---

Securities And Exchange CommissionWashington, D.C. 20549

# Form 10-Q

(Mark One)

XQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE             
            

SECURITIES EXCHANGE ACT OF 1934

For
the Quarter Ended September 30, 2001

OR

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

Commission file number: 1-8094

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

Delaware              
             74-1764876(State or other jurisdiction of       
        (I.R.S. Employerincorporation or organization)      
      Identification No.)

1001 Fannin, Suite 1600, Houston, Texas
77002-6714(Address of principal executive offices)
                   
   (Zip code)(713) 265-6000(Registrant's telephone number, including area code)

None(Former name, former address and former fiscal year, if changed since last report)

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 .

As
of October 26, 2001, 171,810,343 shares of Common Stock, par value $0.10 per share, were
outstanding.

---

Ocean
Energy, Inc.

Index

|                                                                       | Page Number
|---------------------------------------------------------------------- | -----------
|Part I. Financial Information                                          |            
|                                                                      
|Item 1. Unaudited Consolidated Financial Statements                    |            
|                                                                      
|Consolidated Statements of Operations for the Three Months and Nine    |            
|Months Ended September 30, 2001 and 2000                               |            
|                                                                      
|Consolidated Balance Sheets  September 30, 2001 and December 31, 2000 |            
|                                                                      
|Consolidated Statements of Cash Flows for the Nine Months Ended        |            
|September 30, 2001 and 2000                                            |            
|                                                                      
|Consolidated Statements of Comprehensive Income for the Three          |            
|Months and Nine Months Ended September 30, 2001 and 2000               |            
|                                                                      
|Notes to Consolidated Financial Statements                             |            
|                                                                      
|Item 2. Managements Discussion and Analysis of Financial Condition    |            
|and Results of Operations                                              |            
|                                                                      
|Item 3. Quantitative and Qualitative Disclosures about Market Risks    |            
|                                                                      
|Part II. Other Information                                             |            
|                                                                      
|Signatures                                                             |            

(i)

---

Item. 1
Unaudited Consolidated Financial Statements

Ocean
Energy, Inc.Consolidated Statements Of Operations(Amounts in Thousands, Except Per Share Data)(Unaudited)

|                                                      | Three Months Ended September 30, |  | Nine Months Ended September 30, |        
|----------------------------------------------------- | -------------------------------- |  | ------------------------------- | -------
|                                                     
|                                                      |                                  |  |                                 | 2001   
|                                                     
|Revenues                                              |                                  |  | $                               | 279,021
|Costs of Operations:                                  |                                  | 
|Operating expenses                                    |                                  |  |                                 | 81,607 
|Depreciation, depletion and         amortization      |                                  |  |                                 | 89,285 
|General and         administrative                    |                                  |  |                                 | 7,986  
|                                                     
|                                                      |                                  |  |                                 | 178,878
|                                                     
|Operating Profit                                      |                                  |  |                                 | 100,143
|Other (Income) Expense:                               |                                  | 
|Interest expense                                      |                                  |  |                                 | 14,262 
|Merger and integration costs                          |                                  |  |                                 | --     
|Interest income and other                             |                                  |  |                                 | (1,129 
|                                                     
|Income Before Income Taxes                            |                                  |  |                                 | 87,010 
|Income Tax Expense                                    |                                  |  |                                 | 39,167 
|                                                     
|Income Before Extraordinary Loss                      |                                  |  |                                 | 47,843 
|Extraordinary Loss, Net of Income      Taxes          |                                  |  |                                 | --     
|                                                     
|Net Income                                            |                                  |  |                                 | 47,843 
|Preferred Stock Dividends                             |                                  |  |                                 | 813    
|                                                     
|Net Income Available to     Common Stockholders       |                                  |  | $                               | 47,030 
|                                                     
|Basic Earnings Per Common Share:                      |                                  | 
|Income Before Extraordinary Loss                      |                                  |  | $                               | 0.28   
|Extraordinary Loss, Net of       Income Taxes         |                                  |  |                                 | --     
|                                                     
|Net Income to Common      Stockholders                |                                  |  | $                               | 0.28   
|                                                     
|Diluted Earnings Per Common Share:                    |                                  | 
|Income Before Extraordinary Loss                      |                                  |  | $                               | 0.27   
|Extraordinary Loss, Net of       Income Taxes         |                                  |  |                                 | --     
|                                                     
|Net Income                                            |                                  |  | $                               | 0.27   
|                                                     
|Cash Dividends Declared Per      Common Share         |                                  |  | $                               | 0.04   
|                                                     
|Weighted Average Number of Common Shares Outstanding: |                                  | 
|Basic                                                 |                                  |  |                                 | 170,918
|                                                     
|Diluted                                               |                                  |  |                                 | 179,145
|                                                     

See accompanying Notes to Consolidated Financial Statements.

