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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                ________________

                                    FORM 10-Q

                                   (Mark One)

          [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended September 30, 1998




          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                         Commission File Number 0-26662


                                  PANACO, Inc.
             (Exact name of registrant as specified in its charter)


               Delaware                               43 - 1593374
 (State or other jurisdiction of incorporation or(I.R.S. Employer Identification
              organization)                               Number)

        1100 Louisiana Street, Suite 5100
                   Houston, Texas                        77002
 (Address of principal executive offices)              (Zip Code)

      Registrant's telephone number, including area code: (713) 970 - 3100




     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No _______ .


     23,844,863  shares of the  registrant's  $.01 par value  Common  Stock were
outstanding on September 30, 1998.



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<PAGE>

<TABLE>

                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)
<CAPTION>


       ASSETS
                                                                      As of                      As of
                                                                September 30, 1998         December 31, 1997
 CURRENT ASSETS
<S>                                                                                <C>                         
      Cash and cash equivalents                                       $3,217,000                $36,909,000
     Accounts receivable                                              11,704,000                  9,735,000
      Prepaid and other                                                  643,000                    626,000
         Total current assets                                         15,564,000                 47,270,000

 OIL AND GAS PROPERTIES, AS DETERMINED BY THE
 SUCCESSFUL EFFORTS METHOD OF ACCOUNTING
      Oil and gas properties, proved                                 241,651,000                198,840,000
      Oil and gas properties, unproved                                10,863,000                 12,947,000
      Less: accumulated depletion, depreciation,
         and amortization                                           (123,201,000)               (99,239,000)
         Net oil and gas properties                                  129,313,000                112,548,000

 PROPERTY, PLANT AND EQUIPMENT
      Pipelines and equipment                                         26,236,000                 14,875,000
      Less: accumulated depreciation                                  (2,726,000)                (1,416,000)
         Net property, plant and equipment                            23,510,000                 13,459,000

 OTHER ASSETS
      Deferred debt costs, net                                         3,416,000                  3,813,000
      Restricted deposits and other                                    3,831,000                  2,539,000
         Total other assets                                            7,247,000                  6,352,000


 TOTAL ASSETS                                               $        175,634,000       $        179,629,000

</TABLE>
<PAGE>

<TABLE>

                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)
<CAPTION>


                  LIABILITIES AND STOCKHOLDERS' EQUITY
                                                             As of                        As of
                                                        September 30, 1998           December 31, 1997
 CURRENT LIABILITIES
<S>                                                    <C>                         <C>                   
      Accounts payable                                 $          12,530,000       $           17,225,000
      Interest payable                                             5,380,000                    2,416,000
      Current portion of long-term debt                                           
                                                                           -                            -
         Total current liabilities                                17,910,000                   19,641,000


 LONG-TERM DEBT                                                  115,249,000                  101,700,000

 DEFERRED INCOME TAXES                                                     -                    3,100,000

 COMMITMENTS AND CONTINGENCIES                                             -                            -


 STOCKHOLDERS' EQUITY
      Preferred Shares, $.01 par value,
         5,000,000 shares authorized; no
         shares issued and outstanding                                      -                           -
      Common Shares, $.01 par value,
         40,000,000 shares authorized;
         23,844,863 and 23,913,531 shares
         issued and outstanding, respectively                        240,000                      239,000
      Additional paid-in capital                                  69,131,000                   69,041,000
      Treasury stock, held at cost                                 (250,000)                            -
      Accumulated deficit                                       (26,646,000)                 (14,092,000)
         Total stockholders' equity                               42,475,000                   55,188,000




 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $        175,634,000       $          179,629,000

</TABLE>
<PAGE>

<TABLE>

                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                     For the Nine Months Ended September 30,
                                   (Unaudited)
<CAPTION>



                                                                 1998                    1997
                                                        ------------------      -------------------
 REVENUES
<S>                                                        <C>                      <C>           
      Oil and natural gas sales                            $   38,901,000           $   23,434,000

 COSTS AND EXPENSES
      Lease operating expense                                  12,608,000                8,010,000
      Depletion, depreciation & amortization                   25,761,000               10,568,000
      General and administrative expense                        1,593,000                  999,000
      Office consolidation and severance expense                  987,000                        -
      Production and ad valorem taxes                             866,000                  329,000
      Exploratory dry hole expense                              4,813,000                   67,000
      Geological and geophysical expense                          828,000                        -
                                                        ------------------      -------------------
         Total                                                 47,456,000               19,973,000
                                                        ------------------      -------------------

 OPERATING INCOME (LOSS)                                      (8,555,000)                3,461,000
                                                        ------------------      -------------------

 OTHER INCOME (EXPENSE)
      Gain on sale of common stock                                     -                   75,000
      Interest income                                            790,000                   92,000
      Interest expense                                       (7,881,000)              (2,297,000)
                                                       ------------------      -------------------
         Total                                               (7,091,000)              (2,130,000)
                                                       ------------------      -------------------

 INCOME (LOSS) BEFORE INCOME TAXES                          (15,646,000)                1,331,000

 INCOME TAX (BENEFIT)                                        (3,100,000)        
                                                                                                -
                                                       ------------------      -------------------

 NET INCOME (LOSS)                                       $  (12,546,000)          $     1,331,000
                                                       ==================      ===================


