<PAGE>
 
                                                                   EXHIBIT 99.1
                             LETTER OF TRANSMITTAL
 
                         KELLEY OIL & GAS CORPORATION
 
 Offer to Exchange all outstanding 10 3/8% Senior Subordinated Notes Due 2006,
      Series A, for 10 3/8% Senior Subordinated Notes Due 2006, Series B
 
 
            THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
      12:00 MIDNIGHT, NEW YORK CITY TIME, ON      , 1997, UNLESS EXTENDED
 
              Deliver to United States Trust Company of New York
                            (the "Exchange Agent")
 
     BY HAND DELIVERY:       BY OVERNIGHT COURIER:        BY REGISTERED OR
    United States Trust   United States Trust Company      CERTIFIED MAIL:
          Company                 of New York            United States Trust
        of New York              770 Broadway                  Company
       111 Broadway               13th Floor                 of New York
        Lower Level           New York, NY 10003               Box 843
    New York, NY 10005   Attn: Corporate Trust Service  Peter Cooper Station
   Attn: Corporate Trust            Window               New York, NY 10276
                                                        Attn: Corporate Trust

                           BY FACSIMILE TRANSMISSION
                       (FOR ELIGIBLE INSTITUTIONS ONLY):
                    United States Trust Company of New York
                                (212) 420-6152
                            Confirm: (800) 548-6565
                               For Information:
                                (800) 548-6565
 
  DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
 
  The undersigned hereby acknowledges receipt of the Prospectus dated      ,
1997 (the "Prospectus") of Kelley Oil & Gas Company (the "Company") and this
Letter of Transmittal, which together constitute the Company's offer (the
"Exchange Offer") to exchange an aggregate principal amount of $125,000,000 of
its 10 3/8% Senior Subordinated Notes Due 2006, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
the Prospectus is a part, for an equal principal amount of its outstanding 
10 3/8% Senior Subordinated Notes Due 2006, Series A (the "Outstanding Notes"),
in integral multiples of $1,000. The term "Expiration Date" means 12:00
midnight, New York City time, on      , 1997, unless the Company, in its sole
discretion, extends the Exchange Offer, in which case the term shall mean the
latest date and time to which the Exchange Offer is extended. Capitalized
terms used but not defined herein have the respective meanings given to them
in the Prospectus.
 
  YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS RELATING
TO THE PROCEDURE FOR TENDERING AND REQUESTS FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE
AGENT. QUESTIONS RELATING TO THE EXCHANGE OFFER AND REQUESTS FOR ASSISTANCE OR
FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE
DIRECTED TO THE COMPANY.
<PAGE>
 
  List below the Outstanding Notes to which this Letter of Transmittal
relates. If the space indicated below is inadequate, additional information
should be listed on a separately signed schedule affixed hereto.
 
 
               DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREBY
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND
ADDRESS(ES)
    OF
REGISTERED
 HOLDER(S)
EXACTLY AS
  NAME(S)                                    PRINCIPAL
 APPEAR(S)              AGGREGATE PRINCIPAL    AMOUNT
ON NOTE(S)              AMOUNT REPRESENTED   TENDERED**
  (PLEASE       NOTE      BY OUTSTANDING      (IF LESS
 FILL IN)     NUMBERS*         NOTES         THAN ALL)
-------------------------------------------------------
<S>          <C>        <C>               <C>
             --------      --------       -------------
             --------      --------       -------------
             --------      --------       -------------
             --------      --------       -------------
             --------      --------       -------------

             TOTAL
</TABLE>
-------------------------------------------------------------------------------
  * Need not be completed by book-entry Holders.
 ** Unless otherwise indicated, the Holder will be deemed to have tendered
    the full aggregate principal amount represented by such Outstanding
    Notes. All tenders must be in integral multiples of $1,000.
 
