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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 June 30, 1999

[   ] 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   (I.R.S. Employer Identification
                     or 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 _______.


     23,985,927  shares of the  registrant's  $.01 par value  Common  Stock were
outstanding on June 30, 1999.


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<PAGE>



PART I.                             Item 1.

                             FINANCIAL INFORMATION

                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)


                                     ASSETS

<TABLE>
<CAPTION>

                                                            As of                      As of
                                                        June 30, 1999            December 31, 1998
                                                        -------------            -----------------
<S>                                                          <C>                        <C>

CURRENT ASSETS

  Cash and cash equivalents                           $    4,250,000              $    3,452,000
  Accounts receivable                                      7,831,000                   8,332,000
  Accounts receivable-employee                                 4,000                      18,000
  Prepaid and other                                          672,000                     268,000
                                                      --------------              --------------
    Total current assets                                  12,757,000                  12,070,000
                                                      --------------              --------------

OIL AND GAS PROPERTIES, AS DETERMINED BY THE
SUCCESSFUL EFFORTS METHOD OF ACCOUNTING

  Oil and gas properties, proved                         251,571,000                 238,377,000
  Oil and gas properties, unproved                        15,536,000                  15,128,000
  Less accumulated depletion, depreciation,
    and amortization                                    (163,497,000)               (152,782,000)
                                                      --------------              --------------
    Net oil and gas properties                           103,610,000                 100,723,000
                                                      --------------              --------------

PIPELINES AND EQUIPMENT

  Pipelines and equipment                                 26,295,000                  26,252,000
  Less accumulated depreciation                           (4,740,000)                 (3,415,000)
                                                      --------------              --------------
    Net pipelines and equipment                           21,555,000                  22,837,000
                                                      --------------              --------------

OTHER ASSETS

  Deferred debt costs, net                                 3,064,000                   3,359,000
  Employee note receivable                                   300,000                     300,000
  Restricted deposits and other                            5,114,000                   4,083,000
                                                      --------------              --------------
    Total other assets                                     8,478,000                   7,742,000
                                                      --------------              --------------

TOTAL ASSETS                                          $  146,400,000              $  143,372,000
                                                      ==============              ==============
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -2-


<PAGE>


                                  PANACO, Inc.
                      Consolidated Condensed Balance Sheets
                                   (Unaudited)


                      LIABILITIES AND STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                            As of                    As of
                                                         June 30, 1999           December 31, 1998
                                                         -------------           -----------------
<S>                                                         <C>                          <C>
CURRENT LIABILITIES

     Accounts payable                                   $   19,172,000            $   16,976,000
      Interest payable                                       2,701,000                 2,745,000
      Revolving credit facility                             24,000,000                13,500,000
                                                        --------------            --------------
         Total current liabilities                          45,873,000                33,221,000
                                                        --------------            --------------

LONG-TERM DEBT                                             102,249,000               102,249,000


STOCKHOLDERS' EQUITY

  Preferred Shares, $.01 par value,
    5,000,000 shares authorized; no
    shares issued and outstanding                                    -                         -
  Common Shares, $.01 par value,
    100,000,000 shares authorized;
    23,985,927 and 23,704,955 shares
    issued and outstanding, respectively                       243,000                   240,000
  Additional paid-in capital                                69,444,000                69,197,000
  Treasury stock, held at cost                                (592,000)                 (592,000)
  Retained deficit                                         (70,817,000)              (60,943,000)
                                                        --------------            --------------
    Total stockholders' equity (deficit)                    (1,722,000)                7,902,000
                                                        --------------            --------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $  146,400,000            $  143,372,000
                                                        ==============            ==============

COMMITMENTS AND CONTINGENCIES
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -3-
<PAGE>





                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                        For the Six Months Ended June 30,
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                              1999                  1998
                                                        ---------------       ---------------
<S>                                                           <C>                    <C>

REVENUES
  Oil and natural gas sales                             $   19,772,000         $   24,328,000

COSTS AND EXPENSES
  Lease operating expense                                    8,405,000              8,648,000
  Depletion, depreciation & amortization                    12,339,000             15,948,000
  General and administrative expense                         1,740,000              2,063,000
  Production and ad valorem taxes                              371,000                396,000
  Exploratory dry hole expense                                 845,000              4,922,000
  Impairment of oil and gas properties                               -              1,063,000
  Geological and geophysical expense                           564,000                794,000
                                                         -------------         --------------
    Total                                                   24,264,000             33,834,000
                                                         -------------         --------------
OPERATING LOSS                                              (4,492,000)            (9,506,000)
                                                         -------------         --------------
OTHER INCOME (EXPENSE)
  Interest income                                               35,000                751,000
  Interest expense                                          (5,417,000)            (4,959,000)
                                                         -------------         --------------
    Total                                                   (5,382,000)            (4,208,000)
                                                         -------------         --------------
LOSS BEFORE INCOME TAXES                                    (9,874,000)           (13,714,000)

INCOME TAX (BENEFIT)                                                 -             (3,498,000)
                                                         -------------         --------------

NET LOSS                                                 $  (9,874,000)        $  (10,216,000)
                                                         =============         ==============

Net loss per share                                       $       (0.41)        $        (0.43)
                                                         =============         ==============
Basic Shares Outstanding                                    23,894,339             23,961,390
                                                         =============         ==============
Diluted Shares Outstanding                                  23,894,339             23,961,390
                                                         =============         ==============
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -4-
<PAGE>

                                  PANACO, Inc.
                 Consolidated Statements of Income (Operations)
                       For the Three Months Ended June 30,
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                              1999                    1998
                                                       ----------------        ----------------
<S>                                                           <C>                      <C>

REVENUES
  Oil and natural gas sales                            $   10,601,000           $   13,578,000

COSTS AND EXPENSES
  Lease operating expense                                   4,285,000                4,586,000
  Depletion, depreciation & amortization                    5,709,000                8,941,000
  General and administrative expense                          946,000                  909,000
  Production and ad valorem taxes                             217,000                  196,000
  Exploratory dry hole expense                                845,000                3,482,000
  Impairment of oil and gas properties                              -                  505,000
  Geological and geophysical expense                          177,000                  386,000
                                                       --------------           --------------
    Total                                                  12,179,000               19,005,000
                                                       --------------           --------------

OPERATING LOSS                                             (1,578,000)              (5,427,000)
                                                       --------------           --------------
OTHER INCOME (EXPENSE)
  Interest income                                              23,000                  327,000
  Interest expense                                         (2,694,000)              (2,534,000)
                                                       --------------           --------------
         Total                                             (2,671,000)              (2,207,000)
                                                       --------------           --------------

LOSS BEFORE INCOME TAXES                                   (4,249,000)              (7,634,000)
INCOME TAX (BENEFIT)                                                -               (2,225,000)
                                                       --------------           --------------

