Ocean Energy, Inc.
           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.

     On March 30, 1999,  Ocean Energy,  Inc. merged with and into Seagull Energy
Corporation  (the "Seagull  Merger").  The  resulting  company was renamed Ocean
Energy, Inc. The merger was treated for accounting purposes as an acquisition of
Seagull by Ocean in a purchase  business  transaction.  As such,  the  financial
results  presented here are those of Ocean Energy,  Inc. on a stand-alone  basis
for the first  quarter of 1999 and of the combined  company for the remainder of
1999, compared to Ocean's results for 1998 and 1997 on a stand-alone basis ("Old
Ocean").

     The  Company's  accompanying   Consolidated  Financial  Statements  contain
detailed  information  that  should  be  referred  to in  conjunction  with  the
following discussion.

<TABLE>
<CAPTION>
                              Results Of Operations
                             (Amounts in Thousands)

                                                                           Year Ended
                                                                          December 31,
                                                        --------------------------------------------------
                                                            1999               1998              1997
                                                        --------------    ---------------    -------------
<S>                                                     <C>               <C>                <C>
Oil and gas operations:
   Revenues:
     Natural gas.................................        $  323,345       $   221,973        $   214,100
     Oil and NGLs................................           412,173           300,177            335,094
                                                        --------------    ---------------    -------------
                                                            735,518           522,150            549,194
                                                        --------------    ---------------    -------------

   Operating expenses............................           216,981           185,076            139,349
   Depreciation, depletion and amortization......           309,699           288,164            243,640
   Impairment of oil and gas properties..........            46,403           539,915                  -
                                                        --------------    ---------------    -------------
    Operating profit (loss)......................           162,435          (491,005)           166,205
Corporate........................................           (29,689)          (24,950)           (20,046)
                                                        --------------    ---------------    -------------
   Total operating profit (loss).................        $  132,746        $ (515,955)        $  146,159
                                                        ==============    ===============    =============
</TABLE>

      With the Seagull  Merger,  the  Company  gained new  operations  in Egypt,
Russia and Indonesia and expanded its  operations in the U.S. and Cote d'Ivoire.
These  expanded  operations  combined  with the  recovery of world crude oil and
natural gas prices  experienced  during 1999 resulted in a $213 million increase
in revenues.  During this  period,  the Company  initiated  various cost cutting
measures that reduced operating expenses per unit of production by $0.26 per BOE
to $4.12 per BOE. As discussed below,  the Company  recorded  impairments of oil
and gas properties in the amount of $46 million during 1999.  These  impairments
related   primarily  to  the  sale  of  the  Canadian   subsidiary  and  to  the
discontinuance  of certain  international  operations.  During  1998 the Company
recognized  total noncash  impairments in the amount of $540 million pursuant to
the ceiling  limitation  required by the full cost method of accounting  for oil
and gas properties.  The Company had no such impairments in 1999 and 1997. These
factors  combined to improve total operating profit by $649 million for the year
ended December 31, 1999 as compared to 1998.

      For the year ended December 31, 1999, the Company had net income excluding
special  items of $50  million  or $0.33 per  basic  share,  compared  to a loss
excluding  special  items of $40  million  or  $0.39  per  basic  share in 1998.
Including the effect of the various special items,  net loss available to common
shareholders  in 1999 was $47  million or $0.31 per basic  share,  compared to a
loss of $407 million or $4.04 per basic share in 1998.

     The  following is a  reconciliation  of income  (loss)  (excluding  special
items) to net loss to common shareholders:

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                         --------------------------------------------
                                                                1999                    1998
                                                         --------------------    --------------------
                                                         --------------------    --------------------
<S>                                                     <C>                      <C>
Income (Loss) (Excluding Special Items)..........          $      49,850         $         (39,700)

Effect of Special Items, Net of Income Tax:
   Impairment of Oil and Gas Properties..........                (43,168)                 (334,747)
   Merger Expenses...............................                (31,498)                  (32,886)
   Extraordinary Loss............................                (23,413)                        -
   Income from Discontinued Operations...........                  1,127                         -
                                                         --------------------    --------------------
                                                                 (96,952)                 (367,633)
                                                         --------------------    --------------------
Net Loss to Common Shareholders..................          $     (47,102)        $        (407,333)
                                                         ====================    ====================
</TABLE>

      In addition,  during 1999 the Company  embarked on a program to reduce its
high debt levels and reduce all-in costs.  To those ends,  Ocean  completed over
$700  million in asset sales,  most  notably the sales of the Arkoma  assets for
$231 million and ENSTAR for $287 million,  and reduced  all-in costs from $13.27
per BOE for 1998 to $12.57 per BOE for 1999.

      For the year ended December 31, 1998, the Company reported a net operating
loss of $516 million  compared to net operating profit of $146 million for 1997.
Due
                                       22
<PAGE>

to the significant  deterioration  of commodity prices which occurred during
1998 the Company  experienced a 35% decline in realized  crude oil prices and an
18% decline in natural gas prices before hedging activities. The impact of lower
commodity  prices was partially offset by a 25% increase in production over 1997
volumes.  The  operating  loss for 1998 also  included  the  effects  of noncash
impairments totaling $540 million.

                             Oil and Gas Operations

     Revenues - Ocean operates in highly competitive markets where energy prices
fluctuate  significantly.  As  oil  and  gas  prices  fluctuate,  so  too do the
Company's  revenues,  results of operations and cash flows.  Oil prices declined
steadily  through out 1997,  1998 and the first quarter of 1999, with oil prices
reaching multi-year lows in some markets.  Natural gas prices, despite temporary
increases,  also decreased over this time frame. Beginning in the second quarter
of 1999, oil and natural gas prices have increased dramatically.

            Energy Prices
         "GRAPHICS OMITTED"

                 NYMEX      NYMEX
               Oil Prices  Gas Prices
       Jan 97    25.18       4.25
       Feb 97    22.17       2.87
       Mar 97    20.97       1.88
       Apr 97    19.73       1.90
       May 97    20.87       2.10
       Jun 97    19.22       2.33
       Jul 97    19.66       2.22
       Aug 97    19.95       2.16
       Sep 97    19.78       2.51
       Oct 97    21.28       3.22
       Nov 97    20.22       3.51
       Dec 97    18.32       2.68
       Jan 98    16.73       2.27
       Feb 98    16.08       2.04
       Mar 98    15.04       2.23
       Apr 98    15.46       2.33
       May 98    14.93       2.29
       Jun 98    13.67       2.07
       Jul 98    14.09       2.35
       Aug 98    13.38       1.95
       Sep 98    14.97       1.75
       Oct 98    14.42       2.13
       Nov 98    13.04       2.13
       Dec 98    11.31       2.14
       Jan 99    12.49       1.81
       Feb 99    12.02       1.75
       Mar 99    14.68       1.69
       Apr 99    17.30       1.85
       May 99    17.77       2.33
       Jun 99    17.92       2.20
       Jul 99    20.10       2.27
       Aug 99    21.28       2.57
       Sep 99    23.79       2.96
       Oct 99    22.67       2.61
       Nov 99    24.77       3.04
       Dec 99    26.09       2.17

     Natural gas revenues  increased  $101 million,  or 45%, to $323 million for
the year ended December 31, 1999,  from $222 million for the year ended December
31, 1998. This increase is primarily due to production from properties  acquired
in the  Seagull  Merger and to higher  average  gas prices  realized  during the
period.  The average  realized price for natural gas before  hedging  activities
increased  10% to $2.08 per Mcf for 1999 as  compared  to $1.89 for 1998.  Daily
natural gas  production  for 1999 was 422.5  MMcf,  an increase of 31% over 1998
volumes due primarily to the acquisition of producing  properties in the Seagull
Merger, partially offset by the sale of the Canadian subsidiary.

     In the low oil price  environment of early 1999,  the Company  entered into
collars  with  floors of $12.00 and $15.00  per barrel and  ceilings  of $15.00,
$18.85  and  $19.00 per  barrel on a portion  of the  Company's  oil  production
through the remainder of 1999. With rapidly escalating oil prices, the Company's
derivative  contracts decreased oil and gas revenues by $52 million for the year
ended 1999. For the years ended December 31, 1998 and 1997, oil and gas revenues
were increased (decreased) by $25 million and $(1) million,  respectively,  as a
result of derivative  contracts.  Weighted average oil prices including  hedging
activities  were $15.27,  $13.21 and $18.54,  respectively,  for the years ended
December 31, 1999, 1998, and 1997. Weighted average natural gas prices including
hedging  activities  were $2.10,  $1.89 and $2.28,  respectively,  for the years
ended December 31, 1999, 1998, and 1997.

     Natural gas revenues increased $8 million,  or 4%, to $222 million for 1998
from $214 million for 1997, the result of increased  worldwide  production  more
than  offsetting  the  decline in prices  received  for gas.  Daily  natural gas
production  for 1998 was 321.4 MMcf,  an  increase of 25% over 1997  volumes due
primarily  to  increased  production  in the Gulf of Mexico,  Cote  d'Ivoire and
Canada and the impact of  acquisitions,  partially  offset by property sales and
natural  production  declines in North America.  The average  realized price for
natural gas before hedging activities decreased 18% to $1.89 per Mcf for 1998 as
compared to $2.30 for 1997.

     Oil revenues  increased $112 million,  or 37%, to $412 million for the year
ended December 31, 1999, from $300 million for 1998. This increase is the result
of production from properties  acquired in the Seagull Merger and an increase in
the average  realized oil price during 1999. The average  realized price for oil
before  hedging  activities  increased 43% to $17.32 for 1999 compared to $12.13
for 1998.  Daily oil production  increased 19% to 73,933 Bbl in 1999 as compared
to 62,269 Bbl for 1998.

     Oil revenues  decreased $35 million,  or 10%, to $300 million for 1998 from
$335 million for 1997, as a result of the decline in the average  realized price
received partially offset by an increase in worldwide oil production.  Daily oil
production  increased  26% to  62,269  MBbls  for 1998 as  compared  to 1997 due
primarily  to  increased  oil  production  in the Gulf of Mexico and

                                       23
<PAGE>

Equatorial   Guinea.  The  average  sales  price  for  oil  before  hedging
activities decreased 35% to $12.13 for 1998 compared to $18.54 for 1997.

<TABLE>
<CAPTION>

                               Operating Data (1)
                                                                  Year Ended December 31,
                                                  -------------------------------------------------------
                                                        1999              1998                1997
                                                  ----------------  -----------------   -----------------
<S>                                               <C>               <C>                 <C>
Net Daily Natural Gas Production (MMcf):
   Domestic ...................................           375.9              272.2              222.3
   Canada (Sold in April 1999).................            10.5               27.8               20.9
   Cote d'Ivoire ..............................            30.3               21.4               13.6
   Egypt.......................................             0.7                -                  -
   Indonesia ..................................             5.1                -                  -
                                                  ----------------  -----------------   -----------------
   Total.......................................           422.5              321.4              256.8
                                                  ================  =================   =================

Average Natural Gas Prices ($ per Mcf):
   Domestic....................................      $     2.11         $     1.96        $      2.41
   Canada (Sold in April 1999).................      $     1.54         $     1.37        $      1.40
   Cote d'Ivoire ..............................      $     1.68         $     1.64        $      1.81
   Egypt.......................................      $     3.66         $     -           $         -
   Indonesia ..................................      $     2.37         $     -           $         -
   Weighted Average............................      $     2.08         $     1.89        $      2.30
Average Natural Gas Prices Including Hedging
   Activities ($ per Mcf)......................      $     2.10         $     1.89        $      2.28

Net Daily Oil and NGL Production (Bbl):
   Domestic ...................................          37,076             40,165             33,312
   Canada (Sold in April 1999).................             351              1,234              1,203
   Cote d'Ivoire ..............................           4,835              2,960              2,814
   Equatorial Guinea...........................          20,062             17,910             12,200
   Egypt ......................................           8,217                  -                  -
   Russia......................................           3,319                  -                  -
   Indonesia...................................              73                  -                  -
                                                  ----------------  -----------------   -----------------
   Total.......................................          73,933             62,269             49,529
                                                  ================  =================   =================

Average Oil and NGL Prices ($ per Bbl) :
   Domestic ...................................     $    16.94         $     12.46        $     18.88
   Canada (Sold in April 1999).................     $    11.27         $     11.78        $     17.97
   Cote d'Ivoire ..............................     $    18.24         $     12.56        $     18.35
   Equatorial Guinea...........................     $    17.91         $     11.35        $     17.71
   Egypt.......................................     $    19.32         $         -        $         -
   Russia......................................     $    12.34         $         -        $         -
   Indonesia...................................     $    16.14         $         -        $         -
   Weighted Average............................     $    17.32         $     12.13        $     18.54
Average Oil and NGL Prices Including
   Hedging Activities ($ per Bbl)..............     $    15.27         $     13.21        $     18.54
</TABLE>

(1)  The Company's Egyptian, Russian and Indonesian operations, and a portion of
     its domestic and Cote  d'Ivoirian  operations  were acquired as a result of
     the Seagull Merger on March 30, 1999.

     Operating  Expenses - Operating  expenses per BOE decreased 6% to $4.12 per
BOE for the year ended  December  31,  1999,  compared to $4.38 per BOE in 1998.
Total operating expenses increased $32 million,  or 17%, to $217 million for the
year ended December 31, 1999 from $185 million for 1998. This increase primarily
resulted from a 25% increase in  production  volumes which was the result of the
acquisition of additional producing properties in the Seagull Merger, as well as
from increased production from existing properties.

     Total operating expenses increased $46 million, or 33%, to $185 million for
1998 from $139  million for 1997.  This  increase  primarily  results from a 25%
increase in production  volumes and from the timing of workover and  maintenance
activities and the impact of property acquisitions. Operating expenses increased
$0.24 per BOE,  or 6%, to $4.38 per BOE for 1998,  from  $4.14 per BOE for 1997.
This unit increase is primarily the result of the timing of certain workover and
maintenance activities.

     Depreciation,  Depletion and Amortization Expense - Depreciation, depletion
and  amortization  (DD&A)  expense  per BOE  related  to oil and gas  operations
decreased  $0.94, or 14%, to $5.88 per BOE for the year ended December 31, 1999,
from $6.82 per BOE for 1998.  This  variance is  primarily  attributable  to the
effect of the non-cash  impairments of oil and gas properties  recognized by the
Company in 1998.  Total  DD&A for oil and gas  operations  increased  8% to $310
million for the year ended  December 31, 1999  compared to $288 million for 1998
primarily due to the increase in production.

     DD&A expense  related to oil and gas operations  increased $44 million,  or
18%, to $288  million for 1998,  from $244  million for 1997.  This  variance is
primarily  attributable  to the  Company's  25%  increase in  production  and to
related  current and future  capital costs from the 1997 and 1998 Gulf of Mexico
and international drilling programs and acquisitions. Oil and gas DD&A decreased
$0.41 per BOE,  or 6%, to $6.82  per BOE for 1998,  from  $7.23 per BOE for 1997
because of an increase  in proved  reserves  resulting  from such  programs  and
acquisitions.

     Impairment of Oil and Gas  Properties - During 1999,  the Company  recorded
impairments of oil and gas properties of $46 million.  These impairments related
primarily to the sale of the Canadian  subsidiary and to the  discontinuance  of
operations in Bangladesh  and other  international

                                       24
<PAGE>

locations.  During 1998, the Company recognized  impairments of oil and gas
properties in the amount of $540 million pursuant to the ceiling limitation
required by the full cost method of accounting for oil and gas  properties.
The 1998  impairments  were the result of the precipitous  decline in world
crude oil prices experienced during the second and fourth quarters of 1998.
The Company had no such ceiling limitations in 1999 or 1997.

     Outlook - At year-end  1999,  the Company was producing  approximately  397
Mmcf per day of  natural  gas and 74 Mbbl per day of crude  oil  worldwide.  The
Company  has  targeted a 10%  increase in  production  for 2000 based on the low
point  for 1999 and  all-in  costs of $12.00  per BOE.  These  estimates  assume
closure of the Company's  East Bay sale at the end of the first quarter 2000. No
other material acquisition or divestiture  activities are expected at this time.
While oil prices have been at or near multi-year  highs in recent months,  there
can be no assurance that current price levels will continue.  Oil and gas prices
have fluctuated  significantly in recent years in response to numerous economic,
political and  environmental  factors,  and the Company  expects that  commodity
prices  will  continue to  fluctuate  significantly  in the  future.  Changes in
commodity prices could  significantly  affect the Company's  expected  operating
results.  In addition to directly affecting  revenues,  price changes can affect
expected production because production estimates necessarily assume that oil and
gas can profitably be produced at the assumed pricing levels. In addition to the
above   assumptions,   the  Company  is  assuming   that  demand,   curtailment,
producibility  and general  market  conditions for the Company's oil and gas for
2000 will be substantially similar to those of 1999.

                                    Corporate

     Corporate expenditures are comprised of general and administrative expenses
and DD&A expense for non-oil and gas assets.

     General and Administrative  Expenses - General and administrative  expenses
increased $3 million or 16% to $22 million for the year ended  December 31, 1999
compared  to $19 million for 1998.  This  increase is due to the Seagull  Merger
offset by a decline  in  general  and  administrative  expense  as cost  savings
related to  personnel  reduction,  office  consolidations  and reduced  combined
expenses for professional fees and other expense items were realized.

     General and administrative  expenses  increased $4 million,  or 27%, to $19
million for 1998 from $15 million for 1997.  This  increase is primarily  due to
costs of  increased  corporate  staffing  associated  with both an  increase  in
drilling activities during 1998 and the Company's property acquisitions in 1997.

     DD&A expense for non-oil and gas assets was  approximately  $8 million,  $6
million and $5 million for the years 1999, 1998 and 1997, respectively.

                                      Other

     Interest Expense - Interest expense increased $43 million,  or 68%, to $106
million for the year ended  December  31,  1999 from $63  million in 1998.  This
increase is primarily the result of the higher capital spending program in place
throughout  1998 and an  increase  in debt  levels  in 1999  resulting  from the
assumption  of debt in the Seagull  Merger.  However,  the repayment of existing
long-term debt and the  repurchase of outstanding  public debt during the fourth
quarter of 1999 will serve to reduce interest expense for the year 2000 from the
1999 level.

     Interest  expense  increased $14 million,  or 29%, to $63 million for 1998,
from $49 million for 1997.  This increase is primarily the result of an increase
in debt levels during 1998 resulting from the capital  spending program for 1998
and lower than expected cash flows due to the  deterioration  in product prices,
offset by an  increase  in  capitalized  interest  on  significant  projects  in
process.