 Net income (loss) per share                                      $(0.52)                   $0.07
                                                       ==================      ===================

 Basic Shares Outstanding                                     23,979,004               19,735,016
                                                       ==================      ===================
 Diluted Shares Outstanding                                   23,979,004               19,735,016
                                                       ==================      ===================

</TABLE>
<PAGE>

<TABLE>

                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                    For the Three Months Ended September 30,
                                   (Unaudited)
<CAPTION>



                                                                 1998                    1997
                                                          ------------------      -------------------
 REVENUES
<S>                                                          <C>                     <C>            
      Oil and natural gas sales                              $   14,128,000          $     9,146,000

 COSTS AND EXPENSES
      Lease operating expense                                     4,413,000                2,888,000
      
      Depletion, depreciation & amortization                      9,312,000                4,384,000
                                                                  
      General and administrative expense                            572,000                  610,000
                                                                    
      Office consolidation and severance expense                    987,000                        -

      Production and ad valorem taxes                               470,000                  155,000
                                                                    
      Exploratory dry hole expense                                  876,000                        -

      Geological and geophysical expense                            346,000                        -
                                                          ------------------      -------------------
         Total                                                   16,976,000                8,037,000
                                                          ------------------      -------------------

 OPERATING INCOME (LOSS)                                        (2,848,000)                1,109,000
                                                          ------------------      -------------------

 OTHER INCOME (EXPENSE)
      Gain on sale of common stock                                         -                   16,000
      Interest income                                                 39,000                   18,000
      Interest expense                                           (2,744,000)                 (958,000)
                                                           ------------------      -------------------
         Total                                                   (2,705,000)                (924,000)
                                                           ------------------      -------------------

 INCOME (LOSS) BEFORE INCOME TAXES                               (5,553,000)                  185,000

 INCOME TAX (BENEFIT)                                               398,000                        -
                                                           ------------------      -------------------

 NET INCOME (LOSS)                                           $   (5,951,000)          $       185,000
                                                           ==================      ===================


 Net income (loss) per share                                          $(0.25)         $ -
                                                                                            
                                                           ==================      ===================

 Basic Shares Outstanding                                         23,993,585               22,660,702
                                                           ==================      ===================
 Diluted Shares Outstanding                                       23,993,585               22,660,702
                                                           ==================      ===================

</TABLE>
<PAGE>

<TABLE>

                                  PANACO, Inc.
            Consolidated Statement of Changes in Stockholders' Equity
                                   (Unaudited)
<CAPTION>


                                                                                             Amount ($) 
                                        Number of                             Additional
                                          Common             Common            Paid-in              Treasury        Accumulated
                                          Shares             Stock             Capital              Stock             Deficit
                                     ----------------   ----------------   ----------------   -----------------   ----------------
<S>                 <C> <C>               <C>                         <C>                                    <C>                 
 Balances, December 31, 1997              23,913,531        $239,000         $ 69,041,000             $-             $(14,100,000)

 Net Loss                                       -                -                 -                                 (12,546,000)
 
 1998 treasury stock purchases              (118,700)            -                 -                (250,000)              -
    
 Shareholder rights redemption                  -                -              (118,000)              -                   -

 Common shares issued - director            50,032             1,000             208,000               -                   -
 stock bonuses, ESOP                                                                                               
                                              


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

 Balances, September 30, 1998             $23,844,863        $240,000       $ 69,131,000          $ (250,000)      $(26,646,000)
                                                                
                                     ================   ================   ================   =================   ================


</TABLE>
<PAGE>

<TABLE>

                                  PANACO, Inc.
                      Consolidated Statement of Cash Flows
                     For the Nine Months Ended September 30,
                                   (Unaudited)
<CAPTION>

                                                                                     1998                1997
                                                                               -----------------   -----------------
 CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                               <C>                 <C>          
      Net income (loss)                                                           $(12,546,000)       $   1,331,000
      Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
         Depletion, depreciation and amortization                                    25,761,000          10,568,000
         Exploratory dry hole expense                                                 4,813,000     
                                                                                                             67,000
         Deferred income tax benefit                                                (3,100,000)                -

         Office consolidation and severance expense                                     987,000

         Unrealized gain on investment in common stock                                     -               (75,000)
         Other, net                                                                 (1,643,000)            (20,000)
         Changes in operating assets and liabilities:
             Accounts receivable                                                    (1,969,000)             733,000
             Prepaid and other                                                          266,000           (960,000)
             Accounts payable                                                       (4,695,000)           4,536,000
             Interest payable                                                         2,964,000            (72,000)
                                                                               -----------------   -----------------
                         Net cash provided by operating activities                   10,838,000          16,108,000
                                                                               -----------------   -----------------

 CASH FLOWS FROM INVESTING ACTIVITIES
         Sale of oil and gas properties                                                             
                                                                                        23,000              24,000
         Capital expenditures and acquisitions                                     (56,924,000)        (27,518,000)
         Sale of investment in common stock                                                -             1,717,000
         Decrease/(increase) in restricted deposits                                 (1,178,000)             65,000
                                                                               -----------------   -----------------
                         Net cash used by investing activities                     (58,079,000)        (25,712,000)
                                                                               -----------------   -----------------