1

---

Ocean Energy, Inc.Consolidated Balance Sheets(Amounts in Thousands, Except Share Data)(Unaudited)

|                                                                                               | September 30, 2001 |  | December 31, 2000
|---------------------------------------------------------------------------------------------- | ------------------ |  | -----------------
|                                                                                              
|
|
|Current Assets:                                                                                |                    |  |                  
|Cash and cash equivalents                                                                      |                    |  | $                
|Accounts receivable, net                                                                       |                    |  |                  
|Other current assets                                                                           |                    |  |                  
|                                                                                              
|Total Current Assets                                                                           |                    |  |                  
|                                                                                              
|Property, Plant and Equipment, at cost, full cost method for oil and gas properties:           |                    | 
|Evaluated oil and gas properties                                                               |                    |  |                  
|Unevaluated oil and gas properties excluded from amortization                                  |                    |  |                  
|Other                                                                                          |                    |  |                  
|                                                                                              
|                                                                                               |                    |  |                  
|Accumulated Depreciation, Depletion and Amortization                                           |                    |  |                  
|                                                                                              
|                                                                                               |                    |  |                  
|                                                                                              
|Deferred Income Taxes                                                                          |                    |  |                  
|Other Assets                                                                                   |                    |  |                  
|                                                                                              
|Total Assets                                                                                   |                    |  | $                
|                                                                                              
|                                                                                              
|Liabilities And Stockholders Equity                                                           |                    | 
|Current Liabilities:                                                                           |                    | 
|Accounts and notes payable                                                                     |                    |  | $                
|Accrued liabilities                                                                            |                    |  |                  
|                                                                                              
|Total Current Liabilities                                                                      |                    |  |                  
|                                                                                              
|Long-Term Debt                                                                                 |                    |  |                  
|Deferred Revenue                                                                               |                    |  |                  
|Deferred Income Taxes                                                                          |                    |  |                  
|Other Noncurrent Liabilities                                                                   |                    |  |                  
|Commitments and Contingencies                                                                  |                    |  |                  
|                                                                                              
|Stockholders Equity:                                                                         
|Preferred stock, $1.00 par value; authorized 10,000,000 shares;                                |                    | 
|issued 50,000 shares                                                                           |                    |  |                  
|Common stock, $.10 par value; authorized 520,000,000 and                                      
|230,000,000 shares, respectively; issued 174,425,466 and      170,069,114 shares, respectively |                    |  |                  
|Additional paid-in capital                                                                     |                    |  |                  
|Accumulated deficit                                                                            |                    |  |                  
|Less - treasury stock, at cost; 2,669,640 and 2,754,566 shares,     respectively               |                    |  |                  
|Accumulated other comprehensive income                                                         |                    |  |                  
|Other                                                                                          |                    |  |                  
|                                                                                              
|Total Stockholders Equity                                                                     |                    |  |                  
|                                                                                              
|Total Liabilities and Stockholders Equity                                                     |                    |  | $                
|                                                                                              

See accompanying Notes to Consolidated Financial Statements.

2

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Ocean
Energy, Inc.Consolidated Statements Of Cash Flows(Amounts in Thousands)(Unaudited)

|                                                                  | Nine Months Ended September 30, | 
|----------------------------------------------------------------- | ------------------------------- | 
|                                                                 
|
|                                                                 
|Operating Activities:                                             |                                 | 
|Net income                                                        |                                 | 
|Adjustments to reconcile net income to net cash provided by       |                                 | 
|operating activities:                                             |                                 | 
|Depreciation, depletion and amortization                          |                                 | 
|Deferred income taxes                                             |                                 | 
|Extraordinary loss, net of taxes                                  |                                 | 
|Other                                                             |                                 | 
|Changes in operating assets and liabilities, net of acquisitions: |                                 | 
|Decrease (increase) in accounts receivable                        |                                 | 
|Increase in inventories, prepaid expenses and other               |                                 | 
|Increase (decrease) in accounts and notes payable                 |                                 | 
|Amortization of deferred revenue                                  |                                 | 
|Decrease in accrued expenses and other                            |                                 | 
|                                                                 
|Net Cash Provided by Operating Activities                         |                                 | 
|                                                                 
|Investing Activities:                                             |                                 | 
|Capital expenditures                                              |                                 | 
|Acquisition costs, net of cash acquired                           |                                 | 
|Proceeds from sales of property, plant and equipment              |                                 | 
|Other                                                             |                                 | 
|                                                                 
|Net Cash Used in Investing Activities                             |                                 | 
|                                                                 
|Financing Activities:                                             |                                 | 
|Proceeds from borrowings                                          |                                 | 
|Principal payments on borrowings                                  |                                 | 
|Proceeds from exercise of common stock options                    |                                 | 
|Dividends paid                                                    |                                 | 
|Premiums paid on debt buy back                                    |                                 | 
|Purchase of treasury stock                                        |                                 | 
|Increase in deferred revenue                                      |                                 | 
|Proceeds from conveyance of Section 29 credit properties          |                                 | 
|Other                                                             |                                 | 
|                                                                 
|Net Cash Provided by (Used in) Financing Activities               |                                 | 
|                                                                 
|Increase (Decrease) in Cash and Cash Equivalents                  |                                 | 
|Cash and Cash Equivalents at Beginning of Period                  |                                 | 
|                                                                 
|Cash and Cash Equivalents at End of Period                        |                                 | 
|                                                                 

See accompanying Notes to Consolidated Financial Statements.

3

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Ocean Energy, Inc.Consolidated Statements Of Comprehensive Income(Amounts in Thousands)(Unaudited)

|                                                 | Three Months Ended September 30, |  | Nine MonthsEnded September 30, |       
|------------------------------------------------ | -------------------------------- |  | ------------------------------ | ------
|                                                
|
|
|                                                
|Net income                                       |                                  |  | $                              | 47,843
|Other comprehensive income (loss), net of tax:   |                                  | 
|Cumulative effect of accounting change for       |                                  | 
|derivative financial instruments                 |                                  |  |                                | --    
|Net change in fair value of derivative financial |                                  | 
|instruments                                      |                                  |  |                                | 16,926
|Financial derivative settlements taken to income |                                  |  |                                | (6,530
|Other                                            |                                  |  |                                | 45    
|                                                
|                                                 |                                  |  |                                | 10,441
|                                                
|Comprehensive income                             |                                  |  | $                              | 58,284
|                                                
|                                                 |                                  | 

See accompanying Notes to Consolidated Financial Statements.

