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                                                                   EXHIBIT 10.54


                                  July 31, 1998


VIA HAND DELIVERY

Mr. Jim L. David
9420 Loma Vista
Dallas, TX 75243

         Re:  Separation Agreement

Dear Jim:

National Energy Group, Inc. (the "Company") recognizes your service as an
employee of the Company. This letter confirms the discussions we have held
concerning the resignation of your employment from the Company, and the
Company's offer and your acceptance of this proposed separation agreement (this
"Separation Agreement") on the terms set forth below.

1.   Resignation; Termination of Employment. Your employment with the Company as
     Vice President-Exploration is terminated effective July 31, 1998
     (hereinafter the "Separation Date"), at which time your Executive
     Employment Agreement effective August 29, 1996 (the "Employment Agreement")
     shall also terminate.

2.   Salary and Benefits. In accordance with the Company's existing policies,
     you have received, will receive, or are receiving with this letter the
     following payments and benefits pursuant to your employment with the
     Company and your participation in the Company's benefit plans:

     (a)  Payment of your regular base salary through July 31, 1998;

     (b)  Payment of accrued and unused vacation leave, if any, through the
          Separation Date; and

     (c)  Payment of two (2) weeks of your base salary for each year of
          employment you have completed with the Company in the amount of
          $124,600.00, representing credit for eighteen (18) such years of
          employment.
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Mr. Jim L. David
July 31, 1998
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     The amounts paid in accordance with subparagraphs (a), (b) and (c) of this
     Paragraph 2 are gross amounts, subject to lawful deductions, including any
     deductions you have previously authorized or authorize prior to your
     Separation Date.

     Your paid group health insurance benefits are paid through August 31, 1998.
     After the Separation Date, you are entitled at your option to continue your
     group health insurance coverage at your expense in accordance with
     applicable law. Please complete the COBRA election form which will be
     furnished to you if you elect to continue such insurance coverage.

     Payment of any benefits to which you have vested entitlements under the
     terms of the employee benefit plans established by the Company (including
     but not limited to the Company 401(k) Plan and Employee Stock Purchase
     Plan) shall be paid to you in accordance with the provisions of such plans.

     The Company will settle promptly all authorized reimbursable business
     expenses, if any, when you have submitted appropriate expense reports along
     with the required receipts and documenting information. To be eligible for
     reimbursement of these expenses, they must be submitted by the close of
     business on or before August 7, 1998.

3.   Special Separation Benefits. In consideration of the General Release, the
     Confidentiality of Separation Agreement and Nondisparagement provision, and
     the Agreement Regarding Solicitation of Employees and Consultants set forth
     in this Separation Agreement, and contingent upon your acceptance of the
     terms contained herein, the Company offers you the following Special
     Separation Benefits, in addition to the benefits you will receive pursuant
     to Paragraph 2:

     (a)  Termination Allowance. A termination allowance in the amount of
          $55,400.00, which is equivalent to your base salary for sixteen (16)
          weeks, payable concurrently with the execution and delivery to the
          Company of both this Separation Agreement and the Reaffirmation of
          Separation Agreement described in Paragraph 13 hereof.

     (b)  Additional Benefits.

          (i) An amount equal to $9,000.00 (payable to you concurrently with the
          execution and delivery to the Company of both this Separation
          Agreement and the Reaffirmation of Separation Agreement provided in
          Paragraph 13 hereof) in lieu of any benefits which may no longer be
          available to you through the Company after your Separation Date;

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Mr. Jim L. David
July 31, 1998
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          (ii) The Company shall continue to pay your group health benefits
          through August 31, 1998;

          (iii) Any stock options granted to you shall continue to vest in
          accordance with the 1996 Incentive Compensation Plan for so long as
          you continue as a member of the Board of Directors of the Company;

          (iv) The Company shall allow you to retain your lap top computer
          (Name: Texas Instruments Extensa 570CDT, Serial No: 25167851845); and

          (v) The Company shall transfer to you the ownership of that certain
          vehicle (1995 Ford Windstar, VIN #2FMDA51495B, Texas license
          #XCW-61C); provided that you shall pay all transfer, license, sales
          and other taxes, fees and/or assessments payable in connection with
          such transfer of ownership.

