CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                    CONTENTS
<S>                                                                      <C>
                                                                         PAGE
Selected Financial Data.................................................  23
Management's Discussion and Analysis of Financial Condition
     and Results of Operations..........................................  24
Selected Quarterly Financial Data.......................................  35
Report of Management to Shareholders....................................  36
Independent Auditors' Report............................................  37
Consolidated Statements of Operations...................................  38
Consolidated Balance Sheets.............................................  39
Consolidated Statements of Cash Flows...................................  40
Consolidated Statements of Shareholders' Equity.........................  41
Notes to Consolidated Financial Statements..............................  42

</TABLE>

<TABLE>
<CAPTION>
                                              SELECTED FINANCIAL DATA (1)
                                   (Amounts in Thousands Except Per Share Data)

                                                                      Year Ended December 31,
                                          --------------------------------------------------------------------------------
                                             1997             1996             1995            1994             1993
                                          ------------    -------------    -------------   --------------   --------------
<S>                                       <C>             <C>              <C>             <C>              <C>
Revenues...............................    $ 549,367       $ 517,211         $ 406,280       $ 467,579       $ 452,232
Net income (loss) (2)..................       49,130          28,961            (1,738)         (4,405)         34,095
Earnings (loss) per share:
   Basic...............................         0.78            0.46             (0.03)          (0.07)           0.56
   Diluted.............................         0.77            0.46             (0.03)          (0.07)           0.56
Net cash provided by operating
   activities before changes in
   operating assets and liabilities....      249,587         220,543           124,822         182,413         174,697
Net cash provided by
   operating activities................      262,749         258,439           117,727         207,339         139,292
Total assets...........................    1,411,066       1,515,063         1,359,125       1,454,050       1,286,391
Long-term debt.........................      469,017         573,455           557,107         622,080         459,787
Shareholders' equity...................      647,204         597,730           562,621         557,646         567,943
Capital expenditures...................      275,608         213,462           144,101         202,553         137,894
Acquisitions, net of cash acquired.....       17,665         104,420                 -         193,859          29,470
Standardized measure of discounted
   future net cash flows before taxes..    1,219,363       2,137,870         1,103,962         865,047       1,022,140
</TABLE>

(1)  Includes Seagull Energy Canada Ltd. from January 4, 1994 through October 6,
     1997.

(2)  1995 includes a non-cash  pre-tax  charge for the  impairment of long-lived
     assets of $49 million.

23                         Seagull Energy Corporation
<PAGE>



                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

                              RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                             CONSOLIDATED HIGHLIGHTS
                             (Amounts in Thousands)

                                                                                             Year Ended December 31,
                                                                               -----------------------------------------------------
                                                                                    1997               1996               1995
                                                                               ---------------    ---------------    ---------------
<S>                                                                            <C>                <C>                <C>
Revenues:
     Oil and gas operations................................................     $  453,648          $  419,595         $  308,510
     Alaska transmission and distribution..................................         95,719              97,616             97,770
                                                                               ---------------    ---------------    ---------------
                                                                                $  549,367          $  517,211         $  406,280
                                                                               ===============    ===============    ===============
Operating profit (loss):
     Oil and gas operations................................................     $  106,983          $   97,192         $  (35,867)
     Alaska transmission and distribution..................................         22,588              25,781             22,896
     Corporate.............................................................        (19,095)            (19,530)           (23,798)
                                                                               ---------------    ---------------    ---------------

                                                                                $  110,476          $  103,443         $  (36,769)
                                                                               ===============    ===============    ===============
Net income (loss)..........................................................     $   49,130          $   28,961         $   (1,738)
Net cash provided by operating activities before changes in operating
   assets and liabilities..................................................     $  249,587          $  220,543         $  124,822
Net cash provided by operating activities..................................     $  262,749          $  258,439         $  117,727
</TABLE>

     In the last three  years,  Seagull  Energy  Corporation  ("Seagull"  or the
"Company") has made substantial  changes in its operational focus. These changes
have resulted in more  international  operations,  a greater component of oil in
Seagull's  reserve base, a renewed  emphasis on its  exploration  and production
activities  and a  strengthening  of  its  balance  sheet.  These  changes  were
accomplished through various transactions throughout the three-year period ended
December 31, 1997 - including  the sale of its Canadian oil and gas  operations,
the merger  with Global  Natural  Resources  Inc.  ("Global"),  the  purchase of
additional  Egyptian  concessions  and  the  sale  of  substantially  all of the
Company's pipeline and gas processing assets.

