,000 of common stock at an exercise price of $1.25.

44
<PAGE> 46

(5) Includes (i) 2,200,500 shares of common stock directly held by Mr. Daigle,
(ii) 500,100 shares of common stock which may be directly held by Mr.
Daigle pursuant to contingent stock issue rights and (iii) 20,000 shares of
common stock issuable on the exercise of vested options. See "Certain
Relationships and Related Transactions -- Merger with American" (page 40).

(6) Includes (i) 1,309,298 shares of common stock directly held by Mr. Thomas,
(ii) 297,560 shares of common stock which may be directly held by Mr.
Thomas pursuant to contingent stock issue rights, (iii) 487,778 shares of
common stock directly held by his wife, Janell B. Thomas, (iv) 110,856
shares of common stock which may be held directly by his wife, Janell B.
Thomas, pursuant to contingent stock issue rights, (v) 30,000 shares of
common stock indirectly held by American Explorer, Inc., a company in which
Mr. Thomas has 50% ownership, and (vi) 22,000 shares of common stock
issuable on the exercise of vested options. See "Certain Relationships and
Related Transactions -- Merger with American" (page 40).

(7) Includes four-year warrants to purchase 225,000 shares of common stock at
an exercise price of $1.25.

(8) Includes shares held indirectly in the name of Leuschner International
Resources, Ltd., a company wholly owned by Mr. Leuschner and 120,000 shares
of common stock issuable on the exercise of vested options. See "Certain
Relationships and Related Transactions -- Merger with American." Includes
80,000 shares of common stock issued pursuant to the acquisition of a 5%
working interest in the Valentine prospect from Colima as to 2% and Yukon
as to 3%. See "Certain Relationships and Related Transactions -- Merger
with American" (page 40).

(9) Includes shares held indirectly through Hodgkinson Equities Corporation, a
company wholly owned by Mr. Hodgkinson, and 90,000 shares of common stock
issuable on the exercise of vested options. Includes 60,000 shares of
common stock issued pursuant to the acquisition of a 5% working interest in
the Valentine prospect from Colima Oil Company as to 2% and 7804 Yukon,
Inc. as to 3%. See "Certain Relationships and Related
Transactions -- Merger with American" (page 40).

(10) Includes (i) 31,600 shares of common stock directly held by Mr. Brooksher,
(ii) 366,750 shares of common stock which may be directly held by Mr.
Brooksher on the exercise of a vested option to acquire common stock from
Charles T. Goodson, Alfred J. Thomas, II, Janell B. Thomas, Alfred J.
Thomas, III, Blaine A. Thomas, Natalie A. Thomas and Ralph J. Daigle, (iii)
83,350 shares of common stock which may be directly held by Mr. Brooksher
pursuant to contingent stock issue rights on the exercise of a vested
option to acquire contingent stock issue rights from Charles T. Goodson,
Alfred J. Thomas, II, Janell B. Thomas, Alfred J. Thomas, III, Blaine A.
Thomas, Natalie A. Thomas and Ralph J. Daigle and (iv) 12,667 shares of
common stock issuable on the exercise of vested options. See "Certain
Relationships and Related Transactions -- Merger with American" (page 40).

(11) Includes four-year warrants to purchase 20,000 shares of common stock at an
exercise price of $1.25.

(12) Includes 16,667 shares of common stock issuable on the exercise of vested
options. See "Certain Relationships and Related Transactions -- Merger with
American" (page 40).

45
<PAGE> 47

SELLING STOCKHOLDERS

The following table sets forth certain information concerning each of the
selling stockholders. Assuming that the selling shareholders offer all of their
shares of our common stock, the selling stockholders will not have any
beneficial ownership except as otherwise provided in the table below. The shares
are being registered to permit the selling stockholders to offer the shares for
resale from time to time. See "Plan of Distribution."

<TABLE>
<CAPTION>
NUMBER OF SHARES
OWNED AND TO BE NUMBER OF NUMBER OF PERCENTAGE OF
OWNED PRIOR TO SHARES BEING SHARES OWNED SHARES OWNED
SELLING SHAREHOLDERS OFFERING(1) OFFERED(1) AFTER OFFERING(2) AFTER OFFERING(2)
-------------------- ---------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
CRM Partners, LP(3).................. 696,000 696,000 0 *
7804 Yukon Ltd.(4)................... 675,000 675,000 0 *
William W. Rucks, IV(4).............. 705,000 675,000 30,000 *
R. Chaney & Partners IV, L.P.(5)..... 600,000 600,000 0 *
CRM 1998 Enterprise Fund II, LLC(6).. 525,000 525,000 0 *
CRM Retirement Partners, LP(7)....... 509,250 509,250 0 *
Connaught Global Limited(8).......... 300,000 300,000 0 *
CRM Madison Partners, LP(9).......... 272,250 272,250 0 *
Andrew M. Lessman(10)................ 225,000 225,000 0 *
Ingelside Company(10)................ 225,000 225,000 0 *
CRM 20/20 Fund, LLC(10).............. 225,000 225,000 0 *
Gerald Cramer(10).................... 225,000 225,000 0 *
Ironman Energy Capital(10)........... 225,000 225,000 0 *
Vivaldi, LLC(10)..................... 225,000 225,000 0 *
MM & B Holdings, LLC(11)............. 195,000 195,000 0 *
Apex Investment Fund Limited(12)..... 150,000 150,000 0 *
BSR Investments Ltd.(12)............. 150,000 150,000 0 *
Jay B. Langner(12)................... 150,000 150,000 0 *
Michael P. Marcus(12)................ 150,000 150,000 0 *
E. Wayne Nordberg(12)................ 150,000 150,000 0 *
Investors Administration Services,
Inc.(8)............................ 100,000 100,000 0 *
Michael D. Bodino(13)................ 93,750 93,750 0 *
Kenneth R. Etheredge(13)............. 93,750 93,750 0 *
Bruce E. Lazier(13).................. 93,750 93,750 0 *
San Jacinto Securities, Inc.(13)..... 93,750 93,750 0 *
Pamela Equities Corp.(14)............ 90,000 90,000 0 *
Edward J. Rosenthal Profit Sharing
Plan(15)........................... 75,000 75,000 0 *
LAD Equity Partners, LP(15).......... 75,000 75,000 0 *
Robert Rehme(15)..................... 75,000 75,000 0 *
Nelson J. Luria, Trustee u/a dated
12/18/79(15)....................... 75,000 75,000 0 *
FBO Samuel S. Nordberg and Anna L.
Nordberg(15).......................
The Laurence B. Flood Trust Dated
5/10/96(15)........................ 75,000 75,000 0 *
Cramer Rosenthal McGlynn LLC(16)..... 67,500 67,500 0 *
CRM 1998 Enterprise Fund, LLC(17).... 60,000 60,000 0 *
Francisco A. Garcia(17).............. 60,000 60,000 0 *
Kabuki Partners ADP, G.P.(17)........ 60,000 60,000 0 *
</TABLE>

46
<PAGE> 48

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

* Less than 1%.

(1) Ownership is determined in accordance with Rule 13d-3 under the Exchange
Act. The actual number of shares beneficially owned and offered for sale is
subject to adjustment and could be materially less or more than the
estimated account indicated depending upon factors which we cannot predict
at this time.

(2) Assumes the sale of all of the shares offered hereby to persons who are not
affiliates of the selling shareholders.

(3) Includes warrants to purchase 232,000 shares of common stock at an exercise
price of $1.25 per share.

(4) Includes warrants to purchase 225,000 shares of common stock at an exercise
price of $1.25 per share.

(5) Includes warrants to purchase 200,000 shares of common stock at an exercise
price of $1.25 per share.

(6) Includes warrants to purchase 175,000 shares of common stock at an exercise
price of $1.25 per share.

(7) Includes warrants to purchase 169,750 shares of common stock at an exercise
price of $1.25 per share.

(8) Includes warrants to purchase 100,000 shares of common stock at an exercise
price of $1.25 per share.

(9) Includes warrants to purchase 90,750 shares of common stock at an exercise
price of $1.25 per share.

(10) Includes warrants to purchase 75,000 shares of common stock at an exercise
price of $1.25 per share.

(11) Includes warrants to purchase 65,000 shares of common stock at an exercise
price of $1.25 per share.

(12) Includes warrants to purchase 50,000 shares of common stock at an exercise
price of $1.25 per share.

(13) Includes warrants to purchase 93,750 shares of common stock at an exercise
price of $1.25 per share.

(14) Includes warrants to purchase 30,000 shares of common stock at an exercise
price of $1.25 per share.

(15) Includes warrants to purchase 25,000 shares of common stock at an exercise
price of $1.25 per share.

(16) Includes warrants to purchase 22,500 shares of common stock at an exercise
price of $1.25 per share.

(17) Includes warrants to purchase 20,000 shares of common stock at an exercise
price of $1.25 per share.

(18) Includes warrants to purchase 17,500 shares of common stock at an exercise
price of $1.25 per share.

(19) Includes warrants to purchase 12,500 shares of common stock at an exercise
price of $1.25 per share.

(20) Includes warrants to purchase 10,000 shares of common stock at an exercise
price of $1.25 per share.

(21) Includes warrants to purchase 5,000 shares of common stock at an exercise
price of $1.25 per share.

47
<PAGE> 49

PLAN OF DISTRIBUTION

This prospectus covers the resale of shares of our common stock by the
selling stockholders. The selling stockholders may sell their shares of common
stock under this prospectus:

- through one or more broker-dealers acting as either principal or agent;

- through underwriters;

- directly to investors; or

- any combination of these methods.

The selling stockholders will fix a price or prices, and they may change
the price, of the shares of common stock offered based upon:

- market prices prevailing at the time of sale;

- prices related to those market prices; or

- negotiated prices.

These sales may be effected in one or more of the following transactions
(which may involve crosses and block transactions):

- on any securities exchange or U.S. inter-dealer system of a registered
national securities association on which the common stock may be listed
or quoted at the time of sale;

- in the over-the-counter market;

- in private transactions;

- through the writing of options, whether the options are listed on an
option exchange or otherwise; or

- through the settlement of short sales.

Broker-dealers, underwriters or agents may receive compensation in the form
of discounts, concessions from the selling stockholder or the purchasers. These
discounts, concessions or commissions may be more than those customary for the
transaction involved. If any broker-dealer purchases the shares of common stock
as principal, it may effect resales of the shares through other broker-dealers,
and other broker-dealers may receive compensation from the purchasers for whom
they act as agents.

To comply with the securities laws of some states, if applicable, the
shares may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the shares may not be sold
unless they have been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied with.

The selling stockholders and any underwriters, broker-dealers or agents
that participate in the sale of the shares may be "underwriters" within the
meaning of the Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling stockholders who are
"underwriters" within the meaning of the Securities Act will be subject to the
prospectus delivery requirements of the Securities Act.

Any shares covered by this prospectus which qualify for sale under Rule 144
of the Securities Act may be sold under Rule 144 rather than under this
prospectus. A selling stockholder may not sell any shares described in this
prospectus and may not transfer, devise or gift these securities by other means
not described in this prospectus.

To the extent required, the specific shares to be sold, the names of the
selling stockholders, the respective purchase prices and public offering prices,
the names of any agent, dealer or underwriter, and any applicable commissions or
discounts with respect to a particular offer will be set forth in an

48
<PAGE> 50

accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement of which this prospectus is a part.

Under the registration rights agreement, we have agreed to indemnify the
selling stockholders and each underwriter, if any, against certain liabilities,
including certain liabilities under the Securities Act, or will contribute to
payments the selling stockholders or underwriters may be required to make in
respect of those liabilities.

We have agreed to pay substantially all of the expenses in connection with
the registration, offering and sale of the shares covered by this prospectus,
other than commissions, fees and discounts of underwriters, brokers, dealers and
agents.