     By execution of this Separation Agreement, you acknowledge and agree that
     for purposes of unemployment compensation benefits, the amounts to be paid
     as specified in this Paragraph 3 constitute wages in lieu of notice for the
     period from the Separation Date through November 20, 1998. Accordingly, you
     agree not to seek, qualify for nor receive unemployment compensation
     benefits for the period from the Separation Date through November 20, 1998.

4.   Return of Property. Whether or not you accept the terms of this Separation
     Agreement, you must return to the Company any and all items of its
     property, including without limitation: automobiles, telephones, office
     keys, security access cards, computers, equipment, credit cards, forms,
     files, manuals, correspondence, business records, personnel data, lists of
     employees, salary and benefits information, work product, maps, data and
     files relating to wells, leases, partners and/or contractors, seismic data
     and files, contracts, contract information, Prospect information and plans
     for future Prospects, brochures, catalogs, computer tapes and diskettes,
     and data processing reports, and any and all other documents or property
     which you have had possession of or control over during the course of your
     employment, and which you have not already returned to the Company. You
     agree that you will return such property to the Company by no later than
     the close of business on or before August 7, 1998, or as soon thereafter as
     is possible with respect to any items not then immediately available or
     which you later find in your possession. The provisions of this Paragraph 4
     do not prohibit the maintenance by you of copies of any non-confidential,
     non-proprietary information, such as reading files, work papers,
     calculations, flowcharts and other similar information reflecting the
     performance of your job duties and responsibilities.

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Mr. Jim L. David
July 31, 1998
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5.   Use of Confidential Information. You acknowledge and agree that, except for
     your knowledge and training to compete in the marketplace and except for
     information which is now or in the future becomes available in the public
     domain, all of the non-public documents and information to which you have
     had access during your employment, including but not limited to all
     information pertaining to any specific business transactions in which the
     Company or any other Company Released Parties (as defined in Paragraph 6(a)
     below) were, are, or may be involved, all information concerning salary and
     benefits paid to employees of the Company or any of the other Company
     Released Parties, all personnel information relating in any way to current
     or former employees of the Company or any of the other Company Released
     Parties, all non-public information obtained in the course of employment
     pertaining to acquisitions, divestitures, wells, Prospects and development
     plans of the Company or any of the other Company Released Parties, lease
     holdings and lease block bid information and strategies, all financial
     budgetary information, all other information specified in Paragraph 4
     above, and in general, the business and operations of the Company or any of
     the other Company Released Parties in addition to any other work product,
     calculations, files, maps, logs, flowcharts and other related and/or
     similar information to which you had access through the Company, its
     partners or consultants are considered confidential and are not to be
     disseminated or disclosed by you to any other parties, except as may be
     required by law or judicial process. In the event you are required to
     disclose such information to any other party, you shall provide the Company
     immediate written notice to enable the Company to seek, at the Company's
     discretion and expense, a protective order or take other such action as the
     Company in its sole discretion deems advisable or necessary. You further
     agree that in the event it appears that you will be compelled by law or
     judicial process to disclose such confidential information, you will notify
     Mr. Philip D. Devlin, General Counsel, in writing at 4925 Greenville
     Avenue, Suite 1400, Dallas, Texas, 75206, immediately upon your receipt of
     any such notice, a subpoena or other legal process.

6.   General Release.

     (a)  Except for the obligations of the Company and the Company Released
          Parties to be performed hereunder and in consideration of the Special
          Separation Benefits described above, you and your family members,
          heirs, successors, and assigns (collectively, the "Employee Released
          Parties") hereby release, acquit, and forever discharge any and all
          claims and demands of whatever kind or character, whether vicarious,
          derivative, or direct, that you or they, individually, collectively,
          or otherwise, may have or assert against (i) National Energy Group,
          Inc. or (ii) any officer, director, stockholder, fiduciary, agent,
          employee, representative, insurer, attorney, or any successors and
          assigns of National Energy Group, Inc. (collectively, the "Company
          Released Parties"). This Separation Agreement includes but is not
          limited to any claim or demand based on any federal, state, or local
          statutory or 