     With these  changes and an increase in domestic gas prices,  Seagull's  net
income  improved by $20 million to $49 million in 1997 versus 1996 and cash flow
provided  by  operating  activities  before  changes  in  operating  assets  and
liabilities  improved  $29 million to $250  million for 1997.  The same  factors
helped  create a $31 million  increase in net income (loss) from $(2) million in
1995 to $29 million in 1996 and a $96 million  increase in cash flow provided by
operating  activities before changes in operating assets and liabilities to $221
million for 1996 over $125 million for 1995. The increase in net income and cash
flow is concentrated in the Oil and Gas Operations ("O&G") segment.

24                         Seagull Energy Corporation
<PAGE>

<TABLE>
<CAPTION>
                             OIL AND GAS OPERATIONS
                             (Amounts in Thousands)

                                                                                         Year Ended December 31,
                                                                        -----------------------------------------------------------
                                                                              1997                 1996                 1995
                                                                        -----------------    -----------------    -----------------
<S>                                                                     <C>                  <C>                  <C>
Revenues:
     Natural gas...................................................      $    298,223          $   298,235          $   219,111
     Oil and NGL...................................................           131,096               90,779               48,725
     Pipeline and marketing........................................            24,329               30,581               40,674
                                                                        -----------------    -----------------    -----------------
                                                                              453,648              419,595              308,510
                                                                        -----------------    -----------------    -----------------

Production operating expenses......................................           115,713              102,158               85,025
Pipeline and marketing expenses....................................            28,670               24,091               30,674
Exploration charges................................................            42,085               50,772               40,223
Depreciation, depletion and amortization...........................           160,197              145,382              139,613
Impairment of long-lived assets....................................                 -                    -               48,842
                                                                        -----------------    -----------------    -----------------
Operating profit (loss)............................................      $    106,983          $    97,192          $   (35,867)
                                                                        =================    =================    =================
</TABLE>


     As discussed previously, the O&G segment's results reflect some significant
changes in the focus of the Company's  operations.  Revenues from oil production
are now a more  significant  part of the  Company's  activities  as reflected by
Seagull's  expanding  operations  in Egypt.  This growing  presence in Egypt and
increases  in domestic  gas prices over the last three years have helped the O&G
segment's operating profit to grow from $13 million (excluding impairment of $49
million) in 1995 to $107 million in 1997.

     The O&G segment  showed a $34 million  increase in revenues to $454 million
and a $10 million increase in operating profit to $107 million for 1997. This 8%
increase in O&G revenues was principally  due to stronger  natural gas prices in
nearly  all  areas of the  Company's  production  operations  and  increases  in
international oil and gas production, excluding Canada which was sold in October
1997.

     The effect of stronger gas prices and international  liquids production was
partially  offset by a decline in oil prices in all areas other than  Tatarstan,
particularly  Egypt  where the  price  decreased  15% from  1996 to 1997,  and a
decrease in pipeline and marketing  revenues.  The 10% increase in the operating
profit of the O&G  segment was  primarily  a result of the 160%  increase in oil
production  in Egypt.  Increases in Egyptian oil  production  accounted for over
three quarters of the Company's  overall increase in oil production,  as Seagull
realized  additional  contributions  from (i) the East Zeit and  South  Hurghada
concessions,  the  two  concessions  purchased  in late  1996;  (ii)  the  Qarun
concession,  as additional production  facilities became operational;  and (iii)
the West Abu Gharadig concession, purchased in October 1997. Oil prices in Egypt
declined $3.30 per Bbl to $18.26 per Bbl in 1997 versus $21.56 per Bbl in 1996.

