NATIONAL ENERGY GROUP INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

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

COMMISSION FILE NO. 0-19136 (COMMON STOCK)

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

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

1400 ONE ENERGY SQUARE
4925 GREENVILLE AVENUE
DALLAS, TEXAS 75206
(Address of principal executive offices)

(214) 692-9211
(Registrant's telephone number, including area code)

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 [ ]

11,190,650 shares of the registrant's Common Stock, $0.01 par value, were
outstanding on November 12, 2002.

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NATIONAL ENERGY GROUP, INC.

INDEX

1

NATIONAL ENERGY GROUP, INC.

BALANCE SHEETS

See accompanying notes.
2

NATIONAL ENERGY GROUP, INC.

STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.
3

NATIONAL ENERGY GROUP, INC.

STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.
4

NATIONAL ENERGY GROUP, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)

See accompanying notes.
5

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002

1. SETTLEMENT OF BANKRUPTCY CASE AND FORMATION OF LIMITED LIABILITY COMPANY

National Energy Group, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 20, 1990. Effective June 11, 1991, Big
Piney Oil and Gas Company and VP Oil, Inc. merged with and into the Company. On
August 29, 1996, Alexander Energy Corporation was merged with and into a
wholly-owned subsidiary of the Company, which subsidiary was merged with and
into the Company on December 31, 1996.

On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an involuntary
petition placing the Company under protection of the Bankruptcy Court pursuant
to Title 11, Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000, the Bankruptcy Court entered a subsequent order
confirming a Plan of Reorganization (the "Plan of Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy Court
issued a final decree closing the case effective December 13, 2001. Accordingly,
the Company has effectively settled all matters relating to the Bankruptcy
Proceeding.

As mandated by the Plan of Reorganization and the Bankruptcy Court, NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August 2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company contributed
to Holding LLC all of its operating assets and oil and natural gas properties
excluding cash of $4.3 million ("LLC Contribution"). In exchange for its initial
50% membership interest in Holding LLC, Gascon Partners, an affiliate of the
Company's largest stockholder ("Gascon"), contributed its sole membership
interest in Shana National LLC, an oil and natural gas producing company, and
cash, including a $10.9 million Revolving Note issued to Arnos Corp., an
affiliate of the Company's largest stockholder ("Arnos"), evidencing the
borrowings under the Company's revolving credit facility. In connection with the
foregoing, Holding LLC initially owns 100% of the membership interest in NEG
Operating LLC ("Operating LLC"), a Delaware limited liability company. All of
the oil and natural gas assets contributed by the Company and all of the oil and
natural gas assets associated with Gascon's contribution to Holding LLC were
transferred from Holding LLC to Operating LLC on September 12, 2001, but
effective as of May 1, 2001.

The assets contributed by the Company to Holding LLC were current assets of
$11.5 million, net oil and natural gas assets of $85.0 million and other assets
of $4.8 million. The liabilities assumed by Holding LLC were current liabilities
of $4.2 million, intercompany payable to Gascon of $4.8 million and long-term
liabilities of $1.0 million.

The Holding LLC Operating Agreement entered into on September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion, to
redeem the Company's membership interest in Holding LLC at a price equal to the
fair market value of such interest determined as if Holding LLC had sold all of
its assets for fair market value and liquidated. Since all of the Company's
operating assets and oil and natural gas properties have been contributed to
Holding LLC, as noted above, following such a redemption, the Company's
principal assets would consist solely of its cash balances. In the event that
such redemption right is exercised by Gascon, the Company may be obligated to
use the proceeds that it would receive for its redeemed membership interest to
pay outstanding indebtedness and operating expenses before the distribution of
any portion of such proceeds to the Company's stockholders. Following the
payment of the Company's indebtedness (currently held by entities owned or
controlled by Carl C. Icahn) and its operating expenses, there is a substantial
risk that there will be no proceeds remaining for distribution to the Company's
stockholders.

6

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the foregoing transactions and as mandated by the Plan of
Reorganization, the Company's principal assets are its remaining cash balances,
accounts receivable from affiliates, deferred tax asset, and its initial 50%
membership interest in Holding LLC, and the principal liabilities are the $10.9
million outstanding under its existing $25 million revolving credit facility
with Arnos and its 10 3/4% senior notes and long-term interest payable on senior
notes. None of the Company's employees have been transferred to Holding LLC or
Operating LLC.

As a result of the terms and conditions of the various agreements related
to the repayment of the Company's indebtedness to Arnos and repayment of the
priority distribution amounts and the guaranteed payments (plus accrued interest
thereon) to Gascon, there is a substantial risk that there will be no amounts
remaining for distribution to the Company's stockholders.

The Company remains highly leveraged after confirmation of the Plan of
Reorganization.

2. BASIS OF PRESENTATION

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information, and with the instructions to Form 10-Q and Article 10 of Regulation
S-X and are fairly presented. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, these financial
statements contain all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position, results of operations and
cash flows for the periods indicated. The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these
estimates. The Company's quarterly financial data should be read in conjunction
with the financial statements of the Company for the year ended December 31,
2001 (including the notes thereto), set forth in the Company's Annual Report on
Form 10-K.

The results of operations for the nine months ended September 30, 2002, are
not necessarily indicative of the results expected for the full year. Certain
prior year amounts have been reclassified to correspond with the current
presentation.

