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

                                     Form 10-K

   MARK ONE
     X       ANNUAL REPORT  PURSUANT TO SECTION  13 or 15(d)  OF THE  SECURITIES
             EXCHANGE ACT OF 1934 [FEE REQUIRED] 

                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

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

                           Commission File Number 0-9579
                                                     

                            HALLWOOD ENERGY CORPORATION
              (Exact name of registrant as specified in its charter)
                                                     


            TEXAS
    (State or other jurisdiction of                 75-1319083       
    incorporation or organization)               (I.R.S. Employer    
                                               Identification Number)
    4582 SOUTH ULSTER STREET PARKWAY
        SUITE 1700
        DENVER, COLORADO                                80237        
    (Address of principal executive                   (Zip Code)     
    offices)

        Registrant's telephone number, including area code:  (303) 850-7373

            SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                              Name of each exchange
    Title of each class                       on which registered  
         NONE                                        NONE          
            SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                           Common Stock, $.50 par value

   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   

   Indicate by check  mark if disclosure of  delinquent filers pursuant  to Item
   405 of Regulation S-K  is not contained herein and will  not be contained, to
   the  best  of registrant's  knowledge,  in  definitive  proxy or  information
   statements  incorporated by reference  in Part III  of this Form  10-K or any
   amendment to this Form 10-K. X 

   The aggregate market value of  the voting stock held by nonaffiliates  of the
   registrant as of February 27, 1996 was approximately $1,737,153.
   Shares of Common Stock outstanding at February 27, 1996:      792,126 Shares.



                                      PART I

   ITEM 1 - BUSINESS

   Hallwood Energy  Corporation ("HEC") is  a publicly traded  Texas corporation
   engaged in  the development, production and  sale of oil and  gas through its
   ownership of oil and gas properties  and its investments in entities with oil
   and gas  activities.  HEC is the general partner of Hallwood Energy Partners,
   L.P. ("HEP"), a publicly traded oil and gas limited partnership.  HEC is also
   the  general partner  of HEP  Operating Partners, L.P.  ("HEPO"), one  of the
   operating  partnerships for  HEP.   HEC's wholly  owned subsidiary,  Hallwood
   G.P., Inc. is the general partner of EDP Operating, Ltd.  ("EDPO"), the other
   operating partnership for HEP. 

   HEP is engaged in the development, production, sale and transportation of oil
   and gas and in the acquisition, exploration, development and operation of oil
   and  gas properties.   The  principal objectives  of HEP  are to  maintain or
   expand  its reserve base and to provide  cash distributions to the holders of
   its units of limited partner interests ("Units").

   HEC's  general partner interest in HEP entitles it to a share of net revenues
   derived  from  HEP's  properties ranging  from  2%  to  25%,  and  HEC  holds
   approximately 6.5%  of HEP's  limited partner  Units.   HEC accounts  for its
   ownership of HEP using  the proportionate consolidation method  of accounting
   whereby HEC  records its proportional  share of  each of  HEP's revenues  and
   expenses, current assets,  current liabilities, noncurrent assets,  long-term
   obligations and fixed assets.  HEP owns approximately 40% of the common stock
   of its affiliate, Hallwood  Consolidated Resources Corporation ("HCRC") which
   HEP accounts for under the equity method.

   The  activities of  HEP are  conducted by  HEPO and  EDPO.   HEP is  the sole
   limited partner and HEC is the sole general partner of HEPO.  Hallwood, G.P.,
   Inc.,  a wholly-owned subsidiary of HEC, is  the sole general partner and HEP
   is  the sole  limited partner  of EDPO.   Solely  for purposes  of simplicity
   herein,  unless otherwise indicated, all references to HEP in connection with
   the  ownership,  exploration,  development  or  production  of  oil  and  gas
   properties include HEPO and EDPO.

   HEC  does not  engage in  any other  line of  business nor  does it  have any
   employees.  Hallwood Petroleum,  Inc. ("HPI"), an affiliate of  HEP, operates
   the properties and administers the day to day activities of HEC.  On February
   27, 1996, HPI had 133 employees.

   The Hallwood Group  Incorporated ("Hallwood Group"), a public  company traded
   on the New York  Stock Exchange, owns 80% of the outstanding common shares of
   HEC.  Hallwood  Group is a diversified holding company  with interests in oil
   and gas, specialty restaurants, real estate, textile products and hotels.  

   From  1990 through 1995, HEC  acquired 267,709 shares  (adjusted for Hallwood
   Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares
   of Hallwood Group on  the open market.  HEC is  holding the stock of Hallwood
   Group, as a long-term investment  and has classified it as  an available-for-
   sale security.   As of June 30,  1994, it was determined  that Hallwood Group
   stock  had experienced  an  other  than  temporary  decline  in  fair  value.
   Therefore,  HEC's  investment in  Hallwood Group  was  written down  from its
   original cost to  a new cost basis based on its market value at June 30, 1994
   of  $11.50 per share.   The resultant loss  of $3,249,000 was  recorded as an
   impairment of investment in  parent in the accompanying financial  statements
   for 1994.

   During 1991 and  1992 HEC  acquired $2,439,000 principal  amount of  Hallwood
   Group's   13.5%  Subordinated  Debentures   due  July  31,   2009,  which  it
   subsequently exchanged for 7% Collateralized Subordinated Debentures due July
   31,  2000.     On  March  29,   1995,  Hallwood  Group  repurchased   the  7%
   Collateralized Subordinated  Debentures for $1,376,000  plus accrued interest
   through the  purchase date.   The debentures  were repurchased for  an amount
   approximately equal to their book value.

   MARKETING 

   The oil and gas produced from the properties owned by HEC has  typically been
   marketed through normal channels for such products.  Oil is generally sold to
   purchasers at field prices posted by the principal purchasers of crude oil in
   the areas  where  producing properties  are  located.   In  response  to  the
   volatility  in  the oil  markets, HEP  entered  into financial  contracts for
   hedging  transactions of between  3% and 22% of  its estimated oil production
   for 1996 through 1999.  

   The  majority of  HEC's gas  production  is sold  on the  spot market  and is
   transported in intrastate  and interstate  pipelines.  HEP  has entered  into
   financial contracts for  hedging transactions of between  17% and 47% of  its
   estimated gas production for 1996 through 2000.

   The purpose of the hedges is to provide protection against price drops and to
   provide a measure of stability in the volatile environment of oil and natural
   gas spot  pricing.  The  amounts received  or paid upon  settlement of  these
   contracts are recognized as oil or gas revenue at the time the hedged volumes
   are sold.

   Both oil and  natural gas are purchased  by refineries, major  oil companies,
   public  utilities,  industrial customers  and other  users and  processors of
   petroleum products.   HEC is  not confined  to, nor dependent  upon, any  one
   purchaser or  small group of purchasers.   Accordingly, the loss  of a single
   purchaser, or a  few purchasers  would not materially  affect HEC's  business
   because  there are numerous  purchasers in the  areas in which  HEC sells its
   production.   Sales to Conoco  Inc. and Marathon  Petroleum Company accounted
   for 30% and 14%, respectively, of HEC's oil and gas sales  for the year ended
   December 31,  1995 and 23% and 12%, respectively,  of HEC's oil and gas sales
   for the year ended December 31, 1994.  Sales to Conoco Inc., Koch Oil Company
   and  Marathon Petroleum Company accounted for 21%, 11% and 10%, respectively,
   of HEC's oil and gas sales for the year ended December 31, 1993.   

   Factors, if  they were to  occur,  which  might adversely affect  HEC include
   decreases  in oil and  gas prices, the  reduced availability of  a market for
   production,  rising operational  costs of producing  oil and  gas, compliance
   with  and changes in environmental  control statutes and  increasing costs of
   transportation.

   COMPETITION

   In the  course of  its development  activities, HEC  must compete  with other
   entities for the acquisition of undeveloped acreage and desirable leaseholds.
   As described above under "Marketing," production is sold  on the spot market,
   thereby  reducing sales competition; however,  oil and gas  must compete with
   coal, atomic energy, hydro-electric power and other forms of energy.

   REGULATION 

   The  production and  sale of  oil and  gas is  subject to  federal  and state
   governmental  regulations  in  a  variety  of  ways  including  environmental
   regulations, labor  laws, regulation  of interstate  sales, excise  taxes and
   federal and  Indian lands  royalty payments.   Failure  to comply  with these
   regulations may result in fines, cancellation  of licenses to do business and
   cancellation of federal, state or Indian leases.

   The  production of  oil  and  gas  is  subject to  regulation  by  the  state
   regulatory agencies in the states in which HEC does business.  These agencies
   make and  enforce regulations to prevent waste of oil  and gas and to protect
   the  rights of owners  to produce oil and  gas from a common  reservoir.  The
   regulatory agencies regulate the amount of oil and gas  produced by assigning
   allowable production rates to wells capable of producing oil and gas.

   ENVIRONMENTAL CONSIDERATIONS

   The exploration for, and development of, oil and gas involves the extraction,
   production and  transportation of materials which,  under certain conditions,
   can be hazardous or can cause  environmental pollution problems.  In light of
   the  current interest in environmental matters, HEC cannot predict the effect
   of possible future public  or private action on its business.   HEC is taking
   actions necessary in its operations to conform with applicable federal, state
   and  local environmental regulations  and does not  presently anticipate that
   the compliance  with federal, state and local  environmental regulations will
   have a material  adverse effect  upon capital expenditures,  earnings or  the
   competitive position of HEC in the oil and gas industry.

   INSURANCE COVERAGE

   HEC  is  subject to  all  the  risks inherent  in  the  exploration for,  and
   development  of, oil and gas, including blowouts, fires and other casualties.
   HEC maintains  insurance coverage as is  customary for entities of  a similar
   size  engaged in operations similar to that of HEC, but losses can occur from
   uninsurable risks or  in amounts  in excess of  existing insurance  coverage.
   The occurrence of  an event which is not  insured or not fully  insured could
   have an adverse impact upon HEC's earnings and financial position.


   ITEM 2 - PROPERTIES

   OIL AND GAS PROPERTIES

   HEC's oil  and gas properties consist  primarily of its indirect  interest in
   properties  owned through  its  investment in  HEP.   Quantities  and  values
   related  to HEP's  properties are  shown net  to HEC's  interest in  HEP. The
   following  reserve information  for  HEC represents  estimated quantities  of
   proved oil  and gas  reserves which are  located in  the United States.   The
   determination of oil and gas reserves is based on estimates  which are highly
   complex and interpretive.  The estimates are subject to continuing  change as
   additional information becomes available.   The following table presents  the
   December 31, 1995 SEC case reserve data by significant areas and fields.
                         Total Proved  
                         Reserve Quantities         Discounted Value         

                          Mcf of    Bbls of    Proved       Proved
                            Gas       Oil    Undeveloped  Developed    Total
                                            (In thousands)
     Scott/West Ridge     5,089      114                 $ 9,169    $ 9,169
     West Texas           1,862      568       $  226      3,916      4,142
     Kansas                  89       56           35        219        254
     San Juan Basin       1,484                    18        566        584
     South Texas Misc.      579       24          165        665        830
     Southeastern New                                
      Mexico                847       23                     850        850
     East Riceville         202                              243        243
     Other                1,485      209          191      2,737      2,928
                         ------    -----        -----     ------     ------
                         11,637      994      $   635    $18,365    $19,000
                        =======     ====        =====   ========    =======

                                                                           



   The following table presents the oil and gas production for significant areas
   and fields.
<TABLE>
<CAPTION>
                              Production for the Years Ended December 31,      
                                 
                                       1995                     1994 
                              Mcf of Gas  Bbls of Oil  Mcf of Gas  Bbls of Oil
                                              (In thousands)

     <S>                        <C>           <C>        <C>          <C>  
     Scott/West Ridge             907           24         804           28
     West Texas                   138           48          98           31
     Kansas                        16            7          15            7
     San Juan Basin               354                      258
     Southeastern New Mexico      195            6         230            2
     East Riceville                32                       33
     South Texas                   76            5
     Other                         90           40         494           60
                                ------         -----      -----         ----
                                1,808          130       1,932          128
                               ======          =====     ======         ====
</TABLE>

   SCOTT/WEST RIDGE

   The Scott/West  Ridge  area consists  of 12  gas wells  located in  Lafayette
   Parish, Louisiana.  The wells produce principally from the Bol Mex formations
   at  13,500 to 14,500 feet and are operated  by HPI, an affiliate of HEP.  The
   four most significant  wells in the area,  all of which  were drilled by  HPI
   since 1989, are  the A. L. Boudreaux #1,  the G. S. Boudreaux Estate  #1, the
   Lessin  Fontenot #1  and the  Evangeline Shrine  Club #1.   During  1995, HEP
   performed  three  workovers  in  this area,  two  of  which  were successful.
   Surface  facilities  were  upgraded  on  several  wells  to  improve  product
   handling.  

   WEST TEXAS

   The West Texas area is comprised of two significant groups of properties each
   containing significant projects.  The  West Texas Spraberry area consists  of
   367 producing wells in Borden,  Upton, Reagan, Glasscock and Martin  counties
   of Texas.  HPI and  its affiliates operate 357 of  these wells.  Most of  the
   current production  from these wells  is from the  Upper Spraberry,  Jo Mill,
   Dean  and Upper  Wolfcamp formations  which  are at  depths  that range  from
   approximately 5,000 to 9,000 feet.   HEP discovered a new field  during 1995,
   adding  the SRH  (Clearfork) as a  producing horizon  to 70  wells in eastern
   Reagan  County.   HEP  drilled 44  successful  wells and  one  dry hole,  and
   recompleted  30 wells on acreage in  the Rocker "b" Ranch.   Most of the work
   was performed under  a line of  credit of $4,650,000  net to HEP's  interest,
   provided  by a third  party lender.   The line  of credit is  secured only by
   leases in the project area and is otherwise nonrecourse to HEP.  HEP plans to
   purchase additional producing wells and to perform recompletions in this area
   in 1996.