We have agreed to keep the registration statement, of which this prospectus
is a part, effective until August 31, 2004, subject to extension for any
suspension or blackout periods during which shares covered by this prospectus
can not be sold.

49
<PAGE> 51

DESCRIPTION OF OUR CAPITAL STOCK

The following description of certain of our securities is qualified by
reference to our certificate of incorporation and bylaws which are available
upon request.

Our authorized capital stock consists of 75,000,000 shares of common stock,
par value $.001 per share, and 5,000,000 shares of preferred stock, par value
$.001 per share.

COMMON STOCK

Holders of shares of our common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders. Except as required by
applicable law, common stockholders do not vote separately as a class, but vote
together with the holders of outstanding shares of other classes of voting
capital stock. There is no right to cumulate votes for the election of
directors. Stockholders holding a majority of the voting power of the capital
stock issued and outstanding and entitled to vote, represented in person or by
proxy, are necessary for a quorum at any meeting of our stockholders, and the
vote by the holders of a majority of those outstanding shares is required to
effect certain fundamental corporate changes such as amendments to the
certificate of incorporation, liquidations, mergers or sales of all or
substantially all of our assets.

Holders of shares of our common stock are entitled to receive dividends,
when and if declared by the board of directors out of funds legally available
for that purpose, subject to the rights of outstanding shares of preferred
stock. Our existing credit facility prohibits payment of common stock dividends
without the bank's consent. On liquidation, holders of shares of our common
stock are entitled to share ratably in all our assets remaining after payment of
liabilities, subject to rights of any outstanding shares of preferred stock.
Holders of shares of our common stock have no conversion, redemption or
preemptive rights.

PREFERRED STOCK

Under our certificate of incorporation, the board of directors has the
power to issue shares of our preferred stock without stockholder approval. Our
board can issue up to 5,000,000 shares of preferred stock in one or more series
and can determine, for any series of preferred stock, the terms and rights of
the series, including:

- the number of shares and designation of the series,

- the rate and time at which dividends will be payable on the shares of the
series, and the status of the dividends as cumulative or non-cumulative
and as participating or non-participating,

- the voting rights, if any, for shares of the series,

- any prices, times and terms at or on which shares of the series may be
redeemed,

- any rights and preferences of shares of the series upon any liquidation,
dissolution or winding up of our affairs or any distribution of our
assets,

- any rights to convert shares of the series into, or exchange shares of
the series for, shares of any other class of our stock,

- the terms of any retirement or sinking fund for shares of the series,

- any conditions or restrictions on our indebtedness or issuance of
additional stock, and

- any other powers, preferences, and relative, participating, optional and
other special rights and limitations.

Any issuance of our preferred stock may adversely affect the voting powers
or other rights of holders of our common stock and may have the effect of
delaying or preventing a change in control of our company.

50
<PAGE> 52

CONTINGENT STOCK INTEREST RIGHTS

In the merger with American, we issued 1,667,001 contingent stock issue
rights. The contingent stock issue rights entitle the holders to receive
1,667,001 shares of our common stock if the trading price per share of the
common stock is $5.00 or higher for 20 consecutive trading days on or before
September 1, 2001. Holders of contingent stock issue rights generally will have
no voting or other rights as stockholders until those contingent stock issue
rights convert, if at all, to shares of our common stock. The contingent stock
issue rights are generally not transferable other than to Robert R. Brooksher.
See "Certain Relationships and Related Transactions -- Merger with American
-- The Merger" (page 40). The contingent stock issue rights are subject to
adjustment on the occurrence of certain events including stock dividends, stock
splits and combinations, and reclassifications of our common stock. If we are a
party to a consolidation, merger or sale of all or substantially all of our
assets and as a result shares of our common stock are converted into the right
to receive stock, securities or other property, each contingent stock issue
right thereafter will convert, if at all, into the shares, securities or other
property to be received in the transaction by a holder of the number of shares
of common stock for which the contingent stock issue rights were convertible
immediately before the transaction. Our board of directors will also make good
faith adjustments to the conditions to the conversions of the contingent stock
issue rights to maintain as nearly as reasonable practicable the parties'
intent.

WARRANTS

In the private placement of 5,000,000 units to accredited investors in
August 1999, we issued to the unit purchasers warrants to purchase up to
2,500,000 shares of our common stock. We also issued to the placement agents
warrants to purchase 500,000 shares of our common stock. Holders of the
warrants, generally will have no voting or other rights as stockholders until
they exercise their respective warrants. Each warrant is exercisable to purchase
one-half of a share of our common stock, at an initial price of $1.25 per share,
which may be adjusted under certain circumstances. The warrants issued to the
purchasers of units may be exercised in whole or in part within four years of
issuance, and upon delivery of written notice of exercise and payment of the
total exercise price of the shares purchased. The warrants issued to the
placement agents are similarly exercised but are exercisable for a five year
period. The number of shares of our common stock to be issued upon exercise is
calculated to the nearest full shares. No fractional shares or securities
representing fractional shares of our common stock are issuable upon exercise.
Any fractional shares resulting from exercise are paid in cash based on the
current market price of our common stock at the close of business on the first
business day before the exercise date.

If we are a party to a capital reorganization, merger, consolidation, or
sale of all or substantially all of our assets, reclassification of our common
stock or our reorganization which results in shares of our common stock
converting into the right to receive stock, securities or other property, each
warrant thereafter will be exercisable for the shares of stock and other
securities and property to be received in the transaction by a holder of the
number of shares of common stock for which the warrant was exercisable
immediately before the transaction.

If a split or subdivision of our common stock or a combination of our
common stock occurs, the number of underlying shares and the exercise price is
adjusted so as to preserve the relative rights, preferences, voting power and
position of the underlying shares relative to the other shares of our common
stock before such transaction. If we issue any shares of our common stock or any
other securities exercised or convertible into our common stock at a price per
share lower than the then exercise price, then the exercise price and number of
shares underlying the warrants is adjusted based on the dilutive effect of such
issuance.

We may repurchase the placement agent warrants upon prior written notice,
at a purchase price of $0.05 per warrant if the closing price per share of our
common stock is $3.00 or more for a period of 20 consecutive trading days at any
time during the term of the warrants. However, the holders of those

51
<PAGE> 53

warrants are entitled to exercise their respective warrants at any time during
the ten day period after receipt of the notice of our intent to repurchase the
warrants.

REGISTRATION RIGHTS

Under registration rights agreements, the holders of the securities listed
below are entitled to certain registration rights for the following number of
shares of our common stock:

<TABLE>
<CAPTION>
SHARES OF COMMON STOCK TYPE OF
TYPE OF SECURITY WITH REGISTRATION RIGHTS REGISTRATION RIGHTS
- ---------------- ------------------------ -------------------
<S> <C> <C>
Common stock.................................... 7,335,001 Piggy back
Contingent stock issue rights................... 1,667,001 Piggy back
</TABLE>

For a detailed description of these registration rights, see "Shares Eligible
for Future Sale" (page 54).

SPECIAL PROVISIONS OF OUR CHARTER, BYLAWS AND DELAWARE LAW

The following charter and bylaw provisions and provisions of Delaware law
may have the effect of delaying, deterring or preventing a change of control.

Authorization of Preferred Stock. As noted above, our board of directors,
without stockholder approval, has the authority under our certificate of
incorporation to issue preferred stock with rights superior to the rights of the
holders of our common stock. As a result, preferred stock

- could be issued quickly and easily;

- could adversely affect the rights of holders of our common stock; and

- could be issued with terms calculated to delay or prevent a change of
control or make removal of management more difficult.

Election and Removal of Directors. Our charter and bylaws provide that
directors may be removed only for cause. This system of removing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of our company and may maintain the incumbency of
the board of directors, as it generally makes it more difficult for stockholders
to replace a majority of directors.

Stockholder Meetings and Written Consent. Under our bylaws, a special
meeting of the stockholders may be called by:

- the board of directors by written order of a majority of the board;

- the chairman of the board;

- the chief executive officer;

- the president; or

- the stockholders by the written request of not less than two-thirds of
our common stock entitled to vote at such meeting.

Our certificate of incorporation provides that the stockholders may not act by
written consent and, accordingly, can only act at a meeting.

Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by the board of directors or its
committees.

Indemnification. Delaware law authorizes Delaware corporations to limit or
eliminate the personal liability of directors for monetary damages for breach of
a director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations authorized

52
<PAGE> 54

by Delaware law, directors of Delaware corporations are accountable to those
corporations and their stockholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Delaware
law enables Delaware corporations to limit available relief to equitable
remedies such as injunction or rescission. Our certificate of incorporation
limits the liability of our directors to us or our stockholders to the fullest
extent Delaware law permits, and no member of our board is personally liable for
monetary damages for breach of the member's fiduciary duty as a director, except
for liability:

- for any breach of the member's duty of loyalty to us or our stockholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or

- for any transaction from which the member derived an improper personal
benefit.

This provision may discourage derivative litigation against our directors and
may discourage or deter our stockholders or management from bringing a lawsuit
against our directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the company and our
stockholders. Our bylaws provide indemnification to our officers and directors
and other specified persons with respect to their conduct in various capacities,
and we have entered into agreements with each of our directors and executive
officers which indemnify them to the fullest extent Delaware law and our
certificate of incorporation permit.

TRANSFER AGENT AND REGISTRAR

Montreal Trust is the transfer agent and registrar for our common stock.

53
<PAGE> 55

SHARES ELIGIBLE FOR FUTURE SALE

Assuming the exercise of the warrants, the underlying shares of which are
being registered for resale under this prospectus, we would have 26,577,347
shares of our common stock outstanding as of September 30, 1999. Of these
shares, approximately 18,068,000 are freely tradeable with the remaining shares
constituting "restricted securities" within the meaning of Rule 144 promulgated
under the Securities Act.

In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the acquisition date of the restricted securities
from either the company or our affiliate, a person is entitled to sell within
any three-month period a number of restricted securities which does not exceed
the greater of:

- one percent of the then outstanding shares of our common stock, and

- the average weekly trading volume of our common stock during a preceding
period of four calendar weeks.

Sales under Rule 144 are also subject to certain provisions as to the
manner of sale, notice requirements and the availability of current public
information about us. Under Rule 144, if a period of at least two years has
elapsed since the later of the date restricted securities were acquired from the
company or our affiliate, a stockholder who is not an affiliate of the company
at the time of sale and has not been an affiliate for at least three months
prior to the sale is entitled to sell shares of our common stock in the public
market immediately without compliance with the Rule 144 requirements. Persons
who may be treated as our affiliates generally include persons that control, are
controlled by, or are under common control with our company, and may include
certain of our officers, directors as well as our principal stockholders. Rule
144 does not require the same person to have held the restricted securities for
the applicable periods under certain circumstances. The foregoing summary of
Rule 144 is not intended to be a complete description.

In the merger with American, we granted certain registration rights to
persons who received an aggregate of 7,335,001 shares of our common stock and
1,667,001 contingent stock issue rights in the merger. The contingent stock
issue rights entitle the holders to receive 1,667,001 shares our common stock if
the trading price per share for our common stock is $5.00 or higher for 20
consecutive trading date on or before September 1, 2001. The registration rights
provide the holders of this common stock and the common stock underlying the
contingent stock issue rights the right to participate in registrations of our
common stock by the company for our own account or the account of our
stockholders. Accordingly, these persons were entitled to participate in this
registration. However, these persons agreed to waive their rights to participate
in this registration, while preserving their rights as to future registrations.

We filed a registration statement on Form S-8 under the Securities Act to
register 1,800,000 shares of our common stock reserved or to be available for
issuance under our 1998 incentive plan. At September 30, 1999, options to
purchase a total of 1,060,300 shares of our common stock were outstanding,
leaving a total of 699,700 available for grant of incentive awards under our
incentive plan. Shares of our common stock issued under our incentive plan
generally are available for sale in the open market by holders who are not our
affiliates and, subject to volume and other limitations of Rule 144, by holders
who are affiliates of the company.