     Merger Expense - Merger expenses of $50 million  associated with the Merger
between  Ocean and Seagull have been  recorded  for the year ended  December 31,
1999.  These  costs  consisted  primarily  of Old Ocean's  severance  costs ($30
million),  the  write-off of certain costs  relating to Old Ocean's  information
technology system ($14 million) and compensation  expense related to the vesting
of Old Ocean's  restricted  stock ($6 million).  Merger  expenses of $39 million
associated with the March 1998 merger between Old Ocean and UMC were recorded in
the first quarter of 1998.

     Income Tax Benefit - An income tax benefit of $0.1  million was  recognized
for the year ended December 31, 1999,  compared to a benefit of $210 million for
the year  ended  December  31,  1998.  The  decrease  in income  tax  benefit is
primarily the result of three factors: (i) significant

                                       25
<PAGE>

improvement in operating results;  (ii) changes in the nature of deferred tax
assets and  liabilities due to the  Seagull  Merger  and  subsequent  asset
sales;  and (iii) the  relative significance of international operating results
and taxes to the Company's total results of operations.

     An income tax benefit of $210 million was recognized for 1998,  compared to
a  provision  of $41  million for 1997.  The  deferred  tax benefit for 1998 was
impacted  by the  noncash  impairment  of oil  and  gas  properties  and the tax
treatment of certain merger costs, a portion of which was not deductible for tax
purposes.

                          Unaudited Pro Forma Condensed
                      Combined Financial and Operating Data

     The  following  table  sets forth  summary  unaudited  pro forma  condensed
combined  financial and operating data which are presented to give effect to the
Seagull Merger, the repurchase of outstanding debt, and the sales of ENSTAR, the
Canadian  subsidiary  and the Gulf of Mexico and Arkoma oil and gas assets as if
each event had  occurred  as of January 1,  1998.  Accordingly,  Seagull  Merger
expense,  the  extraordinary  loss on  repurchase  of debt,  and the  results of
operations of the disposed assets,  including the impairment of Canadian assets,
are excluded from net income.  The information does not purport to be indicative
of actual  results,  if any of these  transactions  had been in  effect  for the
periods indicated,  or of future results.  The information was prepared based on
the following assumptions:

-    The Seagull Merger,  the sales of ENSTAR,  the Canadian  subsidiary and the
     Gulf of Mexico and Arkoma oil and gas  assets,  and the  repurchase  of the
     outstanding debt are assumed to have occurred as of January 1, 1998;

-    certain costs that Seagull had expensed under the successful efforts method
     of accounting are capitalized under the full cost method of accounting;

-    depreciation,  depletion and amortization  expense of Seagull is calculated
     in  accordance  with the full cost  method  of  accounting  applied  to the
     adjusted  basis of the  properties  acquired  using the purchase  method of
     accounting;

-    a decrease in interest expense results from the revaluation of Seagull debt
     under the purchase  method of  accounting,  including  the  elimination  of
     amortization of historical debt issuance costs,  and from the repurchase of
     outstanding public debt;

-    the proceeds  from the asset sales were used to pay down debt at January 1,
     1998; and

-    the related income tax effects of these  adjustments  are recorded based on
     the applicable statutory tax rate.



<TABLE>
<CAPTION>
                         Unaudited Pro Forma Information
                  (Amounts in Thousands, Except Per Unit Data)

                                                                                     Year Ended December 31,
                                                                            -------------------------------------------
<S>                                                                         <C>                     <C>
                                                                                   1999                    1998
                                                                            -------------------     -------------------
Oil and Gas Sales......................................................       $    749,413            $    757,986
Operating Profit (Loss)................................................       $    146,047            $   (496,328)
Net Income (Loss) Available to Common Shareholders.....................       $     56,804            $   (387,321)
Basic and Diluted Earnings (Loss) per Share............................       $       0.34            $      (2.36)

Operations Data:
   Net daily natural gas production (MMcf).............................              434.0                   523.6
   Net daily oil and NGL production (Bbl)..............................             76,723                  79,297
   Net daily production (MBOE).........................................              149.1                   166.6
   Average natural gas prices ($ per Mcf) (1)..........................       $       2.06            $       1.93
   Average oil and NGL prices ($ per Bbl) (1)..........................       $      17.24            $      11.83
   Average all-in costs ($ per BOE)....................................       $      12.14            $      12.39
</TABLE>

(1)  Prices exclude the effects of hedging  activities.  Weighted average prices
     including  hedging  were  $15.28 and $12.65 for oil and $2.08 and $1.93 for
     gas for 1999 and 1998, respectively.

                         Liquidity And Capital Resources

     Liquidity  - During  1998 and  1997,  Ocean  undertook  aggressive  capital
spending  programs  to find and  produce  oil and gas  reserves.  These  capital
spending  programs  required the Company to increase  outstanding debt from $441
million at the end of 1996 to $1.4 billion at the end of 1998 by issuing various
senior and senior  subordinated notes and revolving credit facilities.  With the
Seagull Merger, the Company had nearly $2 billion in debt at March 30, 1999. One
of  management's  1999 goals was the reduction of these high debt levels.  Ocean
undertook  over $700  million in asset sales and  completed a prepaid  crude oil
sale for $100  million,  reducing  debt to $1.3 billion at the end of 1999.  The
Company's  debt to total  capitalization  ratio has decreased to 58% at December
31, 1999, from 78% at December 31, 1998.

     Concurrently  with the closing of the Seagull Merger on March 30, 1999, the
Company entered into two new credit facilities (the "Credit  Facilities")  which
replaced  the existing  credit  facilities  of both Old Ocean and  Seagull.  The
Credit Facilities consisted of a $500 million five-year revolving facility and a
renewable  $300 million  364-day  facility with a one-year term loan option.  In
December  1999  the $300  million  facility  was  replaced  with a $200  million
facility with substantially the same terms. The Credit Facilities bear interest,
at the Company's

                                       26
<PAGE>

option, at LIBOR or prime rates plus applicable margins ranging
from zero to 1.7% or at a competitive  bid. As of December 31, 1999,  borrowings
outstanding  against the Credit  Facilities  totaled $300 million and Letters of
Credit totaled $44 million, leaving $356 million of available credit.

     In the fourth quarter of 1999, the Company  repurchased $150 million of its
outstanding  10?%  Senior  Subordinated  Notes due 2005 and $158  million of its
outstanding 9 3/4% Senior  Subordinated  Notes due 2006. The repurchase of these
Notes was funded with available  cash balances and  borrowings  under the Credit
Facilities.  In  connection  with  this  repurchase,  the  Company  recorded  an
after-tax  extraordinary  loss of $23  million,  or $0.16 per basic and  diluted
share. The  extraordinary  item is net of a current tax benefit of approximately
$13 million.  At current  rates the Company  expects to save  approximately  $11
million in interest expense annually as a result of the transaction.

     In 1999,  the Company  entered into a prepaid  crude oil sales  contract to
deliver  approximately  5,600 barrels of crude oil per day beginning in February
2000 through May 2003. In exchange for the crude oil to be provided, the Company
received an advance payment of approximately  $100 million.  The Company has the
option to satisfy contract  delivery  requirements with crude oil purchased from
third parties or from oil it produces. The obligation associated with the future
delivery of the crude oil has been  recorded  as  deferred  revenue and is being
amortized  into revenue as deliveries of crude oil are made.  The  obligation is
included in accrued  liabilities and other  noncurrent  liabilities and deferred
revenue on the consolidated balance sheet.

     Effects  of  Leverage  -  The  Company  has  outstanding   indebtedness  of
approximately  $1.3  billion as of December  31, 1999.  The  Company's  level of
indebtedness has several important effects on its future  operations,  including
(i) a substantial  portion of the Company's  cash flow from  operations  must be
dedicated  to the  payment  of  interest  on its  indebtedness  and  will not be
available  for other  purposes,  (ii) the  covenants  contained  in the  various
indentures  require the Company to meet  certain  financial  tests,  and contain
other  restrictions  that limit the Company's ability to borrow additional funds
or to dispose of assets and may affect the  Company's  flexibility  in  planning
for, and reacting to, changes in its business,  including  possible  acquisition
activities and (iii) the Company's ability to obtain additional financing in the
future for working capital,  expenditures,  acquisitions,  general  corporate or
other purposes may be impaired.

<TABLE>
<CAPTION>
                              Capital Expenditures
                             (Amounts in Thousands)

                                                                    Year Ended December 31,
                                                   -----------------------------------------------------------
                                                        1999                 1998                  1997
                                                   ----------------     ----------------     -----------------
<S>                                                <C>                  <C>                  <C>
Oil and Gas Operations:
  Leasehold acquisitions.....................        $  34,043            $ 156,947            $  246,441
  Exploration costs..........................          148,033              395,827               269,942
  Development costs..........................          159,831              395,351               317,975
                                                   ----------------     ----------------     -----------------
                                                       341,907              948,125               834,358
Corporate....................................           20,177               13,854                11,018
                                                   ----------------     ----------------     -----------------
Total Continuing Operations..................          362,084              961,979               845,376
Discontinued Operations......................            6,942                    -                     -
                                                   ----------------     ----------------     -----------------
Total Capital Expenditures...................        $ 369,026            $ 961,979            $  845,376
                                                   ================     ================     =================
</TABLE>

     Capital expenditures,  excluding acquisitions,  from oil and gas operations
in 1999  decreased  $606  million or 64% from 1998 as the  Company  focused  its
efforts on cost control,  sales of non-strategic  properties and debt reduction.
Domestic  spending in 1999  totaled $167  million,  of which $91 million was for
exploration,  $52 million was for  development and $24 million was for leasehold
acquisitions.  International spending in 1999 totaled $175 million, of which $57
million was for  exploration,  $108 million was for  development and $10 million
was for leasehold  acquisitions.  The Company completed  drilling 40 exploratory
wells during 1999, 22 of which were  successful.  Another 31  exploratory  wells
were in progress at year-end.

1999 Actual Expenditures of $369 Million
        "GRAPHICS OMITTED"

Gulf of Mexico          28%
North America onshore   17%
Other International     16%
Equatorial Guinea       31%
Corporate and other      8%


     The Company's capital expenditure budget for the year 2000 is approximately
$500 million (excluding proved property  acquisitions).  Actual capital spending
may vary from the capital  expenditure  budget.  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.

                                       27
<PAGE>
2000 Plan for Capital Expenditures of $500 Million
       "GRAPHICS OMITTED"

Gulf of Mexico          47%
North America Onshore   19%
Other International     18%
Equatorial Guinea       14%
Corporate                2%

     Through drilling,  proved property acquisitions and the Seagull Merger, the
Company experienced a 504% reserve replacement of 1999 production. The Company's
proved  oil and gas  reserves  increased  by 42% or 123  MMBOE  to 415  MMBOE at
December  31, 1999 from 292 MMBOE at  December  31,  1998  primarily  due to the
Seagull  Merger,  offset by sales of oil and gas properties that occurred during
the year.  Excluding the effects of  acquisitions  (primarily the Seagull Merger
and the  purchase  of  certain  working  interests  from  Duke  Energy)  reserve
replacement was 130%. The Company's finding and development ("F&D") cost per BOE
for the year ending  December  31,  1999,  was $5.13.  Excluding  the effects of
acquisitions, the F&D cost was $4.98 per BOE.

     The standardized  measure of discounted  future net cash flows before taxes
for the Company's  proved oil and gas reserves,  calculated  based on Securities
and Exchange Commission ("SEC") criteria,  increased to $3.0 billion at December
31,  1999  compared  with $0.9  billion at the end of 1998.  This  increase  was
primarily  due to the  increase  in oil and gas prices and the  Seagull  Merger,
offset by property sales. Year-end calculations were made using weighted average
prices of $2.04 and $1.83 per Mcf for gas and  $23.33 and $10.02 per Bbl for oil
for 1999 and 1998,  respectively.  The Company's average realized prices for the
year ended December 31, 1999,  excluding the effects of hedging,  were $2.08 per
Mcf for gas and $17.32 per Bbl for oil. The Company's  average  realized  prices
for the month ended  January 31, 2000,  excluding  the effects of hedging,  were
$2.30  per Mcf for gas and  $25.27  per  Bbl for  oil.  Because  the  disclosure
requirements  for discounted  future net cash flows are standardized by the SEC,
significant  changes can occur in these  estimates based upon oil and gas prices
in effect at year-end.  The above estimates  should not be viewed as an estimate
of fair  market  value.  See  Note 15 to the  Company's  Consolidated  Financial
Statements.

     The  Company  makes,  and  will  continue  to  make,   substantial  capital
expenditures  for the  acquisition,  exploration,  development,  production  and
abandonment  of its 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  capital
expenditures for the year 2000 primarily with cash flow provided by operations.

     The  ability of the  Company to satisfy its  obligations  and fund  planned
capital expenditures will be dependent upon its future performance.  Such future
performance is subject to many conditions that are beyond the Company's control,
particularly oil and gas prices,  and the Company's ability to obtain additional
debt and equity financing, if necessary.  The Company currently expects that its
cash flow from operations and availability  under the Credit  Facilities will be
adequate to execute its business plan for the year 2000.  However,  no assurance
can be given that the Company will not experience  liquidity  problems from time
to time or on a long-term  basis. If the Company's cash flow from operations and
availability  under the Credit Facilities are not sufficient to satisfy its cash
requirements, there can be no assurance that additional debt or equity financing
will be available to meet its requirements.

                            Accounting Pronouncements

     In June 1998,  the FASB  issued  SFAS No. 133,  Accounting  for  Derivative
Instruments  and Hedging  Activities.  This statement  establishes  standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement,  as amended,  is effective for fiscal years beginning after June
15, 2000.  While the Company has not yet completed its  evaluation of the impact
of this  statement,  the  Company  does not believe  the  statement  will have a
significant  impact on its results of  operations as it expects that its current
derivative activities would continue to qualify under hedge accounting.

                                       28
<PAGE>
                                  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 its capital  expenditures,
earnings and competitive position.


                                    Year 2000

     Historically,  most computer systems  (including  microprocessors  embedded
into field equipment and other  machinery)  utilized  software that recognized a
calendar year by its last two digits.  Beginning in the year 2000, these systems
require  modification to distinguish  twenty-first  century dates from twentieth
century dates ("Year 2000 issues"). To date, the Company has not experienced any
significant  problems due to Year 2000 issues.  While no assurance can be given,
the Company does not believe it will experience any significant Year 2000 issues
in the future.

     Costs of $0.6  million  for the Year 2000  compliance  review,  evaluation,
assessment and remediation efforts were incurred through December 31, 1999.

                 Forward-Looking Statements May Prove Inaccurate

     This document  includes  forward-looking  statements  within the meaning of
Section  27A of  the  Securities  Act of  1933,  Section  21E of the  Securities
Exchange Act of 1934 and the Private  Securities  Litigation Reform Act of 1995.
All  statements  other than  statements  of  historical  fact  included  in this
document,  including,  without  limitation,  statements  regarding the financial
position,  business strategy,  production and reserve growth and other plans and
objectives  for  the  future  operations  of  the  Company  are  forward-looking
statements.

     Although the Company  believes  that such  forward-looking  statements  are
based on reasonable assumptions,  it can give no assurance that its expectations
will in fact  occur.  Important  factors  could cause  actual  results to differ
materially  from  those  in  the  forward-looking  statements.   Forward-looking
statements  are  subject  to risks and  uncertainties  and  include  information
concerning general economic conditions and possible or assumed future results of
operations  of the Company,  estimates of oil and gas  production  and reserves,
drilling  plans,  future  cash  flows,  anticipated  capital  expenditures,  the
Company's   realization  of  its  deferred  tax  assets,  the  level  of  future
expenditures for  environmental  costs, and management's  strategies,  plans and
objectives as set forth herein.

     When used in this document, the words "believes," "expects," "anticipates,"
"intends" or similar  expressions are intended to identify such  forward-looking
statements.  The following  important  factors,  in addition to those  discussed
elsewhere  in this  document  could  affect  the  future  results  of the energy
industry  in general and could cause  those  results to differ  materially  from
those expressed in such forward-looking statements:

- Risks incident to the drilling and operation of oil and gas wells;
- Future production and development costs;
- The effect of existing and future laws and regulatory actions;
- The political and economic  climate in the foreign  jurisdictions in which the
    Company  conducts oil and gas  operations;
- The effect of changes in commodity prices,  hedging  activities  and
    conditions  in  the  capital  markets;  and
- Competition from others in the energy industry.

                                  Defined Terms

     Natural gas is stated herein in billion  cubic feet ("Bcf"),  million cubic
feet ("MMcf") or thousand  cubic feet ("Mcf").  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.  MMBOE, MBOE and BOE represent
one million  barrels,  one  thousand  barrels and one barrel of oil  equivalent,
respectively, with six Mcf of gas converted to one barrel of liquid.

                                       29
<PAGE>

                        Selected Quarterly Financial Data

         Summarized quarterly financial data is as follows (amounts in thousands
except per share data):

<TABLE>
<CAPTION>
                                                                     Quarter Ended
                                     -------------------------------------------------------------------------------
                                         March 31            June 30           September 30         December 31
                                     ------------------ ------------------  -------------------    -----------------
<S>                                  <C>                <C>                 <C>                     <C>
1999:
  Revenues.........................      $  105,694         $   196,206         $   214,393          $     219,225
  Operating Profit (Loss) (2)......      $  (31,150)        $    32,744         $    69,151          $      62,001
  Income (Loss) Before
     Extraordinary Item(2).........      $  (81,051)        $     2,136         $    28,805          $      29,685
  Earnings (Loss) per Share
    Before Extraordinary Item:
    Basic(1).......................      $   (0.79)         $       0.01        $       0.17         $        0.17
    Diluted(1).....................      $   (0.79)         $       0.01        $       0.16         $        0.17
  Net Income (Loss) (2)............      $  (81,051)        $      2,136        $     28,805         $       6,272
  Earnings (Loss) per Share:
    Basic(1).......................      $   (0.79)         $       0.01        $       0.17         $        0.03
    Diluted(1).....................      $   (0.79)         $       0.01        $       0.16         $        0.03

1998:
  Revenues.........................      $  141,056         $    132,909        $    123,369         $     124,816
  Operating Profit (Loss) (3)......      $   21,337         $   (207,692)       $     (1,528)        $    (328,072)
  Net Loss(3)......................      $  (28,133)        $   (134,846)       $    (14,417)        $    (229,483)
  Earnings per Share:
    Basic(1).......................      $   (0.28)         $      (1.34)       $      (0.14)        $       (2.27)
    Diluted(1).....................      $   (0.28)         $      (1.34)       $      (0.14)        $       (2.27)
</TABLE>


(1) Quarterly  earnings  (loss) per common share may not total to the full year
     per share amount, as the weighted average number of shares  outstanding for
     each  quarter  fluctuated  as a result  of the  assumed  exercise  of stock
     options.

(2)  Includes  pre-tax  impairments of oil and gas assets of $29 million and $17
     million in the first and fourth quarters of 1999, respectively,  and merger
     expense of $41 million, $3 million,  and $6 million in the first, third and
     fourth quarters of 1999, respectively.