  This Letter of Transmittal is to be used (i) if certificates of Outstanding
Notes are to be tendered herewith, (ii) if delivery of Outstanding Notes is to
be made by book-entry transfer to an account maintained by the Exchange Agent
at The Depository Trust Company ("DTC"), pursuant to the procedures set forth
in "The Exchange Offer--Procedures for Tendering" in the Prospectus or (iii)
tender of the Outstanding Notes is to be made according to the guaranteed
delivery procedures described in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures". See Instruction 2. Delivery
of documents to a book-entry transfer facility does not constitute delivery to
the Exchange Agent. It is understood that participants in DTC's book-entry
system (the "Book-Entry Transfer Facility") will, in accordance with DTC's
Automated Tender Offer Program procedures and in lieu of physical delivery to
the Exchange Agent of a Letter of Transmittal, electronically acknowledge
receipt of, and agree to be bound by, the terms of this Letter of Transmittal.
 
  The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their
Outstanding Notes must complete this letter in its entirety.
 
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
    TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK-
    ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
 
Name of Tendering Institution__________________________________________________
 
[_] The Depository Trust Company
 
Account Number_________________________________________________________________
 
Transaction Code Number________________________________________________________
 
  Holders whose Outstanding Notes are not immediately available or who cannot
deliver their Outstanding Notes and all other documents required hereby to the
Exchange Agent on or prior to the Expiration Date must tender their
Outstanding Notes according to the guaranteed delivery procedure set forth in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures". See Instruction 2.
<PAGE>
 
[_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A
   NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
 
Name(s) of Registered Holder(s)________________________________________________
 
Date of Execution of Notice of Guaranteed Delivery_____________________________
 
Name of Eligible Institution that Guaranteed Delivery__________________________
 
If delivered by book-entry transfer:
 
 Account Number________________________________________________________________
 
 Transaction Code Number_______________________________________________________
 
[_]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
   COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
   THERETO.
 
Name___________________________________________________________________________
 
Address________________________________________________________________________
<PAGE>
 
                       SIGNATURES MUST BE PROVIDED BELOW
              PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
 
Ladies and Gentlemen:
 
  Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the
Outstanding Notes indicated above. Subject to, and effective upon, the
acceptance for exchange of such Outstanding Notes tendered hereby, the
undersigned hereby exchanges, assigns and transfers to, or upon the order of,
the Company all right, title and interest in and to such Outstanding Notes as
are being tendered hereby, including all rights to accrual of interest thereon
on and after the date of issuance of the Exchange Notes. The undersigned
hereby irrevocably constitutes and appoints the Exchange Agent the true and
lawful agent and attorney-in-fact of the undersigned (with full knowledge that
the Exchange Agent acts as the agent of the Company in connection with the
Exchange Offer) to cause the Outstanding Notes to be assigned, transferred and
exchanged. The undersigned represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Outstanding Notes and
to acquire Exchange Notes issuable upon the exchange of such tendered
Outstanding Notes, and that when the same are accepted for exchange, the
Company will acquire good and unencumbered title to the tendered Outstanding
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim.
 
  The undersigned represents to the Company that (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is the undersigned, and (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. If the undersigned or
the person receiving the Exchange Notes covered hereby is not a broker-dealer,
the undersigned represents that it is not engaged in, and does not intend to
engage in, a distribution of the Exchange Notes. If the undersigned is a
broker-dealer that will receive Exchange Notes, it represents that the
Outstanding Notes to be exchanged for the Exchange Notes were acquired as a
result of market-making activities or other trading activities. If the
undersigned or the person receiving the Exchange Notes covered hereby is a
broker-dealer that is receiving the Exchange Notes for its own account in
exchange for Outstanding Notes that were acquired as a result of market-making
activities or other trading activities, the undersigned acknowledges that it
or such other person will deliver a prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering a
prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The undersigned and
any such other person acknowledge that, if they are participating in the
Exchange Offer for the purpose of distributing the Exchange Notes, (i) they
cannot rely on the position of the staff of the Securities and Exchange
Commission enunciated in Exxon Capital Holdings Corporation (available May 13,
1988), Morgan Stanley & Co. Incorporated (available June 5, 1991) or similar
no-action letters and, in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with the resale transaction and (ii) failure to comply with
such requirements in such instance could result in the undersigned or any such
other person incurring liability under the Securities Act for which such
persons are not indemnified by the Company. If the undersigned or the person
receiving the Exchange Notes covered by this letter is an affiliate (as
defined under Rule 405 of the Securities Act) of the Company, the undersigned
represents to the Company that (i) the undersigned understands and
acknowledges that such Exchange Notes may not be offered for resale, resold or
otherwise transferred by the undersigned or such other person without
registration under the Securities Act or an exemption therefrom and (ii) the
undersigned or such other person will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
 