   The  West  Texas Kermit  area  consists of  39  wells in  Gaines  and Winkler
   Counties, Texas, 36  of which are operated  by HPI and  its affiliates.   The
   primary focus  of this  area is the  development of  the Holt and  San Andres
   formation  at a  depth of  5,100 feet  on several  leases in  Winkler County.
   During 1995,  HEP drilled  seven wells;  one of  which  was a  dry hole,  and
   performed ten  recompletions;  two of  which  were  unsuccessful.   HEP  also
   purchased  eleven wells in  the area  in 1995.   Up to  ten new wells  may be
   drilled in  1996, and a secondary  recovery project is being  planned for the
   area beyond 1996.


   KANSAS

   The Kansas area consists of 310 producing wells, of which 294 are operated by
   HPI and 16 are operated  by unaffiliated entities, located in 15  counties in
   Kansas.    These wells  produce principally  from  the Arbuckle  and numerous
   Lansing-Kansas City formation  zones from 3,000 feet  to 6,500 feet.   During
   1995,  HEP drilled  two development wells,  one of which  was successful, and
   performed 15 successful recompletions.  The Kansas area is a mature operation
   where  recompletions  and limited  development  drilling  represent the  most
   prudent plans  for future asset  base protection.   HEP plans  to sell  three
   properties  in this  area in 1996  and will  continue to  evaluate and divest
   nonstrategic properties.

   SAN JUAN BASIN

   The San Juan  Basin region consists of  52 wells located in  San Juan County,
   New Mexico.  The wells produce from the Fruitland Coal, Pictured Cliffs, Mesa
   Verde and  Dakota formations at depths  of 1,900 to 7,000  feet.  Twenty-four
   wells are coal bed  methane wells qualifying  for the Section 29  alternative
   fuels tax credit.  During 1994, HEP, HCRC and an unaffiliated entity formed a
   partnership to utilize effectively the Section 29  tax credits.  During 1995,
   HEP successfully  drilled two additional coal  bed methane wells.   For 1996,
   HEP plans to drill one additional well.

   SOUTHEASTERN NEW MEXICO

   The Southeastern New Mexico area consists  of 63 producing wells, 43 of which
   are  operated by  HPI, which  produce primarily  gas and  are located  on the
   northwestern edge of the Delaware Basin in Lea, Eddy and Chavez Counties, New
   Mexico.  These  wells produce at depths ranging from approximately 2,500 feet
   to 14,000 feet from the  Delaware, Atoka, Bone Springs and Morrow formations.
   During 1995, HEP performed nine successful recompletions and participated  as
   a nonoperator in six successful development wells.  During 1996, HEP plans to
   perform   additional   recompletions   and   exploit   development   drilling
   opportunities.

   EAST RICEVILLE

   The East Riceville  area consists of three gas wells and one oil well located
   in  Vermilion  Parish, Louisiana.   The  wells  produce principally  from the
   Barton Sand formation at a depth of approximately 14,800 feet,  and the wells
   are operated  by HPI.   No  significant development plans  for this  area are
   expected for 1996.

   SOUTH TEXAS

   The  South  Texas basin  consists of  approximately  fifteen wells  which are
   operated by  unaffiliated entities,  producing primarily  from the  Wilcox at
   depths of  10,000 to 12,000 feet.  The  majority of the reserves in this area
   are located in the Mercy Field in San Jacinto County in the Houston Embayment
   Basin.   In 1995, four miles  of existing pipeline were  purchased and joined
   with two miles  of newly-constructed  pipeline.  Several  shallower wells  of
   approximate  depths of 800 feet  were also purchased  for deepening potential
   and to alleviate high salt water disposal expense.  Over 500 acres of  leases
   were  also acquired to drill a  step-out test in 1996.   There have also been
   several successful workovers in 1995 that have potential future benefits.

   PROPERTY SALES

   During 1994, HEP received $394,000 in connection with the sale of properties.
   The  proceeds  are  comprised  of  numerous  sales  of  various  nonstrategic
   properties, none of which are individually significant.



   PRODUCTIVE OIL AND GAS WELLS

   The  following  table summarizes  the  productive  oil and  gas  wells as  of
   December  31,   1995  attributable  to  HEC's  and  HEP's  direct  interests.
   Productive wells are producing wells and wells capable  of production.  Gross
   wells  are the total number of  wells in which HEC and  HEP have an interest.
   Net wells are the  sum of HEC's and HEP's  fractional interests owned in  the
   gross wells.
<TABLE>
<CAPTION>
                                      HEC Direct          HEP Direct   
                                                      
             Productive Wells     Gross      Net      Gross      Net
                <S>              <C>       <C>      <C>       <C>  
                Oil                35         1       892       378
                Gas                 0         0       351       114
                                 ----     ------     -----     -----

              Total                35         1     1,243       492
                                 =====    ======     =====     =====
</TABLE>
   OIL AND GAS ACREAGE

   The  following  table sets  forth  the  developed and  undeveloped  leasehold
   acreage  held directly by  HEC and  HEP as of  December 31, 1995.   Developed
   acres  are  acres  which  are  spaced  or  assignable  to  productive  wells.
   Undeveloped acres are acres on which wells have not been drilled or completed
   to a point  that would permit the production of  commercial quantities of oil
   and gas regardless of whether  or not such acreage contains proved  reserves.
   Gross acres are the total number of acres in which HEC and HEP have a working
   interest.   Net acres  are the  sum of HEC's  and HEP's  fractional interests
   owned in the gross acres.
<TABLE>
<CAPTION>
                                          HEC                 HEP        
                                                               

                                  Gross      Net       Gross       Net

           <S>                <C>       <C>       <C>        <C>     
           Developed acreage    9,464     3,585     135,500    76,800
           Undeveloped acreage                      189,350    39,337
                               ------      -----     -------   ------

            Total               9,464     3,585     324,850   116,137
                               ======   ======      =======  =======
</TABLE>
   DRILLING ACTIVITY

   The following  table sets  forth the  number of  wells attributable  to HEC's
   direct  interests  drilled  during  1995.    HEC  had  no  drilling  activity
   attributable to its direct interests during the years ended December 31, 1994
   and 1993.
<TABLE>
<CAPTION>
                                          Gross    Net

                           Development
                           Wells:
                            <S>         <C>       <C>
                            Productive     29        .98
                            Dry             1        .04
                                          ----      -----

                            Total          30       1.02
                                          ====      ====
</TABLE>

   The following  table sets  forth the  number of  wells attributable  to HEP's
   direct interests drilled in the most recent three years.
<TABLE>
<CAPTION>
                                      Year Ended December 31,            
                               1995            1994             1993 
                          Gross    Net     Gross    Net    Gross     Net

          DEVELOPMENT
          WELLS:
            <S>        <C>      <C>     <C>     <C>      <C>      <C>
            Productive   66       28.0    30      14.6     12       6.2
            Dry           2         .5     4        .7      4       1.2
                        ---       ----   ---       ----   ----     ----

              Total      68      28.5     34      15.3     16       7.4
                        ===      ====   ====      ====    ===      ====


          EXPLORATORY
          WELLS:
            Productive    5         .6     2        .1      6       1.1
            Dry           1         .9     6       1.2     10       3.9
                        ---      ----    ---       ----   ---      ----

              Total       6        1.5     8       1.3     16       5.0
                        ===       ====   ===      ====    ===      ====
</TABLE>
   AVERAGE SALES PRICES AND PRODUCTION COSTS

   The following table presents the average oil and  gas sales price and average
   production costs per equivalent  barrel computed at the  ratio of six mcf  of
   gas to one barrel of oil.
<TABLE>
<CAPTION>
                                               1995      1994      1993 

          <S>
          Oil and condensate (includes the    <C>        <C>       <C>
            effects of hedging) (per bbl)    $17.14     $15.98   $17.73 
          Natural gas (includes the 
            effects of hedging) (per mcf)      1.81      1.98      1.98
          Production costs (per equivalent
          bbl of oil)                          3.35      3.46      3.14
</TABLE>
   OFFICE SPACE

   HPI, an affiliate of HEC, leases office  space in Denver, Colorado containing
   approximately 41,000 square feet, for approximately $600,000 per year.  These
   lease payments  are included in the allocation  of general and administrative
   expenses to HEC and other  affiliated entities.  HEP  is guarantor of 60%  of
   the  lease obligation,  and HCRC  is guarantor  of the  remaining 40%  of the
   obligation.  HEC is the guarantor of a five year office lease of an affiliate
   of Hallwood Group in Dallas, Texas covering approximately 17,000 square feet.
   The affiliate of  Hallwood Group has entered  into an agreement to  indemnify
   HEC for any loss  suffered by HEC because of  the guaranty.  The  total lease
   payments on  this property  are  approximately $170,000  per year,  of  which
   approximately $11,000 is billed to HEC.  


   ITEM 3 - LEGAL PROCEEDINGS

   See Notes  11  and 12  to  the financial  statements in  Item  8 -  Financial
   Statements and Supplementary Data.


   ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matters were  submitted to a  vote of security  holders during the  fourth
   quarter of 1995.

                                      PART II

   ITEM 5 -  MARKET  FOR  REGISTRANT'S  COMMON  EQUITY  AND  RELATED STOCKHOLDER
             MATTERS

   Since  January 17,  1995,  HEC's common  stock  has been  quoted  in the  OTC
   Bulletin  Board under the  symbol "HWEC."   Prior to January  17, 1995, HEC's
   common stock was  quoted in  the National Association  of Securities  Dealers
   National  Market System.   As of February 27,  1996, there were approximately
   667 shareholders of HEC's  common stock, including shareholders that  hold in
   street name.  The following table sets forth, for the  periods indicated, the
   high and low closing  bid quotations for the common stock as  reported by the
   National  Quotation Bureau.  See  further discussion under  Dividends in Item
   7 - Management's Discussion  and Analysis of Financial Condition  and Results
   of Operations, Liquidity and Capital Resources.
<TABLE>
<CAPTION>
                HEC COMMON STOCK        High      Low      Dividends


                <S>                   <C>       <C>         <C>
                First Quarter 1995    12 1/2    10 1/4       $1.00
                Second Quarter 1995   18 1/2    10 1/4        1.50
                Third Quarter 1995    21        13 1/2
                Fourth Quarter 1995   16        10            .80
                                                              ----
                                                            $ 3.30
                                                             =====



                First Quarter 1994    15        13           $1.70 

                Second Quarter 1994   15        12

                Third Quarter 1994    14        10            1.50

                Fourth Quarter 1994   10 3/4    9                  
                                                            ----- 
                                                            $3.20 
                                                            =====
</TABLE>

   ITEM 6 - SELECTED FINANCIAL DATA - (In thousands except per share)

   The  following  table sets  forth  selected  financial data  regarding  HEC's
   financial position and  results of operations as of the  dates indicated.  In
   connection with the change in HEC's reserve calculation methodology  in 1994,
   which  is further  described in  Item 8  - Supplemental  Oil and  Gas Reserve
   Information,  all periods  have been  restated to  reclassify HEC's  share of
   internal  overhead  charges  attributable  to  wells  operated  by  HPI  from
   production operating expense to general and administrative expense.
<TABLE>
<CAPTION>
                               As of and for the Years Ended December 31,    
                                                                         
                                        1995            1994          1993 

     
     Summary of Operations
     <S>                               <C>            <C>            <C>     
     Oil and gas revenues               $ 5,507        $ 5,878        $ 5,922
     Total revenue                        5,632          6,138          7,268
     Production operating expense         1,443          1,555          1,394
     Depreciation,depletion,
     amortization and impairment          2,153          1,959          1,944
     Impairment of investment in  
      parent                                             3,249
     Net income (loss)                      706         (2,512)         2,514

     Net income (loss) per        
      common share                        (1.00)        (3.32)          2.67   
     Dividends per common share            3.30          3.20   
     Balance Sheet
     Working capital (deficit)          $  (619)       $   (72)       $ 2,410
     Net property, plant and      
      equipment                           9,839         10,569         11,697

     Total assets                        16,465         18,266         25,298
     Long-term debt                         825
     Long-term obligations of
     affiliate                            5,366          3,917          5,584
     Stockholders' equity                 7,011         11,316         16,284

   (Continued below)
</TABLE>
<TABLE>
<CAPTION>
                                                                          
                                                 1992                1991 


     Summary of Operations
     <S>                                       <C>                 <C>     
     Oil and gas revenues                    $ 6,827             $ 6,690
     Total revenue                             6,835               6,702
     Production operating expense              1,780               2,332
     Depreciation,depletion,
     amortization and impairment               2,308               2,328
     Impairment of investment in  
      parent
     Net income (loss)                         1,006                 498

     Net income (loss) per        
      common share                              .80                 .23   
     Dividends per common share
     Balance Sheet
     Working capital (deficit)               $ 1,638             $ 1,937
     Net property, plant and      
      equipment                               12,909              17,470
     Total assets                             21,792              25,729
     Long-term debt
     Long-term obligations of
     affiliate                                 5,183               7,010
     Stockholders' equity                     16,334              17,774

</TABLE>

   ITEM 7 -  MANAGEMENT'S DISCUSSION  AND  ANALYSIS OF  FINANCIAL CONDITION  AND
             RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES

   LIQUIDITY AND CAPITAL RESOURCES

   HEC  had a  net working  capital deficit  of $619,000  at December  31, 1995,
   including $10,000 of  cash and cash equivalents.  HEC has adopted a policy of
   paying dividends in  an amount  to be determined  by the  board of  directors
   after consideration of the  cash flow and working capital needs of  HEC.  For
   1996, through February 27, 1996, no dividends have been declared by HEC.