NET LOSS                                               $   (4,249,000)          $   (5,409,000)
                                                       ==============           ==============

Net loss per share                                     $        (0.18)                   (0.23)
                                                       ==============           ==============
Basic Shares Outstanding                                   23,985,927               23,972,215
                                                       ==============           ==============
Diluted Shares Outstanding                                 23,985,927               23,972,215
                                                       ==============           ==============
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -5-
<PAGE>

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

                                                            1999                     1998
                                                       ---------------         ----------------

<S>                                                          <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES

  Net loss                                             $   (9,874,000)          $  (10,216,000)
  Adjustments to reconcile net loss to net cash
  provided by operating activities:
    Depletion, depreciation and amortization               12,339,000               15,948,000
    Impairment of oil and gas properties                            -                1,063,000
    Exploratory dry hole expense                              845,000                4,922,000
    Deferred income tax benefit                                     -               (3,498,000)
    Changes in operating assets and liabilities:
      Accounts receivable                                     501,000                  529,000
      Prepaid and other                                      (175,000)                (681,000)
      Accounts payable                                      2,196,000                2,501,000
      Interest payable                                        (44,000)                 233,000
                                                        -------------           --------------
            Net cash provided by operating activities       5,788,000               10,801,000
                                                        -------------           --------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Sale of oil and gas properties                                  -                   23,000
    Capital expenditures and acquisitions                 (14,490,000)             (49,569,000)
    Increase in restricted deposits                        (1,250,000)                (156,000)
                                                        -------------           --------------
            Net cash used by investing activities         (15,740,000)             (49,702,000)
                                                        -------------           --------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Issuance of common shares                                 250,000                        -
    Short-term borrowings                                  10,500,000               24,549,000
    Repayment of long-term debt                                     -              (18,000,000)
                                                        -------------           --------------
            Net cash provided by financing activities      10,750,000                6,549,000
                                                        -------------           --------------

NET INCREASE (DECREASE) IN CASH                               798,000              (32,352,000)

CASH AT BEGINNING OF YEAR                                   3,452,000               36,909,000
                                                        -------------           --------------

CASH AT JUNE 30                                         $   4,250,000           $    4,557,000
                                                        =============           ==============
</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -6-
<PAGE>


                                  PANACO, Inc.
       Consolidated Statement of Changes in Stockholders' Equity (Deficit)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                         Amount ($)
                                                          ----------------------------------------------------------------------
<S>                                            <C>              <C>               <C>                <C>                <C>


                                             Number of                        Additional
                                              Common          Common           Paid-in           Treasury          Retained
                                              Shares          Stock            Capital            Stock             Deficit
                                            -----------   -------------    --------------     ------------       -------------

Balances, December 31, 1998                23,704,955    $    240,000      $   69,197,000     $   (592,000)    $  (60,943,000)

Net Loss                                            -               -                   -                -         (9,874,000)

Common shares issued to the ESOP              280,972           3,000             247,000                -                  -
                                           ----------    ------------      --------------     ------------     --------------

Balances, June 30, 1999                    23,985,927    $    243,000      $   69,444,000     $   (592,000)    $  (70,817,000)
                                           ==========    ============      ==============     ============     ==============

</TABLE>


         The accompanying notes are an integral part of this statement.

                                      -7-
<PAGE>

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

Note 1 - BASIS OF PRESENTATION

     In  the  opinion  of  management,   the  accompanying  unaudited  condensed
consolidated  financial statements contain all adjustments  necessary to present
fairly the financial  position as of June 30, 1999 and December 31, 1998 and the
results of  operations  and cash flows for the  periods  ended June 30, 1999 and
1998.  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,  1998.  These  financial   statements  should  be  read  in
conjunction  with the financial  statements and notes included in the Form 10-K.
Results  for the six  months  and three  months  ended  June 30,  1998 have been
restated  to reflect  the proper  timing of  adjustments  made during the fourth
quarter of 1998 that  related to prior  quarters in that year.

Note 2 - 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.  Exploratory  drilling costs are also capitalized pending
determination  of proved  reserves.  If proved reserves are not discovered,  the
exploratory   costs  are  expensed.   All  development  costs  are  capitalized.
Non-drilling  exploratory  costs including  geological and geophysical costs and
delay rentals are expensed.  Unproved  leaseholds with  significant  acquisition
costs are assessed periodically,  on a property-by-property basis, and a loss is
recognized  to the  extent,  if any,  that  the  cost of the  property  has been
impaired.  Unproved  leaseholds  whose  acquisition  costs are not  individually
significant  are  aggregated,  and  the  portion  of  such  costs  estimated  to
ultimately  prove  nonproductive,  based on  experience,  are amortized  over an
average holding period. As unproved  leaseholds are determined to be productive,
the  related  costs  are  transferred  to  proved   leaseholds.   Provision  for
depreciation  and depletion is  determined on a depletable  unit 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.

     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 the 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 gas prices,  as  determined  by
management,  to estimated  future  production  of oil and gas reserves  over the
economic  lives of the reserves.  Future cash flows are based upon the Company's
estimate of proved  reserves.  In addition,  other  factors such as probable and
possible  reserves  are taken into  consideration  when  justified  by  economic
conditions  and  actual or  planned  drilling.  The  Company  recorded  an asset
impairment for the year ended December 31, 1998 of $20.4 million,  primarily due
to lower oil and natural gas prices.

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


                                      -8-
<PAGE>

the straight-line  method over their estimated lives,  ranging from three to ten
years.  Fees for  processing  oil and  natural  gas for others are  treated as a
reduction  of  lease   operating   expense   related  to  the   facilities   and
infrastructure.

Note 3 - CASH FLOW INFORMATION

     For  purposes of the  consolidated  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
$5,868,000  and  $5,018,000  during  the  first  six  months  of 1999 and  1998,
respectively.  Cash  payments for income  taxes  totaled $0 during the first six
months of 1999 and 1998, respectively.

Note 4 - RESTRICTED DEPOSITS

     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.  Through  November  30, 1997 the
Company  funded  $900,000 into an escrow  account with respect to the West Delta
Fields. At that time, the Company completed its obligation for the funding under
the West Delta agreement.  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 $2.4 million.  In connection  with its BP  Acquisition,  the
Company  deposited  $1.0 million into an escrow  account on July 1, 1998. On the
first day of each quarter  thereafter,  the Company  deposits  $250,000 into the
escrow account until the balance in the escrow account reaches $6.5 million.

Note 5 - COMMITMENTS AND CONTINGENCIES

     The Company is subject to various legal  proceedings and claims which arise
in the ordinary course of business. In the opinion of management,  the amount of
liability, if any, with the respect to these actions would not materially affect
the financial position of the Company or its results of operation.