 CASH FLOWS FROM FINANCING ACTIVITIES
         Proceeds from common stock offering, net                                           -            21,997,000
         Long term debt proceeds                                                     36,549,000          15,800,000
         Repayment of long-term debt                                               (23,000,000)        (28,600,000)
                                                                               -----------------   -----------------
                         Net cash provided by financing activities                   13,549,000           9,197,000
                                                                               -----------------   -----------------

 NET DECREASE IN CASH                                                              (33,692,000)           (407,000)

 CASH AT BEGINNING OF YEAR                                                           36,909,000           1,736,000
                                                                               -----------------   -----------------

 CASH AT SEPTEMBER 30                                                             $   3,217,000       $   1,329,000
                                                                               =================   =================
</TABLE>

<PAGE>

                                  PANACO, Inc.
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

Note 1 - BASIS OF PRESENTATION

     In the  opinion of  management,  the  accompanying  unaudited  consolidated
financial  statements  contain all  adjustments  necessary to present fairly the
financial  position  as of  September  30,  1998 and  December  31, 1997 and the
results of operations  and cash flows for the periods  ended  September 30, 1998
and 1997.  Most  adjustments  made to the financial  statements are of a normal,
recurring  nature.  Although  the  Company  believes  that the  disclosures  are
adequate to make the information  presented not misleading,  certain information
and footnote disclosures,  including significant  accounting policies,  normally
included in financial  statements prepared in accordance with generally accepted
accounting  principles have been condensed or omitted  pursuant to the rules and
regulations  of the  Securities  and Exchange  Commission  (the  "SEC").  A more
complete  description of the accounting policies followed by the Company are set
forth in Note 1 to the Company's financial  statements in Form 10-K for the year
ended  December  31,  1997.  These  financial   statements  should  be  read  in
conjunction with the financial statements and notes included in the Form 10-K.

Note 2 - ACQUISITIONS

     On May 14, 1998 the Company  entered  into a definitive  agreement  with BP
Exploration and Oil, Inc.  ("BP") to acquire BP's 100% working  interest in East
Breaks Blocks 165 and 209 and 75% working interest in High Island Block 587. The
acquisition  was accounted  for using the purchase  method and closed on May 26,
1998. PANACO became the operator of all three blocks effective June 1, 1998. The
Company  acquired  the  properties  for $19.6  million in cash.  Included in the
acquisition  is the  production  platform,  located in 863 feet of water in East
Breaks Block 165. The Company also acquired  31.72 miles of 12"  pipeline,  with
capacity  of over  20,000  barrels  of oil per day,  which  ties the  production
platform to the High Island Pipeline System, the major oil transportation system
in the area.  It also  acquired  9.3 miles of 12 3/4"  pipeline,  which ties the
production   platform  to  the  High  Island  Offshore  System,  the  major  gas
transportation  system in the area.  The  allocation  of the  purchase  price is
preliminary,  however,  management  does not expect that any change in the final
allocation  of the  purchase  price  and  the  resulting  effect  on  depletion,
depreciation and amortization will be material.

     The following pro forma statement of income  (operations)  data is based on
the  historical  financial  information  of  PANACO,  Inc.,  the BP  Properties,
acquired on May 26, 1998, and the Goldking Companies, Inc., acquired on July 31,
1997.  This pro forma data may not be  indicative  of the results that  actually
would  have  occurred  if these  acquisitions  had been  completed  on the dates
indicated  or which may be  obtained  in the  future.  The pro  forma  financial
information  should  be  read  in  conjunction  with  the  historical  financial
statements of PANACO, Inc. and the historical  statements of revenues and direct
operating  expenses of the BP  Properties  and  historical  statements of income
(operations) of the Goldking Companies.
                                  Nine months ended         Nine months ended
                                September 30, 1998          September 30, 1997
  Oil and natural gas sales          $43,929,000              $42,159,000
  Net income (loss) before
    income taxes                      (14,669,000)             5,785,000
  Net income (loss)                   (11,569,000)             5,785,000
  Net income (loss) per share          $(.48)                     $0.27

Note 3 - OIL AND GAS PROPERTIES AND PIPELINES AND EQUIPMENT

     The Company  utilizes the  successful  efforts method of accounting for its
oil and gas properties.  Under the successful efforts method,  lease acquisition
costs are capitalized.  Non-drilling  exploratory costs including geological and
geophysical costs and delay rentals are expensed. Exploratory drilling costs are
capitalized pending determination of proved reserves. If proved reserves are not
discovered,  the  exploratory  costs are  expensed.  All  development  costs are
capitalized.  Interest  on  unproved  properties  is  capitalized  based  on the
carrying amount of the properties.  Provision for  depreciation and depletion is
determined  on a  field-by-field  basis  using  the  unit-of-production  method.
Estimated future  abandonment  costs are recorded by charges to depreciation and
depletion  expense  over the lives of the  proved  reserves  of the  properties.
Unproved property costs are assessed periodically,  on a field-by-field basis to
determine  if an  impairment  has  occurred.  As  unproved  property  costs  are
determined to be productive,  the costs are transferred to proved property costs
and are amortized over the life of the proved reserves.

     The  Company  performs  a  review  for  impairment  of  proved  oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review.  For each  depletable  unit  determined  to be  impaired,  an
impairment  loss equal to the  difference  between the  carrying  value and fair
value of the  depletable  unit will be recognized.  Fair value,  on a depletable
unit basis,  is estimated to be the present value of expected  future cash flows
computed by applying  estimated future oil and natural gas prices, as determined
by management,  to estimated  future  production of oil and natural gas reserves
over the economic lives of the reserves.