   PROPERTY PURCHASES, SALES AND CAPITAL BUDGET

   During 1995,  HEC participated in drilling seven wells  in Winkler County and
   twenty-three wells in Reagan and Irion Counties,  Texas, through its interest
   in the Saxon Drilling Venture (the "Drilling Venture").   The Company's share
   of capital costs on these wells was  $328,000 through December 31, 1995.  The
   Drilling  Venture is a  joint venture between  the Company and  HEP which was
   originally established in 1985.  Under the terms of the Drilling Venture, the
   Company  receives  an  18.75% interest  in  revenues  and  costs relating  to
   production from certain wells drilled in West Texas, in return for payment of
   7.5%  of the drilling costs.  The  Reagan County wells were drilled utilizing
   the third  party financing described  below.  HEC  has recorded its  share of
   debt  on these  wells  ($172,000 at  December 31,  1995),  under the  caption
   "Current Liabilities of Affiliate" in the accompanying balance sheet  because
   the debt matures in August 1996.

   During  1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
   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").   SFAS  121  provides the  standards  for  accounting for  the
   impairment of various long-lived  assets.  The Company  is required to  adopt
   SFAS 121 no later than 1996.  HEC uses the full cost method of accounting for
   its  property, which  requires  an  impairment  to  be  recorded  when  total
   capitalized costs exceed the  present value, discounted at 10%,  of estimated
   future  net revenues  from  proved  oil and  gas  reserves.   Therefore,  the
   adoption of  SFAS  121 is  not  expected to  have a  material  effect on  the
   financial position or results of operations of HEC.

   DIVIDENDS

   HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
   Stock on March 3, 1995.  On August 15, 1995, HEC paid a dividend of $1.50 per
   share of common stock  and Series E Preferred Stock.   On November 15,  1995,
   HEC  paid a dividend of $.80 per share of common stock and Series E Preferred
   Stock.

   The  board  of  directors will  determine  future  dividends,  if any,  after
   consideration  of the  cash flow  and working  capital needs  of HEC.   HEC's
   credit agreement limits aggregate dividends paid by the Company to  $3.50 per
   share each fiscal year.

   HEP DISTRIBUTIONS

   During  1995, HEP declared $.80 per Unit  in distributions to its Unitholders
   and $2,359,000 to its general  partner, HEC.  Oil and gas  prices continue to
   be low  and the resulting negative  effect on cash flow  from operations will
   impact the amount of distributions which HEP will be able to make. 

   On January 19, 1996, HEP paid a dividend of one new Class C Unit for every 15
   HEP Class A Units held as of the  record date of December 18, 1995.  Pursuant
   to the  regulation of the American  Stock Exchange, holders of  Class A Units
   who sold their Units between December 14, 1995 and January 19, 1996 also sold
   their right to receive the associated  Class C Unit dividend.  Class  C Units
   are a newly created class of units that trade separately from HEP's currently
   outstanding Units.  The Class C Units have a distribution preference of $1.00
   per year, payable quarterly, and distributions on the new units will commence
   for the  first quarter of 1996.  Class C Units  have been created to give HEP
   greater  flexibility in structuring  future acquisitions  by allowing  HEP to
   issue a security  with a set  distribution rate.   Currently outstanding  HEP
   Units are referred to as Class A Units but will continue to be  listed on the
   American Stock Exchange using the symbol "HEP."



   If there are  no further adverse changes in the factors which effect HEP cash
   flow, including oil  and gas  prices, property and  partnership expenses  and
   other relevant information, and there is no change in the limitation in HEP's
   Credit facilities on the amount of distributions permitted, HEP believes that
   it can distribute $.13 per Class A Unit and $.25 per Class C Unit for each of
   the four  quarters of 1996.  The  combined effect of the  issuance of the new
   Class C Units and  the decrease in distributions  on the Class A  Units would
   result in  the $.80 annual distribution  that has been paid  since 1992 being
   reduced to an annual rate  of $.58 on a Class A and  associated Class C Unit.
   Future distributions  will be determined  after taking  into account  reduced
   cash flow  and the limitation  in HEP's  Credit Facilities on  the amount  of
   distributions.

   CASH FLOW 

   Cash used  in operating activities  was $495,000 in  1995.  During  1995, HEC
   received  distributions  of  $2,886,000  from   HEP  and  paid  dividends  of
   $2,673,000.     These  items,  together  with   investment  transactions  and
   borrowings, resulted in a decrease in cash of $658,000 during 1995.

   FINANCING 

   During  the second  quarter  of  1995,  the Company  entered  into  a  credit
   agreement  with  a  bank  that  has  committed  to  loan  the  Company up  to
   $1,500,000.   As of December 31, 1995, the Company has outstanding borrowings
   of $1,125,000  against the credit line.   Borrowings against  the credit line
   bear interest at  the bank's prime rate plus 2% (10.5% at December 31, 1995).
   Interest  is  payable monthly,  and quarterly  principal payments  of $75,000
   commenced  December 1, 1995.   The credit line is secured  by the HEP Class A
   Units  owned by the Company.  The credit agreement limits aggregate dividends
   paid by the Company to $3.50 per share each fiscal year.

   Included in the accompanying balance sheet at December 31, 1995 are long-term
   obligations of affiliate of  $5,366,000.  This amount represents  HEC's share
   of  HEP's  outstanding  long-term  obligations  which  consist  primarily  of
   $24,700,000 borrowed  under a line of credit and $12,857,000 borrowed under a
   note purchase  agreement.  HEP's  borrowings are secured  by a first  lien on
   approximately 80%  in value of HEP's oil and gas properties.  Included within
   the caption "Current  Liabilities of Affiliate"  in the accompanying  balance
   sheet as  of December 31,  1995 is $172,000  which represents HEC's  pro rata
   share of borrowings from a third party lender used to finance the drilling in
   which  HEC  participated through  the  Saxon Drilling  Venture.   HEC  is not
   directly  a party  to the  loan; however,  HEC will  reimburse HEP  for HEC's
   $172,000  share  of the  borrowings when  HEP  repays the  loan in  the first
   quarter of 1996.

   INFLATION AND CHANGING PRICES

   Prices obtained for oil and gas  production depend upon numerous factors that
   are beyond the control of  HEC, including the extent of domestic  and foreign
   production,  imports of  foreign oil, market  demand, domestic  and worldwide
   economic and political conditions,  and government regulations and tax  laws.
   Prices  for both  oil and  gas have  fluctuated significantly  in 1995.   The
   following table presents the average prices received each year by HEC and the
   effects of its share of HEP's hedging transactions:
<TABLE>
<CAPTION>
                    Oil            Oil            Gas            Gas
                 (excluding     (including     (excluding     (including
                 effects of     effects of     effects of   effects of
                  hedging        hedging        hedging        hedging
               transactions)  transactions)  transactions)  transactions)
                 (per bbl)      (per bbl)      (per mcf)       (per mcf)

         <C>   <C>            <C>            <C>            <C>  
         1995   $ 16.88        $ 17.14        $  1.66        $  1.81    
         1994     15.33          15.98           1.94           1.98
         1993     17.05          17.73           2.10           1.98
</TABLE>
   During  the first  quarter through  February  14, 1996,  the  oil price  (for
   barrels  not hedged)  averaged between  $17.00  and $18.50  per barrel.   The
   weighted average price of natural gas (for mcf not hedged)  was between $1.35
   and $4.00 per mcf.

   Inflation  did not  have  a  material  impact  on  HEC in  1995  and  is  not
   anticipated to have a material impact in 1996.

   RESULTS OF OPERATIONS

   The following table  is presented  to contrast HEC's  revenues, expenses  and
   earnings for discussion purposes.  Significant fluctuations are discussed  in
   the accompanying narrative.  The "HEC" column represents HEC's direct royalty
   and working interests in oil and gas properties.  The "HEP" column represents
   HEC's  combined limited partner and  general partner ownership  of HEP, which
   was 7.3% of  the limited partner share  for the first three quarters  of 1995
   and 6.5% for the last quarter of 1995, 7.3% of the  limited partner share for
   1994 and 1993, and 100% of the general partner share for 1995, 1994 and 1993.
<TABLE>
<CAPTION>

              TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
                                  (In thousands)
                       For the Year Ended December 31, 1995


                                                                   
                                           HEC        HEP       Total

            
            REVENUE
            <S>                      <C>       <C>        <C>      
            Oil revenue               $   135   $  2,093   $  2,228
            Gas revenue                    35      3,244      3,279
            Acquisition fee                11                    11
            Interest                       86         28        114
                                          ---       ----       ----
                                          267      5,365      5,632
                                          ---     ------      -----

            EXPENSE
            Production operating           44      1,399      1,443
            General and administrative    628        530      1,158
            Depreciation, depletion,   
             amortization and          
             impairment                   127      2,026      2,153
            Interest                      106        387        493
            Litigation settlement of
                  affiliate                           46         46
                                         ----      -----      -----          
                                          905      4,388      5,293
                                         ----     ------     ------

            Other Income (Expense):
            Miscellaneous income       
             (expense)                     30        (69)       (39)
                                         ----      -----      -----
                                           30        (69)       (39)
                                       ------       ----      -----

            Provision (Benefit) for
            income taxes -
              Current                      94                    94
              Deferred                   (500)                 (500)
                                        -----      -----      -----
                                         (406)                 (406)
                                        -----      -----      -----

            Net Income (loss)         $  (202)     $ 908      $ 706
                                     ========    =======    =======
</TABLE>
<TABLE>
<CAPTION>


              TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
                                    (In thousands)
                         For the Years Ended December 31, 1994 


                                                                          
                                    HEC             HEP            Total 


     REVENUE

     <S>                            <C>             <C>              <C>     
     Oil revenue                  $    30         $ 2,016          $ 2,046
     Gas revenue                       10           3,822            3,832
     Acquisition fee                   23                               23
     Interest                         184              53              237
                                    -----           -----            -----
                                      247           5,891            6,138
                                    -----          ------           ------

     EXPENSE
     Production operating              17           1,538            1,555
     General and             
      administrative                  570             528            1,098
     Depreciation,           
      depletion,
      amortization and       
      impairment                      127           1,832            1,959
     Interest                                         363              363
     Litigation settlement   
      of affiliate                                    308              308
                                   ------          ------           ------

                                      714           4,569            5,283
                                   ------          ------           ------

     Other Income (Expense):
     Impairment of           
      investment in parent         (3,249)                          (3,249)
     Miscellaneous income    
      (expense)                        65             (50)              15
                                  -------          ------           ------
                                   (3,184)            (50)          (3,234)
                                  -------         -------          -------

     Provision (Benefit) for
     income taxes -
       Current                        133                              133
       Deferred                                                           
                                    -----          ------            -----
                                      133                              133
                                    -----          ------           ------

     Net Income (loss)            $(3,784)        $ 1,272          $(2,512)
                                 ========         =======         ========
</TABLE>
<TABLE>
<CAPTION>
              TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
                                  (In thousands)
                       For the Years Ended December 31, 1993


                                                                          
                                      HEC              HEP           Total

    
    REVENUE
    <S>                             <C>            <C>            <C>     
    Oil revenue                      $    34        $ 1,916        $ 1,950
    Gas revenue                            7          3,965          3,972
    Litigation settlement     
     of affiliate                                     1,050          1,050
    Acquisition fee                      111                           111
    Interest                             143             42            185
                                       -----          -----          -----
                                         295          6,931          7,268
                                       -----         ------          -----

    EXPENSE
    Production operating                  18          1,376          1,394
    General and               
     administrative                      612            636          1,248
    Depreciation,depletion,   
     amortization and         
     impairment                          189          1,755          1,944
    Interest                                            442            442
                                       -----         ------         ------
                                         819          4,209          5,028
                                      ------         ------        -------

    Other Income (Expense):
    Impairment of investment
     in parent
    Miscellaneous income    
    (expense)                            135            229            364
                                       -----          -----          -----
                                         135            229            364
                                       -----          -----          -----

    Provision (Benefit) for
    income taxes -
      Current                             90                            90
      Deferred                                                            
                                       -----         ------          -----
                                          90                            90
                                       -----         ------         ------

    Net Income (loss)                $  (479)       $ 2,993        $ 2,514
                                     =======       ========        =======
</TABLE>

   1995 COMPARED TO 1994

   OIL REVENUE

   Oil  revenue increased  $182,000,  or  9%, during  1995.   This  increase  is
   primarily due to  a 2% increase in production from 128,000 barrels in 1994 to
   130,000  barrels in 1995, combined with an  increase in the average oil price
   from $15.98 per barrel in 1994  to $17.14 per barrel in 1995.   This increase
   in production is due primarily to HEP's drilling  in 1994 and 1995, partially
   offset by normal production declines.