25                         Seagull Energy Corporation
<PAGE>


     In October  1997,  the Company sold its  Canadian  oil and gas  operations,
which had revenues of approximately $26 million, $34 million and $29 million and
income (loss) before income taxes of approximately $6 million,  $(5) million and
$(11)  million  for  the  years  ended   December  31,  1997,   1996  and  1995,
respectively.

     The $111  million  increase  in  revenues  for 1996 as compared to 1995 was
primarily the result of increases in domestic  natural gas prices,  increases in
international  oil production and increases in international oil and gas prices.
The increase in domestic natural gas prices from $1.62 per Mcf for 1995 to $2.17
per Mcf for 1996 accounted for approximately $63 million of the overall increase
in revenues. International oil production increased over 1995 as production from
the Qarun  concession in Egypt began in November 1995 and the Company  purchased
interests  in two  additional  Egyptian  concessions  in September  1996.  Also,
production  increased steadily during 1996 from Cote d'Ivoire,  where production
began in April 1995.  The  increases in  production  in Cote  d'Ivoire and Egypt
contributed  approximately  $35  million of the overall  increase  in  revenues.
Domestic production also increased slightly,  providing approximately $6 million
of the overall increase in revenues.

     Pipeline and  marketing  revenues  declined to $24 million in 1997 with the
absence of the higher  margins  created from the high  volatility in the natural
gas  markets  during  early  1996,  partially  offset by an increase in revenues
related to the Company's gas gathering and processing facilities.  This increase
in gas gathering and processing revenues was substantially offset by an increase
in the related cost of gas. Pipeline and marketing  revenues  decreased from $41
million  in  1995  to  $31  million  in  1996,  primarily  due to  the  sale  of
substantially all of the Company's gas gathering and processing  facilities (the
"Pipeline  Assets") in September 1995,  partially  offset by the contribution of
the  higher  margins   realized  in  1996.  The  Pipeline   Assets   contributed
approximately  $18 million in revenues  and $6 million in  operating  profit for
1995.

     In late 1995,  Seagull initiated a risk management program for a portion of
its equity production and certain third-party  marketing  activities,  utilizing
such derivative financial  instruments as futures contracts,  options and swaps.
In early 1997, the Company closed  substantially all of its derivative financial
instruments related to equity production and focused its risk management efforts
on  reducing  price and basis  risk for its  third-party  marketing  activities.
Seagull accounts for its commodity  derivative  contracts as hedging  activities
and,  accordingly,  the effect is included in revenues when the  commodities are
sold.

     The Company  recorded  $10  million,  $9 million and $0.5 million for 1997,
1996 and 1995,  respectively,  in costs related to equity hedging activities and
$3 million in costs and $0.5 million in income for 1997 and 1996,  respectively,
related to third-party marketing activities.  By the end of the first quarter of
1997, the Company's equity hedging  activities had been  substantially  reduced,
leaving  primarily  the  commodity  hedges in place as required by the  monetary
production  payment  (related to the 1995 sale of the  Company's  Section 29 tax
credit-bearing  properties) for  approximately  11 MMcf per day through December
1998.  The equity  hedging  costs  discussed  above include costs related to the
monetary production payment hedges of approximately $3 million and $4 million in
1997 and 1996,  respectively.  Total  equity  hedging  costs  had the  effect of
reducing average gas prices by $0.06 per Mcfe

26                         Seagull Energy Corporation
<PAGE>



for both 1997 and 1996 and $0.004 per Mcfe for 1995.  At December 31, 1997,  the
Company had open natural gas futures,  swaps and option contracts related to its
third-party marketing efforts totaling 6 Bcf and 14 Bcf related to purchases and
sales,  respectively,  for the period from January  through  December  1998.  At
December 31, 1997,  the fair value  related to the Company's  commodity  hedging
activities was $1 million of unrealized costs related to open contracts.