We may issue additional restricted securities or register additional shares
of our common stock under the Securities Act in the future for use in connection
with future acquisitions. Under Securities Act Rule 145, the volume limitations
and certain other requirements of Rule 144 will apply to resales of these shares
by affiliates of the businesses acquired for a period of one year from the
acquisition date, or such shorter period as the Securities and Exchange
Commission may prescribe. Otherwise these shares generally will be freely
tradable after their issuance by persons who are not our affiliates, unless we
contractually restrict their sale.

54
<PAGE> 56

The market price of our common stock could decrease because of sales of a
large number of shares in the open market after this offering or the perception
that those sales could occur. These factors also could make it more difficult
for the company to raise funds through future offerings of our common stock.

LEGAL MATTERS

The validity of the shares of our common stock offered in this prospectus
will be passed upon for us by Porter & Hedges, L.L.P., Houston, Texas.

EXPERTS

The audited consolidated financial statements as of December 31, 1998, and
for the year then ended of PetroQuest Energy, Inc. included in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in auditing and
accounting in giving said reports.

The consolidated financial statements of PetroQuest Energy, Inc. (formerly
Optima Petroleum Corporation) included in this prospectus and in the
registration statement have been audited by KPMG LLP, independent chartered
accountants, to the extent and for the periods set forth in their reports
appearing elsewhere herein and in the registration statement, and are included
herein in reliance upon such reports given upon the authority of said firm as
experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

This prospectus constitutes a part of a registration statement on Form S-1
that we filed with the SEC under the Securities Act. This prospectus, which
forms a part of the registration statement, does not contain all the information
set forth in the registration statement. You can read and copy the registration
statement and its related exhibits and schedules for further information with
respect to our company and the shares offered in this prospectus. Statements
contained in this prospectus concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
that document filed as an exhibit to the registration statement or otherwise
filed with the SEC and each such statement is qualified by this reference. The
registration statement and its exhibits and schedules may be inspected and
copied at the SEC's public reference rooms in Washington, D.C. New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.

We file annual, quarterly and current reports and other information with
the SEC. You can read and copy our filed reports, statements or other
information at the SEC's public reference rooms in Washington, D.C. New York,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our public filings are also
available from commercial document retrieval services and at the Internet World
Wide Web site maintained by the SEC at "http://www.sec.gov."

55
<PAGE> 57

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Auditors' Report to the Shareholders........................ F-3
Consolidated Balance Sheets of PetroQuest Energy, Inc. as of
December 31, 1998 and 1997................................ F-4
Consolidated Statements of Operations of PetroQuest Energy,
Inc. for the years ended December 31, 1998, 1997, and
1996...................................................... F-5
Consolidated Statements of Stockholders' Equity of
PetroQuest Energy, Inc. for the years ended December 31,
1998, 1997, and 1996...................................... F-6
Consolidated Statements of Cash Flows of PetroQuest Energy,
Inc. for the years ended December 31, 1998, 1997, 1996.... F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheets of PetroQuest Energy, Inc. as of
June 30, 1999............................................. F-21
Consolidated Statements of Operations of PetroQuest Energy,
Inc. for the six-month period ended June 30, 1999......... F-22
Consolidated Statements of Stockholders' Equity of
PetroQuest Energy, Inc. for the six-month period ended
June 30, 1999 ............................................ F-23
Consolidated Statements of Cash Flows of PetroQuest Energy,
Inc. for the six-month period ended June 30, 1999......... F-24
Notes to Consolidated Financial Statements.................. F-25
</TABLE>

F-1
<PAGE> 58

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
PetroQuest Energy, Inc.:

We have audited the accompanying consolidated balance sheet of PetroQuest
Energy, Inc. (a Delaware corporation, formerly Optima Petroleum Corporation) and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PetroQuest Energy, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

New Orleans, Louisiana
March 12, 1999

F-2
<PAGE> 59

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of PetroQuest Energy, Inc.
(formerly Optima Petroleum Corporation) as at December 31, 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
accessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and the results of its operations and their cash flows for the years ended
December 31, 1997 and 1996 in accordance with generally accepted accounting
principles.

KPMG LLP
Chartered Accountants

Vancouver, Canada
March 13, 1998 (except for Note 1,
for which the date is March 12, 1999)

F-3
<PAGE> 60

PETROQUEST ENERGY, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash...................................................... $ 1,081 $ 4,455
Accounts Receivable....................................... 1,016 1,643
Other Current Assets...................................... 177 --
-------- --------
Total Current Assets.............................. 2,274 6,098
-------- --------
Oil and Gas Properties
Oil and Gas Properties, Full Cost Method.................. 42,755 25,722
Unevaluated Oil and Gas Properties........................ 5,747 2,189
Accumulated Depreciation, Depletion and Amortization...... (31,079) (15,049)
-------- --------
Oil and Gas Properties, Net............................... 17,423 12,862
Plugging and Abandonment Escrow............................. 221 492
Other Assets................................................ 148 711
-------- --------
$ 20,066 $ 20,163
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Liabilities.................. $ 2,330 $ 607
Current portion of Long-term Debt......................... 2,400 --
-------- --------
Total Current Liabilities......................... 4,730 607
-------- --------
Commitments and Contingencies (Note 11)..................... -- --
Long-term Debt.............................................. 1,300 100
Other Liabilities........................................... 700 716
Stockholders' Equity
Common Stock.............................................. 19 32,450
Paid-in capital........................................... 43,795 528
Accumulated Deficit....................................... (30,478) (14,238)
-------- --------
Total Stockholders' Equity........................ 13,336 18,740
-------- --------
$ 20,066 $ 20,163
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE> 61

PETROQUEST ENERGY, INC.

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

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Oil and Gas Sales......................................... $ 3,263 $ 3,964 $ 7,963
Interest Income........................................... 114 181 19
-------- ------- -------
3,377 4,145 7,982
-------- ------- -------
Expenses:
Lease Operating Expenses.................................. 1,349 735 1,209
Production Taxes.......................................... 219 303 647
Depreciation, Depletion and Amortization.................. 2,801 3,133 4,202
Full Cost Ceiling Write-Down.............................. 13,431 1,820 --
General and Administrative Expenses....................... 1,779 1,222 1,220
Provision for Revenue Dispute............................. -- 740 --
Interest Expense.......................................... 116 136 502
Foreign Exchange Gain..................................... (99) (187) (2)
Gain on Sale of Canadian Properties....................... -- (952) --
Other Income.............................................. (52) -- --
-------- ------- -------
Net Income (Loss) Before Income Taxes....................... (16,167) (2,805) 204
Income Tax Expense -- Current............................... 73 109 35
Net Income (Loss)........................................... $(16,240) $(2,914) $ 169
======== ======= =======
Earnings (Loss) Per Common Share
Basic....................................................... $ (1.20) $ (0.26) $ 0.01
======== ======= =======
Diluted..................................................... $ (1.20) $ (0.26) $ 0.01
======== ======= =======
Average shares outstanding.................................. 13,528 11,160 10,946
======== ======= =======
Average shares outstanding assuming dilution................ 13,528 11,160 11,114
======== ======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE> 62

PETROQUEST ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
-------- ------- -------- -------------
<S> <C> <C> <C> <C>
December 31, 1995................................... $ 31,325 $ 528 $(11,493) $ 20,360
Exercises of options and warrants................... 1,827 2 -- 1,829
Issued to directors and consultants................. 29 -- -- 29
Sale of common stock................................ 3 -- -- 3
Net Income.......................................... -- -- 169 169
Treasury Stock Repurchases.......................... (75) (1) -- (76)
-------- ------- -------- --------
December 31, 1996................................... $ 33,109 $ 529 $(11,324) $ 22,314
Issued to directors and consultants................. 17 -- -- 17
Net Loss............................................ -- -- (2,914) (2,914)
Treasury stock repurchases.......................... (676) (1) -- (677)
-------- ------- -------- --------
December 31, 1997................................... $ 32,450 $ 528 $(14,238) $ 18,740
Conversion of Common Shares (Note 3):
Optima no par Shares Surrendered.................. (32,450) (528) -- (32,978)
PetroQuest Energy, Inc. $.001 par value Shares
Issued......................................... 11 32,967 -- 32,978
American Merger Issuance of Shares (Note 3)......... 8 10,828 -- 10,836
Net Loss............................................ -- -- (16,240) (16,240)
-------- ------- -------- --------
December 31, 1998................................... $ 19 $43,795 $(30,478) $ 13,336
======== ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-6
<PAGE> 63

PETROQUEST ENERGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... ($16,240) $ (2,914) $ 169
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization and full
cost ceiling write-down........................... 16,232 4,953 4,202
Gain on sale of Canadian oil and gas properties...... -- (952) --
Changes in working capital accounts:
Accounts receivable....................................... 1,174 159 611
Other current assets...................................... (6) -- (365)
Accounts payable and accrued liabilities.................. (229) (1,288) (386)
Provision for revenue dispute............................. -- 740 --
Plugging and abandonment escrow........................... (284) (132) (483)
Net working capital of Canadian oil and gas properties
sold................................................... -- (318) --
Other..................................................... 231 71 --
-------- -------- -------
Net cash provided by operating activities................... 878 319 3,748
-------- -------- -------
Cash flows from investing activities:
Investment in oil and gas properties...................... (3,612) (3,746) (5,804)
Sale of Canadian properties............................... -- 11,865 859
Debentures receivable..................................... -- -- 360
Cash cost of American merger transaction, net of cash
received (Note 3)...................................... (1,800) -- --
-------- -------- -------
Net cash provided by (used in) investing activities......... (5,412) 8,119 (4,585)
-------- -------- -------
Cash flows from financing activities:
Proceeds from borrowings.................................. 1,600 -- 211
Repayment of debt......................................... (440) (4,845) (605)
Repurchase of common stock................................ -- (645) 1,989
-------- -------- -------
Net cash provided by financing activities................... 1,160 (5,490) 1,595
-------- -------- -------
Net increase (decrease) in cash............................. (3,374) 2948 758
Cash balance beginning of period............................ 4,455 1,507 749
-------- -------- -------
Cash balance end of period.................................. $ 1,081 $ 4,455 $ 1,507
======== ======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 83 $ 109 $ 503
======== ======== =======
Income taxes........................................... $ 120 $ 136 $ 35
======== ======== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-7
<PAGE> 64

PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION

PetroQuest Energy, Inc. ("PetroQuest" or the "Company") is an independent
oil and gas company headquartered in Lafayette, Louisiana with an exploration
office in Houston, Texas. It is engaged in the exploration, development,
acquisition and operation of oil and gas properties onshore and offshore in the
Gulf Coast Region. PetroQuest and its predecessors have been active in this area
since 1986. The financial statements reflect the results of the Company and its
predecessor entity, Optima Petroleum Corporation ("Optima"), for all periods
presented.