  The undersigned also warrants that it will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company
to be necessary or desirable to complete the exchange, assignment and transfer
of tendered Outstanding Notes or transfer ownership of such Outstanding Notes
on the account books maintained by the Book-Entry Transfer Facility. The
undersigned further agrees that acceptance of any tendered Outstanding Notes
by the Company and the issuance of Exchange Notes in exchange therefor shall
constitute performance in full by the Company of its obligations under the
Registration Agreement and that the Company shall have no further obligations
or liabilities thereunder for the registration of the Outstanding Notes or the
Exchange Notes.
<PAGE>
 
  The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer--Conditions". The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Outstanding Notes
tendered hereby and, in such event, the Outstanding Notes not exchanged will
be returned to the undersigned at the address shown below the signature of the
undersigned.
 
  All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered Outstanding Notes may be
withdrawn at any time prior to the Expiration Date.
 
  Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for all Exchange Notes delivered in
exchange for tendered Outstanding Notes, and any Outstanding Notes delivered
herewith but not exchanged, will be registered in the name of the undersigned
and shall be delivered to the undersigned at the address shown below the
signature of the undersigned. If an Exchange Note is to be issued to a person
other than the person(s) signing this Letter of Transmittal, or if the
Exchange Note is to be mailed to someone other than the person(s) signing this
Letter of Transmittal or to the person(s) signing this Letter of Transmittal
at an address different than the address shown on this Letter of Transmittal,
the appropriate boxes of this Letter of Transmittal should be completed. IF
OUTSTANDING NOTES ARE SURRENDERED BY HOLDER(S) THAT HAVE COMPLETED EITHER THE
BOX ENTITLED "SPECIAL REGISTRATION INSTRUCTIONS" OR THE BOX ENTITLED "SPECIAL
DELIVERY INSTRUCTIONS" IN THIS LETTER OF TRANSMITTAL, SIGNATURE(S) ON THIS
LETTER OF TRANSMITTAL MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (SEE
INSTRUCTION 4).
<PAGE>
 
 
 
 
 
 
  SPECIAL REGISTRATION INSTRUCTIONS          SPECIAL DELIVERY INSTRUCTIONS
         (SEE INSTRUCTION 5)                      (SEE INSTRUCTION 5)
 
                                            To be completed ONLY if the
   To be completed ONLY if the            Exchange Notes are to be sent to
 Exchange Notes are to be issued in       someone other than the undersigned,
 the name of someone other than the       or to the undersigned at an address
 undersigned.                             other than that shown under
                                          "Description of Outstanding Notes
                                          Tendered Hereby."
 
 Issue Exchange Note to:
 
 
 Name: ______________________________
                                          Mail Exchange Note to:
 
 
 Address: ___________________________     Name: ______________________________
 
 
 ------------------------------------     Address:____________________________
 
      (Please Print or Type)
                                          ------------------------------------
 
                                                 (Please Print or Type)
 
 
 
 
              REGISTERED HOLDER(S) OF OUTSTANDING NOTES SIGN HERE
               (In addition, complete Substitute Form W-9 Below)
 
 X __________________________________________________________________________
 
 X __________________________________________________________________________
                     (Signature(s) of Registered Holder(s))
 