<TABLE>
<CAPTION>
                          OIL AND GAS REVENUES BY AREA
                             (Amounts in Thousands)

                                                                                        Year Ended December 31,
                                                                   -----------------------------------------------------------------
                                                                          1997                   1996                    1995
                                                                   ------------------     ------------------     -------------------
<S>                                                                <C>                     <C>                    <C>
    Domestic.....................................................     $    290,337            $    282,508            $   205,706
    Canada (*)...................................................           25,956                  34,006                 28,849
    Egypt........................................................           61,772                  28,126                    442
    Cote d'Ivoire................................................           15,995                  12,798                  4,377
    Tatarstan....................................................           21,558                  15,626                 16,037
    Indonesia and other..........................................           13,701                  15,950                 12,425
                                                                   ------------------     ------------------     -------------------
                                                                      $    429,319            $    389,014            $   267,836
                                                                   ==================     ==================     ===================
</TABLE>

     (*)  All of the  Company's  Canadian  oil and gas  operations  were sold in
          October 1997.

<TABLE>
<CAPTION>
                                                                  PRODUCTION AND UNIT PRICE BY AREA
                                                  Net Daily Production                                   Unit Price
                                     -----------------------------------------------    --------------------------------------------
                                                Year Ended December 31,                           Year Ended December 31,
                                     -----------------------------------------------    --------------------------------------------
                                        1997             1996              1995            1997            1996             1995
                                     ------------    -------------     -------------    ----------    --------------    ------------
<S>                                  <C>             <C>               <C>              <C>            <C>               <C>

Gas Sales(1):
     Domestic..................           303               318               311         $ 2.34           $ 2.17           $ 1.62
     Canada (2)................            37                58                60           1.63             1.32             1.07
     Cote d'Ivoire.............             6                 4                 1           1.93             1.77             1.61
     Indonesia and other.......            11                12                11           3.18             3.36             2.96
                                     ------------    -------------     -------------    -----------    --------------    -----------
                                          357               392               383         $ 2.29           $ 2.08           $ 1.57
                                     ============    =============     =============    ===========     =============    ===========

Oil and NGL Sales(1):
      Domestic.................         4,830             4,264             3,845         $17.60           $19.03           $15.84
      Canada (2)...............           665               985             1,092          16.46            16.77            13.01
      Egypt                             9,268             3,565                67          18.26            21.56            17.97
      Cote d'Ivoire............         1,653             1,395               715          19.34            20.04            15.51
      Tatarstan................         4,143             3,053             2,909          14.26            13.98            15.11
      Indonesia and other......           152               147               125          19.31            19.58            17.38
                                     ------------    -------------     -------------    -----------    --------------    -----------
                                       20,711            13,409             8,753         $17.34           $18.50           $15.53
                                     ============    =============     =============    ===========    ==============    ===========
</TABLE>

(1)  Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in Bbl
     and $ per Bbl.

(2)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

27                         Seagull Energy Corporation
<PAGE>


     Production operating expenses for 1997 increased approximately $14 million,
primarily due to the increased production associated with the Company's Egyptian
operations and increased domestic operating expenses. This increase in operating
expenses  associated  with the  Company's  domestic  operations  was the primary
reason  for the $0.40 per BOE  increase  in  production  operating  expense  per
equivalent  unit of production to $3.95 per BOE for 1997.  Increased  production
taxes  as  natural  gas  prices  increased,  a  change  in the mix of  producing
properties   and  an  increase  in   transportation   expenses  were  the  major
contributing factors to the increase in domestic operating expenses during 1997.

     Production  operating  expenses  increased  $17  million  from 1995 to 1996
principally  as a result of the  increased  production  in the United States and
Egypt.  However,  operating  expense per  equivalent  unit of production for the
Company's E&P  activities  increased from $3.21 per BOE in 1995 to $3.55 per BOE
in 1996, primarily due to increased domestic transportation expense.

     Depreciation,  depletion and  amortization  ("DD&A") expense per equivalent
unit of production increased to $5.42 per BOE in 1997 from $4.98 per BOE in 1996
and combined with the increase in Egyptian  production to produce a 10% increase
in DD&A expense for the O&G segment. A change in the mix of the properties being
produced  internationally  was the primary  factor for the  increase,  partially
offset by a decrease in DD&A expense related to Canadian oil and gas properties.
DD&A  expense  increased  from $140  million  in 1995 to $145  million  in 1996,
primarily due to increased  production  discussed  above,  partially offset by a
decrease in the average DD&A rate per equivalent  unit of production  from $5.16
per BOE in 1995 to $4.98 per BOE in 1996.