The financial statements of Optima for the years ended December 31, 1997
and 1996 and previously issued to shareholders were prepared in Canadian dollars
and in accordance with Canadian generally accepted accounting principles with a
reconciliation to United States generally accepted accounting principles
included in the notes to the financial statements. In conjunction with the
relocation of the Company to the United States, the Company changed its
reporting currency to the U.S. dollar and changed its generally accepted
accounting principles from Canada to the United States. Consequently, the
comparative financial statements presented for the years ended December 31, 1997
and 1996 have been prepared in the U.S. dollars and in accordance with United
States generally accepted accounting principles.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principals of Consolidation

The Consolidated Financial Statements include the accounts of the Company
and its subsidiary, PetroQuest Energy, Inc., a Louisiana corporation (PetroQuest
(LA)). Additionally, PetroQuest (LA) owns 100% of the membership interests of
PetroQuest Energy One, L.L.C. All intercompany accounts and transactions have
been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Oil and Gas Properties

The Company utilizes the full-cost method of accounting, which involves
capitalizing all acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves, including the costs of drilling and
equipping productive wells, dry hole costs, lease acquisition costs and delay
rentals. The Company also capitalizes the portion of general and administrative
costs which can be directly identified with acquisition, exploration or
development of oil and gas properties. Costs associated with unevaluated
properties are excluded from amortization. Unevaluated property costs are
transferred to evaluated property costs at such time as wells are completed on
the properties, the properties are sold, or management determines these costs to
have been impaired. Cost of properties, including future development, site
restoration, dismantlement and abandonment costs, which have proved reserves and
those which have been determined to be worthless, are depleted on the units of
production method based on proved reserves. Additionally, the capitalized costs
of oil and gas properties cannot exceed the present value of the estimated net
cash flow from its proved reserves, together with the lower of cost or estimated
fair value of its undeveloped properties (the full cost ceiling). Transactions
involving sales of reserves in

F-8
<PAGE> 65
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

place, unless extraordinarily large portions of reserves are involved, are
recorded as adjustments to accumulated depreciation, depletion and amortization.

Upon the acquisition or discovery of oil and gas properties, management
estimates the future net costs to be incurred to dismantle, abandon and restore
the property using geological, engineering and regulatory data available. Such
cost estimates are periodically updated for changes in conditions and
requirements. Such estimated amounts are considered as part of the full cost
pool for purposes of amortization upon acquisition or discovery. Such costs are
capitalized as oil and gas properties as the actual restoration, dismantlement
and abandonment activities take place.

Other Assets

Other Assets consist primarily of loan costs which are amortized over the
life of the related loan.

Cash and Cash Equivalents

The Company considers all highly liquid investments in overnight securities
made through its commercial bank accounts, which result in available funds the
next business day, to be cash and cash equivalents. The Company holds a minimal
amount of cash denominated in Canadian dollars for settlement of Canadian
obligations incurred prior to the Merger (Note 3). The impact of exchange rate
changes on these amounts is insignificant and is included in results of
operations for all periods shown.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109.
Provisions for income taxes include deferred taxes resulting primarily from
temporary differences due to different reporting methods for oil and gas
properties for financial reporting purposes and income tax purposes. For
financial reporting purposes, all exploratory and development expenditures are
capitalized and depreciated, depleted and amortized on the future gross revenue
method. For income tax purposes, only the equipment and leasehold costs relative
to successful wells are capitalized and recovered through depreciation or
depletion. Generally, most other exploratory and development costs are charged
to expense as incurred; however, the Company may use certain provisions of the
Internal Revenue Code which allow capitalization of intangible drilling costs
where management deems appropriate. Other financial and income tax reporting
differences occur as a result of statutory depletion.

Natural Gas Imbalances

The Company follows an entitlement method of accounting for its
proportionate share of gas production on a well by well basis, recording a
receivable to the extent that a well is in an "undertake" position and
conversely recording a liability to the extent that a well is in an "overtake"
position.

At December 31, 1998, the Company had a net overtake position representing
8,341 Mcfs. There were no gas imbalances at December 31, 1997.

Certain Concentrations

During 1998 and 1997, 51% and 100% respectively, of the Company's oil and
gas production was sold to three customers. Based on the current demand for oil
and gas, the Company does not believe the loss of any of these customers would
have a significant financially disruptive effect on its business or financial
condition.

F-9
<PAGE> 66
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Currency Accounting

The Company's functional currency is the U.S. dollar. During 1998 and 1997,
substantially all of the Company's operations were domestic and recorded in the
Company's primary accounting records in U.S. dollars. The operations of Canadian
oil and gas properties prior to 1997 were translated into U.S. dollars at the
exchange rates in effect at the time of the related transactions. The
translation of Canadian dollar denominated monetary assets and liabilities as of
December 31, 1998 and 1997, are adjusted to reflect the exchange rates at the
balance sheet date. Exchange gains and losses arising from the translation of
Canadian dollar denominated assets and liabilities are included in the results
of operations for each period shown. The net Canadian dollar denominated
monetary assets included in the balance sheet at December 31, 1998, are
insignificant. Prior to the Merger (Note 3), Optima's reporting and functional
currency was the Canadian dollar.

Fair Value of Financial Instruments

The fair value of accounts receivable and accounts payable approximate book
value at December 31, 1998 and 1997 due to the short-term nature of these
accounts. The fair value of the note payable approximates book value due to the
variable rate of interest charged.

New Accounting Standards

In June 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income in the financial statements.
Comprehensive income is the total of net income and all other non-owner changes
in equity. SFAS No. 131 requires that companies disclose segment data based on
how management makes decisions about allocating resources to segments and
measuring their performance. SFAS Nos. 130 and 131 are effective for 1998. The
Company adopted these standards in 1998 with no effect on the Company's
financial statements, financial position or results of operations.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards that require every derivative instrument (including certain
derivative instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.

SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
and must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997 (and, at the company's election,
before January 1, 1998).

Because the Company does not currently use derivative instruments, the
adoption of SFAS No. 133 will not impact the Company's financial statements.

Earnings Per Common Share Amounts

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), Earnings per Share, which generally simplified the manner
in which earnings per share are

F-10
<PAGE> 67
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

determined. The Company adopted SFAS 128 effective December 15, 1997. All per
share amounts for each period presented were restated to reflect SFAS 128.

Basic earnings or loss per common share were computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings or loss per common share for 1996
was determined on a weighted average basis using common shares issued and
outstanding adjusted for the effect of stock options considered common stock
equivalents computed using the treasury stock method. The number of shares
excluded from calculation for 1996 because the exercise price exceeded the
average stock price for the period was insignificant. In 1998 and 1997, all
options were excluded from the computation of diluted loss per share because
they were antidilutive. The contingent stock rights assigned in connection with
the Merger are excluded from the calculation of diluted earnings per share.

NOTE 3 -- MERGER OF OPTIMA ENERGY (U.S.) CORPORATION

On September 1, 1998, the Company completed its previously announced
transaction to merge its wholly owned subsidiary Optima Energy (U.S.)
Corporation with American Explorer, L.L.C. (American). Concurrent with the
transaction, the Company became a Delaware corporation and converted each share
of Optima no par value common stock into one share of the Company's $.001 par
value common stock and changed its name from Optima Petroleum Corporation to
PetroQuest Energy, Inc. American conducted oil and natural gas exploration
activities in the Gulf Coast Region.

Under the terms of the transaction, American merged with the Company in
exchange for 7,335,001 shares of the Company's common stock, issued primarily to
the three former members of American, representing about 40% of the post
acquisition shares outstanding. Additionally, the Company issued to the members
of American and certain current officers of the Company 1,667,001 contingent
stock rights exchangeable for common shares should the market share price of the
Company's common stock exceed $5 per share for 20 consecutive trading days
during the three year term of the rights. The rights terminate on September 1,
2001. Should these rights become exchangeable, the Company would be required to
issue 1,667,001 shares, representing 8.30% of undiluted shares outstanding
(after conversion of the rights) at December 31, 1998, for no net proceeds.

The transaction was treated as a purchase for accounting purposes. No value
was assigned to the contingent stock rights. The purchase price of approximately
$10.6 million was allocated to the assets and liabilities based on estimated
fair value. Net assets acquired in the transaction were as follows:

<TABLE>
<S> <C>
Oil and gas properties.................................... $16,178
Working Capital........................................... (1,890)
Due to Optima............................................. (2,150)
Note Payable.............................................. (2,440)
Escrow funds and other.................................... 903
-------
$10,601
=======
</TABLE>

The purchase price in excess of the net book value of the net assets
acquired of $7.9 million was allocated to the Company's oil and gas properties.

The operating results of American have been consolidated in the Company's
statement of operations since September 1, 1998. The following summarized
unaudited proforma income statement data reflects the impact the transaction
would have had on the Company's results of operations for the years ended
December 31, 1998 and 1997 had the transaction occurred January 1, 1997. These
unaudited proforma results have been prepared for comparative purposes only and
do not purport to be indicative of the

F-11
<PAGE> 68
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts which actually would have resulted had the transaction occurred on
January 1, 1997, or which may result in the future.

<TABLE>
<CAPTION>
PROFORMA RESULTS FOR THE
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ---------
<S> <C> <C>
Revenues.................................................... $ 7,469 $10,872
======== =======
Net Loss.................................................... $ (8,357) $(2,554)
======== =======
Earnings per common share:
Basic..................................................... $ (0.45) $ (0.13)
======== =======
Diluted................................................... $ (0.45) $ (0.13)
======== =======
</TABLE>

Subsequent to the Merger, Optima Energy (U.S.) Corporation changed its name
to PetroQuest Energy, Inc. (a Louisiana corporation) and American Explorer,
L.L.C. changed its name to PetroQuest Energy One, L.L.C.

NOTE 4 -- LIQUIDITY

The Company's liquidity has been adversely affected by declines in prices
received for sales of oil and gas production. In order to fund its cash
requirements for operations and debt service, the Company plans to raise private
capital and to fund a substantial portion of its anticipated capital
expenditures through drilling ventures with industry partners; however, there is
no assurance that such plans will meet with success.

If the Company is unable to obtain additional financing, it could be forced
to delay or even abandon some of its exploration and development opportunities.
Furthermore, the Company may be required to sell some of its producing
properties in order to provide needed liquidity.

The Company obtained a non-recourse bank loan in 1999 to fund completion of
its High Island Block 494 property. Substantially all of the initial cash flows
from production at this property will be dedicated to payment of the bank loan
obtained to fund its completion.

NOTE 5 -- LONG-TERM DEBT

In connection with the Merger described in Note 3, the Company and its
lender amended American's reducing revolving line of credit to provide for
borrowings of up to $25 million, subject to a cap calculated on the Company's
borrowing base, as defined. At December 31, 1998, the borrowing base was $3.7
million and was fully funded. Each month the borrowing base is reduced by
$200,000. The borrowing base amount and the amount by which it will be reduced,
is established by the lender and is based on their evaluation of the Company's
oil and gas properties. The borrowing base is redetermined semi-annually on
February 1 and August 1 of each year. The result of the February 1, 1999
borrowing base review has not yet been determined. Interest under the loan is
payable monthly at prime plus 1/2% (9 1/4% at December 31, 1998). It is secured
by substantially all of the Company's oil and gas properties. A commitment fee
of .5% per annum on the unused available borrowing base is payable quarterly.
The line of credit agreement contains various covenants including restrictions
on additional indebtedness and dividends as well as maintenance of certain
financial ratios. The Company was not in compliance with one of these covenant
tests for the quarter ended December 31, 1998. The Company has obtained an
appropriate waiver of this violation from the bank.

F-12
<PAGE> 69
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Maturity of the credit facility over the next five years and thereafter is
as follows (in thousands):

<TABLE>
<S> <C>
1999....................................................... $2,400
2000....................................................... 1,300
2001....................................................... --
2002....................................................... --
2003 and thereafter........................................ --
------
$3,700
======
</TABLE>

NOTE 6 -- RELATED PARTY TRANSACTIONS

In conjunction with the Merger discussed at Note 3, the employees and
consultants of Optima were terminated. American had no employees. It was managed
and its properties (and certain of Optima's properties) were operated by
American Explorer, Inc. (AEI), a corporation owned by two officers of the
Company and former members of American. From September 1, 1998 through December
31, 1998, the Company's properties were operated by AEI and certain management
functions were performed by AEI. The officers of AEI are also the officers of
the Company. AEI charges the Company a management and overhead reimbursement fee
to cover its costs of services for the Company ($600,000 for the four months
ended December, 1998). Of this amount $365,000 was capitalized as part of the
acquisition, exploration and development effort (See Note 2). The remainder is
included in general and administrative expense. Accounts payable at December 31,
1998 includes $1,052,905 owed AEI. Accounts receivable at December 31, 1998
includes $798,800 due from AEI representing primarily accrued production
revenue. After the transition period, which was September 1, 1998 through
December 31, 1998, the Company will assume the operating and management
functions of AEI, whose employees will become employees of the Company.