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Mr. Jim L. David
July 31, 1998
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          common law that applies or is asserted to apply, directly or
          indirectly, to the formation of your employment relationship, your
          employment relationship, or the termination of your employment
          relationship with the Company. Thus, you and the other Employee
          Released Parties agree not to make any claims or demands against the
          Company or any of the other Company Released Parties such as for
          wrongful discharge; unlawful employment discrimination; retaliation;
          breach of contract (express or implied); breach of the duty of good
          faith and fair dealing; violation of the public policy of the United
          States, the State of Texas, or any other state; intentional or
          negligent infliction of emotional distress; tortious interference with
          contract; promissory estoppel; detrimental reliance; defamation of
          character; duress; negligent misrepresentation; intentional
          misrepresentation or fraud; invasion of privacy; loss of consortium;
          assault; battery; conspiracy; bad faith; negligent hiring or
          supervision; any intentional or negligent act of personal injury; any
          alleged act of harassment or intimidation; or any other intentional or
          negligent tort; or any alleged violation of the Age Discrimination in
          Employment Act of 1967; Title VII of the Civil Rights Act of 1964; the
          Americans with Disabilities Act of 1990; the Employee Retirement
          Income Security Act of 1974; the Fair Labor Standards Act; the Fair
          Credit Reporting Act; the Texas Commission on Human Rights Act; or the
          Texas Wage Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155.

     (b)  Except for your obligations to be performed hereunder, the Company and
          the other Company Released Parties hereby release, acquit, and forever
          discharge any and all claims and demands of whatever kind or
          character, whether vicarious, derivative, or direct, that it or they,
          individually, collectively, or otherwise may have or assert against
          you or any of the other Employee Released Parties. This Separation
          Agreement includes, but is not limited to, any claim or demand based
          on any federal, state, or local statutory or common law that applies
          or is asserted to apply, directly or indirectly, to the formation of
          your employment relationship, your employment, or the termination of
          your employment relationship with the Company.

     (c)  Except as otherwise provided herein, the effect of this Separation
          Agreement is to mutually release, acquit, and forever discharge any
          and all claims and demands of whatever kind or character, that either
          party, the Employee Released Parties, or the Company Released Parties
          may now have, or hereafter have or assert against each other arising
          out of the employment relationship (including the formation and
          termination thereof) which has existed between you and the Company. It
          is further agreed that each of you and the Company agree to indemnify
          and hold harmless the other for any breach of the provisions of this
          Separation Agreement by the respective Employee Released Parties or
          Company Released Parties which results in damage to the other or to
          the respective parties hereto. This mutual general release does not

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Mr. Jim L. David
July 31, 1998
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          include: (i) the executory obligations of either party yet to be
          performed, or (ii) any rights, claims or obligations which may accrue
          as between the parties after the date of this Separation Agreement.

7.   Confidentiality of this Separation Agreement and Nondisparagement. In
     consideration of the Special Separation Benefits described above, each of
     the Company and you agree that the terms of this Separation Agreement shall
     be and remain confidential, and shall not be disclosed by you and the other
     Employee Release Parties or the Company and the other Company Released
     Parties to any party other than your spouse, attorney, accountant or tax
     return preparer; provided such persons have agreed to keep such information
     confidential, and except as may be required by law or judicial process.
     Each of the Company and you further agree, except as compelled by law or
     judicial process, not to cooperate or supply information of any kind in any
     proceeding, investigation, or inquiring raising issues under the Age
     Discrimination in Employment Act of 1967, Title VII of the Civil Rights Act
     of 1964, the Americans with Disabilities Act of 1990, the Employee
     Retirement Income Security Act of 1974, the Fair Labor Standards Act, the
     Fair Credit Reporting Act, the Texas Commission on Human Rights Act, or the
     Texas Wage Payment Statute, Tex. Rev. Civ. Stat. Ann. art. 5155, or any
     other federal, state, or local law, involving the formation of your
     employment relationship, your employment relationship, the termination of
     your employment relationship, or the employment of other persons by the
     Company or any of the Company Released Parties. In the event it appears
     that either party hereto shall be compelled by law or judicial process to
     disclose the terms and conditions of this Separation Agreement, such party
     shall immediately notify the other party in writing and provide a copy of
     any notice that such disclosure is being requested or required so that such
     party at its sole discretion and expense may seek a protective order or
     take other such action as such party in its sole discretion deems advisable
     or necessary.