4

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Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

Note 1.
Presentation of Financial Information

The
consolidated financial statements of Ocean Energy, Inc. (OEIor the
Company), a Delaware corporation, included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Although certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or omitted,
management believes that the disclosures are adequate to make the information presented
not misleading. The financial statements reflect all normal recurring adjustments that,
in the opinion of management, are necessary for a fair presentation.

The
accompanying consolidated financial statements of the Company should be read in
conjunction with the consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2000.

Property,
Plant and EquipmentThe Company capitalizes interest expense and certain
employee-related costs that are directly attributable to oil and gas operations. For the
three months ended September 30, 2001 and 2000, the Company capitalized interest expense
in the amount of $12 million and $11 million, respectively, and certain employee-related
costs in the amount of $15 million and $11 million, respectively. For the nine months
ended September 30, 2001 and 2000, the Company capitalized interest expense in the amount
of $32 million and $34 million, respectively, and certain employee-related costs in the
amount of $44 million and $33 million, respectively.

Revenue
RecognitionRevenues associated with sales of crude oil and natural gas are
recorded when delivery to the customer has occurred (i.e. when production has been
delivered to the pipeline or a tanker lifting has occurred). Oil and gas sales revenues
from properties in which the Company has an interest with other producers are recognized
following the entitlements method of accounting for production, in which any excess
amount received above the Companys share is treated as a liability. If less than
the Companys entitlement is received, the underproduction is recorded as an asset.

Earnings
Per Share The following table provides a reconciliation between basic and
diluted earnings per share:

5

---

Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

|                                       |  |  | Weighted
|-------------------------------------- |  |  | --------
|
|
|                                      
|
|
|Three Months Ended September 30, 2001: |  |  |         
|Basic                                  |  |  | $       
|Effect of dilutive securities:         |  | 
|Stock options                          |  |  |         
|Convertible preferred stock            |  |  |         
|                                      
|Diluted                                |  |  | $       
|                                      
|Three Months Ended September 30, 2000: |  | 
|Basic                                  |  |  | $       
|Effect of dilutive securities:         |  | 
|Stock options                          |  |  |         
|Convertible preferred stock            |  |  |         
|                                      
|Diluted                                |  |  | $       
|                                      
|Nine Months Ended September 30, 2001:  |  | 
|Basic                                  |  |  | $       
|Effect of dilutive securities:         |  | 
|Stock options                          |  |  |         
|Convertible preferred stock            |  |  |         
|                                      
|Diluted                                |  |  | $       
|                                      
|                                       |  | 
|Nine Months Ended September 30, 2000:  |  | 
|Basic                                  |  |  | $       
|Effect of dilutive securities:         |  | 
|Stock options                          |  |  |         
|Convertible preferred stock            |  |  |         
|                                      
|Diluted                                |  |  | $       
|                                      

Weighted
average options to purchase 4.3 million shares of common stock at $18.81 to $36.54 per
share and 4.5 million shares of common stock at $18.35 to $36.54 per share were
outstanding for the third quarter and first nine months of 2001, respectively, and
weighted average options to purchase 6.7 million shares of common stock at $14.69 to
$36.54 per share and 7.3 million shares of common stock at $13.46 to $36.54 per share
were outstanding during the third quarter and first nine months of 2000, respectively,
but were not included in the computation of diluted earnings per share because the optionsexercise
prices were greater than the average market price of the common shares. These options
expire at various dates through 2011.

Treasury
Stock The Company follows the average cost method of accounting for treasury
stock transactions.

6

---

Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

Change
in Accounting Method Effective January 1, 2001, the Company adopted Statement
of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities.This statement establishes accounting
and reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded at fair market value and
included in the balance sheet as assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on the intended use of the derivative and
the resulting designation, which is established at the inception of a derivative. Special
accounting for qualifying hedges allows a derivatives gains and losses to offset
related results on the hedged item in the statement of operations. For derivative
instruments designated as cash flow hedges, changes in fair value, to the extent the
hedge is effective, are recognized in other comprehensive income until the hedged item is
recognized in earnings. Hedge effectiveness is measured quarterly based on the relative
changes in fair value between the derivative contract and the hedged item over time. Any
change in fair value resulting from ineffectiveness, as defined by SFAS 133, is
recognized immediately in earnings.

Adoption
of SFAS 133 at January 1, 2001 resulted in the recognition of $1 million of additional
derivative assets included in other current assets and $23 million of derivative
liabilities, $11 million of which were included in current liabilities and $12 million of
which were included in other noncurrent liabilities in the Companys Consolidated
Balance Sheet, and $14 million, net of taxes, of deferred hedging expense, included in
accumulated other comprehensive income as the effect of the change in accounting
principle. The cumulative effect of the accounting change did not have a material effect
on the Companys net income. Amounts were determined as of January 1, 2001 based on
quoted market values, the Companys portfolio of derivative instruments, and the
Companys measurement of hedge effectiveness. Through December 31, 2000, gains and
losses from these financial instruments were recognized in revenues during the periods to
which the derivative financial instruments related.

From
time to time, the Company has utilized and expects to continue to utilize derivative
financial instruments with respect to a portion of its oil and gas production to achieve
a more predictable cash flow by reducing its exposure to price fluctuations. These
transactions generally are swaps, collars or options and are entered into with major
financial institutions or commodities trading institutions. Derivative financial
instruments are intended to reduce the Companys exposure to declines in the market
price of crude oil and natural gas. Certain of these derivative financial instruments
have been designated and have qualified as cash flow hedges. The Company utilizes
additional financial instruments which have not been designated as cash flow hedges even
though they do protect the Company from changes in commodity prices. These instruments
are marked to market quarterly with the resulting changes in fair value recorded in
earnings. Realized gains and losses are recognized in the statement of operations when
the underlying physical oil and gas production is sold.