     During 1995,  the Company  recognized a pre-tax,  non-cash  charge  against
earnings of $49 million related to impairment of long-lived assets.

Capital Spending and Oil and Gas Reserves

     Exploration  and  production  capital  expenditures  in 1997  totaled  $257
million,  up  substantially  from $200 million in 1996 and $134 million in 1995.
Spending  outside  North  America in 1997  totaled  $102  million,  of which $42
million  was  for  exploration  and  $60  million  for   exploitation.   Seagull
participated  in the drilling of 54  exploratory  wells during 1997, of which 27
were  successful.  Another  14  wells  were  in  progress  at  year-end.  Of the
successes,  18 were in the U.S., 4 in Egypt, 1 in Cote d'Ivoire,  1 in Tatarstan
and 3 in Canada.  In  addition,  domestic  exploitation  expenditures  picked up
considerably  in 1997 and 1996 after  being  severely  curtailed  in 1995 due to
depressed U.S. gas prices.

     Seagull's   program  of  relatively  small  domestic   producing   property
acquisitions  initiated in 1996  resulted in the addition of 1.2 MMBOE at a cost
of $7 million in 1997 and 6.2 MMBOE at a cost of $29 million in 1996.

     Through  drilling and proved property  acquisitions,  the Company  replaced
168% of its  production  during  1997 at a cost of $5.58 per BOE and 144% of its
production  over the three-year  period 1995 through 1997 at a cost of $5.73 per
BOE. However,  Seagull's proved oil and gas reserves decreased from 258 MMBOE at
year-end  1996 to 217 MMBOE at December 31, 1997,  as the sale of the  Company's
Canadian properties offset reserve additions realized elsewhere.

     The standardized  measure of discounted  future net cash flows before taxes
for Seagull's

28                         Seagull Energy Corporation
<PAGE>


     proved oil and gas reserves,  calculated  based on Securities  and Exchange
Commission  criteria,  decreased to $1.2  billion at December 31, 1997  compared
with $2.1 billion at the end of 1996.  This decrease was primarily the result of
the  Canadian  sale and lower  year-end  commodity  prices at December  31, 1997
compared to December 31, 1996. Year-end  calculations were made using an average
price of $15.41  and $20.99  per Bbl for oil,  condensate  and NGL and $2.42 and
$3.27 per Mcf for gas for 1997 and 1996,  respectively.  The  Company's  average
realized  prices for the year ended  December  31,  1997 were $17.34 per Bbl for
oil,  condensate  and NGL and  $2.29  per Mcf for  gas.  The  Company's  average
realized  prices for the month  ended  January  31, 1998 were $14.47 per Bbl for
oil,  condensate  and NGL and  $2.21  per Mcf for gas.  Because  the  disclosure
requirements for discounted future net cash flows are standardized,  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 of Notes to Consolidated Financial Statements.

Outlook

     At  year-end  1997,  the Company  was  producing  about 320 MMcf per day of
natural gas and 20,900 Bbl per day of crude oil,  condensate  and NGL worldwide.
In the United  States,  Seagull  expects to maintain  its level of domestic  gas
production  of  about  300 MMcf per  day.  Internationally,  liquids  production
increases are anticipated in Egypt,  as the first  production from the East Beni
Suef concession begins.

     The future results of the O&G segment will be affected by the market prices
of oil and natural gas and the  Company's  degree of  exploration  success.  The
availability  of a ready market for oil,  natural gas and liquid products in the
future  will  depend on  numerous  factors  beyond the  control of the  Company,
including  weather,  the Company's ability to hire and return skilled personnel,
production  of other  crude  oil,  natural  gas 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 oil, gas
and liquid products,  operating  hazards  attendant to the oil and gas business,
the availability and cost of material and equipment,  the regulatory environment
in the domestic and foreign  jurisdictions  where the Company does  business and
other  international,  regional  and  political  events,  none of  which  can be
predicted with certainty.