   The  effect  of HEP's  hedging  transactions described  under  "Inflation and
   Changing Prices" during 1995 was to  increase HEC's oil price from $16.88 per
   barrel  to $17.14 per barrel, representing $34,000 in additional revenue from
   hedging transactions.

   GAS REVENUE

   Gas revenue decreased $553,000 during 1995, primarily due to a 6% decrease in
   production  from 1,932,000 mcf  in 1994  to 1,808,000 mcf  in 1995.   The gas
   price also declined 9% from  $1.98 per mcf in 1994 to $1.81  per mcf in 1995.
   The  decrease in production is  due primarily to  normal production declines,
   partially offset by HEP drilling in 1994 and 1995.

   The  effect of  HEP's  hedging transactions  described  under "Inflation  and
   Changing Prices" during 1995 was  to increase HEC's gas price from  $1.66 per
   mcf  to $1.81  per  mcf, representing  $271,000  in additional  revenue  from
   hedging transactions.

   ACQUISITION FEE REVENUE

   The acquisition fee earned in  1995 and 1994 relates to property acquisitions
   made by HEP.  The fee decreased during  1995 as compared to 1994, as a result
   of a decline in property acquisitions made by HEP during 1995.

   INTEREST

   Interest income  decreased from 1994 to  1995 primarily as a  result of lower
   invested balances.

   PRODUCTION OPERATING EXPENSE

   Production operating expense decreased  $112,000 in 1995 as compared  to 1994
   primarily as a result of general cost reductions in West Texas.

   GENERAL AND ADMINISTRATIVE EXPENSE

   General  and  administrative  expense  includes  costs  incurred  for  direct
   administrative services  such as legal and  audit fees, as  well as allocated
   internal  overhead incurred by  HPI, an affiliate  of HEC,  which manages and
   operates certain oil  and gas properties on  behalf of HEC and HEP  and their
   affiliates.  These costs increased $60,000 during 1995 as compared with  1994
   as  a result of  increased allocated internal  overhead from HPI,  as well as
   increased insurance costs during 1995.

   DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE

   Depreciation,  depletion,  amortization   and  impairment  expense  increased
   $194,000  in 1995 as compared to 1994.   The increase is primarily the result
   of HEC's share of HEP's impairment of its investment in  Indonesia, which has
   been abandoned.

   INTEREST EXPENSE

   Interest expense increased $130,000 in 1995 as compared to 1994, primarily as
   a result of HEC's borrowings under its line of credit.

   LITIGATION SETTLEMENT OF AFFILIATE

   Litigation  settlement of affiliate, which represents  HEC's share of various
   lawsuit  settlements made  by  HEP, declined  during  1995 compared  to  1994
   because  HEP settled a significant lawsuit in  1994, as described in Item 8 -
   Note 11. 

   IMPAIRMENT OF INVESTMENT IN PARENT

   Impairment  of investment  in  parent of  $3,249,000  during the  year  ended
   December 31,  1994 represents  an other than  temporary decline  in the  fair
   value  of the Hallwood Group  stock held by  HEC.  The  impairment, which was
   recorded  at June 30, 1994, reflects  the difference between the market value
   of the  stock at June  30, 1994  of $11.50 per  share (adjusted  for Hallwood
   Group's 1 for 4 reverse split) and HEC's original cost basis.

   MISCELLANEOUS INCOME

   Miscellaneous income consists  primarily of HEC's  share of HEP's  facilities
   income from two  gathering systems  in New Mexico,  pipeline revenue,  equity
   investment  earnings, and miscellaneous income  or expense.   The decrease in
   miscellaneous income of $54,000 is primarily due to a decrease in HEC's share
   of HEP's equity investment earnings.

   1994 COMPARED TO 1993

   OIL REVENUE

   Oil  revenue  increased  $96,000,  or  5%, during  1994.    This  increase is
   primarily due to a 16% increase in production from 110,000 barrels in 1993 to
   128,000  barrels in 1994, offset by a  decrease in the average oil price from
   $17.73  per barrel in  1993 to $15.98  to barrel in  1994.  This  increase in
   production  is due primarily to HEP property acquisitions which occurred late
   in 1993, partially offset by normal production declines.

   The effect  of  HEP's hedging  transactions  described under  "Inflation  and
   Changing Prices" during 1994 was to increase HEC's oil price  from $15.33 per
   barrel  to $15.98 per barrel, representing $83,000 in additional revenue from
   hedging transactions.

   GAS REVENUE

   Gas revenue decreased $140,000 during 1994, primarily due to a 4% decrease in
   production  from 2,005,000 mcf  in 1993  to 1,932,000 mcf  in 1994.   The gas
   price  remained consistent  at $1.98  per mcf  in both  1994 and  1993.   The
   decrease  in production  is  due primarily  to  decreased production  in  the
   Scott/West  Ridge  area,  due  to  allowable  production  limits  and  normal
   production  declines, partially  offset  by HEP  property acquisitions  which
   occurred late in 1993.

   The effect  of  HEP's hedging  transactions  described under  "Inflation  and
   Changing  Prices" during 1994 was to increase  HEC's gas price from $1.94 per
   mcf to $1.98 per mcf, representing $77,000 in additional revenue from hedging
   transactions.


   LITIGATION SETTLEMENT OF AFFILIATE

   Litigation  settlement of  affiliate  in 1993  represents  HEC's share  of  a
   lawsuit  settlement received by  HEP which is  further described in  Item 8 -
   Note 11.

   ACQUISITION FEE REVENUE

   The acquisition fee earned in 1994 and 1993  relates to property acquisitions
   made by HEP.   The fee decreased during 1994 as compared to 1993, as a result
   of a decline in property acquisitions made by HEP during 1994.

   PRODUCTION OPERATING EXPENSE

   Production operating expense increased  $161,000 in 1994 as compared  to 1993
   primarily as  a result of an  increase in operating expenses  due to property
   acquisitions and drilling  projects completed  by HEP late  in 1993  combined
   with  increased  ad valorem  taxes  and  salt  water  disposal costs  in  the
   Scott/West Ridge area.

   GENERAL AND ADMINISTRATIVE EXPENSE

   General  and  administrative  expense  includes  costs  incurred  for  direct
   administrative services such as  legal and audit fees,  as well as  allocated
   internal overhead incurred  by HPI, an  affiliate of HEC,  which manages  and
   operates certain oil  and gas properties on behalf  of HEC and HEP  and their
   affiliates.  These costs decreased $150,000 during 1994 as compared with 1993
   as a result of reductions in internal allocated overhead from HPI, as well as
   decreased legal expenses during 1994.

   DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE

   Depreciation,  depletion,  amortization  and  impairment   expense  increased
   $15,000 in 1994 as compared to 1993.  The increase is primarily the result of
   HEC's share of HEP's impairment of foreign  drilling projects which have been
   abandoned.

   INTEREST EXPENSE

   Interest expense decreased $79,000 in 1994  as compared to 1993, primarily as
   a  result of HEP's  lower average debt  balance in 1994  as compared to 1993,
   which was partially offset by higher interest rates.

   LITIGATION SETTLEMENT OF AFFILIATE

   Litigation settlement  of  affiliate during  1994 represents  HEC's share  of
   various lawsuit settlements made by HEP which are further described in Item 8
   - Note 11.

   IMPAIRMENT OF INVESTMENT IN PARENT

   Impairment  of investment  in  parent of  $3,249,000  during the  year  ended
   December 31,  1994 represents  an other than  temporary decline  in the  fair
   value  of the Hallwood  Group stock held  by HEC.   The impairment, which was
   recorded  at June 30, 1994, reflects  the difference between the market value
   of the stock at  June 30, 1994  of $11.50 per  share and HEC's original  cost
   basis.


   MISCELLANEOUS INCOME

   Miscellaneous income  consists primarily of  HEC's share of  HEP's facilities
   income  from two  gathering  systems in  New  Mexico, pipeline  revenue,  gas
   marketing  activity and  miscellaneous income  or expense.   The  decrease in
   miscellaneous income of $349,000  is primarily due to a $150,000  decrease in
   HEC's share  of HEP's equity investment and a $50,000 decrease in HEC's share
   of HEP's revenue  from gas  marketing activities which  were discontinued  in
   March 1993.   The remaining  decrease is comprised  of numerous  individually
   insignificant items. 


   ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

               INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


   FINANCIAL STATEMENTS:                                                   Page 

   Independent Auditors' Report                                               20

   Consolidated Balance Sheets at December 31, 1995 and 1994               21-22

   Consolidated Statements of Operations for the years
     ended December 31, 1995, 1994 and 1993                                   23

   Consolidated Statements of Cash Flows for the years 
     ended December 31, 1995, 1994 and 1993                                   24

   Consolidated Statements of Stockholders' Equity for the 
     years ended December 31, 1995, 1994 and 1993                             25

   Notes to Consolidated Financial Statements                              26-37

   SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION - (UNAUDITED)              38-41



                           INDEPENDENT AUDITORS' REPORT


   TO THE STOCKHOLDERS OF HALLWOOD ENERGY CORPORATION:

   We have  audited the  consolidated  financial statements  of Hallwood  Energy
   Corporation as of December 31, 1995 and  1994 and for each of the three years
   in the period ended December 31, 1995, listed  in the index at Item 8.  These
   financial statements are the responsibility of the Company's management.  Our
   responsibility is to express  an opinion on these financial  statements based
   on our audits.

   We conducted  our  audits  in accordance  with  generally  accepted  auditing
   standards.  Those  standards require that  we plan and  perform the audit  to
   obtain reasonable assurance about  whether the financial statements are  free
   of  material misstatement.   An  audit includes examining,  on a  test basis,
   evidence supporting the amounts and disclosures  in the financial statements.
   An  audit  also  includes  assessing  the  accounting  principles   used  and
   significant estimates made by  management, as well as evaluating  the overall
   financial  statement  presentation.   We believe  that  our audits  provide a
   reasonable basis for our opinion.

   In our opinion, such consolidated financial statements present fairly, in all
   material respects, the financial  position of Hallwood Energy Corporation  at
   December 31,  1995 and 1994, and the  results of its operations  and its cash
   flows for each of  the three years in the  period ended December 31,  1995 in
   conformity with generally accepted accounting principles.  



   DELOITTE & TOUCHE LLP

   Denver, Colorado
   February 27, 1996





<TABLE>
<CAPTION>
                            HALLWOOD ENERGY CORPORATION
                            CONSOLIDATED BALANCE SHEETS
                                  (In thousands)

                                                 December 31,        

                                            1995            1994 
    <S>                                <C>               <C>     
    CURRENT ASSETS
    Cash and cash equivalents            $     10        $    668
    Accounts receivable:
     Affiliates                               372             526
     Trade                                     26               7
    Current assets of affiliate             2,236           1,760
                                          -------          ------
          Total                             2,644           2,961
                                          -------         -------

    PROPERTY, PLANT AND EQUIPMENT, at
    cost
    Oil and gas properties (full cost 
    method):

    Proved mineral interests              113,159         111,951
    Unproved mineral interests -    
    domestic                                   82              46
    Unproved mineral interests -      
    foreign                                                   288
    Other property and equipment            3,758           3,745
                                          -------         -------
        Total                             116,999         116,030

    Less accumulated depreciation,    
    depletion,  amortization and
    property impairment                  (107,160)       (105,461)
                                        ---------      ----------

    Net Property, Plant and Equipment       9,839          10,569
                                        ---------       ---------

    OTHER ASSETS
    Investment in common stock of
    parent (carried at market)              2,075           1,680
                                         --------        --------
    Investment in bonds of parent
    (at cost adjusted for
    amortization of discount)                               1,352
    Deferred tax asset                        500
    Noncurrent assets of affiliate          1,407           1,704
                                           ------         -------
          Total                             3,982           4,736
                                           ------         -------

    TOTAL ASSETS                         $ 16,465        $ 18,266
                                         ========        ========








</TABLE>

                         (Continued on the following page)
<TABLE>
<CAPTION>
                            HALLWOOD ENERGY CORPORATION
                            CONSOLIDATED BALANCE SHEETS
                           (In thousands except Shares)


                                                           December 31,   
                                                     1995             1994 
    <S>                                        <C>                <C>      
    CURRENT LIABILITIES
    Accounts payable and accrued               
    liabilities                                    $    106        $    154
    Current portion of long-term debt                   300
    Current liabilities of affiliate                  2,857           2,879
                                                    -------          ------

          Total                                       3,263           3,033
                                                    -------         -------

    NONCURRENT LIABILITIES
    Long-term debt                                      825
    Long-term obligations of affiliate                5,366           3,917
                                                    -------         -------

          Total                                       6,191           3,917
                                                    -------          ------

          Total Liabilities                           9,454           6,950
                                                     ------         -------

    STOCKHOLDERS' EQUITY
    Series D convertible cumulative,
    redeemable preferred stock, $.01 par
    value; 65,000 shares authorized; 18,864
    shares issued as of 1994 with a
    liquidation preference of $1,154
    (cancelled during 1995)                                               1
    Series E convertible preferred stock; $.01
    stated value; 450,000 shares authorized;
    356,000 shares issued as of 1994 with a
    liquidation preference of $.01 per share                              4
    Common stock, $.50 par value; 80,000,000
    shares authorized; 1,198,121 and 842,121
    shares issued at 1995 and 1994,
    respectively                                        599             421
    Capital in excess of par value                   53,789          58,248
    Accumulated deficit                             (41,584)        (42,290)
    Unrealized loss on investment in common
    stock of parent                                  (1,002)           (896)
    Less cost of treasury stock of 405,995 and
    347,995 common shares at 1995 and 1994,
    respectively, and 7,500 Series D preferred
    shares at 1994                                   (4,791)         (4,172)
                                                    -------         -------