     You and the other Employee Released Parties further agree not to make any
     statement, oral or written, which directly or indirectly impugns the
     quality or integrity of the Company's or any of the Company Released
     Parties' business practices, or to make any other disparaging or derogatory
     remarks or statements, oral or written, about the Company or any of the
     Company Released Parties, their officers, directors, stockholders,
     managerial personnel, or other employees or their partners and consultants
     to any other parties. You agree and acknowledge that should you breach this
     obligation, in addition to any other remedy the Company may have at law or
     in equity, you may be required to repay the Special Separation Benefits
     provided to you pursuant to this Separation Agreement, but all other
     provisions of this Separation Agreement shall remain in full force and
     effect.

     In consideration of the General Release, the Confidentiality of Separation
     Agreement and Nondisparagement provision, and the Agreement Regarding
     Solicitation of Employees and 

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Mr. Jim L. David
July 31, 1998
Page 7


     Consultants, set forth herein, the Company and the Company Released Parties
     agree that it and they, respectively, shall instruct its officers,
     directors, managerial personnel, or other employees not to make any
     statement, oral or written, which directly or indirectly impugns the
     quality or integrity of you or any of the Employee Released Parties'
     business practices, or to make any other disparaging or derogatory remarks
     or statements, oral or written, about you or your employment with the
     Company.

8.   Agreement Regarding Solicitation of Employees. In consideration of the
     monetary payments and other benefits provided to you or on your behalf by
     the Company in this Separation Agreement, you acknowledge and agree that
     for a period of two (2) years following the termination of your employment
     with the Company, you will not, directly or indirectly, for your own
     account or for the benefit of any other person or party, solicit, induce,
     entice, or attempt to entice any employee, or independent contractor of the
     Company to terminate his or her employment relationship, agreements or
     contracts with the Company.

9.   Nonadmission of Liability and Wrongdoing. It is acknowledged that this
     Separation Agreement does not in any manner constitute an admission of
     liability or wrongdoing on your part or that of the Company, but that you
     and the Company expressly deny any such liability or wrongdoing, and enter
     into this Separation Agreement for the sole purpose of avoiding further
     trouble and expense; and, except to the extent necessary to enforce this
     Separation Agreement, neither this Separation Agreement, nor any part of it
     may be construed, used, or admitted into evidence in any judicial,
     administrative, or arbitral proceedings as an admission of any kind by the
     Company, the Company Released Parties, or you or any of the Employee
     Released Parties.

10.  Authority to Execute. Each of the parties hereto warrants and agrees that
     it (i) has full power and authority to execute, deliver and perform the
     obligations contained in this Separation Agreement, (ii) is a legally
     binding and enforceable agreement in accordance with its terms and
     conditions, (iii) has the power and authority to bind its respective
     Released Parties, (iv) does not violate, conflict with or constitute a
     breach or default under any statute, rule, ordinance, regulation or
     administrative order of any federal, state, county or municipal court,
     board, office, agency or commission, and (v) is not contemplating, nor are
     any bankruptcy or insolvency proceedings threatened against such party of
     which it is aware.

11.  GOVERNING LAW AND INTERPRETATION. THIS SEPARATION AGREEMENT AND THE RIGHTS
     AND DUTIES OF THE PARTIES UNDER IT SHALL BE GOVERNED BY AND CONSTRUED IN
     ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND PERFORMED IN DALLAS
     COUNTY, TEXAS. If any provision of this Separation Agreement is held to be
     unenforceable, such provision shall be considered separate, distinct, and
     severable from the other remaining provisions and shall not 

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Mr. Jim L. David
July 31, 1998
Page 8


     affect the validity or enforceability of such other remaining provisions,
     and that, in all other respects, this Separation Agreement shall remain in
     full force and effect. If any provision of this Separation Agreement is
     held to be unenforceable as written and may be made to be enforceable by
     limitation thereof, then such provision shall be enforceable to the maximum
     extent permitted by applicable law and to the extent the remaining
     provisions further accomplish the goals, benefits and intent of this
     Separation Agreement. The language of all parts of this Separation
     Agreement shall in all cases be construed as a whole, according to its fair
     meaning, and not strictly for or against any of the parties.