     Pipelines and equipment are carried at cost.  Oil and natural gas pipelines
are depreciated on the  straight-line  method over their estimated useful lives,
primarily fifteen years. Other property is also depreciated on the straight-line
method over their useful lives, ranging from three to seven years.

Note 4 - CASH FLOW INFORMATION

     For purposes of the statement of cash flows, the Company considers all cash
investments  purchased  with  original  maturities of three months or less to be
cash equivalents.  Cash payments for interest totaled  $9,920,000 and $1,787,000
during the first nine months of 1998 and 1997,  respectively.  No cash  payments
for income taxes were made during the first nine months of 1998 or 1997.

Note 5 - RESTRICTED DEPOSITS

     The Company is party to various escrow and trust  agreements  which provide
for monthly  deposits into escrow and trust accounts to satisfy future  plugging
and  abandonment  obligations.  The terms of the  agreements  vary as to deposit
amounts,  based upon fixed monthly amounts or percentages of the properties' net
income. With respect to plugging and abandonment operations, funds are partially
or completely  released upon the presentation by the Company to the escrow agent
or  trustee  of  evidence  that  the  operation  was or is  being  conducted  in
compliance with applicable laws and  regulations.  These amounts are included on
the financial statements as Restricted Deposits.

Note 6 - SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES

     The reserve  information  presented in the following  table was prepared by
the  Company  based upon  reports of  independent  petroleum  engineers  and are
estimates only and should not be construed as being exact amounts.  All reserves
presented  are proved  reserves that are defined as estimated  quantities  which
geological and engineering  data  demonstrate  with  reasonable  certainty to be
recoverable in future years from known  reservoirs  under existing  economic and
operating conditions.
Proved developed and undeveloped reserves         Oil             Gas
                                                 (Bbls)          (Mcf)

December 31, 1997                             4,506,000       73,632,000
Acquisitions and other                        3,713,000       30,431,000
Production                                     (601,000)     (14,330,000)
Estimated reserves at September 30, 1998      7,618,000       89,733,000

     No major  discovery  or other  favorable  or  adverse  event  has  caused a
significant  change in the estimated  proved  reserves since September 30, 1998.
The  Company  does not have  proved  reserves  applicable  to  long-term  supply
agreements with  governments or authorities.  All proved reserves are located in
the United States.

Note 7 - INCOME TAXES

         

<PAGE>

PART I
Item 2.
                           MANAGEMENT'S DISCUSSION AND
                         ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

Forward-looking Statements

     Forward-looking statements in this Form 10-Q, future filings by the Company
with the Securities and Exchange  Commission,  the Company's  press releases and
oral statements by authorized officers of the Company are intended to be subject
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Investors are cautioned that all forward-looking  statements involve risks
and uncertainty, including without limitation, the risk of a significant natural
disaster,  the inability of the Company to insure  against  certain  risks,  the
adequacy of its loss reserves,  fluctuations in commodity  prices,  the inherent
limitations  in the  inability  to  estimate  oil  and  gas  reserves,  changing
government  regulations,  as well as general market conditions,  competition and
pricing.  The Company  believes that  forward-looking  statements made by it are
based upon  reasonable  expectations.  However,  no assurances can be given that
actual  results  will  not  differ  materially  from  those  contained  in  such
forward-looking  statements.  The  words  "estimate",   "anticipate",  "expect",
"predict",   "believe"  and  similar   expressions   are  intended  to  identify
forward-looking statements.
General

     The oil and gas industry has experienced  significant  volatility in recent
years because of the fluctuatory relationship of the supply of most fossil fuels
relative to the demand for such  products and other  uncertainties  in the world
energy  markets.  These  industry  conditions  should  be  considered  when this
analysis of the Compan's operations is read.

Liquidity and Capital Resources
 
     On May 14, 1998 the Company  entered  into a definitive  agreement  with BP
Exploration and Oil, Inc.  ("BP") to acquire BP's 100% working  interest in East
Breaks Blocks 165 and 209 and 75% working interest in High Island Block 587. The
acquisition  was accounted  for using the purchase  method and closed on May 26,
1998. PANACO became the operator of all three blocks effective June 1, 1998. The
Company  acquired  the  properties  for $19.5  million in cash.  Included in the
acquisition  is the  production  platform,  located in 863 feet of water in East
Breaks Block 165. The Company also acquired  31.72 miles of 12"  pipeline,  with
capacity  of over  20,000  barrels  of oil per day,  which  ties the  production
platform to the High Island Pipeline System, the major oil transportation system
in the area.  It also  acquired  9.3 miles of 12 3/4"  pipeline,  which ties the
production   platform  to  the  High  Island  Offshore  System,  the  major  gas
transportation system in the area.