          Stockholders' Equity - net                  7,011          11,316
                                                    -------         -------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY     $ 16,465        $ 18,266
                                                   ========        ========



   <F1>

     The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
                            HALLWOOD ENERGY CORPORATION
                       CONSOLIDATED STATEMENTS OF OPERATIONS
                          (In thousands except per Share)


                                          For the Years Ended December 31,
                                          1995         1994        1993 
    <S>                               <C>         <C>            <C>   
    REVENUES:
      Oil revenue                      $ 2,228     $ 2,046      $ 1,950
      Gas revenue                        3,279       3,832        3,972
      Litigation settlement of
      affiliate                                                   1,050
      Acquisition fee                       11          23          111
      Interest                             114         237          185
                                        ------       -----       ------
                                         5,632       6,138        7,268
                                        ------      ------       ------

    EXPENSES:
      Production operating               1,443       1,555        1,394
      General and administrative         1,158       1,098        1,248
      Depreciation, depletion,
      amortization and impairment        2,153       1,959        1,944
      Interest                             493         363          442
      Litigation settlement of
      affiliate                             46         308             
                                        ------      ------       ------
                                         5,293       5,283        5,028
                                        ------      ------       ------

    OTHER INCOME (EXPENSE):
      Impairment of investment in                   
      parent                                        (3,249) 
      Miscellaneous income (expense)       (39)         15          364
                                         -----       -----        -----
                                           (39)     (3,234)         364
                                         -----     -------        -----

    INCOME (LOSS) BEFORE INCOME TAXES      300      (2,379)       2,604
                                         -----     -------      -------

    PROVISION (BENEFIT) FOR INCOME
    TAXES
      Current                               94         133           90
      Deferred                            (500)                        
                                         -----      ------        -----
                                          (406)        133           90
                                         -----       -----        -----

    NET INCOME (LOSS)                      706      (2,512)       2,514

    PREFERRED STOCK DIVIDENDS            1,175          73           88
                                       -------      ------        -----

    NET INCOME (LOSS) FOR COMMON
    STOCKHOLDERS                       $  (469)    $(2,585)     $ 2,426
                                       =======    ========     ========

    NET INCOME (LOSS) PER COMMON
    SHARE                                $ (1.00)    $ (3.32)     $  2.67  
                                           ======       ======      ====== 

    NET INCOME (LOSS) PER COMMON
    SHARE (assuming full dilution)       $ (1.00)    $ (3.32)     $  2.42  
                                           ======       ======      ====== 

    WEIGHTED AVERAGE COMMON SHARES         469         779          907
                                          ======       =====        =====
<FN>1

     The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>

                            HALLWOOD ENERGY CORPORATION
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (In thousands)


                                            For the Years Ended December 31,   

                                              1995         1994         1993 
    <S>                                   <C>          <C>          <C>    
    OPERATING ACTIVITIES:
    Net income (loss)                      $  706      $(2,512)     $ 2,514
    Adjustments to reconcile net income
    (loss) to net cash used in operating  
    activities:
    Depreciation, depletion, amortization
     and impairment                         2,153        1,959        1,944
    Impairment of investment in parent                   3,249
    Undistributed earnings of affiliate    (2,917)      (3,106)      (4,748)
    Deferred tax benefit                     (500)
    Amortization of bond discount             (24)         (97)         (41)
                                            -----       ------        -----
      Cash used in operations before     
      working capital changes                (582)        (507)        (331)

    Changes in operating assets and
    liabilities provided (used) cash:
    Accounts receivable - affiliates          154          232         (106)
    Accounts receivable - trade               (19)          (2)           5
    Prepaids and other assets                                            11
    Accounts payable and accrued         
    liabilities                               (48)        (189)         215
                                            -----        -----        -----
    Net cash used in operating activities    (495)        (466)        (206)
                                           ------       ------       ------

    INVESTING ACTIVITIES:
    Proceeds from property sales                             4            7
    Additions to property                    (144)        (100)        (187)
    Distributions received from affiliate   2,886        2,904        2,539
    Purchase of common stock of parent       (501)
    Proceeds from sale of bonds of parent   1,376                       380
    Other investing activities                              (9)         (20)
                                           ------        -----        -----
    Net cash provided by investing
    activities                              3,617        2,799        2,719
                                           ------       ------      -------

    FINANCING ACTIVITIES;
    Proceeds from long-term debt            1,200
    Payments of long-term debt                (75)
    Dividends paid                         (2,673)      (2,793)        (118)
    Repurchase of common and preferred                        
     stock                                 (2,232)                   (1,692)
                                          -------    ---------      -------
    Net cash used in financing activities  (3,780)      (2,793)      (1,810)
                                          -------      -------      -------

    INCREASE (DECREASE) IN CASH AND CASH  
    EQUIVALENTS                              (658)        (460)         703

    CASH AND CASH EQUIVALENTS AT 
    BEGINNING OF YEAR                         668        1,128          425
                                           ------      -------       ------

    CASH AND CASH EQUIVALENTS AT END OF
    YEAR                                  $    10      $   668      $ 1,128
                                          =======      =======      =======


<F1>
     The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>


                            HALLWOOD ENERGY CORPORATION
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                  (In thousands)

                              Series D     Series E
                             Convertible  Convertible               Capital in
                              Preferred    Preferred     Common      Excess of
                                Stock        Stock        Stock      Par Value


    <S>                        <C>            <C>      <C>          <C>
    BALANCE,                                                        
    December 31, 1992           $  1                    $  599      $60,955

    Net income
    Preferred stock
    dividends                                                           (88)
    Purchase of treasury
    stock
    Unrealized loss on
    investment in common                                                   
    stock of parent

    BALANCE, 
    December 31, 1993              1                       599       60,867

    Net loss
    Exchange of Series E
    preferred stock for
    common stock                           $    4         (178)         174
    Dividends                                                        (2,793)
    Unrealized loss on
    investment in common                                                   
    stock of parent

    BALANCE,                                                  
    December 31, 1994              1            4          421       58,248

    Net income
    Repurchase and
    cancellation of Series
    D Preferred stock             (1)                                (1,612)
    Repurchase of Common
    Stock
    Conversion of Series E 
    Preferred Stock into 
    Common Stock                               (4)         178         (174)
    Dividends                                                        (2,673)
    Unrealized loss on
    investment in common                                                   
    stock of parent

    BALANCE, 
    December 31, 1995         $            $            $  599      $53,789


<F1>
   (Continued below)

</TABLE>
<TABLE>
<CAPTION>
                             Accumulated  Unrealized    Treasury
                               Deficit       Loss         Stock        Total 

    <S>                    <C>           <C>         <C>           <C>     
    BALANCE, 
    December 31, 1992       $(42,292)     $  (449)    $ (2,480)     $16,334

    Net income                 2,514                                  2,514
    Preferred stock
    dividends                                                           (88)
    Purchase of treasury
    stock                                               (1,692)      (1,692)
    Unrealized loss on
    investment in common                                      
    stock of parent                          (784)                     (784)

    BALANCE, 
    December 31, 1993        (39,778)      (1,233)      (4,172)      16,284

    Net loss                  (2,512)                                (2,512)
    Exchange of Series E
    preferred stock for
    common stock
    Dividends                                                        (2,793)
    Unrealized loss on
    investment in common                                      
    stock of parent                           337                       337

    BALANCE,                                     
    December 31, 1994        (42,290)        (896)      (4,172)      11,316

    Net income                   706                                    706
    Repurchase and
    cancellation of Series
    D Preferred stock                                      570       (1,043)
    Repurchase of Common
    Stock                                               (1,189)      (1,189)
    Conversion of Series E 
    Preferred Stock into 
    Common Stock
    Dividends                                                        (2,673)
    Unrealized loss on
    investment in common                                      
    stock of parent                          (106)                     (106)
    BALANCE, 
    December 31, 1995       $(41,584)     $(1,002)     $(4,791)     $ 7,011


<F1>
     The accompanying notes are an integral part of the financial statements.
</TABLE>

                           HALLWOOD ENERGY CORPORATION 
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


   NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

   Hallwood  Energy Corporation ("HEC" or the  "Company") is a Texas corporation
   engaged in  the development, production and sale of oil and  gas.  HEC is the
   general partner of  Hallwood Energy Partners, L.P. ("HEP"), a publicly traded
   Delaware limited partnership.   HEP commenced operations in August 1985 after
   completing an exchange offer in which HEP acquired oil and gas properties and
   operations from HEC, 24 oil and gas limited partnerships of which HEC was the
   general  partner,  and  certain  working  interests  from   owners  that  had
   participated in  wells  with HEC  and  the  limited partnerships.    HEC  now
   conducts  substantially all of its operations  through HEP.  HEP's properties
   are primarily located  in the Rocky Mountain,  Mid-Continent, Texas and  Gulf
   Coast regions  of the United States.  The  activities of HEP are conducted by
   HEP Operating Partners, L.P. ("HEPO") and EDP Operating, Ltd.  ("EDPO").  

   HEC's wholly-owned subsidiary, Hallwood G.P., Inc., is the general partner of
   EDPO.   Unless otherwise indicated, all references to  HEC in connection with
   the  ownership,  exploration,  development  or  production  of  oil  and  gas
   properties refer to HEC and its proportionate ownership of HEP.  HEC's parent
   company, The Hallwood  Group Incorporated ("Hallwood Group"), owns 80% of the
   common shares of HEC. (See Note 3).

   ACCOUNTING POLICIES: 

   INVESTMENT IN HEP

   HEC's general partner interest in HEP entitles it to  a share of net revenues
   derived from  HEP's  properties  ranging  from  2%  to  25%,  and  HEC  holds
   approximately 6.5%  of HEP's  limited partner  Units.  HEC  accounts for  its
   ownership of HEP  using the proportionate consolidation  method of accounting
   whereby HEC  records its  proportional share  of each  of HEP's  revenues and
   expenses, current  assets, current liabilities,  noncurrent assets, long-term
   obligations  and fixed assets.  HEP owns  approximately 40% of its affiliate,
   Hallwood Consolidated Resources Corporation ("HCRC"), which HEP accounts  for
   under the equity method.

   DERIVATIVES 

   HEP  entered   into  financial   contracts   for  hedging   transactions   of
   approximately 56%, 44% and 37% of its actual crude oil  production during the
   years 1993, 1994 and 1995,  respectively.  The oil price received by  HEP was
   $18.53, $17.93  and $17.31 per barrel  in 1993, 1994  and 1995, respectively,
   for  the barrels hedged.  HEP also  entered into hedging contracts of between
   3% and  22% of its  forecasted oil production during  each of the  years 1996
   through 1999.  The oil price for the volumes hedged is expected to range from
   $14.83 to $15.38 per barrel.

   HEP also hedged approximately 53%,  56% and 56% of its gas  production during
   1993, 1994  and 1995, respectively.   The gas price received  for the volumes
   hedged  was $1.69,  $1.88  and $2.04  per  mcf during  1993,  1994 and  1995,
   respectively.    Additionally,  HEP has  entered  into  hedging contracts  of
   between  17% and 47% of  its forecasted gas production  for each of the years
   1996  through 1999.  The price  for the hedged gas  production is expected to
   range from $2.01 to $2.10 per mcf.

   The purpose of the hedges is to provide protection against price drops and to
   provide a measure of stability in the volatile environment of oil and natural
   gas spot pricing.   The amounts received or paid  in settling these contracts
   is recognized as oil or gas revenue at the time the hedged volumes are sold.

   CASH AND CASH EQUIVALENTS

   All  highly liquid investments purchased  with an original  maturity of three
   months or less are considered to be cash equivalents.

   PROPERTY, PLANT AND EQUIPMENT 

   HEC follows  the full cost method of accounting, whereby all costs related to
   the acquisition  of oil and gas  properties are capitalized in  a single cost
   center ("full cost  pool") and are amortized over the  productive life of the
   underlying  proved reserves using the  units of production  method.  Proceeds
   from property sales are generally credited to the full cost pool.

   Capitalized costs of oil and gas properties may not exceed an amount equal to
   the present value, discounted  at 10%, of estimated future  net revenues from
   proved oil and gas reserves plus the cost, or estimated fair market value, if
   lower, of unproved properties.  Should capitalized costs exceed this ceiling,
   an  impairment is  recognized.   The  present value  of estimated  future net
   revenues is computed by applying year end prices of oil  and gas to estimated
   future production  of  proved oil  and  gas reserves  as  of year  end,  less
   estimated  future expenditures to be incurred in developing and producing the
   proved reserves and assuming continuation of existing economic conditions.  

   HEC  does not  accrue costs  for future  site restoration,  dismantlement and
   abandonment  costs related  to  proved oil  and  gas properties  because  the
   Company estimates that such costs will  be offset by the salvage value of the
   equipment  sold upon abandonment of such properties.  The Company's estimates
   are  based  upon  its  historical  experience  and  upon  review  of  current
   properties and restoration obligations.

   Unproved properties are withheld  from the amortization base until  such time
   as they are either  developed or abandoned.   These properties are  evaluated
   periodically.

   GAS BALANCING

   HEC uses the sales method to account  for gas balancing.  Under this  method,
   it recognizes  revenue  on all  of  its sales  of  production, and  any  over
   production or under production is recovered at a future date.