(3)  Includes  pre-tax noncash  impairments  pursuant to the ceiling  limitation
     required  by the full cost method of  accounting  for oil and gas assets of
     $218  million and $322  million in the second and fourth  quarters of 1998,
     respectively,  and merger  expense of $39  million in the first  quarter of
     1998.

                             Market Risk Disclosures

     The  Company  experiences  market risk in two areas:  commodity  prices and
interest rates.  Because the U.S.  dollar is the functional  currency for all of
the Company's existing foreign  operations,  with predominantly all transactions
being  denominated  in U.S.  dollars,  the Company has little risk from  foreign
currency  translation.  To mitigate a portion of its exposure to fluctuations in
energy  prices,  the Company  has  entered  into  various  derivative  financial
instruments  for its oil and gas production for the year 2000. See Note 8 to the
Company's   Consolidated  Financial  Statements  for  a  discussion  of  hedging
activities  during 1999. By applying the 12-month  NYMEX oil and gas strip price
as of the end of 1999 to the quantity of the  Company's  oil and gas  production
hedged as of December 31, 1999, the Company  calculated the estimated  potential
effect of the derivative  contracts during the year 2000 to be an approximate $4
million net decrease in revenues. Assuming a 10% increase in oil and gas prices,
the potential  effect of the  derivatives  contracts would be an approximate $18
million  decrease in revenues for the year ended  December 31, 2000.  Assuming a
10%  decrease in oil and gas prices,  the  potential  effect of the  derivatives
contracts would be an approximate $15 million  increase in revenues for the year
ended December 31, 2000.

     The Company also evaluated the potential  effect that  reasonably  possible
near term changes in interest rates may have on the Company's Credit Facilities.
Debt outstanding under the Credit Facilities represents approximately 22% of the
Company's total debt as of December 31, 1999 and is the only floating rate debt.
Based  upon an  analysis,  utilizing  the  actual  interest  rates in effect and
balances  outstanding  as of December  31, 1999 and  assuming a 10%  increase or
decrease in interest rates and no changes in the amount of debt outstanding, the
potential effect on annual interest expense is approximately $2 million.

                                       30

<PAGE>



                               Ocean Energy, Inc.
                      Report of Management to Shareholders

     The management of Ocean Energy, Inc. is responsible for the preparation and
integrity  of  financial  statements  and related  data in this  Annual  Report,
whether  audited  or  unaudited.  The  financial  statements  were  prepared  in
conformity  with generally  accepted  accounting  principles and include certain
estimates and  judgments  which  management  believes are  reasonable  under the
circumstances.

     Management  is also  responsible  for and  maintains  a system of  internal
accounting  controls  that is sufficient to provide  reasonable  assurance  that
assets are  safeguarded  against  loss or  unauthorized  use and that  financial
records are reliable for preparing financial  statements,  as well as to prevent
and detect  fraudulent  financial  reporting.  The  internal  control  system is
supported by written  policies and  procedures  and the  employment  of trained,
qualified  personnel.  The Company has an internal  audit function which reviews
the  adequacy of the internal  accounting  controls  and  compliance  with them.
Management has considered  the  recommendations  of internal audit and KPMG LLP,
independent  certified  public  accountants,  concerning the Company's system of
internal controls and has responded appropriately to those recommendations.

     The accompanying consolidated financial statements of Ocean Energy, Inc. as
of December 31, 1999 have been audited by KPMG LLP, independent certified public
accountants,  and  their  report is  included  herein.  Their  audit was made in
accordance with generally  accepted auditing  standards and included a review of
the system of internal controls to the extent considered  necessary to determine
the audit  procedures  required  to support  their  opinion on the  consolidated
financial statements.

     The Board of Directors, through its Audit Committee composed exclusively of
outside  directors,  meets  periodically  with  representatives  of  management,
internal audit and the independent auditors to ensure the existence of effective
internal  accounting  controls  and to  ensure  that  financial  information  is
reported accurately and timely with all appropriate  disclosures  included.  The
independent  auditors and internal  audit have full and free access to, and meet
with, the Audit Committee, with and without management present.



/s/James T. Hackett       /s/William L. Transier         /s/Gordon L. McConnell
James T. Hackett          William L. Transier            Gordon L. McConnell
Chairman of the Board,    Executive Vice President       Vice President and
President and Chief       and Chief Financial Officer    Controller
Executive Officer


January 31, 2000

                                       31
<PAGE>

                               Ocean Energy, Inc.
                          Independent Auditors' Report


The Board of Directors and Shareholders
Ocean Energy, Inc.:

     We have  audited  the  accompanying  consolidated  balance  sheet  of Ocean
Energy,  Inc.  and  subsidiaries  as of  December  31,  1999,  and  the  related
consolidated  statements of operations,  shareholders' equity and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position of Ocean
Energy,  Inc. and subsidiaries as of December 31, 1999, and the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
generally accepted accounting principles.


/s/KPMG LLP


Houston, Texas
January 31, 2000



To the Board of Directors and Shareholders
Ocean Energy, Inc.:

     We have  audited  the  accompanying  consolidated  balance  sheet  of Ocean
Energy,  Inc. (a Delaware  corporation) and subsidiaries as of December 31, 1998
and the related consolidated statements of operations,  shareholders' equity and
cash  flows for each of the two years in the period  ended  December  31,  1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the  financial  position of Ocean  Energy,  Inc. and
subsidiaries  as of December 31, 1998,  and the results of their  operations and
their  cash  flows for each of the two years in the period  ended  December  31,
1998, in conformity with generally accepted accounting principles.



/s/ARTHUR ANDERSEN LLP




Houston, Texas
February 15, 1999

                                       32

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                  ----------------------------------------------------
                                                                       1999                1998             1997
                                                                  ----------------    ---------------   --------------
<S>                                                               <C>                 <C>               <C>
Revenues......................................................      $  735,518          $  522,150        $  549,194

Costs of Operations:
   Operating expenses.........................................         216,981             185,076           139,349
   Depreciation, depletion and amortization...................         317,487             293,905           248,423
   Impairment of oil and gas properties.......................          46,403             539,915                 -
   General and administrative.................................          21,901              19,209            15,263
                                                                  ----------------    ---------------   --------------
                                                                       602,772           1,038,105           403,035
                                                                  ----------------    ---------------   --------------

Operating Profit (Loss).......................................         132,746            (515,955)          146,159
Other (Income) Expense:
   Interest expense...........................................         106,081              62,852            49,134
   Merger expenses............................................          49,603              39,000                 -
   Interest income and other..................................          (1,314)             (1,229)           (6,187)
                                                                  ----------------    ---------------   --------------
                                                                       154,370             100,623            42,947
                                                                  ----------------    ---------------   --------------

Income (Loss) Before Income Taxes.............................         (21,624)           (616,578)          103,212
Income Tax Expense (Benefit)..................................             (72)           (209,699)           40,992
                                                                  ----------------    ---------------   --------------

Income (Loss) from Continuing Operations......................         (21,552)           (406,879)           62,220
Income from Discontinued Operations, Net of Income Taxes......           1,127                   -                 -
                                                                  ----------------    ---------------   --------------

Income (Loss) Before Extraordinary Item.......................         (20,425)           (406,879)           62,220
Extraordinary Loss, Net of Income Taxes.......................         (23,413)                  -           (19,301)
                                                                  ----------------    ---------------   --------------
Net Income (Loss).............................................         (43,838)           (406,879)           42,919

Preferred Stock Dividends.....................................           3,264                 454                 -
                                                                  ----------------    ---------------   --------------

Net Income (Loss) Available to Common Shareholders............      $  (47,102)         $ (407,333)       $   42,919
                                                                  ================    ===============   ==============


Basic Earnings (Loss) Per Common Share:
   Income (Loss) From Continuing Operations...................      $    (0.16)         $    (4.04)       $     0.67
   Income from Discontinued Operations, Net of
     Income Taxes.............................................            0.01                   -                 -
   Extraordinary Loss, Net of Income Taxes....................           (0.16)                  -             (0.21)
                                                                  ----------------    ---------------   --------------
   Net Income (Loss) to Common Shareholders...................      $    (0.31)         $    (4.04)       $     0.46
                                                                  ================    ===============   ==============

Diluted Earnings (Loss) Per Common Share:
   Income (Loss) from Continuing Operations...................      $    (0.16)         $    (4.04)       $     0.64
   Income From Discontinued Operations, Net of
     Income Taxes.............................................            0.01                   -                 -
   Extraordinary Loss, Net of Income Taxes....................           (0.16)                  -             (0.20)
                                                                  ----------------    ---------------   --------------
   Net Income (Loss) to Common Shareholders...................      $    (0.31)         $    (4.04)       $     0.44
                                                                  ================    ===============   ==============

Weighted Average Number of Common Shares Outstanding:
   Basic......................................................         151,022             100,705            93,315
                                                                  ================    ===============   ==============
   Diluted....................................................         151,022             100,705            96,646
                                                                  ================    ===============   ==============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       33
<PAGE>

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

<TABLE>
<CAPTION>
                                   Assets                                                December 31,
                                                                             --------------------------------------
                                                                                     1999                 1998
                                                                             ------------------   -----------------
<S>                                                                          <C>                  <C>
Current Assets:
   Cash and cash equivalents............................................       $      64,889        $      10,706
   Accounts receivable, net.............................................             170,034              111,829
   Inventories..........................................................              28,723               16,802
   Prepaid expenses and other...........................................              26,304               14,444
                                                                             ------------------   -----------------
     Total Current Assets...............................................             289,950              153,781

Property, Plant and Equipment, at cost, full cost method for oil and
  gas properties:
   Evaluated oil and gas properties.....................................           3,706,288            2,759,686
   Unevaluated oil and gas properties excluded from amortization........             507,197              488,689
   Other................................................................              84,410               44,960
                                                                             ------------------   -----------------
                                                                                   4,297,895            3,293,335
Accumulated Depreciation, Depletion and Amortization....................          (2,094,885)          (1,711,696)
                                                                             ------------------   -----------------
                                                                                   2,203,010            1,581,639

Deferred Income Taxes...................................................             233,406              217,824
Other Assets............................................................              56,777               53,716
                                                                             ------------------   -----------------
Total Assets............................................................       $   2,783,143        $   2,006,960
                                                                             ==================   =================

                    Liabilities and Shareholders' Equity
Current Liabilities:
   Accounts and note payable............................................       $     275,629        $     190,727
   Accrued interest payable.............................................              41,119               36,206
   Accrued liabilities..................................................              51,542                9,413
   Current maturities of long-term debt.................................              13,651                  836
                                                                             ------------------   -----------------
     Total Current Liabilities..........................................             381,941              237,182

Long-Term Debt..........................................................           1,333,410            1,371,890
Other Noncurrent Liabilities and Deferred Revenue.......................             120,097               20,945
Commitments and Contingencies...........................................                   -                    -

Shareholders' Equity:
   Preferred stock, $1.00 and $0.01 par value, respectively; authorized
     10,000,000 shares; issued 50,000 shares............................                  50                    1
   Common stock, $0.10 and $0.01 par value, respectively; authorized
     230,000,000 and 250,000,000 shares, respectively; issued
     166,979,981 and 101,753,646 shares, respectively...................              16,699                1,018
   Additional paid-in capital...........................................           1,484,688              892,339
   Accumulated deficit..................................................            (547,216)            (500,114)
   Accumulated other comprehensive loss.................................                   -              (10,720)
   Less - treasury stock, at cost; 378,171 and no shares, respectively..              (3,114)                   -
   Less - notes receivable and other....................................              (3,412)              (5,581)
                                                                             ------------------   -----------------
     Total Shareholders' Equity.........................................             947,695              376,943
                                                                             ------------------   -----------------
    Total Liabilities and Shareholders' Equity..........................       $   2,783,143        $   2,006,960
                                                                             ==================   =================
</TABLE>
          See accompanying Notes to Consolidated Financial Statements.

                                       34

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                  -------------------------------------------------------------
                                                                         1999                  1998                 1997
                                                                  -------------------   --------------------   ----------------
<S>                                                               <C>                   <C>                    <C>
Operating Activities:
Net income (loss).............................................      $   (43,838)          $  (406,879)           $   42,919
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
     Depreciation, depletion and amortization.................          317,487               293,905               248,423
     Impairment of oil and gas properties.....................           46,403               539,915                     -
     Deferred income taxes....................................          (48,123)             (213,514)               20,821
     Noncash merger expenses..................................           20,529                     -                     -
     Noncash items from discontinued operations...............            5,383                     -                     -
     Extraordinary loss, net of taxes.........................           23,413                     -                19,301
     Amortization of deferred financing costs.................            8,146                 8,125                 2,957
     Other....................................................            6,748                (2,477)               (2,306)
                                                                  -------------------   --------------------   ----------------
                                                                        336,148               219,075               332,115
   Changes in operating assets and liabilities, net of
   acquisitions:
     Decrease (increase) in accounts receivable...............              475                23,724               (17,338)
     Decrease (increase) in inventories, prepaid
       expenses and other.....................................           18,446                 8,059               (20,662)
     Increase (decrease) in accounts and notes payable........          (51,731)              (12,836)               48,156
     Increase (decrease) in accrued expenses and other........           30,413                (8,098)               21,931
                                                                  -------------------   --------------------   ----------------
   Net Cash Provided by Operating Activities..................          333,751               229,924               364,202
                                                                  -------------------   --------------------   ----------------

Investing Activities:
   Capital expenditures of continuing operations..............         (362,084)             (970,443)             (830,483)
   Capital expenditures of discontinued operations............           (6,942)                    -                     -
   Acquisition costs, net of cash acquired....................          (33,169)                    -                     -
   Proceeds from sales of property, plant and equipment.......          704,055                 2,054                52,855
   Increase in other assets...................................                -                     -               (23,878)
                                                                  -------------------   --------------------   ----------------
   Net Cash Provided by (Used in) Investing Activities........          301,860              (968,389)             (801,506)
                                                                  -------------------   --------------------   ----------------

Financing Activities:
   Proceeds from debt.........................................        1,543,601             1,918,873               826,081
   Principal payments on debt ................................       (2,186,852)           (1,219,356)             (594,977)
   Proceeds from deferred revenue.............................          100,000                     -                     -
   Premiums paid on debt buy back.............................          (28,837)                    -               (26,700)
   Purchase of treasury stock.................................           (2,840)                    -                     -
   Proceeds from sales of common stock........................                -                     -               178,108
   Proceeds from common stock options exercised...............            2,813                 8,695                 9,428
   Proceeds from issuance of convertible preferred stock......                -                49,954                     -
   Deferred debt issue costs..................................           (6,406)              (20,230)               (3,648)
   Preferred stock dividends paid.............................           (2,907)                 (454)                    -
                                                                  -------------------   --------------------   ----------------
   Net Cash Provided by (Used in) Financing Activities........         (581,428)              737,482               388,292
                                                                  -------------------   --------------------   ----------------

Increase (Decrease) in Cash and Cash Equivalents..............           54,183                  (983)              (49,012)
Cash and Cash Equivalents at Beginning of Year................           10,706                11,689                60,701
                                                                  -------------------   --------------------   ----------------
Cash and Cash Equivalents at End of Year......................      $    64,889           $    10,706            $   11,689
                                                                  ===================   ====================   ================
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       35
<PAGE>

                               Ocean Energy, Inc.
                 Consolidated Statement of Shareholders' Equity
                             (Amounts in Thousands)




<TABLE>
<CAPTION>

                                                     Preferred          Common         Additional        Accumulated
                                                       Stock            Stock         Paid-In-Capital       Deficit
                                                    -------------    -------------    --------------    --------------
<S>                                                 <C>              <C>              <C>               <C>

Balance, January 1, 1999.......................      $       1         $   1,018        $  892,339       $ (500,114)
  Effect of Seagull Merger.....................             49            15,621           588,088                -
  Exercise of common stock options.............              -                60             3,303                -
  Treasury stock purchase......................              -                 -                 -                -
  Contribution to ESOP.........................              -                 -              (236)               -
  Amortization of compensation expense.........              -                 -                 -                -
  Preferred stock dividends....................              -                 -                 -           (3,264)
  Other........................................              -                 -             1,194                -
Comprehensive income:
  Net loss.....................................              -                 -                 -          (43,838)
Other comprehensive income:
Foreign currency translation adjustment:
  Income arising during the year...............              -                -                  -                -
  Reclassification adjustment..................              -                -                  -                -

Net foreign currency translation adjustment....              -                -                  -                -
                                                    -------------    -------------    --------------    --------------
Balance, December 31, 1999.....................      $      50         $ 16,699         $1,484,688       $ (547,216)
                                                    =============    =============    ==============    ==============

Balance, January 1, 1998.......................      $       -         $  1,001         $  823,956       $  (92,781)
  Issuance of preferred stock..................              1                -             49,953                -
  Issuance of common stock.....................              -                6              5,734                -
  Exercise of common stock options.............              -               11             12,696                -
  Preferred stock dividends....................              -                -                  -             (454)
Comprehensive income:
  Net loss.....................................              -                -                  -         (406,879)
Other comprehensive income (loss):
  Foreign currency translation adjustment......              -                -                  -                -
                                                    -------------    -------------    --------------    --------------
Balance, December 31, 1998.....................      $       1         $  1,018         $  892,339       $ (500,114)
                                                    =============    =============    ==============    ==============

Balance, January 1, 1997.......................      $       -         $    918         $  632,111       $ (135,700)
  Issuance of common stock.....................              -               73            177,674                -
  Exercise of common stock options.............              -               10             14,171                -
Comprehensive income:
  Net income...................................              -                -                  -           42,919
Other comprehensive income (loss):
  Foreign currency translation adjustment......              -                -                  -                -
                                                    -------------    -------------    --------------    --------------
Balance, December 31, 1997.....................      $       -         $  1,001         $  823,956       $  (92,781)
                                                    =============    =============    ==============    ==============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       36

<PAGE>


                               Ocean Energy, Inc.
                 Consolidated Statement of Shareholders' Equity
                             (Amounts in Thousands)

<TABLE>
<CAPTION>

                                             Accumulated Other                          Notes             Total
                                               Comprehensive        Treasury         Receivable       Shareholder's    Comprehensive
                                                   Income             Stock           and Other          Equity           Income
                                             -----------------    --------------   --------------    --------------   --------------
<S>                                          <C>                  <C>              <C>               <C>              <C>

Balance, January 1, 1999...................    $     (10,720)        $      -         $   (5,581)      $  376,943
  Effect of Seagull Merger.................                -           (4,293)            (4,261)         595,204
  Exercise of common stock options.........                -                -                  -            3,363
  Treasury stock purchase..................                -           (2,840)                 -           (2,840)
  Contribution to ESOP.....................                -            4,019                849            4,632
  Amortization of compensation expense.....                -                -              5,581            5,581
  Preferred stock dividends................                -                -                  -           (3,264)
  Other....................................                -                -                  -            1,194
Comprehensive income:
  Net loss.................................                -                -                  -          (43,838)     $    (43,838)
Other comprehensive income:
Foreign currency translation adjustment:
  Income arising during the year...........                -                -                  -                -               981
  Reclassification adjustment..............                -                -                  -                -             9,739
                                                                                                                       -------------
Net foreign currency translation adjustment           10,720                -                  -           10,720            10,720
                                             ------------------    -------------    --------------    --------------   -------------
Balance, December 31, 1999.................    $           -         $ (3,114)        $   (3,412)      $  947,695      $    (33,118)
                                             ==================    =============    ==============    ==============   =============

Balance, January 1, 1998...................    $      (6,839)        $      -         $        -       $  725,337
  Issuance of preferred stock..............                -                -                  -           49,954
  Issuance of common stock.................                -                -             (5,581)             159
  Exercise of common stock options.........                -                -                  -           12,707
  Preferred stock dividends................                -                -                  -             (454)
Comprehensive income:
  Net loss.................................                -                -                  -         (406,879)     $   (406,879)
Other comprehensive income (loss):
  Foreign currency translation adjustment..           (3,881)               -                  -           (3,881)           (3,881)
                                            -------------------   -------------    --------------    --------------    -------------
Balance, December 31, 1998.................    $     (10,720)        $      -         $   (5,581)      $  376,943      $   (410,760)
                                            ===================   =============    ==============    ==============    =============

Balance, January 1, 1997...................    $      (4,257)        $      -         $        -       $  493,072
  Issuance of common stock.................                -                -                  -          177,747
  Exercise of common stock options.........                -                -                  -           14,181
Comprehensive income:
  Net income...............................                -                -                  -           42,919      $     42,919
Other comprehensive income (loss):
  Foreign currency translation adjustment..           (2,582)               -                  -           (2,582)           (2,582)
                                            ------------------    -------------    --------------    --------------    -------------
Balance, December 31, 1997.................    $      (6,839)        $      -         $        -       $  725,337      $     40,337
                                            ==================    =============    ==============    ==============    =============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       37

<PAGE>

                               Ocean Energy, Inc.
                   Notes to Consolidated Financial Statements

1.       Organization

     Ocean Energy,  Inc. (the "Company",  "OEI",  or "Ocean") is an independent
energy  company  engaged  in  the  exploration,   development,   production  and
acquisition of oil and natural gas offshore Gulf of Mexico, across North America
and in the oil and  natural  gas  producing  regions  of Cote  d'Ivoire,  Egypt,
Equatorial Guinea, Russian Republic of Tatarstan,  Indonesia,  Pakistan,  Angola
and the Republic of Yemen.