   (Must be signed by registered holder(s) exactly as name(s) appear(s) on
 the Outstanding Notes or on a security position listing as the owner of the
 Outstanding Notes or by person(s) authorized to become registered holder(s)
 by properly completed bond powers transmitted herewith. If signature is by
 attorney-in-fact, trustee, executor, administrator, guardian, officer of a
 corporation or other person acting in a fiduciary capacity, please provide
 the following information.
 (Please Print or Type):
 
 Name and Capacity (full title): ____________________________________________
 Address (including zip): ___________________________________________________
 Area Code and Telephone Number: ____________________________________________
 Dated: _____________________________________________________________________
 
             SIGNATURE GUARANTY (If required--See Instruction 4)
 
 Authorized Signature: ______________________________________________________
                              (Signature of Representative of Signature
                              Guarantor)
 Name and Title: ____________________________________________________________
 Name of Firm: ______________________________________________________________
 Area Code and Telephone Number: ____________________________________________
                                             (Please Print or Type)
 Dated: _____________________
<PAGE>
 
             PAYOR'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
             THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
 
  Please provide your social security number or other taxpayer identification
number on the following Substitute Form W-9 and certify therein that you are
not subject to backup withholding.
 
                        PART 1--Please provide your
                        TIN in the box at right and
                        certify by signing and dating
                        below.                           --------------------
 
                                                           Social Security
 SUBSTITUTE             PART 2--CERTIFICATION--Under          Number or
 FORM W-9               penalties of perjury, I                Employer
                        certify (1) that the number         Identification
                        shown on this form is my                Number
                        correct taxpayer                -----------------------
                        identification number and (2)
                        that I am not subject to
                        backup withholding under the
                        provisions of Section
                        3406(a)(1)(C) of the Internal
                        Revenue Code either because
                        (a) I have not been notified
                        that I am subject to backup
                        withholding as a result of
                        failure to report all
                        interest or dividends or (b)
                        the Internal Revenue Service
                        has notified me that I am no
                        longer subject to backup
                        withholding.
 
 DEPARTMENT OF THE
 TREASURY
 INTERNAL REVENUE
 SERVICE                                                       PART 3--
 
 
 PAYOR'S REQUEST FOR                                      Exempt from backup
 TAXPAYER                                                   withholding [_]
 IDENTIFICATION                                         -----------------------
 NUMBER ("TIN")
 
                                                               PART 4--
 
                                                           Awaiting TIN [_]
 
                        Signature ______________Dated:
 
--------------------------------------------------------------------------------
 
 NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
       WITHHOLDING OF 31% OF ANY INTEREST OR OTHER REPORTABLE PAYMENTS.
       YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
       PART 4 OF SUBSTITUTE FORM W-9.
--------------------------------------------------------------------------------
 
               CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
 
   I certify under penalties of perjury that a taxpayer identification
 number has not been issued to me, and either (a) I have mailed or delivered
 an application to receive a taxpayer identification number to the
 appropriate Internal Revenue Service Center or Social Security
 Administration Office, or (b) I intend to mail or deliver an application in
 the near future. I understand that if I do not provide a taxpayer
 identification number within 60 days, 31% of all reportable payments made
 to me thereafter will be withheld until I provide a number. Moreover, I
 understand that during this 60-day period, 31% of all reportable interest
 payments made to me will be withheld commencing 7 business days after the
 payor receives this Certificate of Awaiting Tax Identification Number and
 terminating on the date I provide a certified TIN to the payor.
 
 --------------------------------------      ------------------------------
               Signature                                  Date
 
<PAGE>
 
                                 INSTRUCTIONS
 
                         FORMING PART OF THE TERMS AND
                       CONDITIONS OF THE EXCHANGE OFFER
 
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES.
 
  All physically delivered Outstanding Notes or any confirmation of a book-
entry transfer to the Exchange Agent's account at the Book-Entry Transfer
Facility of Outstanding Notes tendered by book-entry transfer, as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile thereof, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at any of its addresses
set forth herein on or prior to the Expiration Date (as defined in the
Prospectus). THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE
OUTSTANDING NOTES AND ANY OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK
OF THE HOLDER, AND EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, BE USED.
 