7

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Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

The
Company may also utilize derivative financial instruments such as interest rate swap
agreements to hedge the fair value of its fixed-rate debt. Interest rate swap contracts
are reflected at fair value on the Companys consolidated balance sheets and the
related portion of fixed-rate debt being hedged is reflected at an amount equal to the
sum of its carrying value plus an adjustment representing the change in its fair value
attributable to the interest rate risk being hedged. If the transaction qualifies as a
fair value hedge, the gains or losses on the derivative financial instrument, as well as
the offsetting gains or losses on the hedged item, are recognized currently in earnings.
Consequently, if gains or losses on the derivative financial instrument and the related
hedged item do not completely offset, the difference is recognized currently in earnings.
The net effect of this accounting on the Companys operating results is that
interest expense on the portion of fixed-rate debt being hedged is generally recorded
based on variable interest rates.

Reclassification
of Transportation ExpenseAs a result of the consensus on Emerging Issues Task
Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, the
Company reclassified the 2000 financial statements to reflect transportation expenses
incurred as operating expenses, instead of as a deduction from revenues as previously
recorded. While this reclassification had no effect on net income, it did increase
revenues and operating expenses by $18 million and $7 million for the first nine months
and third quarter of 2000, respectively. Transportation expense totaled $20 million and
$7 million for the first nine months and third quarter of 2001, respectively.

Note 2. Acquisition and Disposition of Assets

Acquisitions
of Oil and Gas AssetsDuring March 2001, the Company acquired Texoil,
Inc. (Texoil) for a cash purchase price of approximately $115 million before
assumed bank debt of $15 million. Texoil was an independent oil and gas company engaged
in the acquisition of oil and gas reserves through a program, which included purchases of
reserves, development and exploration activities in Texas and Louisiana.

During
April 2001, the Company acquired certain oil and gas assets located primarily in East
Texas and North Louisiana for a purchase price of approximately $118 million.

Dispositions
of Oil and Gas Assets The Company received approximately $59 million in
proceeds from the sale of certain non-core properties during the third quarter of 2001.

On
March 31, 2000, the Company completed the sale of its East Bay Complex receiving net
proceeds of approximately $78 million. The East Bay Complex contributed revenues of $23
million and operating profit of $10 million for the three months ended March 31, 2000.
The proceeds were used to repay amounts outstanding under the Companys existing
credit facility.

8

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Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

Note 3. Supplemental Disclosures of Cash Flow Information

Supplemental
disclosures of cash flow information are as follows:

|                                 | Nine Months Ended September 30, | 
|-------------------------------- | ------------------------------- | 
|                                
|
|                                
|
|
|
|Cash paid during the period for: |                                 | 
|Interest                         |                                 | 
|Income taxes                     |                                 | 

Note 4. Financial Instruments

As
of September 30, 2001, the Company has in place put options that place an annual floor
price of $25.00 per Bbl on 20 MBbl of crude oil per day, an annual floor price of $4.00
on 100 MMcf of natural gas per day, and an annual floor price of $5.00 per Mcf on 100
MMcf of natural gas per day for the remainder of 2001. The Company is party to two crude
oil basis swap contracts to fix the sales price differential between WTI and Brent. The contracts, which extend
through May 2002 and relate to 10 MBbl per day each, provide that the Company receives a
net settlement of WTI less Brent less $1.29 per Bbl. The Company also has in place
collars at contracted volumes of 15 MBbl of crude oil per day for the period January
through December 2002 with a floor of $23.00 and a weighted average ceiling of $28.03.

In
addition, a related trust has a swap agreement covering 14.5 MMcf of gas per day at a
price of $4.77 per Mcf for the remainder of 2001 and covering various amounts at various
prices through 2005. Although the Company is not a party to this financial instrument,
under SFAS 133 the Company is required to account for this swap as an embedded derivative
financial instrument.

As
discussed in Note 1, the Company began accounting for qualifying derivative instruments
as cash flow hedges in accordance with SFAS 133. As a result, changes in the fair value
of these cash flow hedges are recognized in other comprehensive income until the hedged
item is recognized in earnings, and any change in fair value resulting from
ineffectiveness is recognized immediately in earnings.

The
change in fair value of derivative financial instruments, currently designated as cash
flow hedges, included in revenues comprises the following:

9

---

Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

|                                                        | Three Months Ended | Nine Months Ended
|------------------------------------------------------- | ------------------ | -----------------
|
|                                                       
|
|                                                       
|Financial derivative settlements transferred from other |                    |                  
|comprehensive income                                    |                    |                  
|Change in time and intrinsic value of put options       |                    |                  
|Ineffective portion of derivative financial instruments |                    |                  
|qualifying as cash flow hedges                          |                    |                  
|                                                       
|Increase (decrease) in revenues                         |                    |                  
|                                                       

The
related results of other derivative financial instruments not designated as cash flow
hedges included as an increase (decrease) in revenues totaled approximately $0.6 million
and ($1.4) million for the three months and nine months ended September 30, 2001.

During
August 2001, the Company entered into interest rate swap agreements to hedge the fair
value of its 7 5/8% senior notes due July 2005 and its 7 7/8% senior notes due August
2003. Under the terms of the agreements, the counterparties pay the Company a weighted
average fixed annual rate of 7.74% on total notional amounts of $225 million, and the
Company pays the counterparties a variable annual rate equal to the six-month LIBOR rate
plus a weighted average rate of 2.73%. The swap agreements remain in effect through the
maturity dates of the respective notes. These swap agreements have been designated as
fair value hedges pursuant to SFAS No. 133. Interest expense for the third quarter of
2001 was reduced by approximately $1 million as a result of interest rate swaps.