     On November 24, 1998,  Ocean Energy,  Inc. ("Old Ocean") and Seagull Energy
Corporation  ("Seagull")  entered into a merger  agreement  that  provided for a
stock-for-stock  merger  (the  "Seagull  Merger")  of Old  Ocean  with  and into
Seagull.  The Seagull Merger was a tax-free  transaction and was approved by the
Company's stockholders on March 30, 1999. In connection with the Seagull Merger,
Old Ocean  stockholders  received  one share of common stock of Seagull for each
existing   outstanding   share  of  Ocean.   Seagull  amended  its  Articles  of
Incorporation to change its name to Ocean Energy, Inc. ("New Ocean").  After the
Seagull Merger, the stockholders of Old Ocean owned  approximately  61.5% of the
outstanding  common stock of New Ocean and the shareholders of Seagull owned the
remaining  38.5% of the outstanding  common stock of New Ocean.  The transaction
was treated as a reverse purchase business combination for accounting purposes.

     Effective  March 27,  1998,  pursuant to the  Agreement  and Plan of Merger
dated December 22, 1997, United Meridian Corporation ("UMC") was merged into the
Company  (the "UMC  Merger").  As a result of the UMC Merger,  each  outstanding
share of UMC common  stock was  converted  into 1.3 shares of Ocean common stock
with  approximately  46  million  shares  issued  to  the  shareholders  of  UMC
representing  approximately  46% of all of the issued and outstanding  shares of
Ocean. The Company's shareholders received 2.34 shares of Ocean common stock for
each  share  outstanding  immediately  preceding  the  UMC  Merger  representing
approximately 54% of all of the issued and outstanding  shares of Ocean. The UMC
Merger  was  accounted  for  as  a  pooling  of  interests.   Accordingly,   the
accompanying  consolidated  financial  statements  for periods  prior to the UMC
Merger have been  restated to combine the  historical  results of Ocean and UMC.
All common share data throughout  these financial  statements have been restated
to reflect the impact of the  respective  stock  splits  resulting  from the UMC
Merger.


2.       Summary of Significant Accounting Policies

     General - The accompanying consolidated financial statements of the Company
have been prepared  according to generally  accepted  accounting  principles and
pursuant to the rules and regulations of the Securities and Exchange Commission.
These  accounting  principles  require  the  use  of  estimates,  judgments  and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial  statements and revenues and expenses during the reporting
period.   Actual   results   could   differ   from  those   estimates.   Certain
reclassifications  of amounts  previously  reported have been made to conform to
current year presentations.

     Consolidation - The accompanying  consolidated financial statements include
the  accounts  of  Ocean  Energy,  Inc.  and its  majority-owned  entities.  All
significant intercompany transactions have been eliminated.

     Cash Equivalents - The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.

     Inventories  - Materials  and  supplies  are valued at the lower of average
cost or market value (net realizable value).

     Oil  and  Gas  Properties  -  The  Company's   exploration  and  production
activities are accounted for using the full cost method.  Under this method, all
acquisition,  exploration  and  development  costs,  including  certain  related
employee  costs and a portion of interest  expense,  incurred for the purpose of
finding oil and gas are  capitalized.  Such amounts include the cost of drilling
and equipping  productive wells, dry hole costs,  lease acquisition costs, delay
rentals and costs related to such  activities.  Employee costs  associated  with
production  operations  and general  corporate  activities  are  expensed in the
period  incurred.  Transactions  involving  sales of reserves  in place,  unless
significant, are recorded as adjustments to oil and gas properties.  Capitalized
costs are limited to the sum of the

                                       38
<PAGE>

present  value  of  future  net  revenues  using  current   unescalated  pricing
discounted at 10%,  related to estimated  production of proved  reserves and the
lower of cost or  estimated  fair value of  unevaluated  properties,  all net of
expected income tax effects.

     Depreciation,  depletion  and  amortization  of oil and gas  properties  is
computed on a country-by-country  basis using a unit-of-production  method based
on estimated  proved  reserves.  All costs associated with evaluated oil and gas
properties,   including   an  estimate  of  future   development,   restoration,
dismantlement  and abandonment costs associated  therewith,  are included in the
computation  base.  The costs of  investments  in unproved  properties and major
development  projects are excluded  from this  calculation  until the project is
evaluated and proved reserves established or impaired.  Oil and gas reserves are
estimated  annually by the Company,  with  reviews of certain data  performed by
independent petroleum engineers.

     Unproved  leaseholds  with  significant   acquisition  costs  are  assessed
periodically, on a property-by-property basis. If a property has been evaluated,
or if impairment is needed,  the costs related to that property are reclassified
as an evaluated  property,  and thus subject to the depreciation,  depletion and
amortization method discussed above. Unproved leaseholds whose acquisition costs
are not individually  significant are aggregated,  and the portion of such costs
estimated to ultimately prove nonproductive,  based on experience, are amortized
over an average  holding  period.  As unproved  leaseholds  are determined to be
productive, the related costs are transferred to proved leaseholds.  Pursuant to
the ceiling  limitation  required by the full cost method of accounting  for oil
and gas properties, the Company recognized total non-cash impairments of oil and
gas  properties in the amount of $540 million ($335 million  after-tax)  for the
year ended December 31, 1998. These write-downs were primarily the result of the
precipitous decline in world crude oil and natural gas prices experienced during
1998. The Company had no such ceiling limitations in 1999 or 1997.

     The  Company  recognized  impairments  in the  amount of $46  million  ($43
million  after-tax)  for the year ended  December  31, 1999.  These  impairments
related primarily to the sale of the Canadian subsidiary ($23 million,  pre-tax)
and to the discontinuance of operations in Bangladesh ($18 million, pre-tax) and
other international locations ($5 million, pre-tax).

     Interest cost  capitalized  as property,  plant and  equipment  amounted to
approximately  $41 million,  $30 million and $13 million in 1999, 1998 and 1997,
respectively. The Company also capitalized certain employee-related costs in the
amounts of $41 million,  $28 million,  and $15 million,  in 1999, 1998 and 1997,
respectively.

     Other  Property,  Plant and Equipment -  Depreciation  of other property is
computed  principally using the straight-line method over their estimated useful
lives,  which vary from three to twenty years.  The Company groups and evaluates
other  property,  plant and  equipment  for  impairment  based on the ability to
identify separate cash flows generated therefrom.  No impairment charges related
to other property, plant and equipment were recorded during 1999, 1998 and 1997.

     Maintenance, repairs and renewals are charged to operations and maintenance
expense except that renewals which extend the life of the asset are capitalized.

     Environmental  Liabilities  -  Environmental  expenditures  that  relate to
current  or  future   revenues  are  expensed  or  capitalized  as  appropriate.
Expenditures that relate to an existing condition caused by past operations, and
that do not  contribute to current or future revenue  generation,  are expensed.
Liabilities  are accrued when  environmental  assessments  and/or  clean-ups are
probable,  and the costs can be reasonably estimated.  Generally,  the timing of
these  accruals  coincides  with the  Company's  commitment  to a formal plan of
action.

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

     Revenue  Recognition  - The  Company  records  oil and  natural gas revenue
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.

     Discontinued  Operations  - The  Company has  operated in Alaska  through a
division of the Company and a wholly-owned subsidiary  (collectively referred to
herein as "ENSTAR"). In July 1999, the Company committed to a plan to dispose of
ENSTAR,  and on November 1, 1999,  the Company  completed the sale.  See Note 5.
ENSTAR's

                                       39
<PAGE>

net income was $1 million, net of income tax expense of $1 million, for the year
ended  December  31,  1999.  The net assets  disposed of  comprised  net current
liabilities of $2 million,  property,  plant and equipment of $292 million,  and
other long-term  liabilities of $3 million,  before  liabilities  assumed of $57
million. The results of operations of ENSTAR have been reflected as discontinued
operations.

     Derivative  Financial  Instruments  - From time to time,  the  Company  has
utilized and expects to continue to utilize hedging transactions with respect to
a portion of its oil and gas production to achieve a more  predictable cash flow
as well as to reduce its  exposure  to price  fluctuations.  These  transactions
generally are swaps or price  collars 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  natural  gas  and  crude  oil.  These  derivative   financial
instruments will limit the Company's  realized  revenues if market prices exceed
the  contracted  ceiling  price and limit losses if market prices fall below the
contracted  floor price. As a result,  gains and losses on derivative  financial
instruments  are generally  offset by similar  changes in the realized  price of
natural gas and crude oil.

     The  Company  uses the hedge or  deferral  method of  accounting  for these
instruments.  To qualify as hedges,  these  instruments must highly correlate to
anticipated future production such that the Company's exposure to the effects of
price changes is reduced.  Income and costs related to these hedging  activities
are recognized in oil and gas revenues when the commodities are produced. Income
and costs on commodity derivative  financial  instruments that are closed before
the  hedged  production  occurs are also  deferred  until the  production  month
originally hedged. In the event of a loss of correlation  between changes in oil
and gas reference prices under a commodity  derivative  financial instrument and
actual  oil and gas  prices,  income or costs are  recognized  currently  to the
extent the  financial  instrument  has not offset  changes in actual oil and gas
prices.  Any realized  income and costs that are  deferred at the balance  sheet
date are included in net current assets or liabilities.

     Income  Taxes - The Company uses the  liability  method of  accounting  for
income taxes under which deferred tax assets and  liabilities are recognized for
the estimated  future tax consequences  attributable to differences  between the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their  respective tax bases.  Deferred tax assets and  liabilities  are measured
using  enacted  tax  rates  in  effect  for the year in  which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is  recognized  as part of the
provision for income taxes in the period that includes the enactment date.

     Foreign Currency  Translation - The U.S. dollar is the functional  currency
for all of the Company's  existing  foreign  operations,  as  predominantly  all
transactions in these operations are denominated in U.S.  dollars.  Prior to the
disposition  of its Canadian  subsidiary in April 1999,  the Company's  Canadian
operations  used the  applicable  local  currency  as the  functional  currency.
Translation  from  Canadian  dollars to U.S.  dollars was  performed for balance
sheet  accounts using exchange rates in effect at the balance sheet date and for
revenue and expense  accounts using primarily a weighted  average  exchange rate
during the period.  Adjustments resulting from such translation were included as
a separate component of shareholders' equity and as a component of comprehensive
income.

     Stock-Based   Compensation   -  The  Company   accounts   for   stock-based
compensation  under the intrinsic value method.  Under this method,  the Company
records no  compensation  expense for stock  options  granted  when the exercise
price of options  granted is equal to or greater  than the fair market  value of
the Company's common stock on the date of grant.

     Concentrations Of Market Risk - The future results of the Company's oil and
gas operations will be affected by the market prices of oil and natural gas. The
availability  of a ready market for natural gas, oil and liquid  products in the
future  will  depend on  numerous  factors  beyond the  control of the  Company,
including  weather,  production  of other  natural  gas,  crude  oil and  liquid
products, imports, marketing of competitive fuels, proximity and capacity of oil
and gas  pipelines  and  other  transportation  facilities,  any  oversupply  or
undersupply  of gas, oil and liquid  products,  the regulatory  environment  and
other  regional  and  political  events,  none of which  can be  predicted  with
certainty.

     The Company operates in various phases of the oil and natural gas industry.
The Company's  receivables  include  amounts due from  purchasers of oil and gas
production  and amounts due from joint  venture  partners  for their  respective
portions of operating expense and exploration and development costs. The Company
believes that no single customer or joint venture partner exposes the Company to
significant  credit risk.  While  certain of these  customers  and joint venture
partners  are  affected  by peri-

                                       40

<PAGE>

odic  downturns  in the economy in general or in their  specific  segment of the
natural  gas  or  oil  industry,   the  Company   believes  that  its  level  of
credit-related  losses  due to such  economic  fluctuations  has  been  and will
continue to be  immaterial  to the  Company's  results of operations in the long
term. Trade receivables are generally not collateralized;  however,  the Company
analyzes  customers' and joint venture  partners'  historical  credit  positions
prior to extending  credit.  At December  31, 1999 and 1998,  the Company had an
allowance  for  doubtful  accounts  receivable  of $2  million  and $1  million,
respectively.

     For the years ended  December 31, 1999,  1998 and 1997, the Company had one
customer who  accounted  for 18%, 15% and 15% of total  revenues,  respectively.
During 1999, the Company had one customer who accounted for 16% and one customer
who  accounted  for 11% of total  revenues.  In  addition,  the  Company had one
customer  who  accounted  for 12% and 21% of total  revenues  in 1998 and  1997,
respectively.

     The  Company  has a  significant  portion  of  its  operations  in  various
international  areas.  The  Company's  activities  in these areas are subject to
risks associated with international operations, including political and economic
uncertainties,  risks of cancellation or unilateral  modification of agreements,
operating  restrictions,  currency  repatriation  restrictions,   expropriation,
export  restrictions,  the  imposition of new taxes and the increase of existing
taxes,  inflation,  foreign exchange fluctuations and other risks arising out of
international  government  sovereignty  over areas in which the  operations  are
conducted.  The Company has endeavored to protect  itself against  political and
commercial  risks inherent in these  operations.  There is no certainty that the
steps taken by the Company will provide adequate protection.

     Concentrations Of Credit Risk - Derivative financial instruments that hedge
the price of oil and natural gas and interest rates are generally  executed with
major financial or commodities trading  institutions which expose the Company to
acceptable  levels of market and credit  risks and may at times be  concentrated
with  certain  counterparties  or groups of  counterparties.  Although  notional
amounts  are  used to  express  the  volume  of  these  contracts,  the  amounts
potentially  subject  to credit  risk,  in the event of  non-performance  by the
counterparties,   are   substantially   smaller.   The  credit   worthiness   of
counterparties   is  subject  to  continuing  review  and  full  performance  is
anticipated.

     Accounting   Pronouncements  -  In  June  1998,  the  Financial  Accounting
Standards  Board  ("FASB")  issued  SFAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities."  This statement  establishes  standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement,  as amended,  is effective for fiscal years beginning after June
15, 2000.  While the Company has not yet completed its  evaluation of the impact
of this  statement,  the  Company  does not believe  the  statement  will have a
significant  impact on its  results  of  operations  as it expects  its  current
derivative activities would continue to qualify under hedge accounting.


3.       Earnings Per  Share

     Basic  earnings  per  share is  computed  by  dividing  net  income  (loss)
available to common shareholders by the weighted average number of common shares
outstanding  during the period.  Diluted earnings per share is determined on the
assumption that outstanding  stock options have been converted using the average
price for the period.  For  purposes of  computing  earnings per share in a loss
year,  common stock  equivalents  have been  excluded  from the  computation  of
weighted average common shares outstanding because their effect is antidilutive.
For the year ended,  December 31, 1997, the assumed  conversion of stock options
resulted in an additional 3.3 million weighted average common shares included in
the diluted earnings calculation.

     Options to purchase  22,515,302  shares of common stock (of which 5 million
were issued in  connection  with the Seagull  Merger) and  12,667,983  shares of
common stock were outstanding at December 31, 1999 and 1998,  respectively,  but
were not  included  in the  computation  of diluted  loss per share  because the
effect of the assumed exercise of these stock options as of the beginning of the
year would have an  antidilutive  effect.  These  options  had  exercise  prices
ranging from $2.11 to $36.55 and expire at various dates  through 2009.  Options
to purchase approximately 1.5 million shares of common stock at $26.44 to $36.53
per share were outstanding  during 1997 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,  which as of
December  31,  1997 had  various  expiration  dates from 1998 to 2007,  remained
outstanding at the end of 1997.