The Company's contribution of all its operating assets and oil and gas
properties occurred on September 12, 2001. For tax and valuation purposes the
effective date is as of May 1, 2001, however, solely for financial reporting
purposes the transaction is as of September 1, 2001. Operations from September
1, 2001 to September 12, 2001 were not significant. Management fees and
guaranteed payments accruing from May 1, 2001 through September 1, 2001
aggregating $7,465,694 were paid by Holding LLC and recorded as an increase to
additional paid-in capital.

The Company capitalized internal general and administrative costs that
could be directly identified with acquisition, exploration and development
activities. Such capitalized costs included salary and related benefits of
individuals directly involved in the Company's acquisition, exploration and
development activities based on the percentage of their time devoted to such
activities. These costs totaled approximately $128,000 and $454,000 for the
three and nine months ended September 30, 2001. Effective with the transfer of
the Company's oil and gas assets to Holding LLC, the Company no longer
capitalizes general and administrative costs.

Overhead reimbursements received from joint interest partners which were
included as a reduction of general and administrative expense totaled
approximately $96,000 and $308,000, for the three and nine months ended
September 30, 2001. Effective with the transfer of the Company's oil and gas
assets to Holding LLC, the Company no longer receives overhead reimbursements
from joint interest partners.

7

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. MANAGEMENT AGREEMENT

The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC; although the Management Agreement
provides that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a management
fee equal to 115% of the actual direct and indirect administrative and
reasonable overhead costs incurred by the Company in operating the oil and
natural gas properties, which either the Company or Operating LLC may seek to
change within the range of 110%-115% as such change is warranted; however, the
parties have agreed to consult with each other to ensure that such
administrative and reasonable overhead costs attributable to the managed
properties are properly reflected in the management fee paid to the Company. In
addition, Operating LLC has agreed to indemnify the Company to the extent it
incurs any liabilities in connection with its operation of the assets and
properties of Operating LLC, except to the extent of its gross negligence, or
misconduct. The Company recorded $1.8 million and $5.8 million as a management
fee for the three and nine month period ended September 30, 2002.

4. COVENANT VIOLATION

On December 15, 2001, the maturity date of the credit facility with Arnos
was extended to December 31, 2003, and the Company was given a waiver of
compliance with any and all covenant violations through December 31, 2003. The
Company was not in compliance with the minimum interest coverage ratio at
September 30, 2002, however, in December 2001 the Company was given a waiver of
compliance with respect to any and all covenant violations through December 31,
2003. Arnos continues to be the holder of the credit facility, however, the
$10.9 million note currently outstanding under the credit facility was
contributed to Holding LLC as part of Gascon's contribution on September 12,
2001. The Company anticipates repayment of this amount through a priority
distribution from Holding LLC. If no priority distribution is made by December
31, 2003, the credit facility must be extended.

5. SENIOR NOTES DUE 2006

In 1996, the Company issued $100 million aggregate principal amount of
unregistered Series A 10 3/4% Senior Notes due 2006 which were exchanged in 1997
for registered Series B 10 3/4% Senior Notes due 2006 with substantially
identical terms. Collectively, the Series A Notes and Series B Notes are
referred to as the "Series A/B Notes." In August 1997, the Company issued $65
million aggregate principal amount of its unregistered Series C 10 3/4% Senior
Notes. In December 1997, the Company exchanged substantially all of the Series
A/B Notes and all of the Series C Notes for registered Series D 10 3/4% Senior
Notes due 2006. The Series D Notes are substantially identical to the Series A/B
Notes and the Series C Notes. Upon confirmation of the Joint Plan, the senior
notes are held in their entirety by Arnos and its affiliates. The Senior Notes
bear interest at an annual rate of 10 3/4%, payable semiannually in arrears on
May 1 and November 1 of each year. The Senior Notes are senior, unsecured
obligations of the Company, ranking pari passu with all existing and future
senior indebtedness of the Company, and senior in right of payment to all future
subordinated
8

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

indebtedness of the Company. Subject to certain limitations set forth in the
indenture covering the Senior Notes (the "Indenture"), the Company and its
subsidiaries may incur additional senior indebtedness and other indebtedness.

The Indenture contains certain covenants limiting the Company with respect
to the following: (i) asset sales; (ii) restricted payments; (iii) the
incurrence of additional indebtedness and the issuance of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.

In August 2001, the Company redeemed both $16.4 million of principal
outstanding under the senior note obligations and $4.8 million of long-term
interest payable on senior notes for $10.5 million. The Company paid two Arnos
affiliates approximately $.4 million in current interest on the redeemed senior
note obligations at the date of redemption related to interest owed from the
last semi-annual interest payment date of May 1, 2001 to the date of redemption.
As this was a partial redemption of the senior notes, it has been accounted for
as a modification of terms that changes the amounts of future cash payments.
Accordingly, the excess of redeemed principal and interest over the redemption
payment of $10.5 million will be amortized as a reduction to interest expense
over the remaining life of the bonds. In connection with this transaction, the
Company borrowed $10.9 million under its existing credit facility with Arnos.

6. INVESTMENT IN NEG HOLDING LLC

As explained below, the Company's investment in NEG Holding LLC is recorded
as a preferred investment. The initial investment was recorded at historical
carrying value of the net assets contributed with no gain or loss recognized on
the transfer.