Three of the officers of the Company contributed their interests in a lease
at the Turtle Bayou Field to the Company in return for a 30% interest after
payout of 100% of the related well cost. The Company promoted this interest to
industry partners thereby reducing its cost in the well. A producing well was
drilled and completed on the lease. No cost was recorded for the contribution of
this lease in the accompanying financial statements because it was treated as an
ordinary farmout agreement.

Certain officers and directors and their affiliates are working interest
owners in properties operated by the Company and are billed for and pay their
proportionate share of drilling and operating costs in the normal course of
business.

During 1998 and 1997, the Company was charged consulting expenses of
$124,500 and $301,700 respectively by companies owned by former directors.
Office expense includes $51,500 and $85,000 for 1998 and 1997 respectively paid
to a company owned by a former director.

F-13
<PAGE> 70
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- SEGMENT INFORMATION

Effective January 1, 1997, the Company sold substantially all of its
Canadian oil and gas interests for cash proceeds of approximately $12.3 million;
thus, material United States and Canada segment revenues and operating expenses
are included only in the 1996 results of operations as follows:

<TABLE>
<CAPTION>
CANADA UNITED STATES TOTAL
------ ------------- ------
<S> <C> <C> <C>
Oil and Gas Sales........................................... $2,016 $5,947 $7,963
Production Taxes............................................ 148 499 647
Lease Operating Expenses.................................... 538 669 1,207
------ ------ ------
Operating Income............................................ 1,330 4,779 6,109
Depreciation and Depletion.................................. 1,070 3,132 4,202
------ ------ ------
Unallocated costs:.......................................... 260 1,647 1,907
General and Administrative................................ 1,220
Interest Expense, net..................................... 483
Income Tax Expense........................................ 35
------
Net Income.................................................. $ 169
======
</TABLE>

NOTE 8 -- COMMON STOCK

Prior to the September 1, 1998, Merger of Optima Energy (U.S.) Corporation,
the Company had authorized 100,000,000 no par common shares. There were
11,002,346 common shares issued and outstanding at December 31, 1997. In
connection with the Merger, all no par common shares of the Company were
surrendered, and replaced by newly authorized and issued shares of $.001 par
value common shares of the Company. There were 75,000,000 shares authorized and
18,537,347 shares issued and outstanding at December 31, 1998.

F-14
<PAGE> 71
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9 -- INVESTMENT IN OIL AND GAS PROPERTIES

The following table discloses certain financial data relative to the
Company's evaluated oil and gas producing activities, which are located onshore
and offshore the continental United States: (amounts in thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Costs incurred during year:
Capitalized
Purchases of producing properties...................... $12,302
Exploration costs...................................... 104
Development costs...................................... 2,832
Plugging and abandonment costs......................... 1,357
Capitalized G & A Cost................................. 438
-------
$17,033 $ 2,739 $ 5,804
======= ======= =======
Oil and gas properties
Balance, beginning of period.............................. $25,722 $34,692 $29,747
Additions................................................. 17,033 2,739 5,804
Sales..................................................... -- (11,709) (859)
------- ------- -------
Balance, end of year...................................... $42,755 $25,722 $34,692
------- ------- -------
Accumulated depreciation, depletion and amortization
Balance beginning of period............................... $15,049 $12,166 $ 7,964
Provision for depreciation, depletion and amortization.... 2,599 3,133 4,202
Provision for ceiling write-down.......................... 13,431 1,820 --
Sales..................................................... -- (2,070) --
------- ------- -------
Balance, end of year...................................... 31,079 15,049 12,166
------- ------- -------
Net capitalized costs....................................... $11,676 $10,673 $22,526
======= ======= =======
DD&A per Mcfe (including provision for ceiling
write-down)............................................... $ 10.33 $ 2.68 $ 0.99
</TABLE>

At December 31, 1998 and 1997, unevaluated oil and gas properties with
capitalized costs of $5,747,000 and $2,189,000, respectively, were not subject
to depletion. Management expects that these properties will be evaluated over
the next one to three years.

The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" (the pool) as incurred, and
properties in the pool are depleted and charged to operations using the units of
production method based on the ratio of current production to total proved
future production. Additionally, the cost in excess of the net book value of
assets and liabilities acquired in the Merger with American of $7.9 million,
discussed above, is recorded in the pool at December 31, 1998, and is subject to
depletion or write-down. To the extent that costs capitalized in the pool (net
of accumulated depreciation, depletion and amortization) exceed the present
value (using a 10% discount rate) of estimated future net cash flow from proved
oil and natural gas reserves, and the lower of cost and fair value of unproved
properties, excess costs are charged to operations. Once incurred, a write-down
of oil and natural gas properties is not reversible at a later date even if oil
or natural gas prices increase. The Company was required to write-down its asset
base in 1998 due primarily to the cost in excess of net book value recorded in
the Merger with American and significant declines in oil prices during 1998.

F-15
<PAGE> 72
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- INCOME TAXES

The Company follows the provisions of SFAS No. 109, "Accounting For Income
Taxes," which provides for recognition of a deferred tax asset for deductible
temporary timing differences, operating loss carryforwards, statutory depletion
carryforwards and tax credit carryforwards net of a "valuation allowance." An
analysis of the Company's deferred taxes follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Net operating loss carryforwards............................ $ 4,094 $ 3,590
Statutory depletion carryforward............................ 195 --
Alternative minimum tax credit.............................. 4 --
Temporary differences:
Oil and gas properties -- full cost............... (1,563) (30)
------- -------
2,730 3560
Valuation allowance......................................... (2,730) (3,560)
------- -------
-- --
======= =======
</TABLE>

For tax reporting purposes, the Company had operating loss carryforwards of
$11,106 at December 31, 1998. If not utilized, such carryforwards would begin
expiring in 2001 and would completely expire by the year 2007. The Company had
available for tax reporting purposes $533 in statutory depletion deductions that
may be carried forward indefinitely. A valuation allowance is provided for that
portion of the tax asset for which it is deemed more likely than not that it
will not be realized. Due to the Company's recent losses, management has
provided a valuation allowance for the entire deferred tax asset.

The Company's effective tax rate differs from the statutory rate each year
because the Company was not able to recognize the tax benefit related to losses
under the SFAS No. 109 criteria. The Company's statutory rates used in
calculating tax attributes for 1998, 1997 and 1996 were 37%, 40% and 40%,
respectively. The change in the statutory rate for 1998 is due to the conversion
of the Company to a domestic tax paying entity (Note 3). Current income tax
expense relates to certain Canadian and domestic liabilities for which offsets
related to the Company's tax preference items is not available.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

S.W. HOLMWOOD

An appeal is currently pending before the United States Court of Appeals
for the Fifth Circuit from the decision of the United States District Court for
the Western District of Louisiana (Lake Charles Division) in the matter Amoco
Production Company v. The Meridian Resource & Exploration Company, No. 98-30724,
United States Court of Appeal for the Fifth Circuit which involves the Company's
Southwest Holmwood Prospect, Cameron Parish, Louisiana. The Company holds a
beneficial four percent (4%) working interest in the prospect by virtue of a
participation agreement with the defendant. Proceeding in the trial court
(instituted on July 11, 1996), resulted in judgment against the defendant
dissolving the oil and gas lease and the associated joint exploration agreement.
The trial judge further terminated the defendant's interest in two wells
effective July 26, 1996 and awarded post-termination production revenues to the
plaintiff. The claims of the plaintiff and the litigation are being actively and
aggressively defended by the defendant in the United States Court of Appeal.
Since the outcome of the litigation is indeterminable, the Company has recorded
100% of the cumulative net operating income to date aggregating to $700,000 in
other liabilities in its consolidated financial statements.

F-16
<PAGE> 73
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

WILDHAY

The Company is party to court proceedings in the Court of Queen's Bench of
the Province of Alberta commenced by a drilling contractor (on May 13, 1996),
Artisan Corporation, relative to the drilling of a well on behalf of the Company
and a joint venture partner. The Company has defended the proceedings and filed
a counter claim for breach of contract against Artisan Corporation and claims of
negligence against Artisan Corporation and Tuboscope Vetco Canada Inc. for an
amount which exceeds the claim of the drilling contractor. The Company's claim
includes thrown away costs and expenses for loss of the well and damages. The
well costs were included in Oil and Gas Properties at December 31, 1998.

ABANDONMENT

The Company maintains abandonment escrows that have been established for
future abandonment obligations of certain oil and gas properties of the Company.
The management of the Company believes the escrows will be sufficient to offset
those future abandonment liabilities; however, the Company is responsible for
any abandonment expenses in excess of the escrow balances. As of December 31,
1998, total estimated site restoration, dismantlement and abandonment costs were
approximately $4,195,000, net of expected salvage value.

NOTE 12 -- EMPLOYEE BENEFIT PLANS

Prior to the Merger, under the Company's stock option plan (the 1996 Plan),
750,000 common shares were reserved for issuance and outstanding options
exercisable into 730,000 common shares of the Company under the 1996 Plan as
well as outstanding options under the Company's previous plan (the 1995 Plan)
exercisable into 52,500 common shares of Optima. After the Merger, these options
(the Amended Options) under the 1995 and 1996 Plans became subject to the new
stock option plan described below. The new exercise price of the Amended Options
is the higher of the weighted average trading price of the common shares of
Optima for the 5 business days immediately prior to the amendment and the
closing price of the common shares of the closing price of the common shares of
Optima on the business day immediately prior to the amendment. The Amended
Options expire three years from the amendment but in no event greater than 10
years from the date of the original grant. All other options outstanding under
the 1995 and 1996 Plans were cancelled. The amendment and cancellation of the
options occurred on the closing date of the Merger.

In March, 1998, Management of the Company, in conjunction with the proposed
Merger, adopted a new stock option plan (the "New Plan") which was effective
upon the closing of the Merger in order to attract new management and retain key
employees. Key employees, including officers (whether or not they are
directors), and consultants of the Company and outside directors are eligible to
participate in the New Plan. Under TSE policies, a new plan was required to be
adopted in order to grant options in excess of those reserved under the 1996 and
1995 plans. The Company's stock option plans reserved 1,950,000 common shares
for issuance. Prior to the Merger, 787,000 common shares had been issued
pursuant to the exercise of options granted under the 1995 and 1996 Plans and
options exercisable into 782,500 shares were outstanding, leaving 380,500
options available for issuance. Under the New Plan, 1,800,000 common shares had
been allotted and reserved for future issuance.

On the closing of the Merger, options to purchase a total of 1,012,300
shares of Common Stock were outstanding. Of these options, 500,000 vested
immediately on grant, and 512,300 vest one third on each of December 31, 1998,
1999 and 2000. Options exercisable into 787,700 shares are available for future
grants.

Generally, options must be exercised within 10 years of the grant date and
may be granted only to employees, directors and consultants. The exercise price
of each option may not be less than 100% of the fair market value of a share of
Common Stock on the date of grant.

F-17
<PAGE> 74
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Upon a Change in Control of the Company, all outstanding options become
immediate exercisable.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which became effective with respect to the Company in 1996. Under
SFAS No. 123, companies can either record expense based on the fair value of
stock-based compensation upon issuance or elect to remain under the current
Accounting Principles Board Opinion No. 25 ("APB 25") method whereby no
compensation cost is recognized upon grant if certain requirements are met. The
Company is continuing to account for its stock-based compensation under APB 25.
However, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS No. 123 are presented below.