                                       41
<PAGE>

4.       Supplemental Disclosures of Cash Flow Information

     Supplemental disclosures of cash flow information (stated in thousands) are
as follows:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  --------------------------------------------------
                                                                       1999             1998              1997
                                                                  ---------------   --------------    --------------
<S>                                                               <C>               <C>               <C>
Cash paid during the year for:
 Interest.....................................................      $   94,229        $   54,758        $   49,563
 Income taxes.................................................      $   27,493        $    3,869        $    6,066
</TABLE>

     As  discussed  in Note 5, the  Seagull  Merger was  completed  through  the
issuance of common stock.  Therefore,  the Seagull  Merger  increased  property,
plant and equipment by $1.3 billion, debt by $563 million,  other liabilities by
$200 million,  and equity by $595 million through a noncash transaction that was
not reflected in the statement of cash flows.  However,  $1.8 million of the $33
million  of  acquisition  costs  reflected  in  "investing  activities"  in  the
statement of cash flows represents the cash expenses paid in connection with the
Seagull Merger, less the cash of Seagull on the date of the Seagull Merger.

5.       Acquisition And Disposition of Assets

     Seagull Merger - On March 30, 1999, the  shareholders  approved the Seagull
Merger.  The Seagull Merger has been accounted for as a purchase under generally
accepted accounting principles. Because Old Ocean stockholders own a majority of
the  outstanding  shares of common stock of the merged  company,  the accounting
treatment  of the  Seagull  Merger  reflects  Old Ocean  acquiring  Seagull in a
"reverse  purchase."  Under this  method of  accounting,  the  merged  company's
historical  results for periods prior to the Seagull  Merger are the same as Old
Ocean's  historical  results.  At the date of the  Seagull  Merger,  assets  and
liabilities of Old Ocean were recorded based upon their  historical  costs,  and
the assets and  liabilities  of Seagull were  recorded at their  estimated  fair
market values.

         The following is a calculation of the purchase price:
<TABLE>
<CAPTION>

<S>                                                                                    <C>
     Calculation of the purchase price (in thousands, except per share data):
       Shares of common stock  issued..............................................               64,630
       Average of OEI stock price three days before and after the
          merger announcement......................................................     $          9.09
                                                                                      ----------------------
       Fair value of stock issued..................................................     $        587,484
       Add: Capitalized merger costs...............................................               54,216
                                                                                      ----------------------
       Purchase Price..............................................................     $        641,700
                                                                                      ======================
</TABLE>

     Capitalized merger costs consisted  primarily of severance costs of Seagull
($19 million),  value of Seagull stock options  maintained by OEI ($17 million),
investment   banking  fees  ($10  million),   and  other  transaction  fees  and
professional  expenses ($8  million).  In addition,  merger costs of $50 million
were expensed through December 31, 1999. These costs consisted  primarily of Old
Ocean's  severance costs ($30 million),  the write-off of certain costs relating
to Old Ocean's  information  technology  system ($14  million) and  compensation
expense related to the vesting of Old Ocean's restricted stock ($6 million).  As
of December 31, 1999, $23 million of Old Ocean's severance costs have been paid.

     Disposition  of Assets - The Company  disposed of the  following  assets in
1999 primarily using the proceeds to repay existing long-term debt:

-    ENSTAR for net proceeds of $287 million;

-    Domestic  properties  located in the Arkoma  Basin and Gulf of Mexico for
     net proceeds of $231 million and $66 million, respectively; and

-    Canadian subsidiary for net proceeds of $68 million.

     The following reflects the results of operations of the disposed assets (in
thousands):

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                                 1999                   1998
                                                                        -----------------------   ------------------
<S>                                                                     <C>                       <C>
ENSTAR:
   Revenues.......................................................        $      38,281             $      93,592
   Operating profit...............................................                4,961                    23,143

Domestic Properties:
   Revenues.......................................................               35,894                    64,864
   Operating profit...............................................               14,516                    21,130

Canada:
   Revenues.......................................................                7,316                    19,232
   Operating profit (loss) (including impairment).................              (21,123)                    4,941
</TABLE>

     Unaudited Pro Forma  Information  - The following  table sets forth summary
unaudited pro forma  condensed  combined  financial and operating data which are
presented to give effect to the Seagull  Merger,  the  repurchase of outstanding
debt,  and the sales of ENSTAR,  the Canadian  subsidiary and the Gulf of Mexico
and Arkoma oil and gas  assets as if each  event had  occurred  as of January 1,
1998. Accordingly,  Seagull Merger expense, the extraordinary loss on repurchase
of debt and the results of  operations  of the disposed  assets,  including  the
impairment of Canadian  assets,  are excluded from net income.  The  information
does  not  purport  to  be  indicative  of  actual  results,  if  any  of  these
transactions had been in effect for the periods indicated, or of future results.
The information was prepared based on the following assumptions:

                                       42
<PAGE>

     -    The Seagull Merger, the sales of ENSTAR,  the Canadian  subsidiary and
          the Gulf of Mexico and Arkoma oil and gas assets,  and the  repurchase
          of the outstanding  debt are assumed to have occurred as of January 1,
          1998;

     -    certain costs that Seagull had expensed under the  successful  efforts
          method of  accounting  are  capitalized  under the full cost method of
          accounting;

     -    depreciation,   depletion  and  amortization  expense  of  Seagull  is
          calculated  in  accordance  with the full cost  method  of  accounting
          applied to the adjusted  basis of the  properties  acquired  using the
          purchase method of accounting;

     -    a decrease in interest expense results from the revaluation of Seagull
          debt  under  the  purchase   method  of   accounting,   including  the
          elimination of amortization  of historical  debt issuance  costs,  and
          from the repurchase of outstanding public debt;

     -    the  proceeds  from the  asset  sales  were  used to pay down  debt at
          January 1, 1998; and

     -    the related income tax effects of these adjustments are recorded based
          on the applicable statutory tax rate.


                         Unaudited Pro Forma Information
                  (Amounts in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                                 1999                   1998
                                                                        -----------------------   ------------------
<S>                                                                     <C>                       <C>
Revenues..........................................................      $       749,413             $     757,986
Net income (loss) available to common shareholders................               56,804                  (387,321)
Basic and diluted earnings (loss) per share.......................                0.34                     (2.36)
</TABLE>


     1998  Transactions - Merger costs of $39 million  relating to the Company's
merger  with UMC were  recorded  in the  first  quarter  of  1998.  These  costs
consisted  primarily of investment banking and other transaction fees,  employee
severance and  relocation  costs as well as the write-off of deferred  financing
costs  related  to the  former  credit  facilities  replaced  by the OEI  Credit
Facility in March 1998. All such costs were paid in 1998.

     In November  1998,  the Company  completed the  acquisition  of incremental
interests in several North  American oil and gas  properties in which it already
owned a working interest.  The properties were acquired from John Hancock Mutual
Life Insurance Company for a net purchase price of $38 million.  The acquisition
was financed through the issuance of Series A Convertible Preferred Stock.

     In December 1998, the Company completed its acquisition of certain contract
interests in Angola for $39 million.  In September  1998,  the Company  acquired
additional  contract  interests in certain  production sharing contracts in Cote
d'Ivoire for a net purchase price of $20 million.

     1997  Transactions - In March 1997, the Company completed an acquisition of
certain  interests in various  state leases in the Main Pass Block 69 field (the
"Main Pass  Acquisition"),  offshore  Plaquemines Parish,  Louisiana,  for a net
purchase  price of $56 million.  The Main Pass  Acquisition  included  interests
situated  contiguous to the Company's existing Main Pass 69 holdings acquired in
June 1992.

     In October  1997 the  Company  acquired  certain oil and gas  interests  in
various  federal  leases in the South Pass 61 and 65 fields  for a net  purchase
price of $60 million and became operator of the properties.

     In 1997,  the Company  acquired  additional  interests in various  domestic
properties  it  operates  and in which it holds  an  existing  working  interest
position  from  several  of  its  institutional  partners  for  a  net  cost  of
approximately $50 million.

     Subsequent  Sale - In  January  2000  the  Company  announced  that  it had
executed a purchase and sale  agreement to sell all its  interests and assets in
its East Bay  Complex  located in the  Mississippi  Delta  Region of the Gulf of
Mexico for an agreed price of $86 million.  The transaction is expected to close
March 31, 2000.


6.       Other Noncurrent Assets

Other noncurrent assets (stated in thousands) include the following:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                             ---------------------------------------
                                                                                   1999                 1998
                                                                             ------------------   ------------------
<S>                                                                          <C>                  <C>
Oil and gas imbalances (net of current portion of $5 million in 1999)...       $      20,099        $       6,491
Deferred financing costs................................................              28,336               31,821
Restricted deposits.....................................................                 168               10,773
Other...................................................................               8,174                4,631
                                                                             ------------------   ------------------
                                                                               $      56,777        $      53,716
                                                                             ==================   ==================
</TABLE>

     Oil and Gas  Imbalances - As  discussed in Note 2, the Company  records oil
and gas revenues following the entitlements method of accounting for production.

     Deferred  Financing Costs - Deferred  financing  costs represent  financing
costs  incurred in  connection  with the  execution of various  debt  facilities
entered into or securities  issued by the Company.  These costs are  capitalized
and amortized to interest expense over the life of the related debt.

     Restricted Deposits - At December 31, 1998, the Company, as the operator of
certain  oil and gas  properties,  was  party  to two  escrow  agreements  which
required monthly deposits into an escrow account.

                                       43
<PAGE>

These  deposits were to provide for the future  plugging and  abandonment  costs
associated with the oil and gas properties.  The escrow balances,  which totaled
approximately $11 million at December 31, 1998, were released in 1999.

7.    Debt

Long-term  debt  consisted  of the  following  at December 31, 1999 and 1998 (in
thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                             ---------------------------------------
                                                                                   1999                 1998
                                                                             ------------------   ------------------
<S>                                                                          <C>                  <C>
Credit Facilities (average interest rate of 6.3%) due 2004..............       $     300,000        $           -
OEI Credit Facility (average interest rate of 7.0%).....................                   -              357,000
Public Notes of Old Ocean:
   8 1/4% Senior Notes, due July 2018...................................             125,000              125,000
   7 5/8% Senior Notes, due July 2005...................................             125,000              125,000
   10 3/8% Senior Subordinated Notes, due October 2005..................                   -              150,000
   9 3/4% Senior Subordinated Notes, due October 2006...................               1,783              159,318
   8 7/8% Senior Subordinated Notes, due July 2007......................             199,745              199,711
   8 3/8% Senior Subordinated Notes, due July 2008......................             250,000              250,000
Public Notes Assumed in the Seagull Merger:
   7 7/8% Senior Notes, due August 2003.................................              98,553                    -
   7 1/2% Senior Notes, due September 2027..............................             125,172                    -
   8 5/8% Senior Subordinated Notes, due August 2005....................              99,559                    -
Monetary Production Payment Assumed in the Seagull Merger...............              12,599                    -
Other...................................................................               9,650                6,697
                                                                             ------------------   ------------------
                                                                                   1,347,061            1,372,726
Less:  Current maturities...............................................             (13,651)                (836)
                                                                             ------------------   ------------------
Total Long-Term Debt....................................................       $   1,333,410        $   1,371,890
                                                                             ==================   ==================
</TABLE>

     Credit  Facilities - Concurrent  with the closing of the Seagull  Merger on
March 30, 1999, the Company entered into two new credit  facilities (the "Credit
Facilities") which replaced the existing credit facilities of both Old Ocean and
Seagull.  The Credit Facilities  consisted of a $500 million five-year revolving
facility and a renewable $300 million 364-day facility with a one-year term loan
option.  In December  1999 the $300 million  facility  was replaced  with a $200
million facility with  substantially  the same terms. The Credit Facilities bear
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 December 31,
1999, borrowings  outstanding against the Credit Facilities totaled $300 million
and Letters of Credit  totaled $44  million,  leaving  $356 million of available
credit.

     Tender Offer - On November 9, 1999, the Company announced a tender offer to
repurchase  $150  million  of the 10 3/8%  Senior  Subordinated  Notes  and $160
million  of the 9 3/4%  Senior  Subordinated  Notes.  As a result of the  tender
offer,  the  Company  repurchased  on  December  10, 1999 all of the 10?% Senior
Subordinated Notes and $158 million of the 9 3/4% Senior Subordinated Notes. The
repurchase of these Notes was funded with available cash balances and borrowings
under the Credit  Facilities.  In connection with this  repurchase,  the Company
recorded an after-tax  extraordinary loss of $23 million, or $0.16 per basic and
diluted  share,  during  the  fourth  quarter of 1999.  The  extraordinary  loss
includes a current tax benefit of approximately $13 million.

     7 7/8% Senior Notes - In connection  with the Seagull  Merger,  the Company
assumed  $100 million of 7 7/8% Senior  Notes (the "7 7/8%  Notes").  The 7 7/8%
Notes bear interest at 7 7/8% per annum and are not redeemable prior to maturity
or subject to any sinking fund.

     7 1/2% Senior Notes - In connection  with the Seagull  Merger,  the Company
assumed $150 million of 7 1/2% Senior Notes (the "7 1/2% Notes"),  recorded at a
discount of $26 million.  The 7 1/2% Notes are not redeemable  prior to maturity
and are not subject to any sinking fund.

     8 5/8% Senior  Subordinated  Notes - In connection with the Seagull Merger,
the Company  assumed  $100 million of 8 5/8% Senior  Subordinated  Notes (the "8
5/8%  Notes").  The 8 5/8% Notes bear  interest  at 8 5/8% per annum and are not
subject to any sinking fund.

     Monetary  Production  Payment - In connection with the Seagull Merger,  the
Company assumed a monetary production payment.  The investors receive 99% of the
operating cash flow from the properties, less funds required for working capital
purposes,  until they reach a stated rate of return. Payout is expected to occur
sometime  during the year 2000. The monetary  production  payment is included in
current maturities at December 31, 1999.

     Notes  Offering - On July 8, 1998,  the Company  closed an offering of $500
million  Senior  and  Senior   Subordinated  Notes  receiving  net  proceeds  of
approximately $488 million, after deducting underwriting discounts and expenses.
The offering  comprised  three separate  indentures  including $125 million of 7
5/8% Senior Notes,  $125 million of 8 1/4% Senior  Notes,  and $250 million of 8
3/8% Senior  Subordinated  Notes.  On September  21, 1998,  the Company  filed a
registration  statement

                                       44
<PAGE>

on Form S-4 with the SEC to exchange the Notes for  publicly-traded  instruments
with identical terms. The exchange offer was completed on October 23, 1998.

     OEI Credit  Facility  -  Concurrent  with the  closing of the UMC Merger on
March 27, 1998, the Company entered into a five-year  unsecured revolving credit
facility  (the "OEI Credit  Facility").  The OEI Credit  Facility  provided  for
various  borrowing  options under either a base rate or Eurodollar margin rates.
As of December 31, 1998,  total  borrowings  outstanding  against the OEI Credit
Facility were approximately $357 million.

     8 7/8% Senior Subordinated Notes - In 1997, the Company issued $200 million
of 8 7/8% Senior  Subordinated Notes due 2007 (the "8 7/8% Notes") at a discount
for proceeds of approximately  $195 million (after offering costs).  Proceeds to
the Company were used  primarily to finance the purchase of  outstanding  public
debt and to repay outstanding indebtedness under the existing credit facility.

     The Company's  senior and senior  subordinated  debt are general  unsecured
obligations  of the  Company and are  guaranteed  by Ocean  Louisiana,  a direct
subsidiary  of the Company,  but are  subordinate  to the Credit  Facility.  The
Company's debt contains conditions and restrictive  provisions including,  among
other things,  restrictions  on additional  indebtedness  by the Company and its
subsidiaries  and  entering  into  sale  and  leaseback   transactions  and  the
maintenance of certain  financial  ratios.  Under the most  restrictive of these
provisions,  approximately  $150  million  was  available  for  payment  of cash
dividends on common stock or to repurchase common stock as of December 31, 1999.

     Other  Disclosures - In 1997, the Company  repurchased  approximately  $125
million of  outstanding  public debt resulting in an  extraordinary  loss of $19
million, net of a deferred tax benefit of $12 million.

     At December 31, 1998,  the Company was party to a fixed LIBOR interest rate
swap contract that provided for fixed  interest rates plus interest rate margins
to be realized on  notional  amounts of $45  million.  The  contract  expired in
January 1999.

     Annual  Maturities - At December 31, 1999, the Company's  aggregate  annual
maturities  of long-term  debt are $14  million,  $1 million,  $1 million,  $101
million  and $301  million  for the  years  2000,  2001,  2002,  2003 and  2004,
respectively.


8.       Fair Value of Financial Instruments

     The estimated fair value of financial  instruments  has been  determined by
the Company using  available  market  information  and  valuation  methodologies
described below.  Considerable  judgment is required in interpreting market data
to develop the estimates of fair value. The use of different market  assumptions
or valuation  methodologies  may have a material  effect on the  estimated  fair
value amounts. The estimated fair values of the Company's financial  instruments
(stated in thousands) are summarized as follows:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                 -------------------------------------------------------------------
                                                              1999                               1998
                                                 --------------------------------   --------------------------------
                                                   Carrying         Estimated         Carrying          Estimated
                                                    Amount          Fair Value         Amount          Fair Value
                                                 --------------   ---------------   --------------    --------------
<S>                                              <C>              <C>               <C>               <C>
Liabilities:
   Debt.....................................     $  1,347,061     $  1,297,959      $  1,372,726      $  1,349,030
Commodity hedging instruments:
   In a receivable position..................               -            5,365                 -             7,309
   In a payable position.....................               -           (9,552)                -                 -
</TABLE>

     Debt - The fair  value of the  public  debt is  estimated  based on  quoted
market prices for the same or similar  issues.  The carrying amount of all other
debt  approximates  fair value because these  instruments bear interest at rates
tied to current market rates or mature in one year.

     Commodity Hedging  Instruments - The fair value of the Company's  commodity
hedging  instruments is the estimated amount the Company would receive or pay to
settle the applicable commodity hedging instrument at the reporting date, taking
into account the  difference  between  market prices or index prices at year-end
and the  contract  price of the  commodity  hedging  instrument.  Certain of the
Company's commodity hedging  instruments,  primarily swaps and options,  are off
balance sheet transactions and, accordingly,  no respective carrying amounts for
these instruments were included in the accompanying consolidated balance sheets.

     As of December 31, 1999, the Company had hedged  approximately  9.5 million
barrels of oil and 18.3 Bcf of natural gas,  representing  approximately 35% and
11% of its  expected  2000 crude oil and natural gas  production,  respectively.
Assuming  current  strip  prices,  the  average  price of hedged  production  is
estimated at $20.93 per Bbl for crude oil and $2.75 per Mcf for natural gas.

     The results of hedging  increased  (decreased) oil and natural gas revenues
by approximately $(52) million, $25 million and ($1) million for the years ended
December 31, 1999, 1998 and 1997, respectively.