The following is a summary balance sheet of NEG Holding LLC as of September
30, 2002.

Current assets.............................................. $ 97,324,800
Net oil and natural gas properties.......................... 119,139,604
Net other property and equipment............................ 1,462,417
Other long-term assets...................................... 14,353
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Total assets................................................ $217,941,174
============
Current liabilities......................................... $ 6,227,690
Long-term liabilities....................................... 2,087,313
Members' equity............................................. 209,626,171
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Total liabilities and members' equity....................... $217,941,174
============

The following is a summary income statement for NEG Holding LLC for the
nine months ended September 30, 2002.

Total revenues.............................................. $ 26,507,103
Total cost and expenses..................................... (22,824,976)
------------
Operating income............................................ 3,682,127
Interest income and other................................... 9,217,636
------------
Net income.................................................. $ 12,899,763
============

For the nine month period ended September 30, 2002, NEG Holding LLC
generated cash flows of $20.9 million from operating activities, used $22.5
million in investing activities and had no cash flows from

9

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

financing activities. Audited financials will be prepared and included in the
Company's Form 10-K at December 31, 2002.

Under the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. The priority distribution is to be
made on or before November 1, 2006. Guaranteed payments are to be paid, on a
semi annual basis, based on 10.75% of the outstanding priority distribution
amount. After the payments to the Company, Gascon is to receive distributions
equivalent to the priority distribution amount and guaranteed payments plus
other amounts as defined. Following the above distributions to the Company and
Gascon, additional distributions, if any, are to be made in accordance with
their respective capital accounts. The order of distributions is listed below.
Because of the substantial uncertainty that the Company will receive any
distributions above the priority and guaranteed payment amounts, the Company
will account for its investment in Holding LLC as a preferred investment whereby
guaranteed payment amounts received and receipts of the priority distribution
amount are recorded as reductions in the investment, and income is recognized
from accretion of the investment up to the priority distribution amount
including the guaranteed payments (based on the interest method) and the
residual interest attributable to Holding LLC will be valued at zero.

This method of accounting results in the recognition of income to November
1, 2006 equivalent to the difference between the original contribution amount of
$91.4 million and the priority distribution amount of $202.2 million. As a
result, the investment will accrete (increase) towards the priority distribution
amount. The residual interest attributable to the Company's investment in
Holding LLC has been valued at zero because of the substantial uncertainty that
the Company will receive any future distributions in excess of the priority
distribution and the guaranteed payments.

The Holding LLC Operating Agreement requires that (provided full payment of
all outstanding guaranteed payments has been made) distributions shall be made
to both the Company and Gascon as follows:

- First and through November 1, 2006, to the Company in an amount equal to
the Company's initial priority amount of $202.2 million minus any
distributions previously made to the Company.

- Second, to Gascon in an amount equal to the excess of (a) the sum of (i)
the Company's initial priority amount of $202.2 million, (ii) any
additional capital contributions made by Gascon, (iii) the aggregate sum
of all Guaranteed Payments, and (iv) an amount equal to the Accrued
Gascon Amount (which, under the Holding LLC Operating Agreement, means an
amount equal to the aggregate of interest that would be computed annually
if interest were imposed at a rate equal to the prime rate plus 1/2% as
of the close of each fiscal year on the excess of (a) the sum of (i) the
cumulative Guaranteed Payments and (ii) the aggregate of any Accrued
Gascon Amount computed in prior years, over (b) the cumulative
distributions by Holding LLC to Gascon), over (b) distributions
previously made to Gascon pursuant to this provision in the Holding LLC
Operating Agreement.

- Third, to the Company and Gascon in accordance with their then respective
Capital Accounts.

Holding LLC, the sole member of Operating LLC, has informed the Company
that it has executed a Purchase and Sale Agreement (PSA) on behalf of Operating
LLC to purchase certain oil and gas assets located in Texas. The transaction was
recommended by the Company, following its due diligence review of the assets to
be acquired, in its role as manager of Operating LLC's oil and gas assets
pursuant to the Management Agreement. The PSA provides that a closing shall
occur on or before November 22, 2002 or as otherwise mutually agreed. If
consummated, the transaction is expected to materially increase the oil and gas
assets of Operating LLC while reducing Operating LLC's cash balances by
approximately $45 million.

10

NATIONAL ENERGY GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Upon completion of the federal income tax return for the year 2001, the
Company estimates it has net operating loss carryforwards available for federal
income tax purposes of approximately $114.9 million which begin expiring in
2002. Utilization of approximately $27.6 million of the net operating loss
carryforwards is subject to various limitations because of previous changes in
control of ownership (as defined in the Internal Revenue Code) of the Company
and Alexander Energy. Additional net operating loss limitations may be imposed
as a result of subsequent changes in stock ownership of the Company. The Company
recorded a deferred tax asset of $31.6 million as of September 30, 2001, based
upon the projected allocations of taxable income by Holding LLC. Ultimate
realization of the deferred tax asset is dependent upon, among other factors,
the Company's ability to generate sufficient taxable income within the
carryforward periods and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used. As a result of the
recognition of expected future income tax benefits, subsequent periods will
reflect a full effective tax rate provision.