If the compensation cost for the Company's 1998, 1997 and 1996 grants for
stock-based compensation plans had been determined consistent with SFAS No. 123,
the Company's 1998, 1997 and 1996 net income and basic and diluted earnings per
common share would have approximated the pro forma amounts below (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
------------------- ------------------ -----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).................... $(16,240) $(17,182) $(2,914) $(3,467) $ 169 $ (384)
Earnings (loss) per common share:
Basic.............................. $ (1.20) $ (1.27) $ (0.26) $ (0.31) $0.01 $(0.04)
Diluted............................ $ (1.20) $ (1.27) $ (0.26) $ (0.31) $0.01 $(0.04)
</TABLE>

The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to grants prior to
1995, and additional awards in the future are anticipated. The contingent stock
rights assigned in connection with the Merger are excluded from the calculation
of pro forma net loss and loss per share.

A summary of the Company's stock options as of December 31, 1998, 1997 and
1996 and changes during the years ended on those dates is presented below.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
WGTD. WGTD. WGTD.
NUMBER AVG. NUMBER AVG. NUMBER AVG.
OF EXER. OF EXER. OF EXER.
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.... 1,163,000 $2.73 1,163,000 $2.87 942,500 $2.59
Granted............................. 1,012,300 0.84 -- -- 750,000 3.03
Expired/cancelled................... (1,163,00) 2.73 -- -- (15,000) 3.85
Exercised........................... -- -- -- -- (514,500) 2.60
---------- --------- ---------
Outstanding at end of year.......... 1,012,300 0.84 1,163,000 2.73 1,163,000 2.87
Options exercisable at year-end..... 694,100 0.84 1,163,000 2.73 1,163,000 2.87
Options available for future
grant............................. 787,700 -- --
Weighted average fair value of
options granted during the year... $ 0.58 -- $ 2.21
</TABLE>

The fair value of each option granted during the periods presented is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: (a) divided yield of 0% (b) expected volatility of
55.6%, (c) risk-free interest rate of 5.30% and 6.50% in 1998 and 1996,
respectively, and (d) expected life of 10 years for 1998 grants and 3 years for
1996 grants.

F-18
<PAGE> 75
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information regarding stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
RANGE OF OPTIONS WGTD. AVG. WGTD. AVG. OPTIONS WGTD. AVG.
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 CONTRACTUAL LIFE PRICE AT 12/31/98 PRICE
- -------- ----------- ---------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.84............................. 1,012,300 6.5 Years $0.84 694,100 $0.84
</TABLE>

NOTE 13 -- OIL AND GAS RESERVE INFORMATION -- UNAUDITED

A majority of the Company's net proved oil and gas reserves at December 31,
1998 have been estimated by independent petroleum consultants in accordance with
guidelines established by the Securities and Exchange commission ("SEC").
Accordingly, the following reserve estimates are based upon existing economic
and operating conditions at the respective dates.

There are numerous uncertainties inherent in estimating quantities of
proved reserves and in providing the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. In addition, the present values
should not be construed as the current market value of the Company's oil and gas
properties or the cost that would be incurred to obtain equivalent reserves.

The following table sets forth an analysis of the Company's estimated
quantities of net proved and proved developed oil (including condensate) and
gas, all located onshore and offshore the continental United States:

<TABLE>
<CAPTION>
OIL NATURAL
IN GAS
MBbls IN MMcf
----- -------
<S> <C> <C>
Proved reserves as of December 31, 1995..................... 748 32,954
Revisions of previous estimates............................. (77) (12,538)
Extensions, discoveries and other additions................. 745 4,088
Purchase of producing properties............................ 200 1,178
Sale of reserves............................................ (12) (1,976)
Production.................................................. (154) (3,309)
----- -------
Proved reserves as of December 31, 1996..................... 1,450 20,397
Revisions of previous estimates............................. (345) (2,065)
Extensions, discoveries and other additions................. -- 371
Purchase of producing properties............................ -- --
Sale of reserves............................................ (311) (15,254)
Production.................................................. (140) (1,002)
----- -------
Proved reserves as of December 31, 1997..................... 654 2,447
Revisions of previous estimates............................. (134) (602)
Extensions, discoveries and other additions................. 5 874
Purchase of producing properties............................ 63 8,891
Production.................................................. (84) (1,049)
----- -------
Proved reserves as of December 31, 1998..................... 504 10,561
===== =======
Proved developed reserves:
as of December 31, 1996................................... 996 19,258
===== =======
as of December 31, 1997................................... 554 2,333
===== =======
as of December 31, 1998................................... 275 7,722
===== =======
</TABLE>

F-19
<PAGE> 76
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables present the standardized measure of future net cash
flows related to proved oil and gas reserves together with changes therein, as
defined by the FASB. The oil, condensate and gas price structure utilized to
project future net cash flows reflects current prices at each year end and has
been escalated only where known and determinable price changes are provided by
contracts and law. Future production and development costs are based on current
costs with no escalations. No future income taxes were included in the
computation of standardized measure in 1998 and 1997 because the Company's tax
basis in oil and gas properties, along with its other tax preference attributes,
net, exceeded pretax estimated discounted future net cash flows. Estimated
future cash flows have been discounted to their present values based on a 10%
annual discount rate.

<TABLE>
<CAPTION>
STANDARDIZED MEASURE
DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Future cash flows.................................... $ 28,958 $ 16,235 $ 58,855
Future production and development costs.............. (14,208) (3,389) (12,827)
Future income taxes.................................. -- -- (1,079)
-------- -------- --------
Future net cash flows................................ $ 14,750 $ 12,846 $ 44,949
10% annual discount.................................. (3,074) (3,789) (14,644)
-------- -------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 11,676 $ 9,057 $ 30,305
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
CHANGES IN STANDARDIZED MEASURE
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure at beginning of year............ $ 9,057 $ 30,305 $ 21,607
Sales and transfers of oil and gas produced, net of
production costs................................... (1,752) (2,926) (6,107)
Changes in price, net of future production costs..... (3,350) (5,050) 16,147
Extensions and discoveries, net of future production
and development costs.............................. 850 480 13,404
Changes in estimated future development costs, net of
development costs incurred during this period...... 237 199 (1,826)
Revisions of quantity estimates...................... (1,592) (4,401) (16,821)
Accretion of discount................................ 906 3,107 2,161
Net change in income taxes........................... -- 1,068 (1,085)
Purchase of reserves in place........................ 7,566 -- 2,346
Sale of reserves in place............................ -- (10,007) (1,198)
Changes in production rates (timing) and other....... (246) (3,718) 1,677
-------- -------- --------
Standardized measure at end of year.................. $ 11,676 $ 9,057 $ 30,305
======== ======== ========
</TABLE>

F-20
<PAGE> 77

PETROQUEST ENERGY, INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash...................................................... $ 767 $ 1,081
Accounts Receivable....................................... 1,278 1,016
Other Current Assets...................................... 103 177
-------- --------
Total Current Assets.............................. 2,148 2,274
-------- --------
Oil and Gas Properties Oil and Gas Properties, Full Cost
Method.................................................... 47,422 42,755
Unevaluated Oil and Gas Properties........................ 5,449 5,747
Accumulated Depreciation, Depletion and Amortization...... (33,033) (31,079)
-------- --------
Net Oil and Gas Properties........................ 19,838 17,423
Plugging and Abandonment Escrow............................. 155 221
Other Assets................................................ 370 148
-------- --------
$ 22,511 $ 20,066
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable & Accrued Liabilities.................... $ 3,765 $ 2,330
Current Portion of Long-Term Debt......................... 2,935 2,400
-------- --------
Total Current Liabilities......................... 6,700 4,730
-------- --------
Accounts Payable to be Refinanced........................... 449 --
Long-term Debt.............................................. 2,550 1,300
Other Liabilities........................................... 700 700
Stockholders' Equity
Common Stock.............................................. 19 19
Paid-in Capital........................................... 43,829 43,795
Accumulated Deficit....................................... (31,736) (30,478)
-------- --------
Total Stockholders' Equity........................ 12,112 13,336
-------- --------
$ 22,511 $ 20,066
======== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-21
<PAGE> 78

PETROQUEST ENERGY, INC.

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Oil and Gas Sales......................................... $ 2,738 $ 1,107
Interest Income........................................... 40 128
----------- -----------
2,778 1,235
----------- -----------
Expenses:
Lease Operating Expenses.................................. 975 396
Production Taxes.......................................... 157 60
Depreciation, Depletion and Amortization.................. 2,012 1,355
General and Administrative................................ 711 596
Interest Expense.......................................... 191 5
Foreign Exchange (Gain)/Loss.............................. (10) (171)
----------- -----------
Loss from Operations........................................ (1,258) (1,006)
Income Tax Expense........................................ -- 9
----------- -----------
Net Loss.................................................... $ (1,258) $ (1,015)
=========== ===========
Earnings Per Common Share
Basic..................................................... (.06) (.09)
=========== ===========
Diluted................................................... (.06) (.09)
=========== ===========
Average shares outstanding.................................. 18,554,391 11,002,346
=========== ===========
Average shares outstanding assuming dilution................ 18,554,391 11,002,346
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-22
<PAGE> 79

PETROQUEST ENERGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
December 31, 1998.................................. $19 $43,795 $(30,478) $13,336
Options Exercised.................................. -- 34 -- 34
Net Loss........................................... -- -- (1,258) (1,258)
--- ------- -------- -------
June 30, 1999...................................... $19 $43,829 $(31,736) $12,112
=== ======= ======== =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-23
<PAGE> 80

PETROQUEST ENERGY, INC.

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss)................................................ $(1,258) $(1,015)
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation, Depletion and Amortization............. 2,012 1,355
Changes in Working Capital Accounts:
Accounts Receivable....................................... (262) (18)
Other Current Assets...................................... 168
Accounts Payable & Accrued Liabilities.................... 1,435 (246)
Loan Receivable........................................... (1,637)
Plugging and Abandonment Escrow........................... 66 472
Other..................................................... (374) (64)
------- -------
Net Cash Provided By (Used in) Operating Activities......... 1,787 (1,153)
------- -------
Cash flows from Investing Activities:
Investment in Oil and Gas Properties...................... (4,793) (1,060)
Sale of Oil and Gas Properties............................ 424
-------
Net Cash (Used in) Investing Activities..................... (4,369) (1,060)
------- -------
Cash Flows from Financing Activities:
Proceeds from Borrowings.................................. 2,399 3
Repayment of Debt......................................... (165) --
Options Exercised......................................... 34 --
------- -------
Net Cash Provided by Financing Activities................... 2,268 3
------- -------
Net Increase (Decrease) in Cash............................. (314) (2,210)
Cash Balance Beginning of Period............................ 1,081 3,980
------- -------
Cash Balance End of Period.................................. $ 767 $ 1,770
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 68 $ 5
======= =======
</TABLE>

The accompanying notes are an integral part of these statements.

F-24
<PAGE> 81

PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- INTERIM FINANCIAL STATEMENTS

The consolidated financial statements of PetroQuest Energy, Inc. (the
"Company") at June 30, 1999 and for the six- month period then ended are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
period. The financial statements reflect the results of the Company and its
predecessor entity, Optima Petroleum Corporation ("Optima"), for all periods
presented. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto, together with
management's discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The results of operations for the six- month period
ended June 30, 1999 are not necessarily indicative of future financial results.
Certain prior period amounts have been reclassified to conform to current period
presentation.

NOTE 2 -- MERGER OF OPTIMA (U.S.) ENERGY CORPORATION

On September 1, 1998, the Company completed its transaction to merge its
wholly owned subsidiary Optima Energy (U.S.) Corporation with American Explorer,
L.L.C. (American). Concurrent with the transaction, the Company became a
Delaware corporation and converted each share of Optima no par value common
stock into one share of the Company's $.001 par value common stock and changed
its name from Optima Petroleum Corporation to PetroQuest Energy, Inc. American
conducted oil and natural gas exploration activities in the Gulf Coast Region.