12.  Expiration of Offer. The Company's offer of the proposed Special Separation
     Benefits will expire at midnight on the 21st day (the "Expiration of
     Offer") following the date of this correspondence, i.e., on August 21,
     1998. You may accept this offer at any time before the Expiration of Offer
     by executing this Separation Agreement and returning it to the designated
     representative of the Company. Whether or not you execute this Separation
     Agreement, you will receive the items set forth in Paragraph 2(a), (b) and
     (c) and are required to follow the obligations set forth in Paragraphs 4
     and 5 hereof.

13.  The Effective Date. This Separation Agreement will become effective and
     enforceable seven (7) days after your execution hereof (the "Effective
     Date"). At any time prior to the Effective Date, you may revoke your
     acceptance of this Separation Agreement by delivering written notice
     thereof to the Company. You further agree to execute and deliver to the
     Company the Reaffirmation of this Separation Agreement, attached hereto as
     Exhibit "A", within seven (7) days of the execution and delivery of this
     Separation Agreement.

14.  Consultation With Counsel. You have the right to consult, and are
     encouraged by the Company to consult, an attorney before executing this
     Separation Agreement.

15.  Voluntary Agreement. You and the Company acknowledge that execution of this
     Separation Agreement is knowing and voluntary, that you and the Company
     have had reasonable time to deliberate regarding its terms, and that you
     and the Company have had the right to consult with an attorney.

16.  Entire Agreement. This Separation Agreement contains and constitutes the
     entire understanding and agreement between you and the Company and may be
     modified only by a writing of contemporaneous or subsequent date executed
     by both you and an authorized officer of the Company.

17.  In the event of a dispute between the parties to this Separation Agreement,
     the parties agree not to file any action or petition in any court of law or
     equity for any relief, but to participate in good faith in a minimum of
     four (4) hours of mediation in Dallas, Texas with an attorney-

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Mr. Jim L. David
July 31, 1998
Page 9


     mediator who trained and certified by the American Arbitration Association,
     the United States Arbitration and Mediation Service, or any comparable
     organization, and to abide by the mediation procedures and decision of such
     organization. The parties agree to equally bear the costs of the mediation.
     In the event the parties cannot resolve their dispute through mediation as
     described herein, the parties agree to participate in binding arbitration
     pursuant to the rules of the American Arbitration Association or mutually
     agreeable similar organization. Such arbitration shall be held in Dallas,
     Texas, shall be binding and nonappealable and a judgment on the award to
     the prevailing party (inclusive of reasonable attorney's fees and costs)
     may be entered in any court having competent jurisdiction.

     If you are in agreement with the terms of this Separation Agreement, please
execute the attached duplicate of this letter in the space provided below. By
executing this Separation Agreement, you acknowledge that (a) you have been
offered at least twenty-one (21) days to consider the terms of this Separation
Agreement, (b) you were advised by the Company to consult with an attorney
regarding the terms of this Separation Agreement, (c) you have consulted with,
or have had sufficient opportunity to consult with, an attorney of your own
choosing regarding the terms of this Separation Agreement, (d) any and all
questions regarding the terms of this Separation Agreement have been asked and
answered to your complete satisfaction, (e) you have read this Separation
Agreement and fully understand its terms and their importance, (f) the
consideration or special separation benefits described in Paragraph 3 of this
Separation Agreement is good and valuable and of a kind to which you were not
otherwise entitled, and (g) you are entering into this Separation Agreement
voluntarily, of your own free will, and without any coercion, undue influence,
threat or intimidation of any kind or type whatsoever.

Sincerely,

National Energy Group, Inc.                 ACCEPTED AND AGREED THIS
                                            ____ DAY OF ___________, 19__.

By:                                                         
   ---------------------------------        ------------------------------------
Name:  Chuck L. Elsey                       Name: Jim L. David,
Title: President and                              an Individual
       Chief Operating Officer