                                       45
<PAGE>

9.   Other Noncurrent Liabilities and Deferred Revenue

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                             ---------------------------------------
                                                                                   1999                 1998
                                                                             ------------------   ------------------
<S>                                                                          <C>                  <C>
Deferred revenue........................................................       $      71,845        $           -
Oil and gas imbalances (net of current portion of $3 million in 1999)...              14,968                5,286
Supplemental benefit and deferred directors fee plans...................               8,361                    -
Redeemable bearer shares................................................               6,160                    -
Deferred income taxes...................................................                   -                8,010
Other...................................................................              18,763                7,649
                                                                             ------------------   ------------------
                                                                               $     120,097        $      20,945
                                                                             ==================   ==================
</TABLE>

     Deferred  Revenue - In 1999,  the Company  entered into a prepaid crude oil
sales  contract  to  deliver  approximately  5,600  barrels of crude oil per day
beginning in February 2000 through May 2003. In exchange for the crude oil to be
provided, the Company received an advance payment of approximately $100 million.
The Company has the option to satisfy contract delivery  requirements with crude
oil  purchased  from  third  parties  or from oil it  produces.  The  obligation
associated  with the  future  delivery  of the  crude oil has been  recorded  as
deferred revenue and is being amortized into revenue as scheduled  deliveries of
crude oil are made.

     Oil and Gas  Imbalances - As  discussed in Note 2, the Company  records oil
and gas revenues following the entitlements method of accounting for production.

     Supplemental  Benefit  and  Deferred  Directors  Fee  Plans -  Supplemental
benefit and deferred  directors fee plans  represent  the  Company's  obligation
under its executive  supplemental  retirement  plan, the deferred  directors fee
plan and other supplemental benefit plans.

     Redeemable  Bearer Shares - As a result of the Seagull Merger,  the Company
assumed an obligation in the form of an interest-free loan which is repayable on
demand only to the extent  certain  bearer  share  warrants  are  presented  for
exchange  prior to July  2008.  At that  time,  the  obligation  will  cease and
remaining  cash  will  revert  to  the  Company  as an  increase  in  additional
paid-in-capital.


10. Shareholders' Equity

     The following table reflects the activity in shares of the Company's common
stock and preferred stock during the three years ended December 31, 1999:
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                  ----------------------------------------------------
                                                                       1999               1998             1997
                                                                  ----------------   ---------------  ----------------
<S>                                                               <C>                <C>              <C>
Common Stock Outstanding:
   Shares at beginning of year................................      101,753,646        100,109,241       91,741,503
   Shares issued in connection with Seagull Merger............       64,629,732                  -                -
   Exercise of common stock options...........................          596,603          1,084,405        1,110,277
   Issuance of common stock...................................                -                  -        7,254,000
   Issuance of restricted stock...............................                -            560,000                -
   Other......................................................                -                  -            3,461
                                                                  ----------------   ---------------  ----------------
   Shares at end of year......................................      166,979,981        101,753,646      100,109,241
                                                                  ================   ===============  ================

Preferred Stock Outstanding:
   Shares at beginning of year................................           50,000                  -               -
   Issuance of preferred stock................................                -             50,000               -
                                                                  ----------------   ---------------  ----------------
   Shares at end of year......................................           50,000             50,000               -
                                                                  ================   ===============  ================

Treasury Stock Outstanding:
   Shares at beginning of year................................                -                  -               -
   Shares assumed in connection with Seagull Merger...........         (472,278)                 -               -
   Purchase of shares.........................................         (394,000)                 -               -
   Contribution of shares to ESOP.............................          488,107                  -               -
                                                                  ----------------   ---------------  ----------------
   Shares at end of year......................................         (378,171)                 -               -
                                                                  ================   ===============  ================
</TABLE>


     Preferred Stock - The Company is authorized to issue  10,000,000  shares of
preferred  stock,  par value $1.00 and $0.01 per share at December  31, 1999 and
1998,  respectively,  in one or more series.  On November 10, 1998,  the Company
completed a private  placement of 50,000 shares of Convertible  Preferred  Stock
for $38 million of oil and gas  properties  and $12 million cash from one of its
institutional  investors and an affiliate of such investor.  The preferred stock
has a 6.5% cumulative  dividend  payable  semi-annually  and ranks senior to the
Company's  common stock with respect to dividend  distribution  and distribution
upon  liquidation.  Upon  liquidation,  the holders of the preferred  shares are
entitled to receive $1,000 per share, plus any accrued and unpaid dividends. The
conversion price of the shares is $15.00.

     Treasury  Stock - In  connection  with  the  Seagull  Merger,  the  Company
acquired  472,000  shares of  treasury  stock.

                                       46
<PAGE>

In December  1999,  the Company  purchased  394,000  shares of stock in the open
market for $2.8 million and subsequently  contributed 488,000 shares of treasury
stock to its Employee Stock Option Plan.

     Preferred  Share Purchase  Rights - The Company has a Share Purchase Rights
Plan to protect the  Company's  shareholders  from  coercive or unfair  takeover
tactics.  Under this Plan, each outstanding share and each share of common stock
subsequently issued has attached to it one Right, exercisable at $30.75, subject
to certain  adjustments.  In the event a person or group acquires 10% or more of
the  outstanding  common  stock,  or in the event the  Company is  acquired in a
merger  or  other  business   combination  or  50%  or  more  of  the  Company's
consolidated  assets or earning power is sold, each Right entitles the holder to
purchase  $30.75  worth of  shares  of  common  stock of the  Company  or of the
acquiring company,  as the case may be, for half of the then-current,  per-share
market prices.

     The Rights,  under certain  circumstances,  are redeemable at the option of
OEI's Board of Directors at a price of $0.005 per Right, within 10 days (subject
to extension)  following the day on which the acquiring  person or group exceeds
the 10%  threshold.  If any person or group  acquires 10% or more (but less than
50%) of the Company's  outstanding  common stock,  the Board may, at its option,
issue  common  stock  in  exchange  for  all  or  part  of the  outstanding  and
exercisable  Rights (other than Rights owned by such person or group which would
become null and void) at an exchange ratio of one share of common stock for each
two shares of common stock for which each Right is then exercisable,  subject to
adjustment. The Rights expire on May 21, 2000.


11. Benefit Plans

     Stock Option Plans - The Company  currently has various stock option plans.
The stock options  generally  become  exercisable  over a three-year  period and
expire 10 years after the date of grant.  At December 31, 1999,  approximately 3
million shares of common stock were available for grant. Information relating to
stock options is summarized as follows:

<TABLE>
<CAPTION>
                                      1999                           1998                           1997
                           ---------------------------- ------------------------------- -----------------------------
                                            Weighted                       Weighted                      Weighted
                                            Average                         Average                       Average
                                            Exercise                       Exercise                      Exercise
                                           Price Per                       Price Per                     Price Per
                              Shares         Share          Shares           Share         Shares          Share
                           -------------- ------------- ---------------- -------------- -------------- --------------
<S>                        <C>            <C>           <C>              <C>            <C>             <C>
Balance outstanding -
  Beginning of year........   12,667,983     $ 13.42        9,334,600       $ 12.34       8,090,322       $  9.30
    Seagull options
      assumed at merger
      date.................    5,414,601     $ 16.16                -            -                -             -
    Granted................    5,261,000     $  7.23        7,960,300       $ 17.80       2,423,590       $ 20.87
     Exercised.............     (596,603)    $  5.64       (1,084,405)      $  8.07      (1,111,886)      $  7.07
     Forfeited.............     (231,679)    $  8.84       (3,542,512)      $ 22.05         (67,426)      $ 41.09
                           -------------- ------------- ---------------- -------------- -------------- --------------
Balance outstanding -
  End of year..............   22,515,302     $ 12.88       12,667,983       $ 13.42       9,334,600       $ 12.34
                           ============== ============= ================ ============== ============== ==============
Options exercisable -
   End of year.............   17,559,619     $ 14.45        8,009,163       $ 12.77       4,167,056       $  8.19
                           ============== ============= ================ ============== ============== ==============
</TABLE>


     The weighted  average fair value of stock options granted during 1999, 1998
and 1997 was $4.28, $11.42 and $10.56 per share, respectively. The fair value of
each option  grant is  estimated  on the date of grant  using the  Black-Scholes
options-pricing model. The model assumed expected volatility of 65%, 61% and 43%
to 54%, weighted average risk-free  interest rates of 5.24%, 4.73% to 5.75%, and
6.16% to 6.83%, for grants in 1999, 1998 and 1997, respectively, and an expected
dividend  yield of 0% and an  expected  life of 5.0 to 6.5 years for each of the
three  years.  Actual  value  realized,  if  any,  is  dependent  on the  future
performance of Ocean common stock and overall stock market conditions.  There is
no  assurance  the value  realized by an  optionee  will be at or near the value
estimated by the Black-Scholes model.

     Information  relating to stock options  outstanding at December 31, 1999 is
summarized as follows:

                                       47
<PAGE>

<TABLE>
<CAPTION>
                                   Options Outstanding                              Options Exercisable
                  ------------------------------------------------------  -----------------------------------------
                                           Weighted         Weighted
                        Number             Average           Average           Number              Weighted
                      Outstanding         Remaining         Exercise       Exercisable at           Average
     Range of             at             Contractual        Price Per       December 31,         Exercise Price
 Exercise Prices   December 31, 1999         Life             Share             1999               Per Share
                  --------------------  ---------------   --------------  -----------------   ---------------------
<S>               <C>                   <C>               <C>             <C>              <C>
   $2.11 -  6.80         2,324,551           4.9              $  4.84          2,324,551             $  4.84
   $6.81 -  6.90         4,348,000           8.8              $  6.81            131,500             $  6.81
   $6.91 -  8.75         3,722,512           5.3              $  8.47          3,703,345             $  8.47
   $8.76 - 12.00         3,561,991           5.2              $ 10.68          2,862,541             $ 10.82
  $12.01 - 22.00         4,490,517           5.1              $ 17.57          4,490,517             $ 17.57
  $22.01 - 36.55         4,067,731           4.9              $ 24.77          4,047,165             $ 24.78
                  --------------------  ---------------   --------------  -----------------   ---------------------
                        22,515,302           5.8              $ 12.88         17,559,619             $ 14.45
                  ====================  ===============   ==============  =================   =====================
</TABLE>


     All  outstanding  options  were issued at an  exercise  price equal to fair
market value or greater of the  Company's  common stock as of the date of grant.
Accordingly,  as discussed in Note 2 for the years ended December 31, 1999, 1998
and 1997, no  compensation  expense  relating to these options was recognized in
the Company's  results of operations.  Had compensation  costs for the Company's
stock  option plans been  determined  based on the fair value at the grant dates
for awards made after  December 31, 1994 under those plans,  the  Company's  net
income (loss) and earnings  (loss) per share would have been restated to the pro
forma amounts (stated in thousands except per-share data) indicated below:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                --------------------------------------------------
                                                                     1999              1998             1997
                                                                ---------------    --------------   --------------
<S>                                                             <C>                <C>              <C>
Net income (loss):
   As reported................................................    $   (43,838)       $  (406,879)     $   42,919
   Pro forma..................................................        (71,019)          (427,166)         36,001

Earnings (loss) per share:
   Basic:                  As reported........................    $    (0.31)        $    (4.04)      $     0.46
                           Pro forma..........................    $    (0.49)        $    (4.43)      $     0.39

   Diluted:                As reported........................    $    (0.31)        $    (4.04)      $     0.44
                           Pro forma..........................    $    (0.49)        $    (4.43)      $     0.37
</TABLE>


     Under SFAS No.  123,  the  acceleration  of  vesting of options  due to the
Seagull  Merger   resulted  in  the  recognition  of  all  remaining  pro  forma
unamortized compensation expense relating to those options in the calculation of
the 1999 pro forma amounts above.

     Restricted  Stock - In November 1998 the Company awarded a total of 560,000
shares of  restricted  stock with a fair market  value of $10.25 per share and a
three-year vesting period to six executive officers at no cost to the employees.
Upon the completion of the Seagull  Merger,  any unvested  shares  automatically
became vested and all restrictions lapsed.

     Other  Benefit  Plans  - The  Company  has  various  other  benefit  plans,
primarily in the form of profit sharing and thrift plans. Collectively,  Company
contributions to these plans were  approximately  $6 million,  $2 million and $2
million in 1999, 1998 and 1997,  respectively and were included in operating and
general and administrative expenses.

12.  Income Taxes

     The income  (loss)  before  income taxes and the  components  of income tax
expense  (benefit) for each of the years ended December 31, 1999,  1998 and 1997
(stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                 -----------------------------------------------------
                                                                      1999               1998               1997
                                                                 ---------------    ----------------    --------------
<S>                                                              <C>                <C>                 <C>
Income (loss) before income taxes and extraordinary item:
   Domestic...................................................     $  (67,739)        $  (494,687)        $   82,542
   Foreign....................................................         46,115            (121,891)            20,670
                                                                 ---------------    ----------------    --------------
                                                                   $  (21,624)        $  (616,578)        $  103,212
                                                                 ===============    ================    ==============

Current income tax expense (benefit):
   Federal....................................................     $   21,577         $       321         $      169
   Foreign....................................................         20,074               3,512              4,716
   State......................................................          6,400                 (18)             1,335
                                                                 ---------------    ----------------    --------------
     Total current............................................         48,051               3,815              6,220
                                                                 ---------------    ----------------    --------------
Deferred  income tax expense (benefit):
   Federal....................................................        (38,179)           (198,798)            28,278
   Foreign....................................................         (2,362)            (13,131)             5,408
   State......................................................         (7,582)             (1,585)             1,086
                                                                 ---------------    ----------------    --------------
     Total deferred...........................................        (48,123)           (213,514)            34,772
                                                                 ---------------    ----------------    --------------
Income tax expense (benefit)..................................     $      (72)        $  (209,699)        $   40,992
                                                                 ===============    ================    ==============
</TABLE>

     In addition,  the Company  incurred tax expense  (benefit) of $1 million on
discontinued  operations  in  1999  and  $(13)  million  and  $(12)  million  on
extraordinary items in 1999 and 1997, respectively.

                                       48

<PAGE>

     As of December 31, 1999 and 1998, the Company and its subsidiaries had U.S.
federal net operating loss (NOL)  carryforwards  of  approximately  $81 and $193
million, respectively, which will expire in the year 2018.

     For federal  income tax  purposes,  certain  limitations  are imposed on an
entity's  ability to utilize its NOLs in future  periods if a change of control,
as defined for federal income tax purposes,  has taken place.  In general terms,
the limitation on  utilization  of NOLs and other tax attributes  during any one
year is determined by the value of an acquired  entity at the date of the change
of control multiplied by the then-existing long-term,  tax-exempt interest rate.
The manner of determining an acquired  entity's value has not yet been addressed
by the Internal  Revenue  Service.  The Company has determined that, for federal
income tax purposes, a change of control has occurred. However, the Company does
not believe such limitations will significantly  impact the Company's ability to
utilize the NOLs.

     Income tax expense (benefit) for each of the years ended December 31, 1999,
1998 and 1997 (stated in thousands) was different than the amount computed using
the federal statutory rate (35%) for the following reasons:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                  --------------------------------------------------
                                                                       1999             1998              1997
                                                                  ---------------   --------------    --------------
<S>                                                               <C>               <C>               <C>
Amount computed using the statutory rate......................      $   (7,568)       $ (215,802)       $   36,125
Increase (reduction) in taxes resulting from:
   Net book deductions not available for tax due to differences
     in book/tax basis........................................             283             2,337               329
   Tax gain in excess of book gain............................           9,045             2,310                 -
   Nondeductible merger costs.................................               -             7,103                 -
   State and local income taxes, net of federal effect........            (768)           (1,575)            1,430
   Taxation of foreign operations, net of federal effect......           7,309           (10,114)            3,020
   Accrual to actual adjustments..............................          (1,816)            1,072               459
   Increase (decrease) in deferred tax asset valuation allowance        (6,570)            4,476                 -
   Other......................................................              13               494              (371)
                                                                  ---------------   --------------    --------------
Income tax expense (benefit)..................................      $      (72)       $ (209,699)       $   40,992
                                                                  ===============   ==============    ==============
</TABLE>

     The net decrease in the valuation allowance for the year ended December 31,
1999  of  approximately  $6.6  million  included  $4.5  million  related  to the
utilization  in 1999 of net operating  loss  carryforwards  expiring in 1999 for
which a valuation  allowance had previously been provided.  The remaining change
for 1999 is related to management's  belief that, due to events occurring in the
year of change, it is more likely than not such deferred tax assets, for which a
valuation allowance had previously been established, will be realized.

     The  significant  components  of  deferred  income  tax  expense  (benefit)
attributable to income from  continuing  operations for the years ended December
31, 1999, 1998 and 1997 (stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                  -------------------------------------------------
                                                                       1999             1998             1997
                                                                  ---------------  ----------------  --------------
<S>                                                               <C>              <C>               <C>
Deferred tax expense (benefit) exclusive of the effects of
   other  components listed below.............................      $  (41,553)      $  (217,990)      $   34,772
Increase (decrease) in deferred tax asset valuation allowance.          (6,570)            4,476                -
                                                                  ---------------  ----------------  --------------
                                                                    $  (48,123)      $  (213,514)      $   34,772
                                                                  ===============  ================  ==============
</TABLE>


     The tax  effects of  temporary  differences  that gave rise to  significant
portions of the deferred tax  liabilities and deferred tax assets as of December
31, 1999 and 1998 (stated in thousands) were as follows:
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                         ---------------------------------------
                                                                               1999                 1998
                                                                         -----------------    ------------------
<S>                                                                      <C>                  <C>
Deferred tax assets:
   Excess of tax basis in oil and gas properties over basis for
     financial reporting purposes....................................      $     131,796        $     136,820
   Deferred revenue..................................................             35,000                    -
   Net operating loss carryforwards..................................             28,317              108,583
   Percentage depletion carryforwards................................              2,688                2,969
   Investment tax credit carryforwards...............................                 25                   25
   Alternative minimum tax credit carryforwards......................             24,415                4,187
   Other.............................................................             17,573                  886
                                                                         -----------------    ------------------
Deferred tax assets..................................................            239,814              253,470
Less - valuation allowance...........................................               (116)              (6,686)
                                                                         -----------------    ------------------
Net deferred tax assets..............................................            239,698              246,784
Deferred tax liabilities:
   Property, plant and equipment, due to differences in depreciation,
     depletion and amortization......................................             (3,596)             (35,528)
   Other.............................................................                  -               (2,676)
                                                                         -----------------    ------------------
Deferred tax liabilities.............................................             (3,596)             (38,204)
                                                                         -----------------    ------------------
Net deferred tax assets..............................................            236,102              208,580
Less - reclassification to current deferred assets (liabilities).....             (2,696)               1,234
                                                                         -----------------    ------------------
Net non-current deferred tax assets..................................      $     233,406        $     209,814
                                                                         =================    ==================
</TABLE>

                                       49
<PAGE>

13.  Related Party Transactions

     The Company conducts a portion of its oil and gas activities in conjunction
with a group of  institutional  and  corporate  investors  that  participate  in
certain of the Company's acquisition,  development and exploration programs, and
provide  the  Company  with  certain  carried  interests  and  management  fees.
Management fee income of $0.3 million, $3 million and $3 million, related to the
years ended  December  31,  1999,  1998 and 1997,  respectively,  is included in
operating expenses.