   An action was filed against the Company,  Exxon Pipeline Company ("Exxon"),
National  Energy  Group,  Inc.  ("NEG"),  Mendoza  Marine,  Inc.,  Shell Western
Exploration  &  Production,  Inc.  ("Shell"),  and the  Louisiana  Department of
Transportation  and  Development.  The petition  was filed in August  1998,  and
alleges  that,  in 1997 and  perhaps  earlier,  leaks  from a buried  crude  oil
pipeline  contaminated  the plaintiffs'  property.

     Pursuant to the  purchase and sale  agreement  between the Company and NEG,
NEG is required to indemnify the Company from any damages  attributable to NEG's
operations  on the  property  after  the sale.  However,  NEG is in  Chapter  11
bankruptcy proceedings, and so any action by the Company to assert its indemnity
rights  against NEG is currently  stayed.  Counsel for the Company have prepared
and may file a  motion  to lift the stay so that  the  Company  may  assert  its
indemnification  rights  against NEG. But even if the Company is  successful  in
proving its right to indemnity, NEG's judgmentworthiness is questionable because
of the bankruptcy.

     Pursuant  to another  purchase  and sale  agreement,  the  Company  may owe
indemnity to Shell and Exxon,  from which it had acquired the property  prior to
selling  same to NEG.  The Company may have  insurance  coverage  for the claims
asserted in the petition, and has notified or is in the process of notifying all
insurance  carriers  that might  provide  coverage  under their  policies.  Some
discovery  has  occurred  in  the  case,  but  discovery  is not  yet  complete.
Therefore,  at this point it is not  possible to evaluate the  likelihood  of an
unfavorable outcome, or to estimate the amount or range of potential loss.


                                      -9-
<PAGE>

Note 6 - LONG-TERM DEBT

     The Company currently has a $20.0 million capital budget for 1999, which is
subject to change upon review by management and the board of directors. To date,
the  majority  of this  capital  budget  has either  already  been  expended  or
committed  to by the  Company.  In  conjunction  with an  amendment  to the loan
agreement,  on April 13,  1999 the  borrowing  base under the line of credit was
reduced to $25.0 million,  see "Bank Facility." The amendment  provided for $4.0
million  reductions  in this  borrowing  base on June 30, 1999 and September 30,
1999.  On June 30,  1999 the Bank  Facility  was again  amended to provide for a
waiver of the $4.0 million  reductions  on June 30, 1999 and September 30, 1999.
This new amendment provided for reductions of $750,000 per month until such time
as the borrowing base was  redetermined in accordance  with the agreement.  This
amendment also waived any financial covenant  deficiencies for the quarter ended
June 30, 1999 and reduced those  covenants  for the quarter ended  September 30,
1999.  The financial  covenants  revert back to those  contained in the original
agreement for the quarter ending  December 31, 1999.  The Company  believes that
the  remainder  of its 1999  capital  budget,  principal  reductions  and  other
commitments will be funded by its cash flow from operations.

     The loan  agreementcontains  certain  covenants  including a requirement to
maintain a positive  indebtedness to cash flow ratio, a positive working capital
ratio,  a certain  tangible net worth,  as well as  limitations  on future debt,
guarantees,  liens, dividends, mergers, and sale of assets. At June 30, 1999 the
Company was in compliance with these.  However,  the Company has classified this
debt as a current  liability  since it is possible the Company will fail to meet
these  covenants on or before  December 31, 1999.  The failure to satisfy  these
covenants,  or any of the other covenants in the Bank Facility would  constitute
an event of default  thereunder  and,  subject to grace periods,  may permit the
lenders to accelerate the indebtedness  outstanding  under the Bank Facility and
demand immediate  payment thereof.  In such event, the Company could be required
to sell certain oil and gas assets,  sell equity securities or obtain additional
bank  financing.  No  assurance  can be  given  that  such  transactions  can be
consummated  on terms  acceptable to the Company or its lenders,  whose approval
may be  required.  In this  situation,  if the  Company  is  unable to raise the
necessary  funds,  the Company could become in default on the full amount of its
indebtedness,  which includes the Senior Notes.  The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility.

Note 7 - 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, 1998                               7,454,000     81,249,000
Extensions and discoveries                      1,768,000     10,176,000
Production                                       (551,000)    (6,304,000)
                                                ---------     ----------
Estimated reserves at June 30, 1999             8,671,000     85,121,000
                                                =========     ==========
     No major  discovery  or other  favorable  or  adverse  event  has  caused a
significant  change in the estimated  proved  reserves  since June 30, 1999. 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.


                                      -10-
<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 ability 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 fluctuating 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 Company's operations is read.

Liquidity and Capital Resources
-------------------------------

     The Company currently has a $20.0 million capital budget for 1999, which is
subject to change upon review by management and the board of directors. To date,
the  majority  of this  capital  budget  has either  already  been  expended  or
committed  to by the  Company.  In  conjunction  with an  amendment  to the loan
agreement,  on April 13,  1999 the  borrowing  base under the line of credit was
reduced to $25.0 million,  see "Bank Facility." The amendment  provided for $4.0
million  reductions  in this  borrowing  base on June 30, 1999 and September 30,
1999.  On June 30,  1999 the Bank  Facility  was again  amended to provide for a
waiver of the $4.0 million  reductions  on June 30, 1999 and September 30, 1999.
This new amendment provided for reductions of $750,000 per month until such time
as the borrowing base was  redetermined in accordance  with the agreement.  This
amendment also waived any financial covenant  deficiencies for the quarter ended
June 30, 1999 and reduced those  covenants  for the quarter ended  September 30,
1999.  The financial  covenants  revert back to those  contained in the original
agreement for the quarter ending  December 31, 1999.  The Company  believes that
the  remainder  of its 1999  capital  budget,  principal  reductions  and  other
commitments will be funded by its cash flow from operations.

     Bank Facility

     On June 30, 1999 the Company amended its reducing, revolving line of credit
(the "Bank  Facility")  which is  designed  to provide  the  Company up to $75.0
million depending on the Company's borrowing base, as determined by the lenders.
The  Company's  borrowing  base  at  June  30,  1999  was  $24.3  million,  with
outstanding  principal under the revolver of $24.0 million. The principal amount
of the loan is due October 22,  2002.  However,  at no time may the Company have


                                      -11-
<PAGE>

outstanding  borrowings in excess of its borrowing  base. The third amendment to
the Bank Facility requires principal reductions of $750,000 per month until such
time as the borrowing  base is  redetermined  in accordance  with the agreement.
Interest  on the loan is  computed  at the bank's  prime rate or at 1.5 to 2.25%
(depending  upon the  percentage of the facility being used) over the applicable
London Interbank  Offered Rate ("LIBOR") on Eurodollar  loans.  Eurodollar loans
can be for terms of one, two,  three or six months and interest on such loans is
due at the expiration of the terms of such loans,  but no less  frequently  than
every three months.  The Bank Facility is  collateralized by a first mortgage on
the Company's offshore  properties.  The amendment on June 30, 1999 provides for
the establishment of a lockbox and cash collateral  account, as described in the
agreement, with the administrative agent no later than August 31, 1999.