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the Company's
Financial Statements and "Selected Financial Data" and respective notes thereto,
included elsewhere herein. The information below should not be construed to
imply that the results discussed herein will necessarily continue into the
future or that any conclusion reached herein will necessarily be indicative of
actual operating results in the future. Such discussion only represents the best
present assessment by management of the Company.

On February 11, 1999, the United States Bankruptcy Court for the Northern
District of Texas, Dallas Division ("Bankruptcy Court") entered an involuntary
petition placing the Company under protection of the Bankruptcy Court pursuant
to Title 11, Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Proceeding"). On July 24, 2000 the Bankruptcy Court entered a subsequent order
confirming a Plan of Reorganization (the "Plan of Reorganization") jointly
proposed by the Company and the official committee of unsecured creditors, which
Plan of Reorganization became effective on August 4, 2000. The Bankruptcy Court
issued a Final Decree closing the case effective December 13, 2001. Accordingly,
the Company has effectively settled all matters relating to the Bankruptcy
Proceeding.

As mandated by the Plan of Reorganization and the Bankruptcy Court, NEG
Holding LLC ("Holding LLC"), a Delaware limited liability company, was formed in
August 2000. In exchange for an initial 50% membership interest in Holding LLC,
on September 12, 2001, but effective as of May 1, 2001, the Company contributed
to Holding LLC all of its operating assets and oil and natural gas properties
excluding cash of $4.3 million. In exchange for its initial 50% membership
interest in Holding LLC, Gascon Partners, an entity owned or controlled by Carl
C. Icahn, the Company's largest stockholder ("Gascon"), contributed its sole
membership interest in Shana National LLC, an oil and natural gas producing
company, and cash, including a $10.9 million Revolving Note issued to Arnos
Corp., an entity owned or controlled by Carl C. Icahn, the Company's largest
stockholder ("Arnos"), evidencing the borrowings under the Company's revolving
credit facility. In connection with the foregoing, Holding LLC initially owns
100% of the membership interest in NEG Operating LLC ("Operating LLC"), a
Delaware limited liability company. All of the oil and natural gas assets
contributed by the Company and all of the oil and natural gas assets associated
with Gascon's contribution to Holding LLC were transferred from Holding LLC to
Operating LLC on September 12, 2001, but effective as of May 1, 2001.

Pursuant to the Holding LLC Operating Agreement, the Company is to receive
guaranteed payments, in addition to a priority distribution amount of $202.2
million before Gascon receives any monies. It is anticipated that the priority
distribution amount of $202.2 million will be used by the Company to pay off the
Company's indebtedness (currently held by entities owned or controlled by Carl
C. Icahn). The priority distribution is to be made on or before November 1,
2006. Guaranteed payments are to be paid on a semi annual basis, based on 10.75%
of the outstanding priority distribution amount. After the payments to the
Company, Gascon is to receive distributions equivalent to the priority
distribution amount and guaranteed payments plus other amounts as defined in the
NEG Holding LLC Operating Agreement referred herein. Following the above
distributions to the Company and Gascon, additional distributions, if any, are
to be made in accordance with their respective capital accounts. Because of the
substantial uncertainty that the Company will receive any distributions above
the priority and guaranteed payment amounts, the Company accounts for its
investment in Holding LLC as a preferred investment whereby guaranteed payment
amounts received and receipts of the priority distribution amount are recorded
as reductions in the investment and income is recognized from accretion of the
investment up to the priority distribution amount, including the guaranteed
payments (based on the interest method), and the residual interest attributable
to Holding LLC will be valued at zero. Cash receipts, if any, from the residual
interest will be reported in income as earned.

The Holding LLC Operating Agreement entered into on September 12, 2001,
contains a provision that allows Gascon at any time, in its sole discretion, to
redeem the Company's membership interest in Holding LLC at a price equal to the
fair market value of such interest determined as if Holding LLC had sold all of
its assets for fair market value and liquidated. Since all of the Company's
operating assets and oil and natural gas properties have been contributed to
Holding LLC, as noted above, following such a redemption, the Company's
principal assets would consist solely of its cash balances. In the event that
such redemption right is

12

exercised by Gascon, the Company may be obligated to use the proceeds that it
would receive for its redeemed membership interest to pay outstanding
indebtedness and operating expenses before the distribution of any portion of
such proceeds to the Company's stockholders. Following the payment of the
Company's indebtedness (currently held by entities owned or controlled by Carl
C. Icahn) and its operating expenses, there is a substantial risk that there
will be no proceeds remaining for distribution to the Company's stockholders. It
is the present intention of Holding LLC to continue to conduct oil and natural
gas drilling and development activities in the ordinary course of business and
to seek additional reserves.