  No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal
(or facsimile thereof), shall waive any right to receive notice of the
acceptance of the Outstanding Notes for exchange.
 
  DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH HEREIN, OR INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN THE ONES SET FORTH HEREIN, WILL NOT CONSTITUTE A
VALID DELIVERY.
 
  2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their
Outstanding Notes and (i) whose Outstanding Notes are not immediately
available or (ii) who cannot deliver their Outstanding Notes, this Letter of
Transmittal or any other required documents to the Exchange Agent (or complete
the procedures for book-entry transfer) prior to the Expiration Date, may
effect a tender if:
 
    (a) the tender is made through a member firm of a registered national
  securities exchange of the National Association of Securities Dealers,
  Inc., a commercial bank or trust company having an office or correspondent
  in the United States or an "eligible guarantor institution" within the
  meaning of Rule 17 Ad-15 under the Securities Exchange Act of 1934, as
  amended (an "Eligible Institution");
 
    (b) prior to the Expiration Date, the Exchange Agent receives from such
  Eligible Institution a properly completed and duly executed Notice of
  Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
  setting forth the name and address of the Holder, the registration
  number(s) of such Outstanding Notes and the principal amount of Outstanding
  Notes tendered, stating that the tender is being made thereby and
  guaranteeing that, within five New York Stock Exchange trading days after
  the Expiration Date, this Letter of Transmittal (or facsimile thereof),
  together with the certificate(s) representing the Outstanding Notes (or a
  confirmation of book-entry transfer of such Outstanding Notes into the
  Exchange Agent's account at the Book-Entry Transfer Facility) and any other
  documents required by this Letter of Transmittal, will be deposited by the
  Eligible Institution with the Exchange Agent; and
 
    (c) such properly completed and executed Letter of Transmittal (or
  facsimile thereof), as well as all tendered Outstanding Notes in proper
  form for transfer (or a confirmation of book-entry transfer of such
  Outstanding Notes into the Exchange Agent's account at the Book-Entry
  Transfer Facility) and all other documents required by this Letter of
  Transmittal, are received by the Exchange Agent within five New York Stock
  Exchange trading days after the Expiration Date.
 
  Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above. Any Holder who wishes to
tender Outstanding Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery relating to such Outstanding Notes prior to the Expiration
Date. Failure to complete the guaranteed delivery procedures outlined above
will not, of itself, affect the validity or effect a revocation of any Letter
of Transmittal form properly completed and executed by a Holder who attempted
to use the guaranteed delivery procedures.
 
<PAGE>
 
3. PARTIAL TENDERS; WITHDRAWALS.
 
  If less than the entire principal amount of Outstanding Notes evidenced by a
submitted certificate is tendered, the tendering Holder should fill in the
principal amount tendered in the column entitled "Principal Amount Tendered"
of the box entitled "Description of Outstanding Notes Tendered Hereby". A
newly issued Outstanding Note for the principal amount of Outstanding Notes
submitted but not tendered will be sent to such Holder as soon as practicable
after the Expiration Date. All Outstanding Notes delivered to the Exchange
Agent will be deemed to have been tendered in full unless otherwise indicated.
Tenders of Outstanding Notes will be accepted only in integral multiples of
$1,000.
 
  Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date, after which tenders of Outstanding
Notes are irrevocable. To be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must be timely received by the Exchange
Agent. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii)
identify the Outstanding Notes to be withdrawn (including the note number(s)
and principal amount of such Outstanding Notes, or, in the case of Outstanding
Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
Holder in the same manner as the original signature on this Letter of
Transmittal (including any required signature guaranties) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the
name of the person withdrawing the tender and (iv) specify the name in which
any such Outstanding Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Outstanding Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Outstanding Notes so withdrawn are validly retendered. Any
Outstanding Notes that have been tendered but not accepted for exchange, will
be returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer.
 
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS;
 GUARANTY OF SIGNATURES.
 