     During 1999,  the Company paid fees of $4.9 million to Merrill Lynch & Co.,
Inc. for financial  advisory services related to the Seagull Merger. A member of
the  Company's  Board of Directors  also serves on the Board of Merrill  Lynch &
Co., Inc.

     During 1999, the Company paid fees totaling $1.1 million to the law firm of
Vinson & Elkins,  L.L.P.  to perform  various legal services for the Company.  A
member of the Company's Board of Directors is of counsel with Vinson and Elkins,
L.L.P.

     The Company  pays an annual  consulting  fee of $425,000  from June 1, 1999
through May 31, 2002 to a member of the Company's Board of Directors.

     During 1999, 1998 and 1997, the Company paid $0.6 million, $0.8 million and
$1.5 million,  respectively, to an affiliate of a stockholder associated with an
overriding royalty interest owned by it.

     Effective January 1, 2000, the Company pays an annual salary of $100,000 to
the former Chairman of the Board of Directors of the Company for a period of two
years.  In  addition,  severance  benefits  of $5.4  million  paid to the former
Chairman have been included in Merger  expenses for the year ended  December 31,
1999.

     Effective November 1, 1995, the Company entered into a consulting agreement
for geological services with a party related to a former officer of the Company.
The original term of this agreement expired on October 31, 1999 and the contract
is now on a  month-to-month  basis.  In 1999,  1998,  and 1997, the Company paid
approximately  $127,000,  $135,000 and $108,000,  respectively,  relating to the
agreement.

     Management believes that all transactions with the aforementioned  entities
are under normal industry terms and conditions.


14.  Commitments And Contingencies

     Marketing  Contract - Approximately  90% of the Company's  monthly domestic
gas  production is being sold at market  prices  pursuant to a purchase and sale
agreement  with Duke Energy Trading and  Marketing,  L.L.C.  The agreement is in
effect through September 30, 2000.

     Transportation   Commitments   -  The  Company  has  entered  into  various
agreements  for  transportation  of  specified  quantities  of natural  gas with
estimated  future minimum  transportation  expense  payments  required for years
ending December 31, 2000 through 2004 of $6 million,  $3 million, $3 million, $2
million and $2 million, respectively.

     Lease  Commitments - The Company  leases certain office space and equipment
under operating lease  arrangements which require future minimum rental payments
ranging  between  $4 million  and $8  million in each of the years 2000  through
2004,  and total less than  $100,000  for all  subsequent  years.  Total  rental
expense under operating leases was approximately $5 million, $4 million,  and $3
million in 1999, 1998, and 1997, respectively.

     Other - The Company is a party to other  ongoing  litigation  in the normal
course of business.  Management  regularly analyzes current  information and, as
necessary,   provides   accruals  for  probable   liabilities  on  the  eventual
disposition of these matters. While the outcome of lawsuits or other proceedings
against the Company cannot be predicted with certainty, management believes that
the effect on its financial condition,  results of operations and cash flows, if
any, will not be material.


15.  Supplemental Oil and Gas Information (Unaudited)

     As  discussed  in Note 5,  during  1999,  the  Company  sold  its  Canadian
subsidiary and portions of its domestic  assets in the Arkoma and Gulf of Mexico
regions.  Also,  as a  result  of  the  Seagull  Merger,  the  Company  acquired
additional  foreign  operations  primarily in Egypt,  Russia and Indonesia,  and
increased its domestic and COte d'Ivorian  operations.  In the following  tables
"Other  International"  information  includes primarily  Indonesia and Russia at
December 31, 1999 and Canada at December 31, 1998 and 1997.

                                       50
<PAGE>

         Capitalized Costs Relating to Oil and Gas Producing Activities
                             (amounts in thousands)

<TABLE>
<CAPTION>
                                                      Cote       Equatorial                     Other
                                    Domestic        d'Ivoire      Guinea        Egypt       International    Total
                                  --------------   -----------  ------------  -----------   ------------- ------------
<S>                               <C>              <C>          <C>           <C>           <C>           <C>
At December 31, 1999:
   Proved ...................      $2,841,940       $227,131    $ 498,747      $ 85,271      $   53,199    $3,706,288
   Unproved .................         371,265              -            -        26,563         109,369       507,197
                                  --------------   -----------  ------------  -----------   ------------- ------------
                                    3,213,205        227,131      498,747       111,834         162,568     4,213,485
   Accumulated depreciation,
    depletion and amortization     (1,707,338)      (112,046)    (203,288)      (18,401)        (20,275)   (2,061,348)
                                  --------------   -----------  ------------  -----------   ------------- ------------
Total Capitalized Costs......      $1,505,867       $115,085    $ 295,459      $ 93,433      $  142,293    $2,152,137
                                  ==============   ===========  ============  ===========   ============= ============

At December 31, 1998:
   Proved ...................      $2,119,574       $203,822     $309,127      $      -      $  127,163    $2,759,686
   Unproved .................         327,015          1,003       74,681             -          85,990       488,689
                                  --------------   -----------  ------------  -----------   ------------- ------------
                                    2,446,589        204,825      383,808             -         213,153     3,248,375
   Accumulated depreciation,
    depletion and amortization     (1,385,738)       (81,484)    (167,740)            -         (56,761)   (1,691,723)
                                  --------------   -----------  ------------  -----------   ------------- ------------

Total Capitalized Costs......      $1,060,851       $123,341     $216,068      $      -      $  156,392    $1,556,652
                                  ==============   ===========  ============  ===========   ============= ============
</TABLE>


               Costs Incurred in Oil and Gas Property Acquisition,
          Exploration and Development Activities (amounts in thousands)

<TABLE>
<CAPTION>
                                                  Cote          Equatorial                   Other
                                   Domestic      d'Ivoire        Guinea       Egypt      International    Total
                                  ------------  -----------    -----------  -----------  ------------- -------------
<S>                               <C>           <C>            <C>          <C>          <C>           <C>
Year  ended December 31, 1999:
Acquisition costs:
   Proved ....................     $  751,266    $ 15,660       $      -     $ 82,673     $  50,717     $   900,316
   Unproved ...................       116,319           -            181       25,855         9,900         152,255
Exploration costs..............        91,207       4,056         16,886        1,063        34,821         148,033
Development costs..............        52,321       2,591         97,873        3,717         3,329         159,831
                                  ------------  -----------    -----------  -----------  ------------- -------------
Total costs incurred...........    $1,011,113    $ 22,307       $114,940     $113,308     $  98,767     $ 1,360,435
                                  ============  ===========    ===========  ===========  ============= =============

Year ended December 31, 1998:
Acquisition costs:
   Proved .....................    $   59,534    $      -       $      -     $      -     $   5,197     $    64,731
   Unproved ..................         46,417           -              -            -        45,799          92,216
Exploration costs .............       261,991      43,745         53,451            -        36,640         395,827
Development costs.............        232,585      29,446  (1)   121,213            -        12,107         395,351
                                  ------------  -----------    -----------  -----------  ------------- -------------
Total costs incurred...........    $  600,527    $ 73,191       $174,664     $      -     $  99,743     $   948,125
                                  ============  ===========    ===========  ===========  ============= =============

Year ended December 31, 1997:
Acquisition costs:
    Proved ....................    $  120,520    $      -       $      -     $      -     $   9,554     $   130,074
    Unproved ..................       113,944           -              -            -         2,423         116,367
Exploration costs .............       153,113      16,240         90,232            -        10,357         269,942
Development costs..............       248,363      23,462  (1)    36,842            -         9,308         317,975
                                  ------------  -----------    -----------  -----------  ------------- -------------
Total costs incurred............   $  635,940    $ 39,702       $127,074     $      -     $  31,642     $   834,358
                                  ============  ===========    ===========  ===========  ============= =============
</TABLE>

(1) Amounts do not include $4,125 and $17,229  incurred on the LPG Plant in
Cote d'Ivoire in 1998 and 1997, respectively.

                                       51
<PAGE>

     Of the $588 million of net unproved  property costs (primarily  seismic and
lease  acquisition  costs)  at  December  31,  1999,  being  excluded  from  the
amortizable  base,  $207 million was incurred in 1999, $245 million was incurred
in 1998, $133 million was incurred in 1997, and $3 million was incurred in prior
years.  The  majority of the costs will be  evaluated  over a five-year  period.

           Results of Operations for Oil and Gas Producing Activities
                             (amounts in thousands)

<TABLE>
<CAPTION>
                                                     Cote       Equatorial                   Other
                                     Domestic      d'Ivoire      Guinea       Egypt      International     Total
                                   -------------  -----------  -----------  -----------  -------------  ------------
<S>                                <C>            <C>          <C>          <C>          <C>            <C>
Year Ended December 31, 1999:
   Revenues ....................   $   467,565     $ 50,799     $131,153     $ 58,910      $  27,091     $ 735,518
   Operating expenses(1) .......       161,253       11,390       22,138       10,690         11,510       216,981
   DD&A(2).....................        212,089       20,582       48,262       19,189          9,577       309,699
   Impairment of oil and
       gas properties...........             -            -            -            -         46,403        46,403
   Income tax expense
      (benefit)(3)..............        34,391        6,494       23,956       10,389        (12,032)       63,198
                                   -------------  -----------  -----------  -----------  -------------  ------------
   Results of activities .......    $   59,832    $  12,333    $  36,797    $  18,642      $ (28,367)    $  99,237
                                   =============  ===========  ===========  ===========  =============  ============

 Year Ended December 31, 1998:
   Revenues ....................    $  402,301     $ 26,397     $ 74,220     $      -     $   19,232     $ 522,150
   Operating expenses(1) .......       157,155        7,837       13,010            -          7,074       185,076
   DD&A(2).....................        219,189       11,775       49,980            -          7,220       288,164
   Impairment of oil and
       gas properties ..........       435,768       43,723       60,424            -              -       539,915
   Income tax expense (benefit)(3)    (155,728)     (14,036)     (18,694)           -          1,876      (186,582)
                                   -------------  -----------  -----------  -----------  -------------  ------------
   Results of activities .......    $ (254,083)    $(22,902)    $(30,500)    $      -     $    3,062     $(304,423)
                                   =============  ===========  ===========  ===========  =============  ============

 Year Ended December 31, 1997:
   Revenues ....................    $  423,935     $ 27,803     $ 78,861     $      -     $   18,595     $ 549,194
   Operating expenses(1) .......       121,329        5,602        5,520            -          6,898       139,349
   DD&A(2).....................        175,245       14,555       46,474            -          7,366       243,640
   Income tax expense(3) ......         48,397        2,905       10,209            -          1,646        63,157
                                   -------------  -----------  -----------  -----------  -------------  ------------
   Results of activities........    $   78,964     $  4,741     $ 16,658     $      -     $    2,685     $ 103,048
                                   =============  ===========  ===========  ===========  =============  ============
</TABLE>

(1)  Operating  expenses  represent costs incurred to operate and maintain wells
     and related  equipment and  facilities.  These costs  include,  among other
     things,  repairs and  maintenance,  labor,  materials,  supplies,  property
     taxes,  insurance,  severance  taxes  and all  overhead  expenses  directly
     related to oil and gas producing activities.

(2)  DD&A represents depreciation, depletion and amortization.

(3)  Income tax expense  (benefit) is  calculated  by applying the statutory tax
     rate to operating profit,  then adjusting for any applicable  permanent tax
     differences or tax credits and allowances.

                                       52
<PAGE>

                          Reserve Quantity Information

<TABLE>
<CAPTION>
                                                          Cote       Equatorial                   Other
                                          Domestic      d'Ivoire       Guinea        Egypt     International    Total
                                        -------------- ------------  ------------  ----------  -------------  -----------
<S>                                     <C>            <C>           <C>           <C>         <C>            <C>
Proved reserves (MBOE):
 January 1, 1999 .....................    194,106         34,394         41,048          -         22,401        291,949
   Revisions of previous estimates....      7,696          1,036         14,498        (33)         2,469         25,666
   Extensions and discoveries .......      39,131              -              -        271          3,638         43,040
   Purchases of reserves in place ....    141,850          4,705              -     25,700         24,481        196,736
   Sales of reserves in place ........    (63,901)             -              -     (2,173)       (23,639)       (89,713)
   Production ........................    (36,399)        (3,606)        (7,323)    (3,043)        (2,310)       (52,681)
                                        -------------- ------------  ------------  ----------  -------------  -----------
December 31, 1999.....................    282,483         36,529         48,223     20,722         27,040        414,997
                                        ============== ============  ============  ==========  =============  ===========

January 1, 1998 ......................    182,912         27,972         40,014          -         19,693        270,591
   Revisions of previous estimates ...     (4,960)         3,945         (1,659)         -            750         (1,924)
   Extensions and discoveries ........     35,579            467          9,230          -          2,775         48,051
   Purchases of reserves in place ....     12,138          4,395              -          -          1,578         18,111
   Sales of reserves in place ........       (345)             -              -          -           (256)          (601)
   Production.........................    (31,218)        (2,385)        (6,537)         -         (2,139)       (42,279)
                                        -------------- ------------  ------------  ----------  -------------  -----------
December 31, 1998.....................    194,106         34,394         41,048          -         22,401        291,949
                                        ============== ============  ============  ==========  =============  ===========

January 1, 1997.......................    141,532         19,218         19,940          -         13,963        194,653
   Revisions of previous estimates ...      6,110          3,216            441          -            281         10,048
   Extensions and discoveries ........     35,234            780         24,086          -          3,697         63,797
   Purchases of reserves in place ....     28,967          6,608              -          -          3,608         39,183
   Sales of reserves in place ........     (3,246)             -              -          -           (145)        (3,391)
   Production ........................    (25,685)        (1,850)        (4,453)         -         (1,711)       (33,699)
                                        -------------- ------------  ------------  ----------  -------------  -----------
December 31, 1997.....................    182,912         27,972         40,014          -         19,693        270,591
                                        ============== ============  ============  ==========  =============  ===========

Proved developed reserves (MBOE):
   December 31, 1999..................    225,773         13,382         18,381     11,003         18,285        286,824
   December 31, 1998..................    143,603         10,566         10,620          -         21,467        186,256
   December 31, 1997 .................    145,044          8,580         11,482          -         19,693        184,799

Proved developed oil reserves (Mbbl):
   December 31, 1999 ................      74,445          2,836         18,381     10,809         11,929        118,400
   December 31, 1998 ................      64,183          2,251         10,620          -          3,900         80,954
   December 31, 1997 .................     70,632          1,861         11,482          -          3,383         87,358

Proved developed gas reserves (MMcf):
   December 31, 1999 .................    907,968         63,273              -      1,167         38,134      1,010,542
   December 31, 1998 .................    476,522         49,891              -          -        105,401        631,814
   December 31, 1997 .................    446,472         40,313              -          -         97,862        584,647
</TABLE>



     The  reserve  volumes  presented  are  estimates  only  and  should  not be
construed as being exact quantities.  These reserves may or may not be recovered
and may increase or decrease as a result of future operations of the Company and
changes in economic conditions.

                                       53
<PAGE>

                          Reserve Quantity Information

<TABLE>
<CAPTION>
                                                        Cote       Equatorial                    Other
                                         Domestic     d'Ivoire       Guinea       Egypt        International   Total
                                        ------------ ------------  -----------  -----------   ------------  ------------
<S>                                     <C>          <C>           <C>          <C>           <C>           <C>
Proved Oil Reserves (Mbbl):
January 1, 1999 .....................       82,936        6,437        41,048            -          3,900       134,321
   Revisions of previous estimates ..       10,234        1,358        14,498           33          2,276        28,399
   Extension and discoveries ........        7,682            -             -          271          3,638        11,591
   Purchases of reserves in place ...       14,717        1,009             -       25,360         14,262        55,348
   Sales of reserves in place .......      (12,229)           -             -       (2,173)        (4,473)      (18,875)
   Production .......................      (13,532)      (1,765)       (7,323)      (2,999)        (1,366)      (26,985)
                                        ------------ ------------  -----------  -----------   ------------  ------------
 December 31, 1999....................      89,808        7,039        48,223       20,492         18,237       183,799
                                        ============ ============  ===========  ===========   ============  ============

January 1, 1998 .....................       88,948        5,257        40,014            -          3,383       137,602
   Revisions of previous estimates ..      (11,818)         902        (1,659)           -            397       (12,178)
   Extension and discoveries ........       14,515          373         9,230            -            230        24,348
   Purchases of reserves in place ...        6,256          986             -            -            360         7,602
   Sales of reserves in place .......         (305)           -             -            -            (20)         (325)
   Production .......................      (14,660)      (1,081)       (6,537)           -           (450)      (22,728)
                                        ------------ ------------  -----------  -----------   ------------  ------------
December 31, 1998....................       82,936        6,437        41,048            -          3,900       134,321
                                        ============ ============  ===========  ===========   ============  ===========

January 1, 1997 .....................       67,717        4,150        19,940            -          3,499        95,306
   Revisions of previous estimates ..          404          854           441            -            192         1,891
   Extension and discoveries ........       16,809          218        24,086            -            181        41,294
   Purchases of reserves in place ...       17,344        1,062             -            -             45        18,451
   Sales of reserves in place .......       (1,167)           -             -            -            (95)       (1,262)
   Production .......................      (12,159)      (1,027)       (4,453)           -           (439)      (18,078)
                                        ------------ ------------  -----------  -----------   ------------  ------------
December 31, 1997....................       88,948        5,257        40,014            -          3,383       137,602
                                        ============ ============  ===========  ===========   ============  ============


Proved Gas Reserves (MMcf):
January 1, 1999 .....................      667,019      167,743            -             -        111,004       945,766
   Revisions of previous estimates ..      (15,236)      (1,927)           -          (400)         1,171       (16,392)
   Extension and discoveries ........      188,693            -            -             -              -       188,693
   Purchases of reserves in place ...      762,799       22,177            -         2,039         61,311       848,326
   Sales of reserves in place .......     (310,031)           -            -             -       (115,000)     (425,031)
   Production........................     (137,195)     (11,050)           -          (264)        (5,666)     (154,175)
                                        ------------ ------------  -----------  -----------   ------------  ------------
December 31, 1999....................    1,156,049      176,943            -         1,375         52,820     1,387,187
                                        ============ ============  ===========  ===========   ============  ============

January 1, 1998 .....................      563,783      136,290            -            -          97,862       797,935
   Revisions of previous estimates ..       41,146       18,256            -            -           2,121        61,523
   Extension and discoveries ........      126,388          566            -            -          15,262       142,216
   Purchases of reserves in place ...       35,291       20,455            -            -           7,308        63,054
   Sales of reserves in place .......         (243)           -            -            -          (1,414)       (1,657)
   Production .......................      (99,346)      (7,824)           -            -         (10,135)     (117,305)
                                        ------------ ------------  -----------  -----------   ------------  ------------
December 31, 1998....................      667,019      167,743            -            -         111,004       945,766
                                        ============ ============  ===========  ===========   ============  ============

January 1, 1997 .....................      442,890       90,410            -            -          62,781       596,081
   Revisions of previous estimates ..       34,234       14,174            -            -             533        48,941
   Extension and discoveries ........      110,547        3,370            -            -          21,102       135,019
   Purchases of reserves in place ...       69,740       33,275            -            -          21,377       124,392
   Sales of reserves in place .......      (12,474)           -            -            -            (301)      (12,775)
   Production........................      (81,154)      (4,939)           -            -          (7,630)      (93,723)
                                        ------------ ------------  -----------  -----------   ------------   ------------
December 31, 1997....................      563,783      136,290            -            -          97,862       797,935
                                        ============ ============  ===========  ===========   ============  ============
</TABLE>

                                       54
<PAGE>

     The Company's  standardized  measure of discounted future net cash flows as
of December  31,  1999 and 1998 and changes  therein for each of the years 1999,
1998 and 1997 are  provided  based on the present  value of future net  revenues
from proved oil and gas reserves  estimated by internal  petroleum  engineers in
accordance   with   guidelines   established  by  the  Securities  and  Exchange
Commission.  These  estimates  were  computed by applying  appropriate  year-end
prices  for oil and gas to  estimated  future  production  of proved oil and gas
reserves over the economic  lives of the reserves and assuming  continuation  of
existing  operating  conditions.  Year-end 1999 and 1998  calculations were made
using  prices of $23.33 per Bbl and $10.02  per Bbl,  respectively,  for oil and
$2.04 per Mcf and $1.83 per Mcf,  respectively,  for gas. The Company's  average
realized  prices before hedging for the year ended December 31, 1999 were $17.32
per Bbl and  $12.13 per Bbl,  respectively,  for oil and $2.08 per Mcf and $1.89
per Mcf,  respectively  for gas.  Ocean's  average prices before hedging for the
month  ended  January 31, 2000 were $25.27 per Bbl and $2.30 per Mcf for oil and
gas, respectively.