   As of December 31, 1995, the imbalance net to HEC's interest is not material.
   Current imbalances can be made up with production from existing wells or from
   wells which  will be drilled  as offsets to  current producing wells  and the
   imbalance  will  not have  a  material effect  on  the  Company's results  of
   operations, liquidity and capital resources.

   SIGNIFICANT CUSTOMERS

   For the years ended December 31, 1995, 1994 and 1993 purchases by each of the
   following   companies  exceeded  10%  of  the  total  oil  and  gas  revenues
   attributable to  HEC's direct interests and  its share of HEP.   Although the
   Company sells the majority of its oil and gas production to a few purchasers,
   there are numerous other purchasers  in the area, therefore, the loss  of its
   significant customers would not adversely affect the Company's operations.
<TABLE>
<CAPTION>
                                            1995      1994      1993 
                                            
            <S>                             <C>       <C>       <C>  
            Conoco Inc.                      30%       23%       21%
            Koch Oil Company                                     11%
            Marathon Petroleum Company       14%       12%       10%
</TABLE>
   ENVIRONMENTAL CONCERNS

   HEC is taking actions necessary  in its operations to conform with applicable
   federal, state and local environmental regulations.  As of December 31, 1995,
   HEC has not been fined or cited for  any environmental violations which would
   have  a material  adverse effect upon  capital expenditures,  earnings or the
   competitive position of HEC in the oil and gas industry.

   DIVIDENDS

   HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
   Stock on March 3, 1995.  On August 15, 1995, HEC paid a dividend of $1.50 per
   share  of common stock and Series  E Preferred Stock.   On November 15, 1995,
   HEC paid a dividend of $.80 per share of common stock and Series  E Preferred
   Stock.

   HEC paid a dividend of $1.70 per share of common stock on March 4, 1994.  HEC
   paid a dividend of $1.50 per share of common stock on August 15, 1994.

   RECLASSIFICATIONS

   Certain reclassifications  have been made to prior  years' amounts to conform
   to the classifications used in the current year.

   USE OF ESTIMATES

   The  preparation of  the financial statements  for the  Company in conformity
   with  generally accepted  accounting principles  requires management  to make
   estimates  and assumptions  that affect  the reported  amounts of  assets and
   liabilities and  disclosure of contingent assets and  liabilities at the date
   of the financial statements and the reported amounts of revenues and expenses
   during  the  reporting  period.    Actual  results  could  differ  from these
   estimates.

   CASH FLOW STATEMENT

   Cash paid  for interest was  $106,000 in  1995.  There  was no cash  paid for
   interest in 1994 or 1993.


   NOTE 2 - OIL AND GAS PROPERTIES

   The following  table summarizes  certain  cost information  related to  HEC's
   direct interests and its share of HEP's oil and gas activities:
<TABLE>
<CAPTION>
                                        For the Years Ended December 31,  
                                         1995         1994         1993 
                                                 (In thousands)


        <S>                           <C>          <C>          <C>    
        Property acquisition costs -   $  191       $  637       $1,103
        proved
        Property acquisition costs -       56          257          176
        unproved
        Development costs                 979          599          585
        Exploration costs                 166          273          169
                                         ----        -----         ----
          Total                        $1,392       $1,766       $2,033
                                         ====        =====         ====
</TABLE>
   Depreciation, depletion, amortization and impairment per equivalent barrel of
   production for 1995, 1994 and 1993 was  $5.00, $4.35 and $4.38, respectively.

   At December 31, unproved domestic properties consist of the following:
<TABLE>
<CAPTION>
                                              1995       1994 
                                               (In thousands)

                   <S>                     <C>         <C>  
                   South Louisiana          $ 10        $ 40
                   Texas                      27
                   Other                      45           6
                                              ---         ---
                                            $ 82        $ 46
                                              ===         ===

</TABLE>
   At December 31,  1994, unproved foreign properties  of $288,000 consisted  of
   HEC's share of HEP's investment  in Indonesia which was abandoned  during the
   first quarter of 1995.

   During  1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
   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").   SFAS  121 provides  the  standards  for accounting  for  the
   impairment of various long-lived assets.  The Company is required  to adopted
   SFAS 121 no later than 1996.  HEC uses the full cost method of accounting for
   its oil and gas properties, which requires an  impairment to be recorded when
   total  capitalized costs  exceed  the present  value, discounted  at  10%, of
   estimated future net revenues from  proved oil and gas reserves.   Therefore,
   the adoption of  SFAS 121 is  not expected to have  a material effect on  the
   financial position or results of operations of HEC.


   NOTE 3 - RELATED PARTY TRANSACTIONS

   The Hallwood Group  Incorporated ("Hallwood Group"), a  public company traded
   on the New  York Stock Exchange, owns 80% of the outstanding common shares of
   HEC.  Hallwood  Group is a diversified holding company  with interests in oil
   and gas, specialty restaurants, real estate, textile products and hotels.  

   From 1990 through  1995, HEC acquired 267,709  shares (adjusted for  Hallwood
   Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares
   of Hallwood Group, on the open market.   Because HEC has the ability and  the
   intent to hold the stock of Hallwood Group indefinitely, HEC has recorded  it
   as  a long-term  investment and  has classified  it as  an available-for-sale
   security.  As of June 30, 1994,  it was determined that Hallwood Group  stock
   had experienced an  other than temporary decline  in fair value.   Therefore,
   HEC's investment in Hallwood Group was written down from its original cost to
   a new cost basis  based on its market  value at June  30, 1994 of $11.50  per
   share.   The resultant loss  of $3,249,000 was  recorded as an  impairment of
   investment in parent in the accompanying financial statements for 1994.

   During 1991  and 1992 HEC  acquired $2,439,000  principal amount of  Hallwood
   Group's  13.5%   Subordinated  Debentures  due   July  31,  2009,   which  it
   subsequently exchanged for 7% Collateralized Subordinated Debentures due July
   31,  2000.     On  March  29,  1995,   Hallwood  Group  repurchased   the  7%
   Collateralized Subordinated  Debentures for $1,376,000 plus  accrued interest
   through  the purchase date.   The debentures  were repurchased for  an amount
   approximately equal to their carrying value.


   NOTE 4 - DEBT

   During  the  second  quarter of  1995,  the  Company  entered into  a  credit
   agreement with  a  bank  that  has  committed  to  loan  the  Company  up  to
   $1,500,000.  As of December 31, 1995, the  Company has outstanding borrowings
   of $1,125,000 against  the credit line.   Borrowings against the credit  line
   bear interest at the bank's prime rate plus 2% (10.5% at December  31, 1995).
   Interest is  payable monthly,  and quarterly  principal payments  of  $75,000
   commenced December  1, 1995.   The credit  line is secured  by the  HEP units
   owned by the Company.   The credit agreement limits aggregate  dividends paid
   by the Company to $3.50 per share each fiscal year.

   At December 31, 1995, HEC's five year debt maturity schedule is as follows:
<TABLE>
                               <C>            <C>        
                                1996           $  300,000
                                1997              300,000
                                1998              300,000
                                1999              225,000
                                                ---------
                                                1,125,000

                      Less current maturities
                        of long-term debt        (300,000)
                                                ---------
                      Long-term debt at 
                        December 31, 1995      $  825,000
</TABLE>

   During  1995, HEP amended its Amended  and Restated Credit Agreement ("Credit
   Agreement")  and  an Amended  and  Restated  Note  Purchase Agreement  ("Note
   Purchase Agreement") (collectively referred  to as the "Credit  Facilities").
   HEP  has a borrowing  base of  $42,000,000 under  the Credit  Facilities, and
   amounts  outstanding at  December 31,  1995 of  $24,700,000 under  the Credit
   Agreement and $12,857,000 under the Note Purchase Agreement.  HEP's borrowing
   base is also reduced by an outstanding contract settlement debt of $2,771,000
   and  capital lease obligations  of $87,000;  therefore, its  unused borrowing
   base totalled $1,585,000 at February 27, 1996.  

   The  Credit Facilities are  secured by a  first lien on  approximately 80% in
   value of HEP's oil and gas properties.  Additionally, aggregate distributions
   paid by  HEP in any  12 month  period are limited  to 50%  of cash flow  from
   operations  before working capital  changes plus  distributions received from
   affiliates.

   HEP's five year debt maturities are as follows:   $87,000 in 1996, $9,721,000
   in 1997, $11,532,000 in  1998, $7,246,000 in 1999, and $7,246,000 in 2000 and
   $1,812,000 thereafter.


   NOTE 5 - PRINCIPAL ACQUISITIONS AND SALES 

   HEC  had no significant direct acquisitions  or sales other than the Hallwood
   Group  stock and  Subordinated Debenture  transactions described  in  Note 3.
   HEP's significant activities are as follows:

   1995

   During 1995, HEP  had no  individually significant  property acquisitions  or
   sales.



   1994

   During the second quarter of 1994, HEP and HCRC formed a limited  partnership
   with a third party for the purpose of producing natural gas qualified for the
   Section  29 tax credit under the Internal  Revenue Code.  A limited liability
   company owned by HEP and HCRC is the general partner of the partnership.
   HEP  and HCRC  sold a  term working  interest  in certain  wells in  San Juan
   County, New  Mexico to the limited  partnership, in return for  which HEP and
   HCRC received  a cash payment  totaling $3,400,000 when the  sale was closed.
   HEP and HCRC will receive 97% of the cash flow from production from the wells
   sold  through the year  2002, and 80% of  the cash flow thereafter.   HEP and
   HCRC will  also receive quarterly cash incentive payments equal to 34% of the
   Section 29 tax credit generated from  the production from the wells.  HEP and
   HCRC will share in all proceeds 55% and 45%, respectively.   HEP recorded its
   $1,870,000  share of the  cash payment  received as a  credit to oil  and gas
   properties in its 1995 financial statements.

   1993

   During  September and October 1993, HEP  completed the following transactions
   which  resulted in the acquisition  of interests in  the following properties
   (the  purchase amounts  are net  to HEP):   130 wells  in twelve  counties in
   central Kansas  for  $1,200,000, of  which  $367,000  was paid  in  cash  and
   $833,000  was paid in  the form  of 96,607  HEP Class A  Units; six  wells in
   Comanche  County, Kansas for $750,000;  nine wells in  Russell County, Kansas
   for $600,000;  three wells in San  Juan County, New Mexico  for $425,000; and
   nine wells in Toole County, Montana for $350,000.  Additionally, HEP acquired
   50% of the stock of Sunburst Exploration, Inc. ("Sunburst") for $1,700,000 by
   issuing 197,103 HEP Class A Units.   Sunburst owns interests in 130  wells in
   Toole County, Montana, 45 of which are operated by Sunburst.

   These  acquisitions were effective as of  various dates from August 1 through
   October 29,  1993 and added an estimated 464,000 barrels of oil and 5 billion
   cubic feet of gas to HEP's reserves at December 31, 1993. 

   Effective  March 31,  1993, HEP  sold its  interest in  Nycotex and  its West
   Virginia  properties  which  included   natural  gas  reserves  estimated  at
   approximately 3.4 billion  cubic feet of gas.  HEP's  share of these proceeds
   after adjustments was approximately $1,600,000.


   NOTE 6 - INVESTMENT IN AFFILIATE

   HEC accounts  for its combined  general and  limited partner interest  in HEP
   (approximately   12%)  using  the   proportionate  consolidation   method  of
   accounting.  The following presents summarized  financial information for HEP
   at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
                                    1995           1994           1993 
                                              (In thousands)

         <S>                   <C>            <C>            <C>      
         Current assets         $ 16,715       $ 14,670       $ 33,535
         Noncurrent assets       106,649        121,611        138,089
         Current liabilities      20,914         24,834         26,515
         Noncurrent               41,836         29,721         43,187
         liabilities
         Minority interest         3,042          2,923          3,346
         Gross oil and gas        41,010         41,496         42,893
         revenue
         Net income (loss)        (9,031)       (10,093)        13,064
</TABLE>

   NOTE 7 - CAPITAL STOCK AND NET INCOME PER SHARE

   SERIES E PREFERRED STOCK

   On October 19,  1994, HEC exchanged 356,000 shares of newly authorized Series
   E preferred  stock for 356,000 shares of its outstanding common stock held by
   Hallwood  Group.   On December  31, 1995,  the Series  E preferred  stock was
   converted into common  stock.  The Series E preferred  stock was not entitled
   to vote for the election of directors, except as required by  law, but it was
   entitled  to vote with the common  stock on all other matters.   The Series E
   preferred stock was entitled to one vote per share.  In addition,  the Series
   E preferred stock  was entitled to  dividends, when and  as declared, at  the
   same  rate as the common stock,  and it had a  liquidation preference of $.01
   per  share.  The  Series E preferred  stock received  $1,175,000 in dividends
   during 1995.

   The purpose  of the initial exchange was to reduce Hallwood Group's ownership
   of the  Company's  common stock  below 50%  to  permit HEC  to  vote its  14%
   interest in Hallwood Group, which it was unable to do under Delaware law when
   Hallwood  Group owned  greater  than  50%  of  the  Company's  common  stock.
   Hallwood Group  exercised its right to convert the  Series E preferred shares
   to common stock on December 31, 1995 to enable it to consolidate HEC into its
   federal  income  tax returns  beginning in  1996.   The  conversion increased
   Hallwood Group's  ownership of  common  stock to  80%.   As a  result of  the
   increased  ownership, HEC will once  again be prohibited,  under Delaware law
   from voting its 14% interest in Hallwood Group.