  If this Letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of the Outstanding Notes tendered hereby, the signature
must correspond with the name(s) as written on the face of the certificates
without alteration or enlargement or any change whatsoever. If this Letter of
Transmittal is signed by a participant in the Book-Entry Transfer Facility,
the signature must correspond with the name as it appears on the security
position listing as the holder of the Outstanding Notes.
 
  If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
 
  If a number of Outstanding Notes registered in different names are tendered,
it will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Outstanding
Notes.
 
  Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the
Outstanding Notes tendered hereby are tendered (i) by a registered Holder who
has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
 
  If this Letter of Transmittal is signed by the registered Holder or Holders
of Outstanding Notes (which term, for the purposes described herein, shall
include a participant in the Book-Entry Transfer Facility whose name appears
on a security listing as the holder of the Outstanding Notes) listed and
tendered hereby, no endorsements of the tendered Outstanding Notes or separate
written instruments of transfer or exchange are required. In any other case,
the registered Holder (or acting Holder) must either properly endorse the
Outstanding Notes or
<PAGE>
 
transmit properly completed bond powers with this Letter of Transmittal (in
either case, executed exactly as the name(s) of the registered Holder(s)
appear(s) on the Outstanding Notes, and, with respect to a participant in the
Book-Entry Transfer Facility whose name appears on a security position listing
as the owner of Outstanding Notes, exactly as the name of the participant
appears on such security position listing), with the signature on the
Outstanding Notes or bond power guaranteed by an Eligible Institution (except
where the Outstanding Notes are tendered for the account of an Eligible
Institution).
 
  If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
 
5. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
 
  Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the Exchange
Notes or substitute Outstanding Notes for principal amounts not tendered or
not accepted for exchange are to be issued (or deposited), if different from
the names and addresses or accounts of the person signing this Letter of
Transmittal. In the case of issuance in a different name, the employer
identification number or social security number of the person named must also
be indicated and the tendering Holder should complete the applicable box.
 
  If no instructions are given, the Exchange Notes (and any Outstanding Notes
not tendered or not accepted) will be issued in the name of and sent to the
acting Holder of the Outstanding Notes or deposited at such Holder's account
at the Book-Entry Transfer Facility.
 
6. TRANSFER TAXES.
 
  The Company will pay all transfer taxes, if any, applicable to the transfer
and exchange of Outstanding Notes to it or its order pursuant to the Exchange
Offer. If, however, certificates representing the Exchange Notes or the
Outstanding Notes for the principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any other reason, other than the transfer and
exchange of Outstanding Notes to the Company or its order pursuant to the
Exchange Offer, the amount of any such transfer taxes (whether imposed on the
registered Holder or any other person) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exception
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering Holder.
 
  Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Outstanding Notes listed in this Letter
of Transmittal.
 
7. WAIVER OF CONDITIONS.
 
  The Company reserves the absolute right to waive, in whole or in part, any
of the conditions to the Exchange Offer set forth in the Prospectus.
 
8. MUTILATED, LOST, STOLEN OR DESTROYED OUTSTANDING NOTES.
 
  Any Holder whose Outstanding Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
<PAGE>
 
9. REQUEST FOR ASSISTANCE OR ADDITIONAL COPIES.
 
  Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent at the address and telephone number(s) set
forth above. In addition, all questions relating to the Exchange Offer, as
well as requests for assistance or additional copies of the Prospectus and
this Letter of Transmittal, may be directed to the Company at 601 Jefferson,
Suite 1100, Houston, Texas 77002, Attention: Investor Relations Manager
(telephone: (713) 652-5200).
 
10. VALIDITY AND FORM.
 
  All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Outstanding Notes and withdrawal of tendered
Outstanding Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company reserves the
absolute right to reject any and all Outstanding Notes not properly tendered
or any Outstanding Notes the Company's acceptance of which would, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
right to waive any defects, irregularities or conditions of tender as to
particular Outstanding Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Outstanding Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to tenders
of Outstanding Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Outstanding Notes will not be deemed to have been made until such
defects or irregularities have been cured or waived. Any Outstanding Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holders as soon as practicable
following the Expiration Date.
 