     On October 9, 1997 the Company  completed  an offering of  $100,000,000  10
5/8% Senior Subordinated Notes due 2004. Interest is payable April 1 and October
1 of each year.  The net  proceeds of  $96,250,000  were used to repay or prepay
substantially  all of its  outstanding  debt in the amount of  $55,460,000.  The
remaining  proceeds were used primarily for the  development  and acquisition of
oil and gas properties

     On October 22, 1997 the Company  replaced  its existing  Bank  Facility and
entered into a new, five year  $75,000,000  revolving  credit facility (the "New
Credit Facility") with First Union National Bank, as  administrative  agent, and
Banque  Paribas.  The purpose of the New Credit Facility is to provide funds for
working  capital  support and general  corporate  purposes and to have available
letters of credit. The borrowing base on September 30, 1998 was $40,000,000. The
Company  may elect to pay  interest  on the New  Credit  Facility  at either the
Bank's prime rate or at the London  Interbank  Offered Rate on Eurodollar  loans
("LIBOR")  plus 1 to 1.75%,  depending upon the percentage of utilization of the
borrowing  base.  Eurodollar  loans can be for terms of one,  two,  three or six
months and interest is due at the expiration of the terms of such loans,  but no
less  frequently  than three months.  On September 30, 1998,  the company was in
default  of  conenants  in its Bank  Facility  which it  expects  to be cured by
amendments  to the  agreement of by a waiver  letter no later than  November 30,
1998.
 
     On March 5, 1997 the Company  completed  an offering  of  8,403,305  common
shares at $4.00 per  share,  $3.728  net of the  underwriter's  commission.  The
offering  consisted of 6,000,000 shares sold by the Company and 2,403,305 shares
sold by shareholders,  primarily Amoco Production Company (2,000,000 shares) and
lenders advised by Kayne, Anderson Investment Management, Inc. (373,305 shares).
The Company's net proceeds of $22,000,000  from the offering were used to prepay
$13,500,000  of  its  12%  subordinated   debt  and  the  remaining  funds  were
temporarily  paid on the Company's  revolving bank loan and ultimately  used for
the development of its properties.
 
     At September 30, 1998, 87% of the Company's  total assets were  represented
by oil and gas  properties  and pipelines and  equipment,  net of  depreciation,
depletion and amortization.

     In 1991 certain lenders  received a net profits  interest (NPI) in the West
Delta properties. During the nine months ended September 30, 1998, cash payments
with respect to this NPI totaled $278,000.

     The product prices  received by the Company,  including the impact of hedge
transactions  discussed below, averaged $2.08 per Mcf for natural gas and $15.05
per barrel for oil for the nine months ended September 30, 1998.

     For 1998 the  Company's  natural  gas hedge  transactions  are  based  upon
published  gas  pipeline  index  prices.  The  Company has natural gas hedged in
quantities ranging from 10,000 to 50,000 MMbtu per day in each month in 1998 for
a total of 11,980,000  MMbtu, at pipeline prices averaging  approximately  $2.05
per MMbtu, for a NYMEX equivalent of  approximately  $2.20 per MMbtu.  Including
hedge  transactions  that  Goldking  had in place,  the Company has hedged 7,356
MMbtu per day in 1999, all at an average  pipeline index swap price of $1.89 per
MMbtu. The Company has also hedged an additional 20,000 MMbtu per day from April
1999 through  September 1999 at a swap price of $2.06 per MMbtu. The Company has
hedged 218 MMbtu for each day in 2000 at an average pipeline index swap price of
$1.87.  The Company has also hedged its oil prices by hedging  1,268 Bbls of oil
for each day in 1998 at an  average  swap  price of $19.06  per Bbl,  with a 40%
participation  above $19.28 on 500 of the 1,268 Bbls. The Company has hedged 223
Bbls of oil for each day in 1999 at an  average  price of $17.27 per Bbl and 232
Bbls of oil for each day in 2000 at an average price of $17.35 per Bbl.

     The Company produces and sells natural gas, oil and natural gas liquids. As
a result,  its  financial  results can be  significantly  affected by changes in
these commodity  prices.  The Company uses derivative  financial  instruments to
hedge its exposure to changes in the market price of natural gas and oil.  While
commodity financial instruments are intended to reduce the Company's exposure to
declines in these market prices,  the commodity  financial  instruments may also
limit the Company's  gains from increases in the market price of natural gas and
oil.  As a result,  gains and  losses on  commodity  financial  instruments  are
generally  offset by similar  changes in the realized  prices of natural gas and
oil.  Gains or losses on these  transactions  are  recognized in the  production
month to which a hedge contract relates.

     Pursuant to existing agreements the Company is required to deposit funds in
bank trust and escrow accounts to provide a reserve against  satisfaction of its
eventual  responsibility  to plug and abandon wells and remove  structures  when
certain  fields no longer  produce oil and gas.  The Company has entered into an
escrow agreement with Amoco Production Company under which the Company deposits,
for the life of the fields,  in a bank escrow  account ten percent  (10%) of the
net cash flow,  as  defined in the  agreement,  from the Amoco  properties.  The
Company has  established the""PANACO East Breaks 110 Platform Trust" in favor of
the Minerals  Management  Service of the U.S.  Department of the Interior.  This
trust  required an initial  funding of $846,720 in December  1996, and remaining
deposits of $244,320  due at the end of each quarter in 1999 and $144,000 due at
the end of each quarter in 2000 for a total of  $2,400,000.  In connection  with
the BP acquisition,  the Company deposited  $1,000,000 into an escrow account on
July 1, 1998.  On the first day of each  quarter  thereafter,  the Company  will
deposit $250,000 into the escrow account until the balance in the escrow account
reaches $6,500,000.  In addition,  the Company has $9,250,000 in surety bonds to
secure its plugging and abandonment operations.