The management and operation of Operating LLC is being undertaken by the
Company pursuant to a Management Agreement (the "Management Agreement") which
the Company has entered into with Operating LLC. However, neither the Company's
officers nor directors will control the strategic direction of Operating LLC's
oil and natural gas business, including oil and natural gas drilling and capital
investments, which shall be controlled by the managing member of Holding LLC
(currently Gascon). The Management Agreement provides that the Company will
manage Operating LLC's oil and natural gas assets and business until the earlier
of November 1, 2006, or such time as Operating LLC no longer owns any of the
managed oil and natural gas properties. The Company's employees will conduct the
day-to-day operations of Operating LLC's oil and natural gas properties, and all
costs and expenses incurred in the operation of the oil and natural gas
properties shall be borne by Operating LLC; although the Management Agreement
provides that the salary of the Company's Chief Executive Officer shall be 70%
attributable to the managed oil and natural gas properties, and the salaries of
each of the General Counsel and Chief Financial Officer shall be 20%
attributable to the managed oil and natural gas properties. In exchange for the
Company's management services, Operating LLC shall pay the Company a management
fee equal to 115% of the actual direct and indirect administrative and
reasonable overhead costs incurred by the Company in operating the oil and
natural gas properties, which either the Company or Operating LLC may seek to
change within the range of 110%-115% as such change is warranted; however, the
parties have agreed to consult with each other to ensure that such
administrative and reasonable overhead costs attributable to the managed
properties are properly reflected in the management fee paid to the Company. In
addition, Operating LLC has agreed to indemnify the Company to the extent it
incurs any liabilities in connection with its operation of the assets and
properties of Operating LLC, except to the extent of its gross negligence, or
misconduct. The Company recorded $1.8 million and $5.8 million as a management
fee for the three and nine month period ended September 30, 2002.

As a result of the foregoing transactions and as mandated by the Plan of
Reorganization, the Company's principal assets are its remaining cash balances,
accounts receivable from affiliates, deferred tax asset and its initial 50%
membership interest in Holding LLC, and the principal liabilities are the $10.9
million outstanding under its existing $25 million revolving credit facility
with Arnos and its 10 3/4% senior notes and long-term interest payable on senior
notes. None of the Company's employees have been transferred to Holding LLC or
Operating LLC.

As a result of the terms and conditions of the various agreements related
to the repayment of the Company's indebtedness to Arnos and repayment of the
priority distribution amounts and the guaranteed payments (plus accrued interest
thereon) to Gascon, there is a substantial risk that there will be no amounts
remaining for distribution to the Company's stockholders.

In August 2001, the Company redeemed both $16.4 million of principal
outstanding under the senior note obligations and $4.8 million of long-term
interest payable on senior notes for $10.5 million. The Company paid two Arnos
affiliates approximately $.4 million in current interest on the redeemed senior
note obligations at the date of redemption related to interest owed from the
last semi-annual interest payment date of May 1, 2001 to the date of redemption.
As this was a partial redemption of the senior notes, it has been accounted for
as a modification of terms that changes the amounts of future cash payments.
Accordingly, the excess of redeemed principal and interest over the redemption
payment of $10.5 million will be amortized as a reduction to interest expense
over the remaining life of the bonds. In connection with this transaction, the
Company borrowed $10.9 million under its existing credit facility with Arnos.

13

Although the Company is highly leveraged following confirmation of the Plan
of Reorganization, the Company expects that availability under its existing
credit facility, expected cash flows from guaranteed payments, priority
distributions and management fees will be sufficient to fund its operations and
debt service. However, no assurances can be given that Holding LLC will generate
sufficient cash flows to make these payments and in that event, the Company
would not be able to meet its obligations.

RESULTS OF OPERATIONS

On September 12, 2001 the Company contributed all its operating assets and
oil and gas properties excluding cash of $4.3 million to Holding LLC in exchange
for an initial 50% membership interest ("LLC Contribution"). For tax and
valuation purposes the effective date is May 1, 2001, however, for financial
reporting purposes the transaction is as of September 1, 2001. Operations from
September 1, 2001 to September 12, 2001 were not significant. During 2002, the
Company only recognized income from accretion of the preferred investment and
management fees compared to oil and natural gas operations recorded in 2001. In
the future, the Company will only recognize income from accretion of the
preferred investment and management fees.

OVERVIEW OF PRODUCTION, SALES AND UNIT ECONOMICS

The following table sets forth certain information regarding the production
volumes, oil and natural gas sales, average sales prices, and unit economics per
Mcfe for revenues and expenses related to the Company's oil and natural gas
production for the periods indicated.

THREE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2002

Revenues. Total revenues increased $.8 million (8.5%) from $9.4 million
for the third quarter of 2001 to $10.2 million for the third quarter of 2002.
Total revenues increased due to the LLC Contribution.

14

The Company produced 115 Mbbls of oil and 1,117 Mmcf of natural gas during
the third quarter of 2001. The Company had no oil and natural gas production
during the third quarter of 2002 due to the LLC Contribution.

Costs and Expenses. Due to the LLC Contribution, the Company did not
record any lease operating expenses during the three months ended September 30,
2002 compared to $1.1 million for the same period in 2001.

Due to the LLC Contribution, the Company did not record any oil and natural
gas production taxes during the three months ended September 30, 2002 compared
to $.4 million for the same period in 2001.

Due to the LLC Contribution, the Company did not record any depreciation,
depletion and amortization during the three months ended September 30, 2002
compared to $1.6 million for the same period in 2001.

General and administrative costs increased $.2 million (14.3%) from $1.4
million for the three months ended September 30, 2001 to $1.6 million for the
same period in 2002. The increase is the result of the LLC Contribution and the
resulting change in the Company's recording of general and administrative costs.
Effective September 1, 2001 the Company no longer offsets general and
administrative costs by field employee costs or lease management income, but is
reimbursed a management fee for these and other costs at 115% of general and
administrative costs as defined in the Management Agreement. As discussed in
Note 2 to the Financial Statements, the Company capitalized internal general and
administrative costs prior to September 1, 2001 that were directly identified
with acquisition, exploration and development activities. These capitalized
general and administrative costs totaled $.1 million for the three months ended
September 30, 2001.