   Per share  information is  based on  the  weighted average  number of  common
   shares  and common  share equivalents  outstanding in  each period.  Series D
   preferred stock dividends  of $73,000 and $88,000  were declared in  1994 and
   1993, respectively, reducing net income per common share in those years.  The
   Series  E preferred stock  dividends reduced net  income per common  share in
   1995.   The weighted average number of common shares outstanding was 469,000,
   779,000 and 907,000 in 1995, 1994 and 1993, respectively.
     
   Net income per common share (assuming full dilution) for 1995,  1994 and 1993
   was determined assuming that the Series D preferred stock  was converted into
   common stock  on January 1, 1993  and the Series  E on January 1,  1994.  Net
   income was adjusted  for the  preferred stock dividends  declared during  the
   year.  The effect  of the conversion of  the Series E  and D preferred  stock
   into common shares was antidilutive during  the years ended December 31, 1995
   and 1994.  For the year ended December 31, 1993, the Series D preferred stock
   was  dilutive.   The  weighted average  number  of common  shares outstanding
   (assuming full dilution) was 1,037,481 in 1993.

   TREASURY STOCK 

   During the first quarter of 1995, HEC repurchased 1,500 shares  of its Series
   D Preferred Stock for $90.88  per share.  During April 1995,  in two separate
   transactions,  HEC repurchased  the remaining  9,864 shares  of its  Series D
   Preferred Stock at $91.80 per share.  These shares were retired during 1995.

   In July  1995,  HEC purchased  58,000  shares of  its  common stock  from  an
   individual  in a  privately  negotiated  transaction  for  a  total  cost  of
   $1,189,000.


   NOTE 8 - EMPLOYEE INCENTIVE PLANS

   INCENTIVE CASH BONUS PLAN 

   HEC's 1980 Incentive Cash Bonus Plan provides for the payment of cash bonuses
   to selected employees.  The amounts of such bonuses will be prescribed by the
   Board of Directors  of HEC at  its sole discretion.   No payments under  this
   plan were made in 1995, 1994 or 1993.

   UNIT OPTION PLAN

   On January 31, 1995, the Board of Directors of HEC approved the adoption of a
   Unit option plan to be used for the motivation and retention of directors and
   employees performing services  for HEP.  The plan authorized  the issuance of
   425,000 options to purchase  HEP Class A Units.  Grants  of the total options
   authorized were  made on January  31, 1995,  vesting one-third at  that time,
   one-third  on  January 31,  1996  and  one-third on  January  31,  1997.   In
   addition, the plan  provides that vesting of  the options may be  accelerated
   under certain  conditions.  The exercise price of the options is $5.75, which
   was the closing price of the Class A Units on January 30, 1995.

   During 1995 the FASB  issued Statement of Financial Accounting  Standards No.
   123,  "Accounting for  Stock  Based Compensation"  ("SFAS  123").   SFAS  123
   requires entities  to use  the fair  value method to  either account  for, or
   disclose, stock  based  compensation  in their  financial  statements.    The
   Company  is required  to adopt  SFAS 123  no later  than 1996.   Because  the
   Company intends to  elect only  the disclosure  provisions of  SFAS 123,  the
   adoption  of SFAS  123 is  not  expected to  have  a material  effect on  the
   financial position or results of operations of HEC.


   NOTE 9 - COMMITMENTS AND CONTINGENCIES

   HPI, an affiliate of HEC, leases office space in  Denver, Colorado containing
   approximately 41,000 square feet, for approximately $600,000 per year.  These
   lease payments are included  in the allocation of general  and administrative
   expenses to HEC  and other affiliated entities.   HEC is the guarantor  of an
   office lease of  an affiliate of  Hallwood Group,  in Dallas, Texas  covering
   approximately 17,000 square feet.  The lease payments  on this property total
   approximately $170,000  per year from June  1, 1994 through May  31, 1999, of
   which  approximately $11,000 per year is allocated  to HEC.  The affiliate of
   Hallwood Group  has entered into an  agreement to indemnify HEC  for any loss
   suffered by HEC because of the guaranty.


   NOTE 10 - INCOME TAXES

   At  December  31,  1995,  HEC  has  a  statutory  depletion  carryforward  of
   approximately $5,900,000, which may  be used to offset future  taxable income
   without  expiration limitation.   At December  31, 1995, HEC has available an
   investment  tax credit  carryforward  of approximately  $800,000, which  will
   expire between 1996 and 2000 and is reduced annually, as mandated by tax law,
   and $2,700,000 of capital  loss carryforward expiring  in 1996.  At  December
   31, 1995, HEC has  net operating loss ("NOL") carryforwards  of approximately
   $108,000,000, which expire between 1996  and 2006.  A subsidiary of  HEC also
   has approximately $1,000,000 of NOL carryforwards expiring in 2005.

   The following is a summary of the income tax provision (benefit):
<TABLE>
<CAPTION>
                                    For the Years Ended December 31,   
                                       1995         1994        1993 
                                               (In thousands

           <S>                      <C>         <C>          <C>    
           State                     $   88      $  100       $   72
           Federal - current              6          33           18
           Deferred tax benefit        (500)                        
                                        ---       -----        ---  


                                     $ (406)     $  133       $   90
                                        ===         ===          ===
</TABLE>


   Reconciliations  of  the  expected  tax at  the  statutory  tax  rate  to the
   effective tax are as follows:
<TABLE>
<CAPTION>
                                              For the Years Ended
                                                December 31,
                    Description          1995       1994      1993 
                                               (In thousands)

              <S>                     <C>       <C>       <C>    
              Expected tax (benefit)
              at the statutory rate   $  102     $ (808)   $  885
              Increase (decrease) in
              deferred tax asset
              valuation allowance net
              of NOL carryforward       (572)       875      (843)
              State taxes net of
              federal benefit             58         66        48
              Effect of use of AMT         6                     
                                        ------     -----      -----

                Effective tax         $ (406)    $  133    $   90
                                      ========   =======   ========
</TABLE>

   The following is a  schedule of the types  and amounts of existing  temporary
   differences  and NOL carryforwards,  at the  statutory tax  rate of  34%, tax
   credits and the valuation allowance at December 31, 1995 and 1994:
<TABLE>
<CAPTION>

                                                     1995 
                                              Deferred Income Tax
                                            Assets         Liabilities
                                                (In thousands)

    <S>                                    <C>             <C>      
    NOL carryforward                       $ 36,739         $       
    Statutory depletion carryforward
                                              1,991
    Investment tax credit
    carryforward                                800
    AMT credit carryforward                     227
    Capital loss carryforward                   945
    Basis difference - investment in
    partnership and property                  1,744                 
                                             -------
        Deferred tax assets                  42,446                 


    Less:   Deferred tax liabilities
          Valuation allowance (a)           (41,946)                
                                           ---------        ----------
          Deferred tax asset              $     500         $      -
                                          ==========        ==========
</TABLE>

   (Continued below)
<TABLE>
<CAPTION>
                                                     1994 
                                              Deferred Income Tax
                                            Assets         Liabilities
                                                (In thousands)

    <S>                                   <C>              <C>      
    NOL carryforward                       $ 37,047         $       
    Statutory depletion carryforward          1,991
    Investment tax credit
    carryforward                                800
    AMT credit carryforward                     221
    Capital loss carryforward                   909
    Basis difference - investment in
    partnership and property                  1,550                 
                                             -------

        Deferred tax assets                  42,518                 

    Less:   Deferred tax liabilities
          Valuation allowance (a)           (42,518)                
                                          ----------       ----------
          Deferred tax asset              $       -        $       -
                                          ==========       ===========

<F1>
     (a)   The net change  in the valuation allowance  during 1995 was $572,000,
           $875,000 and $843,000 during 1995, 1994 and 1993, respectively.

</TABLE>

   NOTE 11 - LITIGATION SETTLEMENTS OF AFFILIATE

   In  1994, the  Minerals Management  Services ("MMS")  of the  Bureau of  Land
   Management notified  HEP that the  MMS had preliminarily determined  that the
   MMS was  owed royalty payments  on take-or-pay settlements  involving federal
   oil and gas leases.  In  the fourth quarter of 1995, HEP and the  MMS reached
   an agreement  in principle that HEP  would pay $321,000 in  settlement of all
   claims.  HEP anticipates that the settlement amount will be paid in the first
   quarter of 1996.  HEC's share of HEP's settlement was  recorded as litigation
   settlements of affiliate in the 1995 financial statements.

   In September  1995, the  court order  approving the  settlement in the  class
   action  lawsuit  styled  In  re. Hallwood  Energy  Partners,  L.P. Securities
   Litigation became final.  As  part of the settlement, on September  28, 1995,
   HEP paid $2,870,000 in cash (which was recorded as an expense in the December
   31,  1994 financial  statements as  the  estimated cost  associated with  the
   litigation)  and issued 1,158,696  HEP Class A  Units with a  market value of
   $5,330,000 to a nominee of the class.  HCRC subsequently  exercised an option
   to  purchase these  Units from  the nominee  for $5,330,000  in cash.   Other
   defendants contributed an additional $900,000 in cash to the settlement.  The
   net  proceeds of the settlement will be  distributed to a class consisting of
   former  owners of  limited partner  interests in Energy  Development Partner,
   Ltd.  ("EDP")  who exchanged  their units  in  that entity  for Units  of HEP
   pursuant to the merger of EDP and HEP on May 9, 1990 (the "Transaction").

   Upon  issuance, these  Class A  Units were  treated, for  financial statement
   purposes  only, as  additional Class  A Units issued  in connection  with the
   Transaction, which  was accounted for  as a reorganization of  entities under
   common  control, in a manner similar to a  pooling of interest, and have been
   reflected  as outstanding Class  A Units since May  9, 1990, the  date of the
   Transaction.  As a result, the number  of HEP's Units outstanding and the net
   income  (loss) per  Class A  Unit and  Class B  Unit have  been retroactively
   restated for all periods subsequent to the Transaction.

   On  June  24, 1993,  HEP settled  two  lawsuits and  all related  claims with
   Louisiana  Intrastate  Gas Corporation  ("LIG").   The  lawsuits  against LIG
   involved the prices  paid for natural  gas production under  a long-term  gas
   contract.  The  settlement terminates the contract with LIG  and resolves all
   issues and  claims relating  to the gas  purchase contract for  the Northeast
   Montegut Field  located in Terrebonne  Parish, Louisiana.  The  proceeds from
   the  settlement  after payment  of  royalties  and  related legal  costs  are
   reflected in HEP's earnings during the year ended December 31,  1993 and were
   used to pay down debt and for working capital purposes.

   In January 1994, Hallwood Oil paid $525,000 to the former shareholders of the
   general partner  of a  predecessor entity  to settle a  claim for  payment of
   Hallwood  Oil's  $800,000  guaranty  of  the  promissory  note  of  a  former
   affiliate.  The promissory note was  made in 1985 when EDP was  formed.  This
   payment was accrued as litigation settlement expense as of December 31, 1993.

   In  February  1994, HEP  and  the other  parties  to the  lawsuit  styled SAS
   Exploration, Inc. v. Hall  Financial Group, Inc. et al.  settled the lawsuit.
   The plaintiffs alleged that certain leases in the A.L. Boudreaux  #1 and A.M.
   Duhon #1 wells expired and terminated at the end of their primary lease terms
   as a result  of production  being from Bol  Mex 4 Sand  rather than the  A.B.
   Sand.   In the settlement,  the plaintiffs and  the defendants cross-conveyed
   interests  in certain  leases  to one  another  and HEP  paid the  defendants
   $388,000.   The cash paid by  HEP was paid from the  revenues attributable to
   the disputed leases that were escrowed beginning in February 1990.   The cash
   paid by HEP was included in litigation settlement expense in the December 31,
   1993 financial statements.  The interest conveyance resulted in a decrease in
   HEP's consolidated reserves as of  December 31, 1993 totalling 698,000 mcf of
   gas, 15,000 bbls  of oil and  $1,317,000 in  discounted future net  revenues.
   This  reduction has been included  in the revisions line  in the Supplemental
   Oil and Gas Reserve Information for the year ended December 31, 1993.


   NOTE 12 - LEGAL PROCEEDINGS

   In June  1993,  14 lawsuits  were  filed against  HEP  in the  15th  Judicial
   District Court,  Lafayette Parish,  Louisiana, Docket Nos.  93-2332-F through
   93-2345-F, styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et
   al.   The  plaintiffs in  the  lawsuits claim  that  they have  valid  leases
   covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S.
   Boudreaux #1 well, Paul Castille #1  well, Mary Guilbeau #1 well,  Evangeline
   Shrine Club #1 well  and Duhon #1 well and  are entitled to a portion  of the
   production  for the  wells dating  from  February 1990.   The  plaintiffs are
   claiming between .4% and  2.3% of HEP's interest in  the wells.  HEP  has not
   recognized revenue attributable to the  contested leases since January  1993.
   These revenues, totaling $303,000 at  December 31, 1995, have been  placed in
   escrow pending resolution  of the lawsuits.  At this  time, HEP believes that
   the  difference between the  escrowed amount and the  amount of any liability
   that may result upon resolution of this matter will not be material.