     The loan agreement  contains certain  covenants  including a requirement to
maintain a positive  indebtedness to cash flow ratio, a positive working capital
ratio,  a certain  tangible net worth,  as well as  limitations  on future debt,
guarantees,  liens, dividends, mergers, and sale of assets. At June 30, 1999 the
Company was in compliance with these.  However,  the Company has classified this
debt as a current  liability  since it is possible the Company will fail to meet
these  covenants on or before  December 31, 1999.  The failure to satisfy  these
covenants,  or any of the other covenants in the Bank Facility would  constitute
an event of default  thereunder  and,  subject to grace periods,  may permit the
lenders to accelerate the indebtedness  outstanding  under the Bank Facility and
demand immediate  payment thereof.  In such event, the Company could be required
to sell certain oil and gas assets,  sell equity securities or obtain additional
bank  financing.  No  assurance  can be  given  that  such  transactions  can be
consummated  on terms  acceptable to the Company or its lenders,  whose approval
may be  required.  In this  situation,  if the  Company  is  unable to raise the
necessary  funds,  the Company could become in default on the full amount of its
indebtedness,  which includes the Senior Notes.  The holders of the Senior Notes
have acceleration rights, subject to certain grace periods, if the Company is in
default under the Bank Facility. Due to the restrictive covenants and borrowing
base limitations  imposed by the Bank Facility the Company is evaluating several
alternative  sources of funding to improve its current  liquidity and to provide
resources for continued reserve growth.

     Property Acquisition

     On May 14, 1998 the Company  entered  into a definitive  agreement  with BP
Exploration  and Oil, Inc. (the "BP  Acquisition")  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.

     Senior Note offering

     On October 9, 1997, the Company issued $100.0 million  principal  amount of
10 5/8%  Senior  Notes due  October  1, 2004.  Interest  on the Notes is payable
semi-annually  in  arrears on each April 1 and  October 1,  commencing  April 1,
1998.  Of the  $96.2  million  net  proceeds,  $55.5  million  was used to repay
substantially all of the Company's  outstanding  indebtedness with the remaining
$40.7 million used for capital expenditures and the BP Acquisition.


                                      -12-
<PAGE>

     Common Stock offering

     On March 5, 1997 the Company  completed  an offering of 8.4 million  common
shares at $4.00 per  share,  $3.728  net of the  underwriter's  commission.  The
offering  consisted  of 6.0  million  shares sold by the Company and 2.4 million
shares sold by  shareholders,  primarily Amoco  Production  Company (2.0 million
shares) and  lenders  advised by Kayne,  Anderson  Investment  Management,  Inc.
(373,305  shares).  The  Company's net proceeds of $22 million from the offering
were used to prepay $13.5 million 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.

     Commodity price hedges

     In 1999 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 7,300 to 37,300 MMbtu per day in each month in 1999 for
a total of 8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per
MMbtu, for a NYMEX equivalent of approximately  $2.14 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 hedged a total of 540,000 bbls of oil in 1999 at an average
NYMEX West Texas  Intermediate  equivalent  floor  price of $15.34 per bbl.  The
number of hedged bbls per day ranges from 232 to 2,232. Of the oil hedged, 1,000
bbls per day have a floor  price of $15.00 per bbl and a cap price of $19.12 per
bbl and  another  1,000 bbls per day have a floor  price of $15.00 per bbl and a
cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed the cap price
for the period in which the Company has a cap price in effect,  the Company must
pay the difference to the company that effected the swap for the total number of
bbls  hedged.  The Company has hedged 232 Bbls of oil for each day in 2000 at an
average price of $17.35 per Bbl.

     Due to an increase in NYMEX future  commodity  prices  since the  inception
date of the respective hedge agreements,  as of June 30, 1999, the fair value of
these agreements is a $1.7 million loss.

     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.

     Restricted deposits

     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 $2.4 million.  In connection with
the BP Acquisition, the Company deposited $1.0 million into an escrow account on



                                      -13-
<PAGE>

July 1, 1998. On the first day of each quarter thereafter,  the Company deposits
$250,000 into the escrow account until the balance in the escrow account reaches
$6.5  million.  In  addition,  the Company has $9.3  million in surety  bonds to
secure its plugging and abandonment operations.

     Capital expenditures

     Capital  expenditures  totaled  $14.5  million  for the first six months of
1999,  which  represents  a 71%  decrease  from the $49.6  capital  expenditures
incurred in the comparable period of 1998. The capital expenditures  incurred in
1999 were primarily for the development of the East Breaks 165 Field,  which was
acquired in May 1998,  and property  acquisition  and well costs incurred in the
Price Lake Field  (Stallion  prospect)  and North  Cowards  Gully  Field.  These
expenditures  were funded with cash flows from  operations and borrowings  under
the Bank Facility, accounting for the $10.5 million increase in debt outstanding
at June 30, 1999. The decrease in capital  expenditures  is primarily due to the
decrease in availability of capital resources from lower commodity  prices.  The
Company's total capital budget for 1999 is $20.0 million,  the majority of which
has already been expended or committed to spend.

Results of Operations
---------------------

For the six months ended June 30, 1999 and 1998:
------------------------------------------------

     "Oil and natural gas sales"  decreased 19% for the first six months of 1999
due to the  combination of a 14% decrease in total  production and a 5% decrease
in total oil and natural gas sales prices.  Natural gas production decreased 32%
in 1999 while oil production increased 71%.

     PRODUCTION. Natural gas production decreased 32%, to 6.3 billion cubic feet
("Bcf") in 1999,  from 9.3 Bcf in 1998. The shut in of the West Delta Fields and
reduced  production  from the High Island 309 Fields  accounted  for the largest
part of the decreases. Production from the High Island 309 Fields decreased from
4.2  Bcf in  1998  to 1.8  Bcf in 1999  due to  repair  work  being  done on the
production  facilities  in the first  quarter of 1999 while the remainder of the
reduction was due to natural production declines. The West Delta Fields produced
1.8 Bcf of  natural  gas in 1998  versus .7 Bcf in 1999 for the most part due to
production  being shut in while Tennessee Gas Pipeline  repairs were being made.
The BP acquisition in May 1998 added 1.0 Bcf of production in 1999, which offset
part of the overall decreased production.

     Oil  production  increased  71% in 1999 to 551,000  barrels,  from  322,000
barrels in 1998.  The primary  factor in the  increased oil  production  was the
acquisition of the East Breaks 165 Field in May 1998,  which is primarily an oil
field.