     Capital  expenditures  of $56.9  million  for the first nine months of 1998
represent an increase of $29.4 million over 1997. These expenditures,  funded by
operating  cash flows,  proceeds  from the Senior Note  offering and  borrowings
under  the  Company's  Bank  Facility,   consisted  primarily  of  drilling  and
development activities on its oil and natural gas properties and the acquisition
of oil and natural gas properties. Of the $56.9 million in capital expenditures,
35% was  invested in the  properties  acquired  from BP, 24% was invested in the
High Island 309 Field,  7% was  invested in the West  Cameron 144 Field,  5% was
invested in the  Umbrella  Point  Field,  3% was invested in the East Breaks 160
Field with the  remaining  capital  expenditures  being  incurred  primarily  on
development of its smaller onshore properties and on exploratory  projects.  The
Company  expects  that its cash  flows  from  operations  along  with  borrowing
availability  under its Bank  Facility  will be sufficient to meet its operating
and capital requirements for 1998.

Results of Operations

For the nine months ended September 30, 1998 and 1997:
 
    "Oil  and  natural  gas  sales"  increased  66% for the nine  months  ended
September  30, 1998  despite a 17%  decrease in oil prices and a 11% decrease in
natural gas prices.  Increases in natural gas and oil  production  brought about
the increase in oil and natural gas sales. The increased  production in 1998, as
discussed below, would have been greater had the storms in the Gulf of Mexico in
August and September not occurred.  During August and September, the Company was
required  for safety  reasons  to shut in at least a portion  of its  production
facilities due to severe weather on four separate occasions.

     Production.  Natural gas  production  increased  93%, to 14,330,000  Mcf in
1998,  from  7,446,000 Mcf in 1997. The BP acquisition in May 1998, the Goldking
acquisition in July 1997 and successful  developmental  drilling program in 1997
and 1998 were the primary  factors in the  increased  production.  The  Goldking
acquisition  and  several  wells  completed  on  those  properties  during  1998
accounted for an increase of 3,115,000 Mcf. Successful developmental drilling in
the High Island 309 and 310 Fields  accounted  for an increase in  production of
3,293,000 Mcf, while a successful  developmental  well and the  acquisition of a
co-owner's  working  interest  in the West  Cameron 144 Field  accounted  for an
increase of 577,000 Mcf.

     Oil  production  increased  79% in 1998 to 601,000  barrels,  from  336,000
barrels in 1997. The primary  factors in the increased oil  production  were the
acquisition  of  the  East  Breaks  165  Field  in  May  1998  and a  successful
developmental well completed in the Umbrella Point Field in January 1998.

     Prices.  Average  natural  gas  prices,  net  of  the  impacts  of  hedging
transactions,  decreased  11% in 1998,  from  $2.33  per Mcf in 1997 to $2.08 in
1998.  The 1998  natural  gas hedge  program  had the effect of  increasing  the
natural gas price  realized by $0.03 per Mcf in 1998 and  decreasing it by $0.07
per Mcf in 1997.  The Company has natural gas hedged in quantities  ranging from
10,000 to 50,000  MMbtu per day in each month in 1998 for a total of  11,980,000
MMbtu, at pipeline prices averaging  approximately  $2.05 per MMbtu, for a NYMEX
equivalent of approximately $2.20 per MMbtu.
 
     Average oil prices, net of the impacts of hedging  transactions,  decreased
17%,  to $15.05 per barrel,  from $18.02 per barrel in 1997.  The 1998 oil hedge
program had the effect of increasing the average net oil price realized by $2.26
per barrel.  The Company has hedged its oil prices on 1,268 Bbls of oil for each
day in 1998 at an average swap price of $19.06 per Bbl, with a 40% participation
above $19.28 on 500 of the 1,268 Bbls.  Depressed commodity prices will continue
to have a negative  impact on the Company's  results of  operations.  At current
prices,  the Company expects to incur an additional loss from operations for the
fourth quarter of 1998.

     "Lease  operating  expense"  decreased to 32% of oil and natural gas sales,
from 34% in 1997. Moreover, on an Mcf equivalent ("Mcfe") basis, lease operating
expenses decreased from $0.85 in 1997 to $0.70 in 1998.

     "Depletion,   depreciation  and   amortization"   increased  $15.2  million
primarily due to the increase in 1998 production as discussed  above. The amount
per Mcfe also increased from $1.12 in 1997 to $1.44 in 1998. The increase in the
amount  per Mcfe was in part due to the  decline  in  reserve  value of a small,
non-operated  oil  property.  The magnitude of depletion is also impacted by the
relatively short lives of the Company's proved reserves.  Currently, the average
life of the Company's proved reserves is approximately six years.

     "General  and  administrative  expense"  increased  $594,000 in 1998 due to
acquisitions  made by the  Company in July 1997,  April 1998 and May 1998.  As a
percentage  of oil and natural gas sales and on an Mcfe  basis,  these  expenses
remained  flat at 4% of oil and natural gas sales,  and  decreased  to $0.09 per
Mcfe from $0.11 per Mcfe in 1997.

    "Office consolidation and severance expense" was a non-recurring charge for
the costs  associated with closing the Company's  Kansas City,  Missouri office.
The charge  includes  costs for the relocation of personnel and equipment to its
Houston, Texas office and severance costs for several former employees.