As
of September 30, 2001, the Company expects to transfer approximately $1 million of the
initial transition adjustment recorded in accumulated other comprehensive income to
reduce earnings during the remainder of 2001. The Company expects to transfer
approximately $18 million of net deferred gains in accumulated other comprehensive income
as of September 30, 2001 to earnings during the next twelve months when the forecasted
transactions actually occur. All forecasted transactions currently being hedged are
expected to occur by December 2005.

Subsequent
to September 30, 2001, the Company entered into natural gas collars for the period
January through December 2002. The contracts cover 100 MMcf of natural gas per day with a
floor of $2.75 and a ceiling of $4.10 and 40 MMcf of natural gas per day with a floor of
$3.00 and a ceiling of $4.00.

Note 5. Debt

On
September 28, 2001, the Company issued $350 million of 71⁄4% senior notes due 2011
pursuant to a shelf registration statement. A portion of the proceeds was used to repay
amounts outstanding under the Companys credit facility at September 28, 2001. The
remainder of the proceeds is being used to retire existing higher interest rate debt by
exercising call provisions for the Companys 8 5/8% senior subordinated notes due
2005 and 93⁄4% senior subordinated notes due

10

---

Ocean
Energy, Inc.Notes to Consolidated Financial Statements
(Unaudited)

2006.
The repurchase of these notes will be completed by early November 2001, with a resulting
extraordinary loss of approximately $1 million.

During
the second quarter of 2001, the Company repurchased on the open market approximately $22
million of its 8 3/8% senior subordinated notes due July 2008 and $25 million of its 8
7/8% senior subordinated notes due July 2007. In connection with the repurchase, the
Company recorded an after-tax extraordinary loss of approximately $2.6 million, or
($0.01) per diluted share. The extraordinary loss included a current tax benefit of
approximately $1.4 million. The repurchase of these notes was funded with available cash
balances and borrowings under the Companys existing credit facility.

11

---

Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

The
following discussion is intended to assist in understanding the Companys financial
position, results of operations and cash flows for each of the periods indicated.

The
Companys accompanying unaudited consolidated financial statements and the notes
thereto and the consolidated financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2000 contain detailed
information that should be referred to in conjunction with the following discussion.

Results of Operations(Amounts in Thousands)

|                            | Three Months Ended | Nine Months Ended
|--------------------------- | ------------------ | -----------------
|
|                           
|
|                           
|Oil and Gas Operations:     |                    |                  
|Revenues:                   |                    |                  
|Natural gas                 |                    |                  
|Oil and NGL                 |                    |                  
|                           
|                            |                    |                  
|                           
|Operating expenses          |                    |                  
|Depreciation, depletion and |                    |                  
|amortization                |                    |                  
|                           
|Operating profit            |                    |                  
|Corporate                   |                    |                  
|                           
|Total operating profit      |                    |                  
|                           

For
the first nine months of 2001, a 13% increase in daily equivalent production and
significantly higher realized natural gas prices led to revenues increasing 36% and
operating profit increasing 61% as compared to the same period in 2000. The Company
experienced similar increases in daily equivalent production over the third quarter of
2000. However, as the effects of the weakening commodity markets were manifested in lower
realized prices excluding the effects of financial derivatives for third quarter 2001
versus third quarter 2000, revenues and operating profit did not follow the increases in
daily equivalent production.

RevenuesNatural
gas revenues decreased $13 million, or 9%, to $131 million for the third quarter of 2001
as compared to $144 million for the third quarter of 2000 primarily due to lower average
realized prices offset by increases in production. Daily production for the third quarter
of 2001 totaled 464 MMcf, an increase of 13% from third quarter 2000 volumes. This
increase was due primarily to domestic acquisitions of producing properties and
exploitation in the Gulf of Mexico. The average realized price excluding the effects of
financial derivatives decreased 33% to $2.79 for the third quarter of 2001 compared to
$4.18 for the third quarter of 2000.

Natural
gas revenues increased $248 million, or 70%, to $602 million for the nine months ended
September 30, 2001, from $354 million for the nine months ended September 30, 2000. This
increase is due to increases in production and higher average realized prices. Daily
natural gas production for the first nine months of 2001 increased 13% to 456 MMcf from
403 MMcf per day for the first nine months of 2000. The average realized price for
natural gas excluding the

12

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

effects
of financial derivatives increased 40% to $4.74 per Mcf for the first nine months of 2001
as compared to $3.39 for the first nine months of 2000.

For
the third quarter of 2001, oil revenues increased $24 million, or 19%, to $148 million
compared to $124 million for the third quarter of 2000 primarily due to increases in
production. For the third quarter of 2001, daily oil production was 74 MBbl, an increase
of 17% from the third quarter of 2000. However, the average realized oil price excluding
the effects of financial derivatives decreased 16% to $21.84 for the third quarter of
2001 compared to $26.11 for the third quarter of 2000.

For
the nine months ended September 30, 2001, oil revenues totaled $436 million as compared
to revenues of $407 million for the comparable period of 2000 due primarily to increases
in production. Daily oil production increased 12%, to 75 MBbl for the first nine months
of 2001 as compared to 67 MBbl for the same period in 2000. The average realized price
for oil excluding the effects of financial derivatives decreased 10% to $23.04 for the
first nine months of 2001 compared to $25.57 for the same period in 2000.