Other Income and Expenses. The $.4 million decrease in interest expense
from $5.1 million for the three months ended September 30, 2001 to $4.7 million
for the same period in 2002 was due primarily to the senior note redemption
discussed below. In August 2001, the Company redeemed both $16.4 million of
principal outstanding under the senior note obligations and $4.8 million of
long-term interest payable on senior notes for $10.5 million. This redemption
reduced interest expense approximately $.6 million for the three months ended
September 30, 2002. (See Note 1 to the Financial Statements). The weighted
average interest rate for the three months ended September 30, 2001 was 10.75%
compared to 9.43% for the same period in 2002.

Income Taxes. Upon completion of the federal income tax return for the
year 2001, the Company estimates it has net operating loss carryforwards
available for federal income tax purposes of approximately $114.9 million which
begin expiring in 2002. Utilization of approximately $27.6 million of the net
operating loss carryforwards is subject to various limitations because of
previous changes in control of ownership (as defined in the Internal Revenue
Code) of the Company and Alexander Energy. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. The Company recorded a deferred tax asset of $30.6 million and
$26.9 million as of December 31, 2001 and September 30, 2002, respectively,
based upon the projected allocations of taxable income by Holding LLC. Ultimate
realization of the deferred tax asset is dependent upon, among other factors,
the Company's ability to generate sufficient taxable income within the
carryforward periods and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used. As a result of the
recognition of expected future income tax benefits, subsequent periods will
reflect a full effective tax rate provision. The Company recorded deferred
income tax expense of $1.4 million for the three months ended September 30,
2002.

NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2002

Revenues. Total revenues decreased $5.0 million (13.9%) from $36.1 million
for the nine months ended September 30, 2001 to $30.1 million for the same
period in 2002. Total revenues declined due to the LLC Contribution.

The Company produced 428 Mbbls of oil and 4,333 Mmcf of natural gas during
the nine months ended September 30, 2001. The Company had no oil and natural gas
production during the same period in 2002 due to the LLC Contribution.

15

Costs and Expenses. Due to the LLC Contribution, the Company did not
record any lease operating expenses during the nine months ended September 30,
2002 compared to $3.9 million for the same period in 2001.

Due to the LLC Contribution, the Company did not record any oil and natural
gas production taxes during the nine months ended September 30, 2002 compared to
$1.7 million for the same period in 2001.

Due to the LLC Contribution, the Company did not record any depreciation,
depletion and amortization during the nine months ended September 30, 2002
compared to $6.2 million for the same period in 2001.

General and administrative costs increased $1.2 million (27.9%) from $4.1
million for the nine months ended September 30, 2001 to $5.3 million for the
same period in 2002. The increase is the result of the LLC Contribution and the
resulting change in the Company's recording of general and administrative costs.
Effective September 1, 2001 the Company no longer offsets general and
administrative costs by field employee costs or lease management income, but is
reimbursed a management fee for these and other costs at 115% of general and
administrative costs as defined in the Management Agreement. As discussed in
Note 2 to the Financial Statements, the Company capitalized internal general and
administrative costs prior to September 1, 2001 that were directly identified
with acquisition, exploration and development activities. These capitalized
general and administrative costs totaled $.5 million for the nine months ended
September 30, 2001.

Other Income and Expenses. The $2.3 million decrease in interest expense
from $16.5 million for the nine months ended September 30, 2001 to $14.2 million
for the same period in 2002 was due primarily to the senior note redemption
discussed below. In August 2001, the Company redeemed both $16.4 million of
principal outstanding under the senior note obligations and $4.8 million of
long-term interest payable on senior notes for $10.5 million. This redemption
reduced interest expense approximately $1.7 million for the nine months ended
September 30, 2002. (See Note 1 to the Financial Statements). The weighted
average interest rate for the nine months ended September 30, 2001 was 10.75%
compared to 9.44% for the same period in 2002.

Income Taxes. Upon completion of the federal income tax return for the
year 2001, the Company estimates it has net operating loss carryforwards
available for federal income tax purposes of approximately $114.9 million which
begin expiring in 2002. Utilization of approximately $27.6 million of the net
operating loss carryforwards is subject to various limitations because of
previous changes in control of ownership (as defined in the Internal Revenue
Code) of the Company and Alexander Energy. Additional net operating loss
limitations may be imposed as a result of subsequent changes in stock ownership
of the Company. The Company recorded a deferred tax asset of $30.6 million and
$26.9 million as of December 31, 2001 and September 30, 2002, respectively,
based upon the projected allocations of taxable income by Holding LLC. Ultimate
realization of the deferred tax asset is dependent upon, among other factors,
the Company's ability to generate sufficient taxable income within the
carryforward periods and is subject to change depending on the tax laws in
effect in the years in which the carryforwards are used. As a result of the
recognition of expected future income tax benefits, subsequent periods will
reflect a full effective tax rate provision. The Company recorded deferred
income tax expense of $3.7 million for the nine months ended September 30, 2002.