    "Production and ad valorem taxes" increased  $537,000 in 1998, to 2% of oil
and natural gas sales,  from 1% in 1997. The increase is due to production  from
properties subject to state taxes which were acquired in July 1997.

     "Exploratory dry hole expense"  increased $4.7 million due to the Company's
increased  exploratory  activities  in 1998.  Of the 18 wells  the  Company  has
drilled or  participated  in during the first nine  months of 1998,  five of the
exploratory wells were not commercially productive. One of the wells was spudded
and completed during the first quarter of 1998, three others reached total depth
during the second quarter and the final one reached total depth during the third
quarter.  The  wells  were  operated  by third  parties  and the  Company  owned
interests  ranging  from 10 to 20%.  The  Company  believes  that its  continued
participation  in a modest  amount of  exploratory  activities  is an  important
factor in increasing shareholder value.
 
     "Geological  and  geophysical   expense"  during  1998  resulted  from  the
Company's non-drilling exploratory activities.

     "Interest  income"  increased  $698,000 in 1998  primarily  due to interest
income earned on the excess  proceeds  from the  Company's  Senior Note offering
completed in October 1997.

    "Interest  expense"  increased  $5.6  million  in  1998  primarily  due  to
increased  borrowing  levels.  The increase in borrowing is due to the Company's
Senior Note offering completed in October 1997. The increase in borrowing levels
is somewhat  offset by a reduced  interest  rate on a majority of the  Company's
long term debt. In connection  with the offering,  the Company prepaid or repaid
long term debt, a significant amount of which had rates in excess of the 10 5/8%
rate on the Notes.  This included  amounts borrowed in connection with the Amoco
acquisition  in October  1996 and debt assumed in  connection  with the Goldking
acquisition in July 1997.

Results of Operations

For the three months ended September 30, 1998 and 1997:
 
    "Oil and natural  gas sales"  increased  55% for the third  quarter of 1998
despite a 21%  decrease  in oil prices and a 6%  decrease in natural gas prices.
Increases in natural gas and in oil production brought about the increase in oil
and natural gas sales.  The increased  production  in 1998, as discussed  below,
would  have been  greater  had the  storms  in the Gulf of Mexico in August  and
September not occurred.  During August and  September,  the Company was required
for safety  reasons to shut in at least a portion of its  production  facilities
due to severe weather on four separate occasions.

     Production. Natural gas production increased 65%, to 5,005,000 Mcf in 1998,
from 3,025,000 Mcf in 1997. Successful  developmental drilling on the properties
acquired from Goldking accounted for an increase in production of 1,835,000 Mcf,
while a  successful  developmental  well  and the  acquisition  of a  co-owner's
working  interest  in the West  Cameron 144 Field  accounted  for an increase of
138,000 Mcf.  Production for 1998 also includes  production from the East Breaks
165 Field, acquired May 26, 1998 from BP.

     Oil  production  increased  89% in 1998 to 280,000  barrels,  from  148,000
barrels in 1997.  The primary  factors in the increased oil  production  are the
acquisition  of  the  East  Breaks  165  Field  in  May  1998  and a  successful
developmental well completed in the Umbrella Point Field in January 1998.

     Prices.  Average  natural  gas  prices,  net  of  the  impacts  of  hedging
transactions,  decreased  6%,  from $2.14 per Mcf in 1997 to $2.02 in 1998.  The
1998  natural  gas hedge  program had the effect of  increasing  the natural gas
price  realized by $0.12 per Mcf in 1998 and  decreasing  it by $0.11 per Mcf in
1997.  The Company has natural gas hedged in  quantities  ranging from 10,000 to
50,000 MMbtu per day in each month in 1998 for a total of 11,980,000  MMbtu,  at
pipeline prices averaging  approximately $2.05 per MMbtu, for a NYMEX equivalent
of approximately $2.20 per MMbtu.
 
     Average oil prices, net of the impacts of hedging  transactions,  decreased
21% in 1998 to $14.29 per barrel,  from $18.09 per barrel in 1997.  The 1998 oil
hedge program had the effect of increasing the net oil price realized in 1998 by
$2.01 per barrel. The Company has hedged its oil prices on 1,268 Bbls of oil for
each  day in 1998 at an  average  swap  price  of  $19.06  per  Bbl,  with a 40%
participation above $19.28 on 500 of the 1,268 Bbls.  Depressed commodity prices
will continue to have a negative impact on the Company's  results of operations.
At  current  prices,  the  Company  expects  to incur an  additional  loss  from
operations for the fourth quarter of 1998.

     "Lease  operating  expense"  decreased to 31% of oil and natural gas sales,
from 32% in 1997. Moreover, on an Mcfe basis, lease operating expenses decreased
from $0.74 in 1997 to $0.66 in 1998.

     "Depletion, depreciation and amortization" increased $4.9 million primarily
due to the increase in 1998 production as discussed  above.  The amount per Mcfe
also  increased  from $1.12 in 1997 to $1.39 in 1998. The increase in the amount
per  Mcfe  was  in  part  due  to the  decline  in  reserve  value  of a  small,
non-operated  oil  property.  The magnitude of depletion is also impacted by the
relatively short lives of the Company's proved reserves.  Currently, the average
life of the Company's proved reserves is approximately six years.