Outlook
During late 2000 and early 2001, natural gas prices reached extraordinarily
high levels. While lagging behind natural gasphenomenal rise, crude prices were
also strong throughout this period. In the last few months, commodity prices have
declined significantly. Natural gas prices have reached their lowest point since the
first quarter of 2000 as the effects of economic slowdown, increasing gas inventory
levels, and cooler summer weather are felt. Crude oil prices decreased after the
September 11, 2001 terrorist attacks in anticipation of an economic downturn. As
operating profits and discretionary cash flow follow changes in commodity prices, such
changes are watched closely by management. With continued uncertainty in the commodity
price markets, the Company is unable to predict future commodity prices. The Company will
evaluate its level of capital spending based upon drilling results, commodity prices,
cash flows from operations and property acquisitions.

Reclassification
of Transportation Expense The Company has reclassified the 2000 financial
statements to reflect transportation expenses incurred as operating expenses, instead of
as a deduction from revenues as previously recorded. While this reclassification had no
effect on net income, it did increase revenues and operating expenses by $18 million and
$7 million for the first nine months and third quarter of 2000, respectively.
Transportation expense totaled $20 million and $7 million for the first nine months and
third quarter of 2001, respectively.

13

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

Operating
Data

|                                                | Three Months | Nine Months
|----------------------------------------------- | ------------ | -----------
|
|
|                                               
|
|                                               
|Net Daily Natural Gas Production (MMcf):        |              |            
|Domestic                                        |              |            
|Côte dIvoire                                   |              |            
|Other International                             |              |            
|                                               
|Total                                           |              |            
|                                               
|Average Natural Gas Prices ($ per Mcf):         |              |            
|Domestic                                        |              |            
|Côte dIvoire                                   |              |            
|Other International                             |              |            
|Weighted Average                                |              |            
|Average Natural Gas Prices Including the Impact |              |            
|of Financial Derivatives ($ per Mcf)            |              |            
|                                                |              |            
|Net Daily Oil and NGL Production (MBbl):        |              |            
|Domestic                                        |              |            
|Equatorial Guinea                               |              |            
|Côte dIvoire                                   |              |            
|Egypt                                           |              |            
|Other International                             |              |            
|                                               
|Total                                           |              |            
|                                               
|Average Oil and NGL Prices ($ per Bbl):         |              |            
|Domestic                                        |              |            
|Equatorial Guinea                               |              |            
|Côte dIvoire                                   |              |            
|Egypt                                           |              |            
|Other International                             |              |            
|Weighted Average                                |              |            
|Average Oil and NGL Prices Including the Impact |              |            
|of Financial Derivatives ($ per Bbl)            |              |            
|                                                |              |            
|Wells Drilled:                                  |              |            
|Gross                                           |              |            
|Net                                             |              |            
|Success Rate                                    |              |            

All price
information excludes the impact of financial derivatives, unless otherwise stated.

Operating
Expenses Total operating expenses increased $45 million, or 24%, to $235
million for the nine months ended September 30, 2001 compared to $190 million for the
comparable 2000 period. For the third quarter of 2001, total operating expenses increased
$18 million, or 27%, to $82 million compared to $64 million for the third quarter of
2000. The increase in operating expenses is attributable primarily to increases in
production taxes and to additional lease operating expense incurred as a result of
increases in production. Operating

14

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

expenses
per BOE were $5.71 per BOE for the first nine months of 2001 compared to $5.16 per BOE
for the comparable 2000 period. This increase is due primarily to increased production
taxes and workover expenses. Operating expenses were $5.86 per BOE for the third quarter
of 2001 compared to $5.30 per BOE for the third quarter of 2000. This increase is
attributable primarily to increases in workover and general operating expenses offset by
a reduction in production taxes which have declined as a result of the third quarter 2001
commodity price decline.

Depreciation,
Depletion and Amortization Expense Total depreciation, depletion and
amortization (DD&A) expense for oil and gas operations increased $35 million to $260
million for the nine months ended September 30, 2001 from $225 million for the same
period in 2000. DD&A expense for oil and gas operations increased $13 million to $88
million for the third quarter of 2001 compared to $75 million for the third quarter of
2000. The increases in expense were due primarily to increased production. DD&A
expense per BOE related to oil and gas operations has increased only slightly for the
first nine months and for the third quarter of 2001 as compared to 2000. DD&A expense
per BOE was $6.33 per BOE for the nine months ended September 30, 2001 as compared to
$6.13 per BOE for the comparable period in 2000 and $6.31 per BOE for the third quarter
of 2001 as compared to $6.22 per BOE for the third quarter of 2000. These increases are
due primarily to changes in estimated future development costs associated with reserve
additions.

General
and Administrative Expenses General and administrative expenses totaled $22
million and $21 million for the nine months ended September 30, 2001 and 2000,
respectively. General and administrative expense for the third quarter of 2001 increased
approximately $2 million, to $8 million, as compared to $6 million for the third quarter
of 2000 primarily due to the timing of corporate expenditures.

Other

Interest
Expense Interest expense decreased approximately $10 million, or 16%, to $48
million for the nine months ended September 30, 2001 from $58 million in the comparable
2000 period. Interest expense for the third quarter of 2001 decreased approximately $6
million, or 28%, to $14 million from $20 million for the third quarter of 2000. These
decreases are primarily the result of the Companys debt reduction program. In
addition, interest expense for the third quarter of 2001 was reduced by approximately $1
million as a result of interest rate swaps.

Merger
and Integration Costs Merger and integration costs of $3 million relating
primarily to severance costs were recorded in the first nine months of 2000.