LIQUIDITY AND CAPITAL RESOURCES

NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2002

Net cash provided by operating activities was $16.3 million for 2001,
compared to net cash used in operating activities of $10.2 million for 2002. The
decrease in cash flows from operating activities is primarily due to the LLC
Contribution. The cash received from the guaranteed payments is on a semi-annual
basis computed at 10.75% of the outstanding priority distribution amount. The
guaranteed payments are expected to be sufficient to make the interest payments
on the Senior Notes until their due date of 2006.

Net cash used in investing activities was $30.8 million for 2001 compared
to net cash provided by investing activities of $10.8 million for 2002. The cash
used in investing activities for 2001 included $27.3 million of expenditures
related to drilling, workovers, recompletions and other production enhancement

16

activities. The cash provided by investing activities for 2002 consisted of the
$10.8 guaranteed payment from NEG Holding LLC.

Net cash used in financing activities in 2001 consisted of repayment of the
outstanding borrowings of $25 million under the credit facility, $10.9 million
borrowed under the credit facility and $10.5 million repayment of senior notes.
There was no cash used in financing activities in 2002.

FUTURE CAPITAL AND FINANCING REQUIREMENTS

The Company currently has $10.9 million outstanding under its existing $25
million credit facility with Arnos. Arnos continues to be the holder of the
credit facility; however, the $10.9 million note currently outstanding under the
credit facility was contributed to Holding LLC as part of Gascon's contribution
to Holding LLC on September 12, 2001. In December 2001, the maturity date of the
credit facility was extended to December 31, 2003 and the Company was given a
waiver of compliance with respect to any and all covenant violations. The
Company anticipates repayment of this amount through the priority distribution
from Holding LLC. If no priority distribution is made by December 31, 2003, the
credit facility must be extended. The Company was not in compliance with the
minimum interest coverage ratio at September 30, 2002, however, in December 2001
the Company was given a waiver of compliance with respect to any and all
covenant violations through December 31, 2003.

Although the Company is highly leveraged following confirmation of the Plan
of Reorganization, the Company expects that availability under its existing
credit facility, expected cash flows from guaranteed payments, priority
distributions and management fees will be sufficient to fund its operations and
debt service. However, no assurances can be given that Holding LLC will generate
sufficient cash flows to make these payments and in that event, the Company
would not be able to meet its obligations.

In 1996, the Company issued $100 million aggregate principal amount of
unregistered Series A 10 3/4% Senior Notes due 2006 which were exchanged in 1997
for registered Series B 10 3/4% Senior Notes due 2006 with substantially
identical terms. Collectively, the Series A Notes and Series B Notes are
referred to as the "Series A/B Notes." In August 1997, the Company issued $65
million aggregate principal amount of its unregistered Series C 10 3/4% Senior
Notes. In December 1997, the Company exchanged substantially all of the Series
A/B Notes and all of the Series C Notes for registered Series D 10 3/4% Senior
Notes due 2006. The Series D Notes are substantially identical to the Series A/B
Notes and the Series C Notes. Upon confirmation of the Joint Plan, the senior
notes are held in their entirety by Arnos and its affiliates. The Senior Notes
bear interest at an annual rate of 10 3/4%, payable semiannually in arrears on
May 1 and November 1 of each year. The Senior Notes are senior, unsecured
obligations of the Company, ranking pari passu with all existing and future
senior indebtedness of the Company, and senior in right of payment to all future
subordinated indebtedness of the Company. Subject to certain limitations set
forth in the indenture covering the Senior Notes (the "Indenture"), the Company
and its subsidiaries may incur additional senior indebtedness and other
indebtedness.

The Indenture contains certain covenants limiting the Company with respect
to the following: (i) asset sales; (ii) restricted payments; (iii) the
incurrence of additional indebtedness and the issuance of certain redeemable
preferred stock; (iv) liens; (v) sale and leaseback transactions; (vi) lines of
business; (vii) dividend and other payment restrictions affecting subsidiaries;
(viii) mergers and consolidations; and (ix) transactions with affiliates.

In August 2001, the Company redeemed both $16.4 million of principal
outstanding under the senior note obligations, and $4.8 million of long-term
interest payable on senior notes for $10.5 million. The Company paid two Arnos
affiliates approximately $.4 million in current interest on the redeemed senior
note obligations at the date of redemption related to interest owed from the
semi-annual interest payment date of May 1, 2001 to the date of redemption. As
this was a partial redemption of the senior notes, it was accounted for as a
modification of terms that changes the amounts of future cash payments.
Accordingly, the excess of redeemed principal and interest over the redemption
payment of $10.5 million will be amortized as a reduction to interest expense
over the remaining life of the senior note obligations. In connection with this
transaction, the Company borrowed $10.9 million under its existing credit
facility with Arnos.
17

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS No. 143") which establishes requirements for the accounting
of removal-type costs associated with asset retirements. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. The Company does not believe there will be a material
impact upon adoption.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement
supercedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30 ("APB 30"). SFAS 144 retains the fundamental
provisions of SFAS 121 and the basic requirements of APB 30; however, it
establishes a single accounting model to be used for long-lived assets to be
disposed of by sale and it expands the presentation of discontinued operations
to include more disposal transactions. The provisions of SFAS 144 became
effective January 1, 2002. The Company's adoption of SFAS 144 did not have a
material impact on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 provides guidance for income statement classification
of gains and losses on extinguishment of debt and accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 will be effective for the Company in January 2003.
The Company is evaluating the impact of SFAS No. 145 and does not expect
adoption to materially affect the financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS No. 146 will be effective for the Company in January
2003. The Company is evaluating the impact of SFAS NO. 146.