                           IMPORTANT TAX INFORMATION
 
  Under federal income tax law, a holder receiving interest on Exchange Notes
is required to provide the payor of interest with such holder's correct TIN on
Substitute Form W-9 herein. If such holder is an individual, the TIN is the
holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the holder has not been issued a
TIN and has applied for a number or intends to apply for a number in the near
future. The payor is required to report to the Internal Revenue Service the
amount of reportable interest paid to the holder on Exchange Notes. If the
payor is not provided with the correct TIN, the holder may be subject to a $50
penalty imposed by the Internal Revenue Service. In addition, interest
payments that are made to such holder on Exchange Notes may be subject to
backup withholding.
 
  Certain holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. For a foreign holder to qualify as an
exempt recipient, that holder must submit to the payor of interest a properly
completed Internal Revenue Service Form W-8, signed under penalties of
perjury, attesting to that holder's exempt status. Such forms can be obtained
from the Exchange Agent.
 
  If backup withholding applies, the payor is required to withhold 31% of any
amounts otherwise payable to the holder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be applied for with the
Internal Revenue Service.
 
<PAGE>
 
PURPOSE OF SUBSTITUTE FORM W-9
 
  To prevent backup withholding on interest payments to be made to a holder
with respect to Exchange Notes, the holder is required to notify the payor of
his or her correct TIN by completing the form herein certifying that the TIN
provided on Substitute Form W-9 is correct (or that such holder is awaiting a
TIN) and that (i) such holder has not been notified by the Internal Revenue
Service that he or she is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified such holder that he or she is no longer subject to backup
withholding.
 
WHAT NUMBER TO GIVE THE PAYOR
 
  Each holder is required to give the payor the social security number or
employer identification number of the record holder(s) of the Exchange Notes.
If Exchange Notes are in more than one name or are not in the name of the
actual holder, consult the attached Guidelines for Certifying TIN for
additional guidance on which number to report.
 
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
 
  If the holder of Exchange Notes has not been issued a TIN and has applied
for a number or intends to apply for a number in the near future, write
"Applied For" in the space for the TIN on Substitute Form W-9, check the box
in Part 4, sign and date the form and the Certificate of Awaiting Taxpayer
Identification Number and return them to the Exchange Agent. If such
certificate is completed and the payor of interest on the Exchange Notes is
not provided with the TIN within 60 days, the payor will withhold 31% of all
payments made thereafter until a TIN is provided to the payor. Moreover, even
if a TIN is provided within such 60-day period, the payor is required to
withhold 31% of any reportable interest payments made to the payee 7 days
following receipt by the payor of the Certificate of Awaiting Tax
Identification Number. The payor must refund these amounts withheld if it
receives the payee's certified TIN within the 60-day period and the payee was
not otherwise subject to backup withholding during the period.
 
  IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE THEREOF
(TOGETHER WITH OUTSTANDING NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND
ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
<PAGE>
 
                         KELLEY OIL & GAS CORPORATION
 
                         NOTICE OF GUARANTEED DELIVERY
                    (NOT TO BE USED FOR SIGNATURE GUARANTY)
 
  As set forth in the Prospectus dated      , 1997 (the "Prospectus") of
Kelley Oil & Gas Corporation (the "Company") in the section entitled "The
Exchange Offer--Procedures for Tendering" and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") and Instruction 2 thereto, this form
or one substantially equivalent hereto must be used to accept the Exchange
Offer if certificates representing the Company's 10 3/8% Senior Subordinated
Notes Due 2006, Series A (the "Outstanding Notes") are not immediately
available to the Holder thereof or time will not permit the Holder to deliver
its Outstanding Notes or other required documents to the Exchange Agent, or to
complete the procedures for book-entry transfer, before the Expiration Date.
Capitalized terms used but not defined herein have the respective meanings
given to them in the Prospectus. This form may be delivered by hand or sent by
overnight courier, facsimile transmission or registered or certified mail to
the Exchange Agent and must be received by the Exchange Agent before 12:00
midnight, New York City time on       , 1997.
 
