Chancellor Group Inc (CHAG)

[EZ2]

April 13, 2001

CHANCELLOR GROUP INC/ (CHAG.OB)
Annual Report (SEC form 10KSB)
Management's Discussion and Analysis or Plan of Operations
The following discussion should be read in conjunction with the Financial Statements and notes thereto included herein.

The Company -

Chancellor Group, Inc. is in the business of acquisition, exploration, and development of natural gas and oil properties. The Company is further examining opportunities in the fields of power generation, minerals development and environmental engineering and remediation. The Company is constantly reviewing investment opportunities and intends to develop a geographically diversified portfolio of projects, each of which exhibits a significantly positive net present value.


The Company, through three subsidiaries, controls certain leasehold lands covering approximately 6,000 acres located in Pecos County, Texas together with all of the oil and gas and mineral rights thereon.




The property contains proven undeveloped gas reserves of approximately 240 billion cubic feet (bcf) of economically recoverable natural gas, representing estimated future cash inflows of more than $580 million, and future net cash flows before taxes of approximately $480 million, with a net present value using PV-10% of approximately $120 million after taxes.

Comparison of Operating Results -

Effective September 23, 1997 the Company entered into a stock purchase agreement with Polaris Oil & Gas, Inc., in which the Company issued 12,300,000 shares of common stock representing approximately 80% of its issued and outstanding shares in exchange for all the common stock of Radly Petroleum, Inc. The assets of Radly Petroleum, Inc. consist of oil, gas and mineral leases and proved gas reserves situated on 3,200 acres located in Pecos County, Texas. Also as of September 23, 1997, the Company elected an entirely new board of directors, and new officers and directors assumed management of the Company. Due to these substantial changes in the Company's business and management structure as of September 23, 1997, corporate activities occuring prior to that time are unrelated to activities occuring after that time and to future corporate activities. As a consequence, a comparison of corporate financial activity of the Company prior to and subsequent to September 23, 1997 is not meaningful.

On July 25, 1998, the Company acquired 100% of the stock of Lichfield Petroleum America, Inc. ("Lichfield"). The assets of Lichfield consist of oil, gas and mineral leases, and proved reserves situated on 2,861 acres located in Pecos County, Texas.

In September and October of the 2000 fiscal year, the Company acquired 100% of the stock of Getty Petroleum, Inc. ("Getty").

The acquisitions of Radly, Lichfield, and Getty were strategic and enabled the Company to consolidate its holdings in Pecos County, while making the overall development economics of its Glass Mountain gas project more attractive and compelling.

The Company generated no revenue during the period represented by this report. The period since September 30, 1997 has been primarily devoted to preparatory activities related to development of the Company's natural resources assets, negotiations related to the acquisition of additional natural resources assets, capital raising activities and organizational activities. The Company anticipates that during the course of 2001, revenue will begin to be received from its oil and natural gas development activities, and from other acquisitions and investments.

The Company incurred general and administrative expense of $1,083,674 in the 2000 fiscal year, compared to $243,992 for the 1999 fiscal year. These amounts include accumulated executive compensation due to officers of the Company for those periods. The expenses incurred were directly related to the Company's present business purposes, and consisted of consulting expenses related to operational and administrative needs of the Company, legal expenses, and office expenses. These expenses were incurred in the ordinary course of the Company's business and it is expected that they will continue in the future. The Company's current estimated monthly operating costs are approximately $70,000. Also, as the Company commences development of its natural resources assets, and the implementation of its business plan, Management anticipates that general and administrative expenses will increase to an average of $350,000 per month, in line with the forecast increase in operational activity, staff hiring, and opening of a new corporate head office, etc.




Liquidity & Capital Resources -

As of December 31, 2000 the Company had a working capital deficit of $479,594. This deficit was funded by accounts payable and reimbursements and unpaid salaries payable to certain officers and directors in the same amount, in aggregate. In addition throughout the fiscal 2000 period the Company raised equity capital through a series of placements of Rule 144 restricted common stock, and borrowed funds from outside parties.

The Company is actively seeking additional sources of capital to be used for operations, and for the development of existing energy properties, as well as for the acquisition of additional energy properties or interests therein. Management has set a short term capital acquisition target of $31,000,000, which would provide sufficient operational capital to; commence initial drilling and development at the Company's Glass Mountain gas project located in Pecos County, Texas; fund the development of a producing oil and natural gas property in Kansas, which upon completion of a full development program the Company expects will generate at least $1,500,000 in net monthly cash flow; fund certain additional drilling and development expenditures and investments; fund the cost of acquiring options over certain other identified oil and gas opportunities in the United States and elsewhere; and fund certain general and administrative expenses. Management believes that it presently has identified and has in place, the necessary investors for the promulgated debt and equity capital requirements for fiscal 2001 and beyond.

The Company is pursuing the use of various potential instruments with which to raise capital, including the sale of equity, the sale of preferred stock, and the issuance of debt. The Company's ability to raise capital will depend upon, among other things, investor perception of the Company's financial prospects, the prevailing share price of the Company's stock on the OTCBB market, the prevailing and expected price for oil and natural gas, the success of prior projects, the availability of and return on competing investment opportunities, and various macroeconomic factors.