   In June  1995,  an additional  lawsuit  was filed  against  HEP in  the  15th
   Judicial District Court,  Lafayette Parish, Louisiana, Docket No. 95-2601 3B,
   styled Lamson Petroleum Corporation v. Hallwood  Petroleum, Inc. et al.   The
   plaintiffs  in the  lawsuit  claim that  they  have additional  valid  leases
   covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S.
   Boudreaux #1 well, Paul Castille #1  well, Mary Guilbeau #1 well and Duhon #1
   well and are entitled to a portion of the production from the wells.  HEP has
   not yet determined the amount of  its interest in the properties which is  at
   issue.   At this time,  HEP believes that  the difference between  the amount
   already in  escrow as a result  of the litigation described  in the preceding
   paragraph and the amount of any liability that may result  upon resolution of
   this matter and  the matter described in the preceding  paragraph will not be
   material.

   The Company  is involved  in other  legal proceedings and  claims which  have
   arisen  in the  ordinary course  of its  business and  have not  been finally
   adjudicated.  The Company believes that its liability, if any, as a result of
   such  proceedings  and  claims  will  not  materially  affect  its  financial
   condition or operations.


   NOTE 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

   The following disclosure of the estimated fair value of financial instruments
   is  made in accordance  with the requirements  of SFAS No.  107, "Disclosures
   about Fair Value of Financial Instruments."  The estimated fair value amounts
   have been determined by  the Company, using available market  information and
   appropriate  valuation  methodologies.    However,  considerable judgment  is
   necessarily  required in interpreting market data to develop the estimates of
   fair  value.  Accordingly, the estimates presented herein are not necessarily
   indicative of  the amounts that the Company could realize in a current market
   exchange.    The  use  of  different  market  assumptions  and/or  estimation
   methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
                                               December 31, 1995  
                                                       
                                           Carrying     Estimated
                                            Amount        Fair
                                                          Value   

                                               (in thousands)

                 Assets:
                 <S>                     <C>         <C>     
                 Investment in common
                 stock of parent         $ 2,075      $ 2,075
                 Liabilities:                                
                   Current portion of        300          300
                   long-term debt

                   Long-term debt            825          825
</TABLE>
   The long-term  debt is carried in the accompanying balance sheet at an amount
   which is  a reasonable estimate of its fair  value as it is revolving debt at
   floating rate.

   The fair value estimates presented herein are based on  pertinent information
   available to management as of December  31, 1995.  Although management is not
   aware of any factors that would significantly affect the estimated fair value
   amounts, such amounts have not been comprehensively revalued for  purposes of
   these  financial statements  since that date,  and current  estimates of fair
   value may differ significantly from the amounts presented herein.


                            HALLWOOD ENERGY CORPORATION
                   SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
                                 DECEMBER 31, 1995
                                    (Unaudited)


   The following reserve quantities and future net cash flow information for HEC
   represents  proved reserves  which are  located in  the United  States.   The
   reserve  estimates  presented  have   been  prepared  by  in-house  petroleum
   engineers  and  the  majority  of  these  reserves  have  been   reviewed  by
   independent petroleum  engineers.  The determination of  oil and gas reserves
   is  based on  estimates  which  are highly  complex  and  interpretive.   The
   estimates are subject to continuing  change as additional information becomes
   available.

   The standardized  measure of  discounted  future net  cash flows  provides  a
   comparison  of HEC's  proved oil  and gas  reserves  from year  to year.   No
   consideration has been given to future income taxes since HEC's tax basis and
   net  operating loss carryforwards  exceed future net  cash flows.   Under the
   guidelines  set  forth  by  the  Securities  and  Exchange  Commission,   the
   calculation is  performed using year end  prices.  At December  31, 1995, oil
   and gas prices  averaged $18.00 per bbl of  oil and $2.10 per mcf  of gas for
   HEC, including its  interest in HEP.   Future production  costs are based  on
   year-end costs and include severance taxes.  This standardized measure is not
   necessarily representative of the market value of HEC's properties.

   As  of December  31,  1994, HEC  no  longer includes  its  share of  internal
   overhead charges attributable to wells  operated by Hallwood Petroleum,  Inc.
   in lease operating expense for reserve calculation purposes.   These overhead
   costs  are  now included  in  general and  administrative  expenses  in HEC's
   financial statements.   This change resulted  in an upward revision  of HEC's
   reserves  during  1994 of  65,000  barrels of  oil,  796,000 mcf  of  gas and
   $895,000 of discounted future net cash flows.  This change was implemented to
   conform  HEC's reserve calculation methodology to what management believes is
   a more accurate representation of reserves and is the most common practice of
   HEC's industry peers.

   HEC's  standardized  measure of  discounted future  net  cash flows  has been
   decreased by $39,000  at December  31, 1995 for  its share  of the effect  of
   HEP's  hedge contracts.  This  amount represents the  difference between year
   end oil  and  gas prices  and the  hedge contract  prices  multiplied by  the
   quantities subject to contract, discounted at 10%.
<TABLE>
<CAPTION>
                            HALLWOOD ENERGY CORPORATION
                                RESERVE QUANTITIES
                                  (In thousands)
                                    (Unaudited)

                                                      Gas       Oil
                                                      Mcf      Bbls
              PROVED RESERVES:
              <S>                               <C>        <C>   
              Balance, December 31, 1992         17,373       938
              Extensions and discoveries            774        66
              Revisions of previous estimates (a)(1,993)     (205)
              Sales of reserves in place           (460)      (37)
              Purchases of reserves in place        737        70

              Production                         (2,005)     (110)
                                                 --------    -----

              Balance, December 31, 1993         14,426       722

              Extensions and discoveries            636       104
              Revisions of previous estimates      (412)      105
              Sales of reserves in place            (96)       (9)
              Purchases of reserves in place         74        14
              Production                         (1,932)     (128)
                                                 ---------   -----

              Balance, December 31, 1994         12,696       808

              Extensions and discoveries            728       267
              Revisions of previous estimates        (6)       52
              Sales of reserves in place            (13)       (6)
              Purchases of reserves in place         40         3
              Production                         (1,808)     (130)
                                                 -------     -----

              Balance, December 31, 1995         11,637       994
                                                 =======     =====

              PROVED DEVELOPED RESERVES:
              Balance, December 31, 1993         12,779       666
                                                 ======      =====
              Balance, December 31, 1994         12,061       752
                                                 ======      =====
              Balance, December 31, 1995         11,009       914
                                                 ======      =====

<F1>
   (a)   The majority of these  revisions relate  to the  G. S.  Boudreaux
         Estate  #1 well  which, throughout  1993, produced  an increasing
         amount of  water, resulting in  higher operating  costs and  less
         consistent production rates.
</TABLE>
<TABLE>
<CAPTION>
                            HALLWOOD ENERGY CORPORATION
             STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
                                  (In thousands)
                                    (Unaudited)<PAGE>
                                                   December 31,         

                                           1995       1994       1993 

           <S>                         <C>      <C>        <C>      
           Future cash flows         $  43,000   $ 37,000   $ 44,000

           Future production and
           development costs           (15,000)   (13,000)   (13,000)
           Future net cash flows
           before discount              28,000     24,000     31,000

           10% discount to present            
           value                        (9,000)    (7,000)   (10,000)
                                       ---------   -------   --------
           Standardized measure of
           discounted future net cash
           flows                      $ 19,000   $ 17,000   $ 21,000
                                      ========   ========   ========
</TABLE>
<TABLE>
<CAPTION>

                            HALLWOOD ENERGY CORPORATION
      CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
                                  (In thousands)
                                    (Unaudited)



                                         For the Years Ended December 31, 
                                                         

                                          1995        1994         1993 
         <S>                         <C>          <C>         <C>     
         Standardized measure of
         discounted future net cash
         flows at beginning of year  $ 17,000     $ 21,000     $25,000

         Sales of oil and gas
         produced, net of production
         costs                         (4,064)      (4,323)     (4,528)
         Net changes in prices and
         production costs               2,424       (3,757)      1,150

         Extensions, discoveries and
         other additions, net of
         future production costs        2,550        1,239       1,361

         Changes in estimated future
         development costs             (1,037)        (575)       (643)
         Development costs incurred       979          599         585

         Revisions of previous
         quantity estimates (a)           335          214      (3,750)
         Purchases of reserves in
         place                             63          155       1,346

         Sale of reserves in place        (54)        (148)       (793)

         Accretion of discount          1,700        2,100       2,500
         Changes in production rates                      
         and other                       (896)         496      (1,228)
                                        -------       -----     -------
         Standardized measure of
         discounted future net cash
         flows at end of year         $19,000      $17,000     $21,000
                                      =======      ========    ========
<F1>
     (a)   The majority  of these revisions  in 1993  relate to the G.  S.
           Boudreaux Estate  #1 well  which, throughout  1993, produced an
           increasing amount of water, resulting in higher operating costs
           and less consistent production rates.

</TABLE>

   ITEM   9  -  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND  FINANCIAL
   DISCLOSURES 
     None.


                                     PART III


   ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 

     The information  required by this item  will be included  in the definitive
     proxy  statement  of   HEC  relating  to  HEC's  1996  Annual   Meeting  of
     Shareholders,  to be filed with  the SEC pursuant to  Regulation 14A, which
     information is incorporated herein by reference.


   ITEM 11 - EXECUTIVE COMPENSATION 

     The information  required by this item  will be included in  the definitive
     proxy  statement  of   HEC  relating  to  HEC's  1996  Annual   Meeting  of
     Shareholders, to be  filed with the  SEC pursuant to Regulation  14A, which
     information is incorporated herein by reference.


   ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 

     The information required by  this item will  be included in the  definitive
     proxy  statement  of   HEC  relating  to  HEC's  1996  Annual   Meeting  of
     Shareholders, to be filed  with the SEC pursuant  to Regulation 14A,  which
     information is incorporated herein by reference.


   ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 

     The  information required by this  item will be included  in the definitive
     proxy  statement  of   HEC  relating  to  HEC's  1996  Annual   Meeting  of
     Shareholders, to  be filed with  the SEC pursuant to  Regulation 14A, which
     information is incorporated herein by reference.


                                      PART IV


   ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)   Financial Statements and Financial Statement Schedules.

         See Index at Item 8.

     (b)   Reports on Form 8-K.

         HEC filed no current reports on Form 8-K during the last quarter of the
         period covered by this report.

     (c)   Exhibits.

   (1)   3.1 -   Articles of  Incorporation of  HEC, as  amended through October
                 26, 1990.  (Exhibit 3.1)

   (3)   3.2 -   Bylaws of the Company. 

   (2)   4.2 -   Statement of  Resolution establishing and designating  Series D
                 Preferred Stock of the Company.  (Exhibit 10.2)

   (4)   4.3 -   Statement of Resolution establishing  and designating Series  E
                 preferred stock of the Company.

   (5) 10.20 -   Loan Agreement with NBD Bank dated May 19, 1995.

     *10.21 -    Financial  Consulting  Agreement  between  the  Hallwood  Group
                 Incorporated and Hallwood Petroleum, Inc. dated June 30, 1994.

     *10.22 -    Compensation  Agreement  between  Hallwood Petroleum,  Inc. and
                 Anthony J. Gumbiner dated August 1, 1994

     *10.23 -    Domestic  Incentive Plan  between the Partnership  and Hallwood
                 Petroleum, Inc. dated January 14, 1993

     *10.24 -    1995 Unit Option Plan of the Partnership

     *10.25 -    Unit Option Plan Loan Program of the Partnership

      21    -    Subsidiaries of Registrant.

                                          

   (1)   Portions incorporated by reference to the exhibit shown in  parentheses
         filed  with Saxon  Oil  Company's  Current Report  on Form  8-K,  dated
         December 27, 1984,  and portions filed with  the Annual Report on  Form
         10-K for the fiscal year ended December 31, 1990.

   (2)   Incorporated  by reference  to the  exhibit shown in  parentheses filed
         with Saxon Oil Company's Current Report on  Form 8-K, dated January 28,
         1987.

   (3)   Filed with Annual  Report on Form  10-K for fiscal year  ended December
         31, 1992 and incorporated herein by this reference.

   (4)   Filed  with Annual Report on  Form 10-K for fiscal  year ended December
         31, 1994 and incorporated herein by this reference.

   (5)   Filed with Quarterly  Report on Form 10-Q for quarterly year ended June
         30, 1995 and incorporated herein by this reference.

     *   Designates management contracts or compensating plans or arrangements.



   SIGNATURES

   Pursuant  to  the  requirements of  Section  13 or  15(d)  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.


                                    HALLWOOD ENERGY CORPORATION<PAGE>


    Date:  February 29, 1996        By:/s/William L. Guzzetti   
                                       William L. Guzzetti
                                       President and Director

   Pursuant to  the requirements of  the Securities Exchange  Act of  1934, this
   report  has been  signed below  by  the following  persons on  behalf  of the
   registrant and in the capacities and on the dates indicated.

            Signature                Capacity               Date
                                                          




    /s/Anthony J. Gumbiner     Chairman of the         February 29, 1996
    Anthony J. Gumbiner        Board and Director                       
                               (Chief Executive
                               Officer)



    /s/Brian M. Troup          Director                February 29, 1996
    Brian M. Troup                                                      



    /s/Hans-Peter Holinger     Director                February 29, 1996
    Hans-Peter Holinger




    /s/Rex A. Sebastian        Director                February 29, 1996
    Rex A. Sebastian                                                    



    /s/Robert S. Pfeiffer      Principal Accounting    February 29, 1996
    Robert S. Pfeiffer         Officer