     "Office consolidation and severance expense" was a non-recurring charge for
the costs  associated with closing the Company's  Kansas City,  Missouri office.
The charge  includes  costs for the relocation of personnel and equipment to its
Houston, Texas office and severance costs for several former employees.

     "Production  and  ad  valorem  taxes"  increased  $315,000  in  1998.  As a
percentage of oil and natural gas sales, they increased from 2% in 1997 to 3% in
1998. On an Mcfe basis,  these  expenses also  increased  from $0.04 per Mcfe in
1997 to $0.07 per Mcfe in 1998.

     "Exploratory  dry hole  expense"  increased  $876,000 due to the  Company's
increased  exploratory  activities  in 1998.  One of the  exploratory  wells the
Company  participated during the third quarter was not commercially  productive.
The well was  operated  by a third party and the  Company  owned a 7.5%  working
interest.  The Company  believes  that its continued  participation  in a modest
amount  of  exploratory   activities  is  an  important   factor  in  increasing
shareholder value.
 
     "Geological  and  geophysical   expense"  during  1998  resulted  from  the
Company's non-drilling exploratory activities.

     "Interest  expense"  increased  $1.8  million  in  1998  primarily  due  to
increased  borrowing  levels.  The increase in borrowing is due to the Company's
Senior Note offering completed in October 1997. The increase in borrowing levels
is somewhat  offset by a reduced  interest  rate on a majority of the  Company's
long term debt. In connection  with the offering,  the Company prepaid or repaid
long term debt, a significant amount of which had rates in excess of the 10 5/8%
rate on the Notes.  This included  amounts borrowed in connection with the Amoco
acquisition  in October  1996 and debt assumed in  connection  with the Goldking
acquisition in July 1997.

Year 2000

     The   Company   is   currently   reviewing   its   information   technology
infrastructure and addressing the issues of the associated computer programs and
hardware and their ability to  distinguish  between the year 1900 and 2000.  The
Company  is  performing  this  review  with  the help of a  third-party  support
provider.  This review involves evaluating each component of this infrastructure
by the Company and its support  provider and includes a critical  review of each
component as well as discussions  with the providers or  manufacturers  of those
components.  Throughout this review, the Company has retired or replaced several
components of its information technology  infrastructure.  The costs incurred by
the Company for this process have been  immaterial to its results of operations.
The Company  believes that this review and replacement  process is substantially
complete,  and should be finished  during the first  quarter of 1999.  Once this
review is complete,  the Company and its service provider will begin testing its
entire information technology infrastructure,  which should be completed by June
30,  1999.  The  Company  believes  that the  costs of  testing  and  subsequent
modifications, if necessary, will be immaterial to its results of operations. At
this time the Company does not have a contingency plan for the Year 2000 problem
as it believes that it substantially has, and will have completely addressed the
Year 2000 problem internally by June 30, 1999.

     The  Company  has also begun the process of  identifying  and  prioritizing
critical  suppliers and customers and  communicating  with them regarding  their
plans and progress in addressing the Year 2000 problem.  These  evaluations will
be followed by the  development of contingency  plans,  as necessary,  which are
scheduled  to begin in the  first  and  second  quarters  of 1999 and  should be
completed by mid-1999.

     The  failure to correct a material  Year 2000  problem  could  result in an
interruption  in, or a failure of,  certain  normal  business  operations.  Such
failures  could  materially  and  adversely  affect  the  Company's  results  of
operations,  liquidity and financial  condition.  Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of  third-party  suppliers and customers and the reliance on
third-party  information technology support providers,  the Company is unable to
determine at this time whether the  consequences  of the Year 2000 failures will
have a material  impact on the  Company's  results of  operations,  liquidity or
financial  condition.  The  completion  of the  Company's  Year  2000  review is
expected  to  reduce  the  Company's  level of  uncertainty  about the Year 2000
problem and, in  particular,  about the Year 2000  readiness of its  third-party
suppliers and  customers.  The Company  believes that with the completion of its
review and  development of contingency  plans as necessary,  the  possibility of
significant interruptions of normal operations should be reduced.

PART II
                                OTHER INFORMATION

Item 4.           OTHER EVENTS

     On October 6, 1998 the Company held its annual meeting of  shareholders  in
Houston,  Texas. With 68% of the shareholders voting, Donald W. Chesser, Mark C.
Licata and James B. Kreamer were elected to serve on the board of directors  for
the next three years.

     A motion  to allow  25% or more of the  Company's  shareholders  to call an
annual meeting was not approved due to less than 50% of the shareholders voting.

     The choice of KPMG Peat Marwick LLP as independent accountants was approved
by the shareholders.
<PAGE>

Item 6.           EXHIBITS AND REPORTS ON FORM 8-K
 
 (a)Exhibits

    27                    Financial Data Schedule

 (b)Reports on Form 8-K

    June 16,1998    Change in registrant's certifying accountant
    June 16,1998    Acquisition of properties from BP Exploration & Oil, Inc.
    August 13,1998  Amended 8-K,  acquisition of properties  from BP Exploration
                    & Oil, Inc.
    October 23,1998 Registrant's new certifying accountant


                                   SIGNATURES
     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.
                                                   PANACO, Inc.

Date: November 16,1998                       /s/Todd R.BartTodd R. Bart,
                                                Chief Financial Officer