The Company continually reviews exploration, development, and acquisition opportunities and expects to participate in numerous such projects in late 2001 and beyond. The Company currently owns certain gas development assets and reserves as outlined herein above. It is anticipated that $35 million will be required to fully develop these properties, of which a substantial portion is expected to be provided by cashflow generated from an initial set of wells. Thus, Management believes that the Company's development activities will be limited by the availability of capital with which to develop these resources. There is no assurance as to the certainty, timing, or final amount that will be available to the Company for oil and gas exploration activities.

Often in the oil and gas exploration business, a company that owns development rights but lacks capital for drilling and completion will enter into a joint venture with a company who provides the required development capital in exchange for a share of the revenues arising from that project. These arrangements vary in nature. Should the Company not be able to raise the required capital to develop its properties by itself, it will likely seek such a joint venture arrangement. If it does so, revenues available to the Company from production of its oil and gas rights will be diluted.



Certain Risks -

Forward Looking Statements. This Report on Form 10-KSB contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements regarding: future oil and gas production and prices, future exploration and development spending, future drilling and operating plans and expected results, reserve and production potential of the Company's properties and prospects, "Year 2000" compliance issues and the Company's strategy. Actual events or results could differ materially from those discussed in the forward looking statements as a result of various factors including, without limitation, the factors set forth below and elsewhere in this 10-KSB.

Dependence on Additional Capital. Successful development of the Company's oil and natural gas reserves will require a substantial amount of additional funding relative to the Company's current capitalization. There is no assurance that such development capital will be available to the Company as it is required. Further, due to the lack of operating cash flow in amounts sufficient to fund Company operations, there is no assurance that the Company will be able to continue its efforts to operate and to develop its oil and gas reserves.

Exploration and Development Risks. The business of exploring for and, to a lesser extent, of acquiring and developing oil and gas properties is an inherently speculative activity that involves a high degree of business and financial risk. Although available geological and geophysical information can provide information with respect to a potential oil or gas property, it is impossible to determine accurately the ultimate production potential, if any, of a particular property or well.

Volatility of Oil and Gas Prices. The Company's future revenues, profitability and rate of growth are substantially dependent upon prevailing market prices for natural gas and oil, which can be extremely volatile and in recent years have been depressed by excess domestic and imported supplies.

Uncertainty of Estimates of Proved Reserves and Future Net Revenues. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. Estimating quantities of proved reserves is inherently imprecise. Such estimates are based upon certain assumptions about future production levels, future natural gas and crude oil prices and future operating costs made using currently available geologic engineering and economic data, some or all of which may prove incorrect over time.


Operating and Weather Hazards. The costs and timing of drilling, completing and operating wells is often uncertain. Drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including regulatory and environmental constraints, unexpected drilling conditions, equipment failures, accidents, adverse weather conditions, encountering unexpected formations or pressures in drilling and completion operations, encountering corrosive or hazardous substances, mechanical failure of equipment, blowouts, cratering and fires. These conditions could result in damage or injury to, or destruction of, formations, producing facilities or other property or could result in personal injuries, loss of life or pollution of the environment.

Additional factors. Additional factors that could cause actual events to vary from those discussed above and elsewhere in this report include, among others: loss of key company personnel; adverse change in governmental regulation; regulatory and/or environmental constraints; inability to obtain critical supplies and equipment, personnel and consultants; and inability to access capital to pursue the Company's plans.


Glossary

When the following terms are used in written material related to the Company, they have the following meanings:

Bbl - One stock barrel or 42 U.S. gallons liquid volume, usually used in reference to crude oil or other liquid hydrocarbons.

Bcf - One billion cubic feet; expressed, where gas sales contracts are in effect, in terms of contractual temperature and pressure basis and, where contracts are nonexistent, at 60 degrees Fahrenheit at 14.65 pounds per square inch absolute.

Prospect - An area in which a party owns or intends to acquire one or more oil and gas interests which is geographically defined on the basis of geological data and which is reasonably anticipated to contain at least one reservoir of oil, gas, or other hydrocarbons.

Proved Developed Reserves - Proved Reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved Reserves - The estimated quantities of crude oil, natural gas, and other hydrocarbons which, based upon geological and engineering data, are expected to be produced from known oil and gas reserves under existing economic and operating conditions, and the estimated present value thereof based upon the prices and costs on the date that the estimate is made and any price changes provided for by existing conditions.

Proved Undeveloped Reserves - Reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.


PV10% - The discounted future net cash flows for proved oil and gas reserves computed using prices and costs, at the dates indicated, before income taxes and a discount rate of 10%.

Royalty Interest - An interest in an oil and gas property entitling the owner to a share of oil and gas production free of the costs of production.

Undeveloped Acreage - Oil and gas acreage (including, in applicable instances, rights in one or more horizons which may be penetrated by existing well bores, but which have not been tested) to which Proved Reserves have not been asigned by independent petroleum engineers.

Working Interest - The operating interest under a lease which gives the owner the right to drill, produce and conduct operating activities on the property and a share of production, subject to all royalty interests, and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.