Under the terms of the transaction, American merged with the Company in
exchange for 7,335,001 shares of the Company's common stock, issued to the three
former members of American, representing about 40% of the post acquisition
shares outstanding. Additionally, the Company issued 1,667,001 contingent stock
rights exchangeable for common shares should the market share price of the
Company's common stock exceed $5 per share for 20 consecutive trading days
during the three year term of the rights. The rights terminate on September 1,
2001.

The operating results of American have been consolidated in the Company's
statement of operations since September 1, 1998. The following summarized
unaudited income statement data reflects the impact the transaction would have
had on the Company's results of operations for the six- months ended June 30,
1998 had the transaction occurred January 1, 1998.

<TABLE>
<CAPTION>
PROFORMA RESULTS
FOR THE
SIX MONTHS ENDED
JUNE 30, 1998
----------------
(UNAUDITED)
<S> <C>
Revenues............................................ $ 4,422
=======
Net Loss............................................ $(1,514)
=======
Loss per common share:
Basic............................................. (0.08)
=======
Diluted........................................... (0.08)
</TABLE>

F-25
<PAGE> 82
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- EARNINGS PER SHARE

Basic net income per share of common stock was calculated by dividing net
income applicable to common stock by the weighted-average number of common
shares outstanding during the period. For the period, options of 21,391 shares
for the six month period were excluded from the computation of diluted loss per
share because they were antidilutive. The contingent stock rights assigned in
connection with the merger are excluded from the calculation of diluted earnings
per share.

NOTE 4 -- LONG-TERM DEBT

In April 1999, the Company's borrowing base was redetermined and set at
$3,350,000. It reduced $150,000 on May 1, 1999 and June 1, 1999. Beginning July
1, 1999 and continuing on the first day of each month thereafter, the borrowing
base shall be reduced by $250,000. The next redetermination is scheduled for
September 1, 1999. Interest under the loan is payable monthly at prime plus
1/2% (8 1/4% at June 30, 1999).

On April 21, 1999, the Company entered into a loan agreement for
non-recourse financing to fund completion, flow line and facility costs of its
High Island Block 494 property. The property is security for the loan. Interest
is payable at 12% and the lender receives a 2 1/2% overriding royalty interest
in the property. For the first three production months, all of the cash flow
from the property will be dedicated to payment of principal and interest on the
loan. Subsequently, 85% of the cash flow from the property (assuming certain
production levels) will be dedicated to debt service. The well began producing
during the first part of July 1999. At June 30, 1999, $449,446 of vendor
payables related to the completion, flow line, and facilities of the well at
High Island 494 are classified as long-term since they were subsequently funded
through this facility.

NOTE 5 -- NEW ACCOUNTING STANDARDS

Because the Company does not currently use derivative instruments, the
adoption of SFAS No. 133 will not impact the Company's financial statements.

NOTE 6 -- RELATED PARTY TRANSACTIONS

In conjunction with the merger discussed at Note 2, the employees and
consultants of Optima were terminated. American had no employees. It was managed
and its properties (and certain of Optima's properties) were operated by
American Explorer, Inc. (AEI), a corporation owned by two officers of the
Company and former members of American. From September 1, 1998 through December
31, 1998, the Company's properties were operated by AEI and certain management
functions were performed by AEI. The officers of AEI are also the officers of
the Company. AEI charged the Company a management fee to cover its costs of
services for the Company ($600,000 for the four months ended December 31, 1998).
At December 31, 1998, the Company owed AEI approximately $1,053,000, which is
included in Accounts Payable. Effective January 1, 1999, the Company assumed the
operating and management functions from AEI, whose employees became employees of
the Company.

F-26
<PAGE> 83
PETROQUEST ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- PRIVATE PLACEMENT

On August 3, 1999 the Company received the initial funding of a private
placement of 5 million units at a purchase price of $1.00 per unit for a total
consideration of $5,000,000 before fees and expenses. Of the total
consideration, $4,000,000 has been received with the remaining funds expected to
be received within the next two weeks. The proceeds from the private placement
will be used for drilling and exploration costs, delay rentals on oil and gas
leases and working capital and general corporate purposes.

Each unit sold in the private placement consists of one share of the
Company's common stock and one warrant exercisable to purchase one-half a share
of the Company's common stock. Each warrant is exercisable at any time through
the fourth year after issuance to purchase one-half of a share of the Company's
common stock at a per share purchase price of $1.25.

In addition to the units issued to investors, the Company also issued to
the placement agents of the units warrants exercisable to purchase 500,000
shares of the Company's common stock. These warrants are exercisable at any time
through the fifth year after issuance to purchase 500,000 shares of the
Company's common stock at a per share purchase price of $1.25.

F-27
<PAGE> 84

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE
FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTUS MAY HAVE CHANGED SINCE THAT DATE.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
Summary............................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Capitalization........................ 13
Price Range of Our Common Stock....... 14
Dividend Policy....................... 14
Selected Financial Data............... 15
Selected Operating And Reserve Data... 16
Management's Discussion And Analysis
of Financial Condition And Results
of Operations....................... 17
Business.............................. 23
Management............................ 32
Certain Relationships And Related
Transactions........................ 40
Principal Stockholders................ 44
Selling Stockholders.................. 46
Plan of Distribution.................. 48
Description of Capital Stock.......... 50
Shares Eligible For Future Sale....... 54
Legal Matters......................... 55
Experts............................... 55
Where You Can Find More Information... 55
Index to Financial Statements......... F-1
</TABLE>

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

8,000,000 SHARES
PETROQUEST
ENERGY, INC.
COMMON STOCK
-------------------------

PROSPECTUS
-------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 85

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 3. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by us. All of such amounts
(except the SEC Registration Fee and the Toronto Stock Exchange Listing Fee) are
estimated.

<TABLE>
<S> <C>
SEC Registration Fee...................................... $ 3,858
Blue Sky Fees and Expenses................................ 10,000
Toronto Exchange Listing Fee.............................. 29,425
Printing and Mailing Costs................................ 5,000
Legal Fees and Expenses................................... 15,000
Accounting Fees and Expenses.............................. 15,000
Miscellaneous............................................. 5,000
-------
Total........................................... $83,283
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the DGCL permits a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action.

In a suit brought to obtain a judgment in the corporation's favor, whether
by the corporation itself or derivatively by a stockholder, the corporation may
only indemnify for expenses, including attorney's fees, actually and reasonably
incurred in connection with the defense or settlement of the case, and the
corporation may not indemnify for amounts paid in satisfaction of a judgment or
in settlement of the claim. In any such action, no indemnification may be paid
in respect of any claim, issue or matter as to which such persons shall have
been adjudged liable to the corporation except as otherwise provided by the
Delaware Court of Chancery or the court in which the claim was brought. In any
other type of proceeding, the indemnification may extend to judgments, fines and
amounts paid in settlement, actually and reasonably incurred in connection with
such other proceeding, as well as to expenses (including attorneys' fees).

The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interest of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. There are additional limitations applicable to
criminal actions and to actions brought by or in the name of the corporation.
The determination as to whether a person seeking indemnification has met the
required standard of conduct is to be made (i) by a majority vote of a quorum of
disinterested members of the board of directors, or (ii) by independent counsel
in a written opinion, if such a quorum does not exist or if the disinterested
directors so direct, or (iii) by the stockholders.

Our certificate of incorporation and bylaws require us to indemnify our
directors and officers to the fullest extent permitted under Delaware law. Our
certificate of incorporation limits the personal liability of a director to us
or our stockholders to damages for breach of the director's fiduciary duty.

II-1
<PAGE> 86

The above discussion of our certificate of incorporation and bylaws and the
DGCL is not intended to be exhaustive and is qualified in its entirety by the
certificate, bylaws and statute.

We maintain officers' and directors' indemnity insurance against expenses
of defending claims or payment of amounts arising out of good-faith conduct
believed by the officer or director to be in or not opposed to our best
interest.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since September 1996, we have issued and sold the following unregistered
securities:

(a) On September 1, 1998, we completed the transaction to merge our wholly
owned subsidiary, Optima Energy (U.S.) Corporation, with American Explorer,
L.L.C. We also converted from a Canadian corporation to a Delaware corporation
and changed our name from Optima Petroleum Corporation to "PetroQuest Energy,
Inc."

Under the terms of the merger, we acquired 100% of the ownership interests
of American in exchange for 7,335,001 shares of our common stock and 1,667,001
contingent stock issue rights. The contingent stock issue rights entitle the
holders to receive 1,667,001 shares of our common stock if the trading price of
our common stock is $5.00 or higher for 20 consecutive trading days on or before
September 1, 2001. All of the shares of our common stock and common stock issue
rights issued in the merger were issued to the following persons, each of whom
became our officer and director upon completion of the merger:

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

(1) Does not include 487,778 shares of our common stock and 110,856 common stock
issue rights issued to Mr. Thomas' spouse and an aggregate of 770,175 shares
of our common stock and 175,035 common stock issue rights issued to Mr.
Thomas' adult children.

In addition, Robert R. Brooksher, who became a director and our chief
financial officer and secretary upon completion of the merger, holds a three
year option to acquire from Charles T. Goodson, Alfred J. Thomas, II, Janell B.
Thomas, Alfred J. Thomas, III, Blaine A. Thomas, Natalie A. Thomas and Ralph J.
Daigle 5% of the shares of our common stock and common stock issue rights issued
in connection with the merger.

(b) In August 1999, we completed a private placement of 5 million units to
accredited investors at a purchase price of $1.00 per unit for a total
consideration of $5,000,000 before fees and expenses. Each unit sold in the
private placement consisted of one share of our common stock and one warrant to
purchase one-half a share of our common stock. Each warrant is exercisable at
any time for a period of four years after the date of issuance to purchase
one-half a share of our common stock at a purchase price of $1.25 per share. In
addition, we issued to the placement agents of the units, warrants to purchase
500,000 shares of our common stock. The warrants received by the placement
agents are exercisable at any time for a period of five years after the date of
issuance to purchase one share of our common stock at a purchase price of $1.25
per share. In addition, we agreed to file this registration statement covering
the resale of our common stock underlying the units and the shares of our common
stock issuable on the exercise of the warrants received by the unit holders and
the placement agents within 60 days of the closing of the private placement.