     PRICES.  Average  natural  gas  prices,  including  the  impacts of hedging
transactions,  decreased  11% in 1999,  from  $2.07  per Mcf in 1998 to $1.84 in
1999.  The Company's  natural gas hedge program had the effect of decreasing the
natural gas price realized by $0.04 per Mcf during 1999 and $0.01 per Mcf during
1998.  The Company has natural gas hedged in  quantities  ranging  from 7,300 to
37,300  MMbtu per day in each month in 1999 for a total of 8,770,000  MMbtu,  at
pipeline prices averaging  approximately $1.99 per MMbtu, for a NYMEX equivalent
of approximately $2.14 per MMbtu.

     Average  oil  prices,   including  the  impacts  of  hedging  transactions,
decreased 6%, to $14.78 per barrel, from $15.71 per barrel in 1998. The 1999 oil
hedge program had the effect of increasing the average net oil price realized by
$0.18 per barrel.  The Company has hedged a total of 540,000 bbls of oil in 1999
at an average NYMEX West Texas Intermediate equivalent floor price of $15.34 per
bbl.  The  number of hedged  bbls per day ranges  from 232 to 2,232.  Of the oil



                                      -14-
<PAGE>

hedged,  1,000 bbls per day have a floor price of $15.00 per bbl and a cap price
of $19.12 per bbl and  another  1,000 bbls per day have a floor  price of $15.00
per bbl and a cap price of $17.50 per bbl. If the NYMEX equivalent prices exceed
the cap price for the period in which the Company has a cap price in effect, the
Company must pay the  difference  to the company that  effected the swap for the
total number of bbls hedged.

     "Lease  operating  expense"  increased to 43% of oil and natural gas sales,
from 36% in 1998. On an Mcf equivalent  ("Mcfe") basis, lease operating expenses
also  increased  from  $0.77  in 1998 to  $0.87 in  1999.  These  increases  are
primarily due to the decreases in production discussed above.

     "Depletion,  depreciation and amortization" decreased $3.6 million in large
part due to a lower  unit of  production  cost in 1999,  in  conjunction  with a
decrease  in  production.  The amount per Mcfe  decreased  from $1.42 in 1998 to
$1.28 in 1999.

     "General and  administrative  expense" decreased $322,000 in 1999 primarily
due to a reduced  provision for bad debts and cost savings from a  consolidation
of  offices in 1998,  offset  somewhat  by an  increase  in  outside  legal fees
incurred in connection  with various  corporate  legal matters  during the first
quarter of 1999. The Company resolved several of these matters during the second
quarter and anticipates a reduction in these fees for the remainder of 1999.

     "Exploratory  dry hole expense"  decreased $4.1 million in 1999 as a result
of the Company's  limited  exploratory  well  participation  in 1999.  While the
Company  believes  that  its  continued  participation  in a  modest  amount  of
exploratory  activities is an important factor in increasing  shareholder value,
the amount  budgeted for 1999 is  significantly  less than that incurred  during
1998.

     "Geological  and  geophysical  expense"  decreased  in 1999 as a result  of
reduced  seismic  acquisition  costs  and  lower  salaries  and  contract  labor
expenses.

     "Interest income" decreased  primarily due to a decrease in cash on hand in
1999 versus the comparable  period of 1998.  The interest  income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October  1997.  These excess  proceeds  were  utilized in May 1998 for the BP
Acquisition.

     "Income tax benefit" decreased in 1999 due to the complete elimination of a
deferred  income tax liability  recorded in connection  with an  acquisition  in
1997. The Company has not recorded a deferred  income tax asset to date based on
uncertainty  regarding its  utilization of over $40.2 million net operating loss
carryforwards.

For the three months ended June 30, 1999 and 1998:
--------------------------------------------------

     "Oil and natural gas sales"  decreased  22% for the second  quarter of 1999
primarily  due to a 25%  decrease in total  production.  Natural gas  production
decreased 42% in 1999 while oil production increased 40%.

     PRODUCTION.  Natural gas production decreased 42%, to 2.9 Bcf in 1999, from
5.1 Bcf in 1998. The declines in production  from the West Delta Fields and High
Island 309 Fields  accounted for the largest part of the  decreases.  Production
from the High  Island  309 Fields  was lower  during the second  quarter of 1999
primarily due to natural  production  declines.  Natural gas production from the
High  Island 309 Fields  decreased  from 2.0 Bcf in 1998 to .9 Bcf in 1999.  The


                                      -15-
<PAGE>

West Delta Fields  produced .9 Bcf of natural gas in 1998 versus .3 Bcf in 1999.
The BP  Acquisition  in May  1998  added  429,000  Mcf of  production  in  1999,
offsetting part of the decreased production.

     Oil  production  increased  40% in 1999 to 289,000  barrels,  from  206,000
barrels in 1998.  The primary  factor in the  increased oil  production  was the
acquisition of the East Breaks 165 Field in May 1998,  which is primarily an oil
field.

    PRICES.  Average  natural  gas  prices,  including  the  impacts of hedging
transactions, decreased 7% in 1999, from $2.06 per Mcf in 1998 to $1.92 in 1999.
The Company's natural gas hedge program had the effect of decreasing the natural
gas price realized by $0.14 and $0.06 per Mcf during the second quarters of 1999
and 1998, respectively. The Company has natural gas hedged in quantities ranging
from  7,300  to  37,300  MMbtu  per day in each  month  in 1999  for a total  of
8,770,000 MMbtu, at pipeline prices averaging approximately $1.99 per MMbtu, for
a NYMEX equivalent of approximately $2.14 per MMbtu.

     Average  oil  prices,   including  the  impacts  of  hedging  transactions,
increased  11%, to $17.06 per barrel,  from $15.32 per barrel in 1998.  The 1999
oil  hedge  program  had the  effect of  increasing  the  average  net oil price
realized by $0.20 per barrel.  The 1998 oil hedge program  increased the average
realized  oil price per barrel by $2.30.  The Company  hedged a total of 540,000
bbls of oil in 1999 at an average NYMEX West Texas Intermediate equivalent floor
price of $15.34 per bbl.  The number of hedged  bbls per day ranges  from 232 to
2,232.  Of the oil  hedged,  1,000 bbls per day have a floor price of $15.00 per
bbl and a cap  price of $19.12  per bbl and  another  1,000  bbls per day have a
floor  price of $15.00 per bbl and a cap price of $17.50  per bbl.  If the NYMEX
equivalent prices exceed the cap price for the period in which the Company has a
cap price in effect,  the Company  must pay the  difference  to the company that
effected the swap for the total number of bbls hedged.

     "Lease  operating  expense"  increased to 40% of oil and natural gas sales,
from 34% in 1998. On an Mcfe basis, lease operating expenses also increased from
$0.73 in 1998 to  $0.92  in  1999.  These  increases  are  primarily  due to the
decreases in production discussed above.