                  To United States Trust Company of New York
                            (the "Exchange Agent")
 
     BY HAND DELIVERY:       BY OVERNIGHT COURIER:        BY REGISTERED OR
    United States Trust   United States Trust Company      CERTIFIED MAIL:
          Company                 of New York            United States Trust
        of New York              770 Broadway                  Company
       111 Broadway               13th Floor                 of New York
        Lower Level           New York, NY 10003               Box 843
    New York, NY 10005   Attn: Corporate Trust Service  Peter Cooper Station
   Attn: Corporate Trust            Window               New York, NY 10276
                                                        Attn: Corporate Trust
 
                           BY FACSIMILE TRANSMISSION
                       (FOR ELIGIBLE INSTITUTIONS ONLY):
                    United States Trust Company of New York
                                (212) 420-6152
                            Confirm: (800) 548-6565
 
                               FOR INFORMATION:
                                (800) 548-6565
 
  DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
 
  THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTY MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL FOR GUARANTY OF SIGNATURES.
<PAGE>
 
Ladies and Gentlemen:
 
  The undersigned hereby tender(s) to Kelley Oil & Gas Corporation, the
principal amount of the Outstanding Notes listed below, upon the terms of and
subject to the conditions set forth in the Prospectus and the related Letter of
Transmittal and the instructions thereto (which together constitute the
"Exchange Offer"), receipt of which is hereby acknowledged, pursuant to the
guaranteed delivery procedures set forth in the Prospectus, as follows:
 
<TABLE>
<CAPTION>
                              
                       AGGREGATE PRINCIPAL            PRINCIPAL AMOUNT TENDERED
NOTE NOS.               AMOUNT OF NOTE(S)       (MUST BE IN INTEGRAL MULTIPLES OF 1,000)
-------------------  -------------------------  ----------------------------------------
<S>                  <C>                        <C> 
-------------------  -------------------------  ----------------------------------------
-------------------  -------------------------  ----------------------------------------
-------------------  -------------------------  ----------------------------------------
-------------------  -------------------------  ----------------------------------------
</TABLE> 
 
The Book-Entry Transfer                                 Sign Here
Facility Account Number (if the           X
Outstanding Notes                         -------------------------------------
will be tendered by book-entry
transfer)
                                          X
                                          -------------------------------------
-------------------------------                       Signature(s)
        Account Number
                                          -------------------------------------
-------------------------------               Number and Street or P.O. Box
   Principal Amount Tendered
(must be in integral multiples            -------------------------------------
          of $1,000)                              City, State, Zip Code
 
                                          Dated:                         , 1997
                                                -------------------------
<PAGE>
 
                                    GUARANTY
 
                    (NOT TO BE USED FOR SIGNATURE GUARANTY)
 
  The undersigned, a member firm of a registered national securities exchange,
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States,
guarantees (a) that the above named person(s) "own(s)" the principal amount of
10 3/8% Senior Subordinated Notes due 2006, Series A, of Kelley Oil & Gas
Corporation (the "Outstanding Notes") tendered hereby within the meaning of
Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (b) that such
tender of such Outstanding Notes complies with Rule 14e-4 and (c) to deliver to
the Exchange Agent the certificates representing the Outstanding Notes tendered
hereby or confirmation of book-entry transfer of such Outstanding Notes into
the Exchange Agent's account at The Depository Trust Company, in proper form
for transfer, together with the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guaranties
and any other required documents, within five New York Stock Exchange trading
days after the Expiration Date.
 
Name of Firm __________________           Title________________________________
 
 
Authorized Signature __________           Address______________________________
                                                                        Zip Code
 
 
Name __________________________
     Please Type or Print                 Area Code and Telephone No.__________
 
                                          Dated:_________________________, 1997
 
     NOTE: DO NOT SEND ORIGINAL NOTES WITH THIS FORM. ORIGINAL NOTES SHOULD
                   BE SENT ONLY WITH A LETTER OF TRANSMITTAL.