The sales of the securities described in paragraphs (a) and (b) were deemed
to be exempt from registration under the Securities Act in reliance upon Section
4(2) of the Securities Act, or Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only

II-2
<PAGE> 87

\and not with a view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either receive adequate
information about PetroQuest or had access, through employment or other
relationships, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Plan and Agreement of Merger by and among Optima
Petroleum Corporation, Optima Energy (U.S. Corporation
its wholly-owned subsidiary and Goodson Exploration
Company, NAB Financial L.L.C., Dexco Energy, inc.,
American Explorer, L.L.C. (incorporated herein by
reference to Appendix G of the Proxy Statement on
Schedule 14A filed July 22, 1998).
3.1 -- Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated
September 16, 1998).
3.2 -- Bylaws of the Company (incorporated herein by reference
to Exhibit 4.2 to Form 8-K dated September 16, 1998).
3.3 -- Certificate of Domestication of Optima Petroleum
Corporation (incorporated herein by reference to Exhibit
4.4 to Form 8-K dated September 16, 1998).
4.1 -- Registration Rights Agreement dated as of September 1,
1998 among Optima Petroleum Corporation, Charles T.
Goodson, Alfred J. Thomas, II, Ralph J. Daigle, Janell B.
Thomas, Alfred J. Thomas, III, Blaine A. Thomas, and
Natalie A. Thomas (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated September 16, 1998).
4.2 -- Form of Certificate of Contingent Stock Issue Right
(incorporated herein by reference to Exhibit 4.3 to Form
8-K dated September 16, 1998).
4.3 -- Form of Warrant to Purchase Shares of Common Stock of
PetroQuest Energy, Inc. (incorporated herein by reference
to Exhibit 4.1 to Form 8-K dated August 9, 1999).
4.4 -- Form of Placement Agent Warrant to Purchase Shares of
Common Stock of PetroQuest Energy, Inc. (incorporated
herein by reference to Exhibit 4.2 to Form 8-K dated
August 9, 1999).
*5.1 -- Opinion of Porter & Hedges, L.L.P.
10.1 -- 1998 Stock Option Plan (incorporated herein by reference
to Exhibit 10.2 to Form 8-K dated September 16, 1998).
10.2 -- Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(incorporated herein by reference to Exhibit 10.3 to Form
8-K dated September 16, 1998).
10.3 -- Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(incorporated herein by reference to Exhibit 10.2 to Form
8-K dated September 16, 1998).
10.4 -- Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated
herein by reference to Exhibit 10.4 to Form 8-K dated
September 16, 1998).
10.5 -- Employment Agreement dated September 1, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(incorporated herein by reference to Exhibit 10.5 to Form
8-K dated September 16, 1998).
10.6 -- First Amendment to Employment Agreement dated September
1, 1998 between PetroQuest Energy, Inc. and Charles T.
Goodson dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.1 to Form 8-K dated August 9,
1999).
10.7 -- First Amendment to Employment Agreement dated September
1, 1998 between PetroQuest Energy, Inc. and Alfred J.
Thomas, II dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.2 to Form 8-K dated August 9,
1999).
</TABLE>

II-3
<PAGE> 88

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.8 -- First Amendment to Employment Agreement dated September
1, 1998 between PetroQuest Energy, Inc. and Ralph J.
Daigle dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.3 to Form 8-K dated August 9,
1999).
10.9 -- First Amendment to Employment Agreement dated September
1, 1998 between PetroQuest Energy, Inc. and Robert R.
Brooksher dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.4 to Form 8-K dated August 9,
1999).
10.1 -- Credit Agreement dated September 24, 1998, among
PetroQuest Energy, Inc. (a Louisiana corporation),
PetroQuest Energy One, L.L.C. (a Louisiana limited
liability company), PetroQuest Energy, Inc. (a Delaware
corporation) and Compass Bank (incorporated herein by
reference to Exhibit 10.6 to Form 10-K for the year ended
December 31, 1998).
10.11 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(incorporated herein by reference to Exhibit 10.7 to Form
10-K for the year ended December 31, 1998).
10.12 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(incorporated herein by reference to Exhibit 10.8 to Form
10-K for the year ended December 31, 1998).
10.13 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated
herein by reference to Exhibit 10.9 to Form 10-K for the
year ended December 31, 1998).
10.14 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(incorporated herein by reference to Exhibit 10.10 to
Form 10-K for the year ended December 31, 1998).
10.15 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Charles T.
Goodson dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.5 to Form 8-K dated August 9,
1999).
10.16 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Alfred J.
Thomas, II dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.6 to Form 8-K dated August 9,
1999).
10.17 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Ralph J.
Daigle dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.7 to Form 8-K dated August 9,
1999).
10.18 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Robert R.
Brooksher dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.8 to Form 8-K dated August 9,
1999).
10.19 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Charles T. Goodson
(incorporated herein by reference to Exhibit 10.11 to
Form 10-K for the year ended December 31, 1998).
10.20 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Alfred J. Thomas, II
(incorporated herein by reference to Exhibit 10.12 to
Form 10-K for the year ended December 31, 1998).
10.21 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Ralph J. Daigle
(incorporated herein by reference to Exhibit 10.13 to
Form 10-K for the year ended December 31, 1998).
10.22 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Robert R. Brooksher
(incorporated herein by reference to Exhibit 10.14 to
Form 10-K for the year ended December 31, 1998).
10.23 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Daniel G. Fournerat
(incorporated herein by reference to Exhibit 10.15 to
Form 10-K for the year ended December 31, 1998).
</TABLE>

II-4
<PAGE> 89

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and William C. Leuschner
(incorporated herein by reference to Exhibit 10.16 to
Form 10-K for the year ended December 31, 1998).
10.25 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Robert L. Hodgkinson
(incorporated herein by reference to Exhibit 10.17 to
Form 10-K for the year ended December 31, 1998).
16.1 -- Letter from KPMG dated December 18, 1998 (incorporated
herein by reference to Exhibit 16.1 to Form 8-K dated
December 21, 1998)
21.1 -- Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21.1 to the Registration Statement
No. 333-55745 filed June 2, 1998)
*23.1 -- Consent of Arthur Andersen LLP
*23.2 -- Consent of KPMG LLP
*23.3 -- Consent of Porter & Hedges, LLP (contained in Exhibit
5.1)
*24.1 -- Power of attorney (included on the signature page of this
Registration Statement).
</TABLE>

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

* Filed herewith.

(b) Financial Statement Schedules. All schedules are omitted because they
are not applicable or because the required information is contained in
the Financial Statements or Notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

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

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

II-5
<PAGE> 90

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lafayette, State of
Louisiana, on October 29, 1999.

PETROQUEST ENERGY, INC.

By: /s/ CHARLES T. GOODSON
----------------------------------
Charles T. Goodson,
President, Chief Executive
Officer and Director

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints Charles T.
Goodson and Robert R. Brooksher, and both of them, either of whom may act
without the joinder of the other, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and any
registration statement for the same offering filed pursuant to Rule 462 under
the Securities Act of 1933, and to file the same, with all exhibits thereto and
all other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing appropriate or
necessary to be done, as fully and for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<C> <S> <C>

Chairman of the Board and October , 1999
- ----------------------------------------------------- Director
William C. Leuschner

/s/ CHARLES T. GOODSON President, Chief Executive October 29, 1999
- ----------------------------------------------------- Officer and Director
Charles T. Goodson (Principal Executive
Officer)

/s/ ALFRED J. THOMAS, II Chief Operating Officer October 28, 1999
- ----------------------------------------------------- and Director
Alfred J. Thomas, II

/s/ RALPH J. DAIGLE Senior Vice President -- October 28, 1999
- ----------------------------------------------------- Exploration and Director
Ralph J. Daigle

/s/ ROBERT R. BROOKSHER Chief Financial Officer, October 26, 1999
- ----------------------------------------------------- Secretary and Director
Robert R. Brooksher (Principal Financial and
Accounting Officer)

/s/ DANIEL G. FOURNERAT Director October 28, 1999
- -----------------------------------------------------
Daniel G. Fournerat
</TABLE>

II-6
<PAGE> 91

<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------- ------------------------ ----
<C> <S> <C>
Director October , 1999
- -----------------------------------------------------
Robert L. Hodgkinson

/s/ WILLIAM W. RUCKS, IV Director October 28, 1999
- -----------------------------------------------------
William W. Rucks, IV

Director October , 1999
- -----------------------------------------------------
Francisco A. Garcia
</TABLE>

II-7
<PAGE> 92

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9 -- First Amendment to Employment Agreement dated September
1, 1998 between PetroQuest Energy, Inc. and Robert R.
Brooksher dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.4 to Form 8-K dated August 9,
1999).
10.1 -- Credit Agreement dated September 24, 1998, among
PetroQuest Energy, Inc. (a Louisiana corporation),
PetroQuest Energy One, L.L.C. (a Louisiana limited
liability company), PetroQuest Energy, Inc. (a Delaware
corporation) and Compass Bank (incorporated herein by
reference to Exhibit 10.6 to Form 10-K for the year ended
December 31, 1998).
10.11 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Charles T. Goodson
(incorporated herein by reference to Exhibit 10.7 to Form
10-K for the year ended December 31, 1998).
10.12 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Alfred J. Thomas, II
(incorporated herein by reference to Exhibit 10.8 to Form
10-K for the year ended December 31, 1998).
10.13 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Ralph J. Daigle (incorporated
herein by reference to Exhibit 10.9 to Form 10-K for the
year ended December 31, 1998).
10.14 -- Termination Agreement dated December 16, 1998, between
PetroQuest Energy, Inc. and Robert R. Brooksher
(incorporated herein by reference to Exhibit 10.10 to
Form 10-K for the year ended December 31, 1998).
10.15 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Charles T.
Goodson dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.5 to Form 8-K dated August 9,
1999).
10.16 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Alfred J.
Thomas, II dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.6 to Form 8-K dated August 9,
1999).
10.17 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Ralph J.
Daigle dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.7 to Form 8-K dated August 9,
1999).
10.18 -- First Amendment to Termination Agreement dated December
16, 1998, between PetroQuest Energy, Inc. and Robert R.
Brooksher dated July 30, 1999 (incorporated herein by
reference to Exhibit 10.8 to Form 8-K dated August 9,
1999).
10.19 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Charles T. Goodson
(incorporated herein by reference to Exhibit 10.11 to
Form 10-K for the year ended December 31, 1998).
10.20 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Alfred J. Thomas, II
(incorporated herein by reference to Exhibit 10.12 to
Form 10-K for the year ended December 31, 1998).
10.21 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Ralph J. Daigle
(incorporated herein by reference to Exhibit 10.13 to
Form 10-K for the year ended December 31, 1998).
10.22 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Robert R. Brooksher
(incorporated herein by reference to Exhibit 10.14 to
Form 10-K for the year ended December 31, 1998).
10.23 -- Indemnification Agreement dated December 16, 1998,
between PetroQuest Energy, Inc. and Daniel G. Fournerat
(incorporated herein by reference to Exhibit 10.15 to
Form 10-K for the year ended December 31, 1998).
</TABLE>
<PAGE> 94

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

* Filed herewith.

<PAGE> 1

EXHIBIT 5.1

[Porter & Hedges, L.L.P. Letterhead]

October 29, 1999

PetroQuest Energy, Inc.
625 E. Kaliste Saloom Road, Suite 400
Lafayette, Louisiana 70508

Gentlemen:

We have acted as counsel to PetroQuest Energy, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended. The Registration Statement relates to an aggregate of 8,000,000 shares
of the Company's common stock, par value $.001 per share (the "Common Stock"),
which may be offered and sold from time to time by selling security holders (the
"Selling Security Holders") of the Company.

We have examined such corporate records, documents, instruments and
certificates of the Company and have received such representations from the
officers and directors of the Company and have reviewed such questions of law as
we have deemed necessary, relevant or appropriate to enable us to render the
opinion expressed herein. In such examination, we have assumed the genuineness
of all signatures and the authenticity of all documents, instruments, records
and certificates submitted to us as originals.

Based on such examination and review and on representations made to us
by the officers and directors of the Company, we are of the opinion that (i) the
5,000,000 shares of Common Stock to be offered pursuant to the Registration
Statement are validly issued, fully-paid and nonassessable outstanding shares of
Common Stock and (ii) up to 3,000,000 shares of Common Stock to be offered and
sold pursuant to the Registration Statement will be, when issued by the Company
upon the exercise or conversion by certain of the Selling Security Holders of
warrants convertible into shares of Common Stock, validly issued, fully-paid and
nonassessable outstanding shares of Common Stock.

We consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement

Very truly yours,

/s/ Porter & Hedges, L.L.P.

PORTER & HEDGES, L.L.P.

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated March 12, 1999 on the consolidated financial statements of PetroQuest
Energy, Inc. as of December 31, 1998, and for the year then ended, and to all
references to our Firm included in this registration statement on Form S-1 of
PetroQuest Energy, Inc.

/s/ ARTHUR ANDERSEN LLP

New Orleans, Louisiana
October 29, 1999

<PAGE> 1
EXHIBIT 23.2

The Board of Directors
PetroQuest Energy, Inc.

We consent to the use of our auditors' report dated March 13, 1998 (except as to
note 1, for which the date is March 12, 1999) on the consolidated financial
statements of PetroQuest Energy, Inc. (formerly Optima Petroleum Corporation)
for the years ended December 31, 1997 and 1996 included herein and to the
reference to our firm under the heading "Experts" in the Form S-1 Registration
Statement.

/s/ KPMG LLP

Vancouver, Canada

October 29, 1999