     "Depletion,  depreciation and amortization" decreased $3.2 million in large
part due to a lower unit of  production  cost in the second  quarter of 1999, in
conjunction  with a decrease in  production.  The amount per Mcfe decreased from
$1.42 in 1998 to $1.22 in 1999.

     "Exploratory  dry hole expense"  decreased $2.6 million in 1999 as a result
of the Company's  limited  exploratory  well  participation  in 1999.  While the
Company  believes  that  its  continued  participation  in a  modest  amount  of
exploratory  activities is an important factor in increasing  shareholder value,
the amount  budgeted for 1999 is  significantly  less than that incurred  during
1998.

     "Geological  and  geophysical  expense"  decreased  in 1999 as a result  of
reduced  seismic  acquisition  costs  and  lower  salaries  and  contract  labor
expenses.

     "Interest income" decreased  primarily due to a decrease in cash on hand in
1999 versus the comparable  period of 1998.  The interest  income earned in 1998
related to the excess proceeds from the Company's Senior Note offering completed
in October 1997.


                                      -16-
<PAGE>

Year 2000 Issue
---------------

     The various problems that may result from the use of date codes in software
and other  machinery  is referred  to as the "Year 2000  Issue." The once common
practice  of using a  two-digit  identifier  for the year in a date may  cause a
program  or system to become  faulty or  inoperative  on or prior to  January 1,
2000.  This document  serves as an  informational  disclosure  regarding the Y2K
assessment  activities  for the  Company  under  the Year 2000  Information  and
Readiness Disclosure Act of 1998.

     The Company established a program during 1998 to ensure that, to the extent
reasonably possible, all systems are or will be Year 2000 ready prior to the end
of 1999. The Year 2000 Program ("Y2K Program"),  designed with the assistance of
an outside  consultant,  consists of five phases: (a) Assessment -which includes
compiling an inventory of assets, including significant third-party supplier and
customer relationships, (b) Repair/Upgrade/Replace -including an analysis of the
assets to determine  compliance or  non-compliance  and repairing,  upgrading or
replacing those that are non-compliant,  (c) Compliance Testing, (d) Contingency
Planning, and (e) Roll-over Planning.

     A team  consisting of the  Company's  managers of  Information  Technology,
Finance and Operations has been established as the Year 2000 Compliance  Project
Team.  With the assistance of its outside  consultant,  the Team has designed an
aggressive schedule to identify information  technology ("IT") and non-IT assets
requiring readiness upgrades, and a timetable for performance and testing of the
affected  systems.  In  addition,  the  Y2K  Program  calls  for  validation  of
compliance by significant suppliers and customers.

     Once  identified,  detailed  remediation  steps will be scheduled to ensure
that internal systems and significant  external suppliers and customers meet Y2K
compatibility requirements, or that sufficient contingency plans are in place.

     Current Status

     As of August 1999, the Company's Year 2000  assessment is not complete.  An
inventory of computing,  communications  and facility  systems has been prepared
and validated.  Significant  third-party  suppliers and customers have also been
identified for validation.

     The Company has  substantially  completed the inventory for both its IT and
non-IT systems.  The Y2K Program calls for the completion of all phases for both
IT and non-IT systems by year-end 1999.

     The  Company  is also  performing  a  review  of  significant  third  party
suppliers,  customers and  purchasers  and,  where  available,  is surveying the
public  Year  2000  statements  issued  by  them.  Additionally,   it  has  sent
questionnaires  to  certain  third  party  suppliers  and  customers  requesting
information  regarding  their  vulnerability  to Year 2000  issues.  The Company
intends to pursue  appropriate  responses  to these  inquiries  and evaluate the
responses  it  receives to  determine  if  alternate  business  actions  will be
necessary.  Management  expects to complete the third party  assessment phase by
August 31, 1999, at which time contingency plans will be developed.

     Costs

     The  estimated  total  costs  for Y2K  readiness  has been  nominal.  It is
anticipated  that such costs for  complete  Y2K  readiness  will  continue to be
nominal. In addition,  there have been no material capital  expenditures for Y2K
and there is not  anticipated  to be  material  capital  expenditures,  as it is
believed at this point that most major  critical  field  operations  do not have
date sensitive  equipment.  The Company does not  separately  track the internal


                                      -17-
<PAGE>

costs  incurred  for the Y2K project as such costs are  principally  the related
payroll costs for its  information  systems  group.  Remediation  and testing is
scheduled to be completed during the 3rd quarter of 1999.

     Contingency Plans

     Should any systems,  customers or  significant  suppliers be  determined to
have questionable  remediation potential,  the Year 2000 Compliance Project Team
will  establish a  contingency  plan to address the at-risk  area.  This will be
decided  during the  analysis  phase of the overall  project now  underway.  The
Company is unable at this time to  determine  what  contingency  plans,  if any,
should be  implemented.  As the Company  progresses  through the Y2K Program and
identifies  specific  risk  areas,  it intends to timely  implement  appropriate
remedial actions and contingency plans.

     Risks

     The failure to correct a Year 2000 problem could result in the interruption
or failure of certain  normal  business  activities or  operations.  The Company
believes that the greatest risks lie in its (a) financial systems  applications,
(b) embedded chips in field equipment, (c) and third parties. A significant Year
2000-related  disruption in these systems could disrupt financial and accounting
functions, crude oil and natural gas production,  transportation,  and marketing
activities.  This  disruption  could  have  a  material  adverse  effect  on the
Company's operating results and liquidity.

     The Company is not  presently  aware of any vendor  related Year 2000 issue
that is likely  to result in any  disruption  of this  type.  Although  there is
inherent  uncertainty  in the Year 2000 issue,  the Company  expects  that as it
progresses in its Y2K Program,  the level of uncertainty about the impact of the
Year 2000 issue will be reduced significantly.

     Conclusion and Disclaimers

     These estimates and conclusions contain forward-looking  statements and are
based on  management's  best estimates of future events.  PANACO's  expectations
about  risks,  future  costs,  and  the  timely  completion  of  its  Year  2000
remediation  are subject to  uncertainties  that could cause  actual  results to
differ materially from the statements made in this readiness disclosure.

Changes in Accounting Principles
--------------------------------

     Accounting for Derivatives

     Statement of Financial  Accounting  Standards ("SFAS") No. 133, "Accounting
for Derivative  Instruments and for Hedging  Activities,"  provides guidance for
accounting for derivative instruments and hedging activities. In July 1999, SFAS
No. 137 "Deferring  Statement 133's Effective Date," was issued which delays the
effective date for one year, to fiscal years  beginning after June 15, 2000. The
Company has not yet completed an  evaluation of the impact of the  provisions of
SFAS No. 133.


                                      -18-
<PAGE>

     Other Contingencies

     The Company is subject to various legal  proceedings and claims which arise
in the ordinary course of business. In the opinion of management,  the amount of
liability, if any, with the respect to these actions would not materially affect
the financial position of the Company or its results of operation.