     Because the disclosure  requirements are standardized,  significant changes
can  occur  in these  estimates  based  upon oil and gas  prices  in  effect  at
year-end.  The following  estimates  should not be viewed as an estimate of fair
market  value.  Income taxes are computed by applying the  statutory  income tax
rate in the  jurisdiction to the net cash inflows relating to proved oil and gas
reserves  less the tax bases of the  properties  involved  and giving  effect to
appropriate  net  operating  loss  carryforwards,  tax  credits  and  allowances
relating to such properties.

 Standardized Measure of Discounted Future Net Cash Flows (amounts in thousands)

<TABLE>
<CAPTION>
                                                         Cote       Equatorial                     Other
                                        Domestic       d'Ivoire       Guinea         Egypt      International     Total
                                      -------------- -------------  ------------  ------------  -------------  -------------
<S>                                   <C>            <C>            <C>           <C>           <C>            <C>
December 31, 1999:
  Future cash inflows...............   $4,381,919    $  661,231     $ 1,154,462   $   482,108    $   491,695    $7,171,415
  Future development costs..........     (569,875)     (117,069)       (206,963)      (31,711)       (16,724)     (942,342)
  Future production costs...........   (1,285,846)     (134,778)       (110,286)      (80,438)      (164,770)   (1,776,118)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Future net cash flows before
     income taxes...................    2,526,198       409,384         837,213       369,959        310,201     4,452,955
  10% annual discount ..............     (897,360)     (171,272)       (193,135)      (98,504)      (140,831)   (1,501,102)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Discounted future net cash flows
     before income taxes............    1,628,838       238,112         644,078       271,455        169,370     2,951,853
  Discounted income taxes ..........     (119,771)      (98,239)       (126,548)      (95,762)       (96,115)     (536,435)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Standardized measure of discounted
     future net cash flows..........   $1,509,067     $ 139,873     $   517,530   $   175,693   $     73,255   $ 2,415,418
                                      ============== =============  ============  ============  =============  =============

December 31, 1998:
  Future cash inflows...............   $2,115,600     $ 328,562      $  416,710   $         -    $   217,662    $3,078,534
  Future development costs..........     (374,227)     (111,048)       (214,629)            -         (3,213)     (703,117)
  Future production costs...........     (763,979)     (105,528)        (89,348)            -        (63,547)   (1,022,402)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Future net cash flows before
     income taxes...................      977,394       111,986         112,733             -        150,902     1,353,015
  10% annual discount ..............     (283,902)      (50,347)        (40,066)            -        (61,619)     (435,934)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Discounted future net cash flows
     before income taxes............      693,492        61,639          72,667             -         89,283       917,081
  Discounted income taxes ..........       (8,619)          405           2,222             -         (7,266)      (13,258)
                                      -------------- -------------  ------------  ------------  -------------  -------------
  Standardized measure of discounted
     future net cash flows..........   $  684,873     $  62,044      $   74,889   $         -   $     82,017    $  903,823
                                      ============== =============  ============  ============  =============  =============
</TABLE>

                                       55
<PAGE>

           Principal Sources of Change in the Standardized Measure of
             Discounted Future Net Cash Flows (amounts in thousands)

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                 ---------------------------------------------------
                                                                      1999               1998             1997
                                                                 ----------------   ---------------  ---------------
<S>                                                              <C>                <C>              <C>
 Beginning of Year............................................     $   903,823        $ 1,220,407      $ 1,326,514

    Revisions of previous quantity estimates less related costs        312,017            (19,572)          72,113
    Extensions and discoveries less related costs.............         200,617            126,854          558,737
    Purchases of reserves in place............................         900,316             47,290          180,707
    Sales of reserves in place................................        (417,231)              (377)         (28,976)
    Net changes in future prices and production costs.........       1,191,165           (507,478)        (793,915)
    Future development costs incurred during the period.......         159,831            236,170           75,484
    Sales of oil and gas produced, net of production costs....        (518,537)          (333,978)        (424,286)
    Accretion of discount.....................................          91,708            133,906          149,599
    Net changes in income taxes...............................        (523,177)           111,025          210,628
    Changes in production, future development costs,
        timing and other .....................................         114,886           (110,424)        (106,198)
                                                                 ----------------   ---------------  ---------------
                                                                     1,511,595           (316,584)        (106,107)
                                                                 ----------------   ---------------  ---------------
 End of Year..................................................      $2,415,418        $   903,823      $ 1,220,407
                                                                 ================   ===============  ===============
</TABLE>


16. Supplemental Guarantor Information

     Ocean Energy, Inc., a Louisiana corporation and wholly-owned  subsidiary of
the Company ("Ocean  Louisiana"),  has  unconditionally  guaranteed the full and
prompt  performance of the Company's  obligations under certain of the notes and
related  indentures,  including the payment of  principal,  premium (if any) and
interest. None of the referenced indentures place significant  restrictions on a
wholly-owned  subsidiary's ability to make distributions to the parent. In order
to provide  meaningful  financial  data relating to the guarantor  (i.e.,  Ocean
Louisiana on an unconsolidated  basis),  the following  condensed  consolidating
financial information has been provided following the policies set forth below:

1)   Investments  in  subsidiaries  are accounted for by the Company on the cost
     basis.  Earnings of subsidiaries are therefore not reflected in the related
     investment accounts.

2)   Certain  reclassifications  were  made  to  conform  all of  the  financial
     information  to the financial  presentation  on a consolidated  basis.  The
     principal  eliminating  entries  eliminate  investments in subsidiaries and
     intercompany balances.

                                       56
<PAGE>

          Supplemental Condensed Consolidating Statements of Operations
           For the Three Years Ended December 31, 1999, 1998 and 1997
                             (Amounts in Thousands)
<TABLE>
<CAPTION>
                                                            Unconsolidated
                                     --------------------------------------------------------------
                                                               Guarantor          Non-Guarantor
                                            OEI               Subsidiary           Subsidiaries      Consolidated OEI
                                     ------------------   --------------------  -------------------  ------------------
<S>                                  <C>                  <C>                   <C>                  <C>
1999
Revenues...........................    $           -        $     223,732         $     511,786        $     735,518
Costs of Operations:
   Operating expenses..............                -               82,823               134,158              216,981
   Depreciation, depletion and
     amortization..................            7,712               95,229               214,546              317,487
   Impairment of oil and gas
     properties....................                -                    -                46,403               46,403
   General and administrative......           14,633                7,268                     -               21,901
                                     ------------------   --------------------  -------------------  ------------------
Operating Profit (Loss)............          (22,345)              38,412               116,679              132,746
Interest Expense...................          116,398               13,126               (23,443)             106,081
Merger Expenses....................                -               49,603                     -               49,603
Interest Income and Other..........           (6,238)              (2,576)                7,500               (1,314)
                                     ------------------   --------------------  -------------------  ------------------
Income (Loss) Before Taxes.........         (132,505)             (21,741)              132,622              (21,624)
Income Tax Expense (Benefit).......          (48,364)                 698                47,594                  (72)
                                     ------------------   --------------------  -------------------  ------------------
Income (Loss) from Continuing
   Operations......................          (84,141)             (22,439)               85,028              (21,552)
Income from Discontinued
   Operations, Net of Income Taxes.                -                    -                 1,127                1,127
Extraordinary Loss (Net of Taxes)..          (23,413)                   -                     -              (23,413)
                                     ------------------   --------------------  -------------------  ------------------
Net Income (Loss)..................    $    (107,554)       $     (22,439)        $      86,155        $     (43,838)
                                     ==================   ====================  ===================  ==================

1998
Revenues...........................    $           -        $     307,318         $     214,832        $     522,150
Costs of Operations:
   Operating expenses..............                -              116,424                68,652              185,076
   Depreciation, depletion and
     amortization..................                -              160,353               133,552              293,905
   Impairment of oil and gas
     properties....................                -              399,768               140,147              539,915
   General and administrative......              249               18,116                   844               19,209
                                     ------------------   --------------------  -------------------  ------------------
Operating Loss.....................             (249)            (387,343)             (128,363)            (515,955)
Interest (Income) Expense..........           36,545               42,950               (16,643)              62,852
Merger Expense.....................                -               39,000                     -               39,000
Interest Income and Other..........                -                  552                (1,781)              (1,229)
                                     ------------------   --------------------  -------------------  ------------------
Loss Before Taxes..................          (36,794)            (469,845)             (109,939)            (616,578)
Income Tax Benefit.................          (16,847)            (151,444)              (41,408)            (209,699)
                                     ------------------   --------------------  -------------------  ------------------
Net Loss...........................    $     (19,947)       $    (318,401)        $     (68,531)       $    (406,879)
                                     ==================   ====================  ===================  ==================

1997
Revenues...........................    $           -        $     343,263         $     205,931        $     549,194
Costs of Operations:
   Operating expenses..............                -               87,480                51,869              139,349
   Depreciation, depletion and
     amortization..................                               125,003               123,420              248,423
   General and administrative......              120               14,447                   696               15,263
                                     ------------------   --------------------  -------------------  ------------------
Operating Profit (Loss)............             (120)             116,333                29,946              146,159
Interest (Income) Expense..........           16,115               65,670               (32,651)              49,134
Interest Income and Other..........                -               (2,753)               (3,434)              (6,187)
                                     ------------------   --------------------  -------------------  ------------------
Income (Loss) Before Taxes.........          (16,235)              53,416                66,031              103,212
Income Tax Expense (Benefit).......          (20,585)              57,556                 4,021               40,992
Extraordinary Loss (net of taxes)..                               (19,301)                    -              (19,301)
                                     ------------------   --------------------  -------------------  ------------------
Net Income (Loss)..................    $       4,350        $     (23,441)        $      62,010        $      42,919
                                     ==================   ====================  ===================  ==================
</TABLE>
                                       57
<PAGE>

               Supplemental Condensed Consolidating Balance Sheets
                          At December 31, 1999 and 1998
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                 Unconsolidated
                                --------------------------------------------------
                                                   Guarantor       Non-Guarantor     Eliminating       Consolidated
                                     OEI           Subsidiary       Subsidiaries       Entries             OEI
                                --------------   ---------------   ---------------  ---------------   ---------------
<S>                             <C>              <C>               <C>              <C>               <C>
December 31, 1999
Assets
Current Assets................    $     3,266      $    60,340       $   226,344      $         -       $   289,950
Intercompany Investments......      2,498,760         (167,761)           (8,925)      (2,322,074)                -
Property,  Plant and Equipment,
   Net........................         22,630          586,164         1,594,216                -         2,203,010
Other Assets..................         72,943          187,393            29,847                -           290,183
                                --------------   ---------------   ---------------  ---------------   ---------------
Total Assets..................    $ 2,597,599      $   666,136       $ 1,841,482       (2,322,074)      $ 2,783,143
                                ==============   ===============   ===============  ===============   ===============

Liabilities and Shareholders' Equity
Current Liabilities...........    $   131,041      $   107,628       $   143,272      $         -       $   381,941
Long-Term Debt................      1,324,811                -             8,599                -         1,333,410
Other Liabilities.............        102,976           11,390             5,731                -           120,097
Shareholders' Equity..........      1,038,771          547,118         1,683,880       (2,322,074)          947,695
                                --------------   ---------------   ---------------  ---------------   ---------------
Total Liabilities and
   Shareholders' Equity.......    $ 2,597,599      $   666,136       $ 1,841,482       (2,322,074)      $ 2,783,143
                                ==============   ===============   ===============  ===============   ===============

December 31, 1998
Assets
Current Assets................    $         -      $    49,680       $   104,101      $         -       $   153,781
Intercompany Investments......      1,645,933          174,608          (410,255)      (1,410,286)                -
Property,  Plant and Equipment,
   Net........................              -          674,598           907,041                -         1,581,639
Other Assets..................         24,686          214,868            31,986                -           271,540
                                --------------   ---------------   ---------------  ---------------   ---------------
Total Assets..................    $ 1,670,619      $ 1,113,754       $   632,873      $(1,410,286)      $ 2,006,960
                                ==============   ===============   ===============  ===============   ===============

Liabilities and Shareholders' Equity
Current Liabilities...........    $    31,271      $   187,878       $    18,033      $         -       $   237,182
Long-Term Debt................      1,009,274          357,000             5,616                -         1,371,890
Other Liabilities.............              -              981            19,964                -            20,945
Shareholders' Equity..........        630,074          567,895           589,260       (1,410,286)          376,943
                                --------------   ---------------   ---------------  ---------------   ---------------
Total Liabilities and
   Shareholders' Equity.......    $ 1,670,619      $ 1,113,754       $   632,873      $(1,410,286)      $ 2,006,960
                                ==============   ===============   ===============  ===============   ===============
</TABLE>

                                       58
<PAGE>

          Supplemental Condensed Consolidating Statements of Cash Flows
           For the Three Years Ended December 31, 1999, 1998 and 1997
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                          Unconsolidated
                                     ----------------------------------------------------------
                                                             Guarantor         Non-Guarantor
                                            OEI              Subsidiary         Subsidiaries      Consolidated OEI
                                     ------------------   -----------------   -----------------   ------------------
<S>                                  <C>                  <C>                 <C>                 <C>
1999
Cash Flows from Operating
   Activities:
   Net Income (Loss)...............    $    (107,554)       $     (22,439)      $      86,155       $     (43,838)
   Adjustments to reconcile net
     income (loss) to net cash from
     operating activities..........          (35,826)               2,190             413,622             379,986
   Changes in operating assets and
     liabilities, net of
     acquisitions..................          383,299              372,990            (758,686)             (2,397)
                                     ------------------   -----------------   -----------------   ------------------
Net Cash Provided by (Used in)
   Operating Activities............          239,919              352,741            (258,909)            333,751
Cash Flows Provided by (Used in)
   Investing Activities............          (20,194)              10,629             311,425             301,860
Cash Flows Provided by (Used in)
   Financing Activities............         (218,173)            (363,370)                115            (581,428)
                                     ------------------   -----------------   -----------------   ------------------
Net Increase in Cash and Cash
   Equivalents.....................            1,552                    -              52,631              54,183
Cash and Cash Equivalents:
   Beginning of Period.............                -                    -              10,706              10,706
                                     ------------------   -----------------   -----------------   ------------------
   End of Period...................    $       1,552        $           -       $      63,337       $      64,889
                                     ==================   =================   =================   ==================

1998
Cash Flows from Operating
   Activities:
   Net Loss........................    $     (19,947)       $    (318,401)      $     (68,531)      $    (406,879)
   Adjustments to reconcile net
     loss to net cash from
     operating activities..........          (15,157)             412,254             228,857             625,954
   Changes in assets and liabilities          28,030               70,907             (88,088)             10,849
                                     ------------------   -----------------   -----------------   ------------------
Net Cash Provided by (Used in)
   Operating Activities............           (7,074)             164,760              72,238             229,924
Cash Flows Used in Investing
   Activities......................                -             (500,123)           (468,266)           (968,389)
Cash Flows Provided by Financing
   Activities......................            7,072              332,710             397,700             737,482
                                     ------------------   -----------------   -----------------   ------------------
Net Increase (Decrease) in Cash and
   Cash Equivalents................               (2)              (2,653)              1,672                (983)
Cash and Cash Equivalents:
   Beginning of Period.............                2                2,653               9,034              11,689
                                     ------------------   -----------------   -----------------   ------------------
   End of Period...................    $           -        $           -       $      10,706       $      10,706
                                     ==================   =================   =================   ==================

1997
Cash Flows from Operating
   Activities:
   Net Income (Loss)...............    $       4,350        $     (23,441)      $      62,010       $      42,919
   Adjustments to reconcile net
     income (loss) to net cash from
     operating activities..........          (20,033)             182,475             126,754             289,196
   Changes in assets and liabilities              (1)              44,685             (12,597)             32,087
                                     ------------------   -----------------   -----------------   ------------------
Net Cash Provided by (Used in)
   Operating Activities............          (15,684)             203,719             176,167             364,202
Cash Flows Used in Investing
   Activities......................                -             (510,738)           (290,768)           (801,506)
Cash Flows Provided by Financing
   Activities......................           15,683              262,154             110,455             388,292
                                     ------------------   -----------------   -----------------   ------------------
Net Decrease in Cash and Cash
   Equivalents.....................               (1)             (44,865)             (4,146)            (49,012)
Cash and Cash Equivalents:
   Beginning of Period.............                3               47,518              13,180              60,701
                                     ------------------   -----------------   -----------------   ------------------
   End of Period...................    $           2        $       2,653       $       9,034       $      11,689
                                     ==================   =================   =================   ==================
</TABLE>

                                       59