Income
Tax Expense Income tax expense of $212 million was recognized for the nine
months ended September 30, 2001 compared to an income tax expense of $115 million for the
nine months ended September 30, 2000. The effective income tax rates were approximately
45% and 44% for the first nine months of 2001 and 2000, respectively.

15

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

Liquidity
And Capital Resources

Liquidity
On September 28, 2001, the Company issued $350 million of 71⁄4% senior
notes due 2011 pursuant to a shelf registration statement. A portion of the proceeds was
used to repay all amounts outstanding under the Companys credit facility. The
credit facility, which consists of a $500 million five-year revolving facility due in
2004, bears interest, at the Companys option, at LIBOR or prime rates plus
applicable margins ranging from zero to 1.7% or at a competitive bid. As of September 30,
2001, the Companys balance under the credit facility was zero, and letters of
credit totaled $31 million, leaving approximately $469 million of available credit.

The
remaining proceeds from the debt issuance are being used to retire existing higher
interest rate debt by exercising call provisions for the Companys 8 5/8% senior
subordinated notes due 2005 and its 93⁄4% senior subordinated notes due 2006. The
repurchase of these notes is expected to be completed by early November 2001, with a
resulting extraordinary loss of approximately $1 million.

The
Companys long-term debt totaled $1.3 billion at September 30, 2001, and the Companys
debt to total capitalization ratio was 48%. Excluding $100 million of senior subordinated
notes expected to be repurchased with proceeds from the debt offering, the Companys
debt to total capitalization ratio was 46%.

During
the second quarter of 2001, the Company repurchased on the open market approximately $47
million of its higher interest rate debt. In connection with the repurchase, the Company
recorded an after-tax extraordinary loss of approximately $2.6 million, or ($0.01) per
diluted share. The repurchase of these notes was funded with available cash balances and
borrowings under the credit facility. The Company may from time to time take advantage of
favorable market conditions and repurchase some of its higher interest rate debt.

On
September 26, 2001, the Companys Board of Directors declared a quarterly common
stock dividend of four cents per share payable on October 24, 2001. The amount of future
dividends on OEI common stock will be determined on a quarterly basis and will depend on
earnings, financial condition, capital requirements and other factors.

16

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

Capital
Expenditures(Amounts in Thousands)

|                           | Three Months Ended | Nine Months Ended
|-------------------------- | ------------------ | -----------------
|                          
|
|                          
|Oil and Gas Operations:    |                    |                  
|Leasehold acquisitions     |                    |                  
|Exploration costs          |                    |                  
|Development costs          |                    |                  
|                          
|                           |                    |                  
|Corporate                  |                    |                  
|                          
|Total Capital Expenditures |                    |                  
|                          
|Acquisitions               |                    |                  
|                          

The
Companys revised capital expenditure budget totals approximately $1.1 billion
including acquisition costs. The spending will be funded primarily from the Companys
cash flows from operations and is subject to change if market conditions shift or new
opportunities are identified. The Company will evaluate its level of capital spending
throughout the year based upon drilling results, commodity prices, cash flows from
operations and property acquisitions.

During
the second quarter of 2001, the Company was successful bidder on two deepwater blocks
offshore Brazil. The Company has a 65% working interest in Block BM-C-15, which it will
operate, and a 20% working interest in Block BM-S-22. In addition, the Company completed
its acquisition of certain oil and gas assets located primarily in East Texas and North
Louisiana for a purchase price of approximately $118 million. During March 2001, the
Company acquired Texoil, Inc. for a cash purchase price of approximately $115 million
before assumed bank debt of $15 million. These acquisitions were funded with cash flows
from operations and borrowings under the credit facility.

The
Company makes, and will continue to make, substantial capital expenditures for the
acquisition, exploration, development, production and abandonment of its crude oil and
natural gas reserves. The Company has historically funded its expenditures from cash
flows from operating activities, bank borrowings, sales of equity and debt securities,
sales of non-strategic oil and natural gas properties, sales of partial interests in
exploration concessions and project finance borrowings. The Company intends to finance
remaining 2001 capital expenditures primarily with funds provided by operations.

Accounting Pronouncements

Accounting
PronouncementsDuring 2001, the Financial Accounting Standards Board has
issued four new pronouncements:

- Statement 141, Business
Combinations, requires the purchase method of accounting for all business
combinations and applies to all business combinations initiated after June 30,
2001 and to all business combinations accounted for by the purchase method that
are completed after June 30, 2001.

17

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

- Statement 142, Goodwill and
Other Intangible Assets,requires that goodwill as well as other intangible
assets be tested annually for impairment and is effective for fiscal years
beginning after December 15, 2001.

- Statement 143, Accounting for
Asset Retirement Obligations, requires entities to record the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset and is effective for fiscal years beginning after June 15,
2002.

- Statement 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, provides that long-lived
assets to be disposed of by sale be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations, and broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. Statement 144 is effective
for fiscal years beginning after December 15, 2001.

Statements
141 and 142 will not apply to the Company unless it enters into a future business
combination. The Company is currently assessing the impact of Statements 143 and 144 on
its financial condition and results of operations.

Environmental

Compliance
with applicable environmental and safety regulations by the Company has not required any
significant capital expenditures or materially affected its business or earnings. The
Company believes it is in substantial compliance with environmental and safety
regulations and foresees no material expenditures in the future; however, the Company is
unable to predict the impact that compliance with future regulations may have on capital
expenditures, earnings and competitive position.

Defined Terms

Natural
gas is stated herein in thousand cubic feet (Mcf) or million cubic feet (MMcf).
Oil, condensate and natural gas liquids (NGL) are stated in barrels (Bbl)
or thousand barrels (MBbl). Oil, condensate and NGL are converted to gas at a
ratio of one barrel of liquids per six Mcf of gas, based on relative energy content. MBOE
and BOE represent one thousand barrels and one barrel of oil equivalent, respectively,
with six Mcf of gas converted to one barrel of liquid.