PART II                          OTHER INFORMATION

Item 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On May 27, 1999, the Company held its 1999 Annual Meeting of  Shareholders.
At such time the following  items were submitted to a vote of security  holders.
Such matters were submitted to the security  holders through the solicitation of
proxies.

     1. Election of Class I Directors.

     The following persons were elected to serve on the Board of Directors until
the 2000 Annual Meeting of Shareholders or until their successors have been duly
elected and qualified. The Directors received the votes set forth opposite their
respective names:


Name                                For            Against            Abstain
----                                ---            -------            -------

A. Theodore Stautberg, Jr.       17,742,925        495,984               0

Felix Pardo                      17,743,418        495,491               0

     2. Shareholders were requested to vote on a proposal to amend the Company's
Certificate  of  Incorporation  to increase the number of  authorized  shares of
Common Stock, par value $0.01,  from 40 million shares to 100 million shares. In
order to be adopted, such proposal required an affirmative vote of two-thirds of
the outstanding  share (15,990,618  shares).  Such amendment was approved by the
shareholders.  Such proposal received 17,038,099 votes in favor, 1,096,681 votes
against, and 104,129 abstained or withheld authority to vote.

     3. Shareholders were requested to vote on a proposal to amend the Company's
Certificate of  Incorporation  and By-Laws to allow  stockholders  owning 25% or
more of the outstanding  shares of common stock to call (i) a special meeting of
the  stockholders,  or (ii) an annual meeting of the stockholders if such annual
meeting has not been called by June 1 of any year. In order to be adopted,  such
proposal  required  an  affirmative  vote  of  80%  of  the  outstanding  shares
(19,188,742  shares).  Such  amendment  was rejected by the  shareholders.  Such
proposal  received  8,286,762  votes in  favor,  2,029,500  votes  against,  and
7,922,647 abstained or withheld authority to vote.

     4. Shareholders were requested to vote on a proposal to amend the Company's
Certificate  of  Incorporation  and Bylaws to eliminate  the  classification  of
directors.  Such  amendment  was  rejected by the  shareholders.  In order to be
adopted,  such  proposal  required  an  affirmative  vote of  two-thirds  of the
outstanding shares (15,990,618  shares).  Such proposal received 8,293,657 votes
in favor, 1,988,475 votes against, and 7,956,777 abstained or withheld authority
to vote.


                                      -19-
<PAGE>

Item 6.        EXHIBITS AND REPORTS ON FORM 8-K

         (a)   Exhibits

               27            Financial Data Schedule


               10.24         Third Amendment to Amended and Restated  Credit
                             Agreement Dated June 30, 1999

         (b)   Reports on Form 8-K

               None


                                   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:       August 13, 1999              /s/ Todd R. Bart
        ------------------------         -------------------------------------
                                         Todd R. Bart, Chief Financial Officer
<PAGE>


EXHIBIT 10.24

            THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT


     THIS THIRD  AMENDMENT  TO  AMENDED  AND  RESTATED  CREDIT  AGREEMENT  (this
"Amendment")  dated as of June 30,  1999 is  among:  PANACO,  INC.,  a  Delaware
corporation  (the  "Borrower");  each of the  Lenders  (as defined in the Credit
Agreement  as  hereinafter  defined)  that is a  signatory  hereto;  FIRST UNION
NATIONAL  BANK, a national  banking  association  (in its  individual  capacity,
"First  Union"),  as agent for the Lenders (in such capacity,  together with its
successors  in such  capacity,  the  "Administrative  Agent");  and  PARIBAS  as
Documentation Agent.

                                 R E C I T A L S
                                 ---------------

     A. The Borrower,  the Administrative Agent, the Documentation Agent and the
Lenders have entered into that  certain  Amended and Restated  Credit  Agreement
dated as of October 9, 1997 as amended by First  Amendment  to Credit  Agreement
dated as of December  11,  1998 and Second  Amendment  to Amended  and  Restated
Credit  Agreement  dated  as  of  March  31,  1999  (as  amended,   the  "Credit
Agreement"), pursuant to which the Lenders have agreed to make certain loans and
extensions of credit to the Borrower  upon the terms and  conditions as provided
therein.

     B. The Borrower has requested the Lenders to amend the Credit  Agreement to
change the reductions of the Borrowing Base.

     C. The Borrower,  the Administrative Agent, the Documentation Agent and the
Lenders now desire to make certain amendments to the Credit Agreement.

     NOW,  THEREFORE,  in  consideration  of the  premises  and  other  good and
valuable consideration and the mutual benefits,  covenants and agreements herein
expressed, the parties hereto now agree as follows:

     1. All capitalized  terms used in this Amendment and not otherwise  defined
herein shall have the meanings ascribed to such terms in the Credit Agreement.

     2.  Section  1.02 of the Credit  Agreement  is hereby  supplemented,  where
alphabetically appropriate, with the addition of the following definitions:

           "Third  Amendment"  shall mean that certain Third  Amendment to
     Amended and Restated  Credit  Agreement  dated as of June 30, 1999 among
     the  Borrower,  the Lenders, the Administrative Agent and the Documentation
     Agent.

     3. The automatic reductions of the Borrowing Base to occur on June 30, 1999
and  September  30, 1999 as set forth in Section 4 of the Second  Amendment  are
hereby  canceled.  The Borrower and the Lenders  hereby agree that the Borrowing
Base  shall  automatically  reduce  on the  last day of each  month by  $750,000
commencing  on June 30, 1999 and on each  successive  last day of each  calendar
month thereafter until the Borrowing Base is redetermined in accordance with the
Credit  Agreement.  If on the last day of any month after  giving  effect to the
automatic  reduction setforth in this Section the reduced Borrowing Base is less
than  the  aggregate  outstanding  principal  amount  of the  Loans  plus the LC
Exposure, the Borrower shall prepay such deficiency on such date.

     4. Section  2.07(b) of the Credit  Agreement  is hereby  amended to read as
follows:

     "(b) Upon  any  redetermination  of the  amount  of the  Borrowing  Base in
          accordance  with Section 2.08, if the  redetermined  Borrowing Base is
          less than the aggregate outstanding principal amount of the Loans plus
          the LC Exposure,  the Borrower  shall upon notice  thereof  prepay the
          Loans in an aggregate  principal amount equal to such excess within 30
          days of receipt of written  notice  thereof  and if a  Borrowing  Base
          deficiency  remains  after  prepaying  all of the Loans  because of LC
          Exposure,  pay to the Administrative Agent on behalf of the Lenders an
          amount  equal to such  Borrowing  Base  deficiency  to be held as cash
          collateral as provided in Section 2.10(b) hereof."