INFLATION

Although certain of the Company's costs and expenses are affected by the
level of inflation, inflation did not have a significant effect on the Company's
results of operations during the three months ended September 30, 2001 and 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

In the past, the Company utilized various derivative instruments,
principally to control risk related to future oil and natural gas prices. While
the use of derivative contracts can limit the downside risk of adverse price
movements, it may also limit future gains from favorable movements. The Company
addressed market risk by selecting instruments whose value fluctuations
correlated strongly with the underlying commodity. Credit risk related to
derivative activities was managed by requiring minimum credit standards for
counterparties, periodic settlements, and market to market valuations.

No derivative assets, or liabilities have been recorded by the Company as
all of the derivatives entered into by the Company were contributed to Holding
LLC in September 2001. (Note 1)

ITEM 4. INTERNAL CONTROLS

Our Board of Directors adopted a policy designed to establish disclosure
controls and procedures that are adequate to provide reasonable assurance that
we will be able to collect, process and disclose both financial and
non-financial information, on a timely basis, in our reports to the Securities
and Exchange Commission ("SEC") and other communications with our stockholders.
Disclosure controls and procedures include all processes necessary to ensure
that material information is recorded, processed, summarized and reported
18

within the time periods specified in the SEC's rules and forms, and is
accumulated and communicated to our management, including our chief executive
and chief accounting officer, to allow timely decisions regarding required
disclosures.

With respect to our disclosure controls and procedures:

- We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days prior to the filing of
this report;

- This evaluation was conducted under the supervision and with the
participation of our management, including our chief executive and chief
accounting officer; and

- It is the conclusion of our chief executive and chief accounting officer
that these disclosure controls and procedures operate such that material
information flows to the appropriate collection and disclosure points in
a timely manner and are effective in ensuring that material information
is accumulated and communicated to our management and is made known to
the chief executive and chief accounting officer, particularly during the
period in which this report was prepared, as appropriate to allow timely
decisions regarding required disclosures.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Currently, the Company is not a party to any material pending legal
proceedings, nor is NEG Operating LLC. With respect to certain claims of the
Company against Enron North America Corp. relating to the oil and natural gas
properties contributed to Holding LLC, a representative of the Company has been
appointed to the official committee of unsecured creditors in the Enron
bankruptcy proceeding, and the Company has filed a claim for damages in that
bankruptcy proceeding. This claim represents a hedge against future oil and
natural gas prices and does not reflect a cash gain or loss. Any recoveries from
Enron North America Corp. will become the property of Operating LLC as a result
of the LLC Contribution.

The Company's Joint Plan became effective August 4, 2000 and the Bankruptcy
Court issued a final decree effective December 13, 2001 closing the case.

ITEM 2-5. None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

The list of exhibits required by Item 601 of Regulation S-K and filed as
part of this report is set forth in the Index to Exhibits.

(b) Reports on Form 8-K

None.

19

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.

NATIONAL ENERGY GROUP, INC

By: /s/ BOB G. ALEXANDER
------------------------------------
Bob G. Alexander
President and Chief Executive
Officer

November 14, 2002

By: /s/ RANDALL D. COOLEY
------------------------------------
Randall D. Cooley
Vice President and Chief Accounting
Officer

November 14, 2002

20

CERTIFICATIONS

I Bob G. Alexander, certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Energy
Group, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, is made known to us by
others within those entities, particularly during the period in which this
quarterly report is being prepared;

(b) evaluating the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date") and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

By: /s/ BOB G. ALEXANDER
------------------------------------
Bob G. Alexander
Chief Executive Officer

November 14, 2002

21

CERTIFICATIONS

I Randall D. Cooley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of National Energy
Group, Inc.

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, is made known to us by
others within those entities, particularly during the period in which this
quarterly report is being prepared;

(b) evaluating the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date") and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

By: /s/ RANDALL D. COOLEY
------------------------------------
Randall D. Cooley
Chief Accounting Officer

November 14, 2002

22

CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of National Energy Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, Bob
G. Alexander, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of
2002, that:

1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ BOB G. ALEXANDER
------------------------------------
Bob G. Alexander
Chief Executive Officer

23

CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of National Energy Group, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Randall D. Cooley, Chief Accounting Officer, certify, pursuant to 18 U.S.C.
sec. 1350, as adopted pursuant to sec. 906 of the Sarbanes-Oxley Act of 2002,
that:

1. The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ RANDALL D. COOLEY
------------------------------------
Randall D. Cooley
Chief Accounting Officer

24

INDEX TO EXHIBITS

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

(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.

(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.

(4) Incorporated by reference to the Company's Registration Statement on Form
S-4 (No. 33-38331), dated April 23, 1991.

(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.

(6) Incorporated by reference to the Company's Form S-4 (No. 333-38075), filed
October 16, 1997.

(7) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998.

(8) Incorporated by reference to the Company's Current Report on Form 8-K,
dated August 29, 1996.

(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.

(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995.

(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997.

(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.

(13) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended June 30, 2001.

(14) Incorporated by reference to the Company's Report on Form 10-Q for the
quarter ended September 30, 2001.

(15) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.