18

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Ocean
Energy, Inc.

Item 2.  Managements Discussion And Analysis of Financial
Condition And Results of Operations

Forward-Looking Statements May Prove Inaccurate

This
document contains forward-looking statementswithin the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and
information that is based on managements belief and assumptions based on currently
available information. All statements other than statements of historical fact included
in this document are forward-looking statements. When used in this document, words such
as anticipate, believe, estimate, expect, forecast,
intend, project and
similar expressions serve to identify forward-looking statements. Although we believe
that the expectations reflected in our forward-looking statements are reasonable, we can
give no assurance that these expectations will prove correct. Our forward-looking
statements are subject to risks, uncertainties and assumptions. Should one of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect, our
actual results may vary materially from those expected. Among the key factors that may
have a direct bearing on our results of operations and financial condition are:

- volatility of energy commodity
prices, generally, including as a result of the potential worldwide economic downturn resulting from the
September 11, 2001 terrorist attacks, and fluctuations in the commodity prices for crude oil and
natural gas that have not been effectively hedged, in particular;
- operational and systems risk incident to the drilling and operation of oil and gas wells;
- competitive conditions in the oil and gas industry;
- general economic and capital markets conditions, including fluctuations in interest rates;
- the impact of current and future laws and governmental  regulations,  particularly  environmental
regulations,  affecting the energy industry in general, and our oil and gas operations, in particular;
- environmental liabilities that are not covered by insurance or indemnity;
- the political and economic climate in the foreign
jurisdictions in which we conduct oil and gas operations, including potential adverse results of military or
terrorist actions in those areas; and
- the effect on
our results of operations and financial condition associated with implementing
various accounting rules and regulations.

Item 3. Quantitative and Qualitative Disclosures About
Market Risks

Commodity
Price Risk To mitigate a portion of its exposure to fluctuations in commodity
prices, the Company entered into various derivative financial instruments for its oil and
gas production. See Note 4 to the Companys Consolidated Financial Statements for a
discussion of activities involving derivative financial instruments in place at September
30, 2001. To calculate the potential effect of the derivatives contracts on future
revenues, the Company applied the average NYMEX oil and gas strip prices as of September
30, 2001 to the quantity of the Companys oil and gas production
covered by those derivative contracts as of that date. The

19

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Ocean
Energy, Inc.

following table shows the
estimated potential effects of the derivative financial instruments on future revenues:

|                          | Estimated Increase |  | Estimated Increase |      | Estimated Increase
|------------------------- | ------------------ |  | ------------------ | ---- | ------------------
|
|
|
|                         
|
|                         
|Gas puts                  |                    |  |                    | $  9 |                   
|Oil puts                  |                    |  |                    | (1   | )                 
|Oil collars               |                    |  |                    | 7    |                   
|Gas swap of related trust |                    |  |                    | 8    |                   

# Part II.
Other Information

Item 4.
Submission of Matters to a Vote of Security Holders

None
during the third quarter of 2001.

Item 6.
Exhibits and Reports on Form 8-K

(a)
Exhibits:

|*#10.1 |  | Fifth
Amendment to the Ocean Energy, Inc. Long-Term Incentive Plan for Nonexecutive Employees,
filed herewith.
|------ |  | --------------------------------------------------------------------------------------------------------------

|*#10.2 |  | Ocean
Energy Inc. Executive Supplemental Retirement Plan (as Amended and Restated) as of July
1, 2001, filed herewith.
|------ |  | ----------------------------------------------------------------------------------------------------------------------

|*#10.3 |  | Ocean
Energy, Inc. 2001 Change of Control Severance Plan dated September 27, 2001, filed
herewith.
|------ |  | --------------------------------------------------------------------------------------------------

|*#10.4 |  | Ocean Energy, Inc.
Directors Compensation Plan adopted July 19, 2001, filed herewith.
|------ |  | -------------------------------------------------------------------------------------

*
Filed herewith.

#
Identifies management contracts and compensatory plans or arrangements.

(b)
Reports on Form 8-K:

On
August 3, 2001, the Company filed a Current Report on Form 8-K dated August 3, 2001
concerning the Companys current estimates of its operating statistics for the third
quarter of 2001 and full year ended December 31, 2001. The item reported in such Current
Report was Item 9 (Regulation FD Disclosure).

20

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Ocean
Energy, Inc.

On
September 28, 2001, the Company filed a Current Report on Form 8-K dated September 28,
2001, concerning an underwriting agreement with respect to the issue and sale by the
Company of $350 million aggregate principal amount of 71⁄4% Senior Notes due October 1, 2011
in an underwritten public offering. The items reported in such Current Report were Item 5
(Other Events) and Item 7 (Financial Statements and Exhibits).

On
October 23, 2001, the Company filed a Current Report on Form 8-K dated October 23, 2001
concerning the Companys current estimates of its operating statistics for the
fourth quarter of 2001 and full year ended December 31, 2001. The item reported in such
Current Report was Item 9 (Regulation FD Disclosure).

Signatures

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

| | Ocean Energy, Inc.
| | ------------------

| | By:  
/s/ William L. Transier       William L. Transier 
       Executive Vice President and       Chief Financial Officer
       (Principal Financial Officer)
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Date:  October 31, 2001
| | -----------------------

| | By:  
/s/ Robert L. Thompson       Robert L. Thompson 
       Vice President and Controller
       (Principal Accounting Officer)
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Date:  October 31, 2001
| | -----------------------

21

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