                                      -2-
<PAGE>

      5. The Credit  Agreement is hereby amended by adding the following Section
8.11:

     "Section 8.11 Cash Collateral  Account  Agreement.  On or before August 31,
1999,  the  Borrower  shall enter into a lock box  arrangement  including a cash
collateral  account  agreement  (collectively,   the  "Cash  Collateral  Account
Agreement") with the  Administrative  Agent in form and substance  acceptable to
the  Administrative  Agent and shall have notified the respective  purchasers of
the Borrower's and its Subsidiaries' Hydrocarbons to direct all proceeds arising
from  the  sale of the  Borrower's  and  its  Subsidiaries'  Hydrocarbons  to be
transferred  by check or wire  transfer  to the  account  set  forth in the Cash
Collateral  Account  Agreement.  Promptly,  each time  after the  Borrower  or a
Subsidiary  confirms a sale or enters  into a contract  in  connection  with its
Hydrocarbons,  the Borrower  shall  provide for the the dircetion of proceeds as
required by the previous sentence and send to the Administrative Agent a copy of
such  confirmation or contract.  The Cash Collateral  Account  Agreement and the
Liens  and  security  interests  established  in such  Cash  Collateral  Account
Agreement will continue until all the Indebtedness  under this Agreement is paid
in full and this Agreement is terminated."

     6. The Lenders  hereby agree to waive any default of Sections 9.13 and 9.14
for the fiscal  quarter  ending  June 30,  1999 only and to waive any default of
Section 9.12 for the period  commencing on June 30, 1999 and ending on September
29, 1999.

     7. Sections 9.12, 9.13 and 9.14 of the Credit  Agreement are hereby amended
to read as follows:

     "Section 9.12 CURRENT RATIO. The Borrower will not permit its Current Ratio
as of the end of any fiscal  quarter of the Borrower to be less than 0.75 to 1.0
at  September  30,  1999  and  1.0  to 1.0 at  the  end  of any  fiscal  quarter
thereafter.  As used in this Section 9.12, "CURRENT RATIO" shall mean, as of any
time,  the ratio of (i) current  assets at such time,  plus unused  availability
under the Aggregate  Commitments,  minus the sum of (A) prepaid expenses at such
time,  (B) advance  payments on wells at such time,  and (C) the aggregate  book
value of all of the Borrower's  assets held for sale and classified as a current
asset on the Borrower's balance sheet, to (ii) current liabilities at such time,
minus current maturities on the Notes at such time.

     Section 9.13 TANGIBLE NET WORTH.  The Borrower will not permit its Tangible
Net Worth as of the end of any fiscal  quarter of the Borrower to be less than a
negative  $7,500,000 at September 30, 1999 and at the end of any fiscal  quarter
thereafter  less than an amount  equal to 85% of Tangible Net Worth as March 31,
1999 plus 85% of the  Borrower's  Net Income (only if positive)  for each fiscal
quarter of the Borrower after December 31, 1998, plus 75% of the net proceeds of
any new  issuance of capital  stock or other equity  securities  of the Borrower
issued after March 31, 1999.

     Section 9.14  INTEREST COVERAGE RATIO.  The Borrower  will not permit its
Interest  Coverage  Ratio as of the end of any fiscal  quarter  of the  Borrower
(calculated quarterly as of the last day of each fiscal quarter) to be less than
(i) 1.5 to 1.0 for the fiscal  quarter ended  September 30, 1999 and (ii) 2.5 to
1.0 for any fiscal  quarter  thereafter.  For the purposes of this Section 9.14,
"Interest Coverage Ratio" shall mean the ratio of (i) EBITDA for the four fiscal
quarters  ending on such date to (ii) cash interest  payments made for such four
fiscal quarters of the Borrower and its Consolidated Subsidiaries.

     8. This Amendment  shall become binding on the Lenders when, and only when,
the following  conditions shall have been satisfied and the Administrative Agent
shall have received each of the following, as applicable,  in form and substance
satisfactory to the Administrative Agent or its counsel:

     (a)  counterparts  of this Amendment and the  Ratification  attached hereto
          executed by the Borrower, the Guarantors and the Lenders; and

     (b)  such other documents as it or its counsel may reasonably request.


                                      -4-
<PAGE>

     9. The  parties  hereto  hereby  acknowledge  and  agree  that,  except  as
specifically  supplemented and amended,  changed or modified hereby,  the Credit
Agreement shall remain in full force and effect in accordance with its terms.

     10. The Borrower  hereby  reaffirms that as of the date of this  Amendment,
the  representations  and  warranties  contained  in  Article  VII of the Credit
Agreement, as amended by this Amendment, are true and correct on the date hereof
as  though  made  on and as of the  date  of  this  Amendment,  except  as  such
representations and warranties are expressly limited to an earlier date.

     11.  THIS  AMENDMENT  (INCLUDING,  BUT NOT  LIMITED  TO, THE  VALIDITY  AND
ENFORCEABILITY  HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE  WITH,
THE LAWS OF THE STATE OF TEXAS, OTHER THAN THE CONFLICT OF LAWS RULES THEREOF.

     12. This  Amendment  may be executed  in two or more  counterparts,  and it
shall not be necessary that the signatures of all parties hereto be contained on
any one counterpart  hereof;  each counterpart shall be deemed an original,  but
all of which together shall constitute one and the same instrument.





                         [SIGNATURES BEGIN NEXT PAGE]



                                      -5-

<PAGE>


     IN WITNESS WHEREOF, the parties  hereto have caused this  Amendment to be
executed as of the date first above written.


BORROWER:                                      PANACO, INC.
---------



                                               By:--------------------------
                                               Name:
                                               Title:

LENDER AND ADMINISTRATIVE AGENT:               FIRST UNION NATIONAL BANK
--------------------------------



                                               By:--------------------------
                                               Name:
                                               Title:


LENDER AND DOCUMENTATION AGENT:                PARIBAS
-------------------------------



                                               By:--------------------------
                                               Name:
                                               Title:



                                               By:--------------------------
                                               Name:
                                               Title:



                                      S-1

<PAGE>

                                  RATIFICATION

     Each of the undersigned (a "Guarantor")  hereby agrees that its liabilities
under  its  respective   Guaranty   Agreement   guaranteeing  the  indebtedness,
obligations  and  liabilities  under that certain  Amended and  Restated  Credit
Agreement dated October 9, 1997, as amended,  shall remain  enforceable  against
such  Guarantor  in  accordance  with the terms of its Guaranty and shall not be
reduced,  altered, limited, lessened or in any way affected by the execution and
delivery of this Second Amendment to Amended and Restated Credit Agreement. Each
Guarantor hereby confirms and ratifies its liabilities under its Guaranty in all
respects.
                                              PANACO PRODUCTION COMPANY




                                              By:--------------------------
                                              Name:
                                              Title:



                                              GOLDKING ACQUISITION CORP.




                                               By:--------------------------
                                               Name:
                                               Title:



                                      S-2