29                         Seagull Energy Corporation

<PAGE>


<TABLE>
<CAPTION>
                      ALASKA TRANSMISSION AND DISTRIBUTION
                    (Amounts in Thousands Except Degree Days)

                                                                                            Year Ended December 31,
                                                                            --------------------------------------------------------
                                                                                 1997                 1996                1995
                                                                            ----------------     ---------------     ---------------
<S>                                                                         <C>                  <C>                 <C>
Revenues................................................................      $   95,719          $   97,616           $   97,770
Cost of gas sold........................................................          43,684              42,600               46,328
                                                                            ----------------     ---------------     ---------------
Gross margin............................................................          52,035              55,016               51,442
Operations and maintenance expense......................................          21,079              21,045               20,504
Depreciation, depletion and amortization................................           8,368               8,190                8,042
                                                                            ----------------     ---------------     ---------------
Operating profit........................................................      $   22,588          $   25,781           $   22,896
                                                                            ================     ===============     ===============
OPERATING DATA:
   Degree days (*)......................................................           9,727              10,975                9,997
</TABLE>

(*)  A  measure  of  weather   severity   calculated  by  subtracting  the  mean
     temperature  for each day from 65  degrees  Fahrenheit.  More  degree  days
     equate to colder weather.

     Operating profit of the Alaska transmission and distribution segment of the
Company  ("ENSTAR  Alaska")  is  primarily  a  function  of the  weather  in the
Anchorage, Alaska area during the winter heating season. Cold weather equates to
higher gas volumes delivered,  resulting in increased profits. This relationship
between  operating  profit  and  degree  days  held true in 1997 and 1996 as the
percentage  change in operating profit (12% decrease in 1997 versus 1996 and 13%
increase in 1996 versus 1995) was  approximately  equal to the percentage change
in degree days (11% decrease in 1997 and 10% increase in 1996).

Outlook

     ENSTAR Alaska will continue to play a significant role in Seagull's future.
Even though its  activities may be somewhat  different from the Company's  other
O&G-oriented  activities,  management  expects ENSTAR Alaska's stable cash flows
and  activities  to continue to  contribute  to  Seagull's  goals and  financial
stability.

     Future  operating  profit for this  segment  will be  affected  by weather,
regulatory  action and customer growth in ENSTAR Alaska's service area. The 1997
degree days were 6% under the previous  30-year average degree days. The Company
expects  customer growth to continue at a modest 2% to 3% rate.  During the 1997
summer construction season, approximately 63 miles of new distribution pipelines
were  installed to connect some 2,700 new  customers (a 3% increase in customers
over 1996).

     ENSTAR Alaska purchases all of its natural gas under long-term contracts in
which  the  price is  indexed  to  changes  in the  price of crude  oil  futures
contracts. However, because ENSTAR Alaska's sales prices are adjusted to include
the  projected  cost of its  natural  gas,  there has been and is expected to be
little or no impact on  margins  derived  from  ENSTAR  Alaska's  gas sales as a
result of fluctuations in commodity prices due to worldwide political events and
changing market conditions.

     Currently,  ENSTAR  Alaska's  supply  source is  confined to the Cook Inlet
area.  During  1997,  two of the Cook Inlet  area's  major  suppliers  filed for
regulatory approval to export certain quantities of gas to overseas LNG markets.
ENSTAR Alaska has filed as an intervenor  in these  proceedings  and is actively
working with  regulatory  authorities to ensure that the future gas supply needs
of its customers are met.

30                         Seagull Energy Corporation

<PAGE>


                                      OTHER

     After  excluding the effects of provisions for litigation  ($4.5 million in
1997 for a proposed  settlement  and $3 million in 1996  covering  several minor
settlements),  general and administrative  expenses decreased from $14.4 million
in 1996 to $11.6 million in 1997.  This  decrease in general and  administrative
expenses from 1996 to 1997 was  primarily due to a decrease in certain  expenses
due to  efficiencies  realized as a result of the Global merger and a decline in
expenses associated with compensation plans that are tied directly to the market
price of Seagull's  common  stock.  In November  1997,  the  Company,  NorAm Gas
Transmission  Company  and  Arkansas  Western Gas  Company  signed a  settlement
proposal  regarding  the  litigation  discussed  in  Note  14 of  Notes  to  the
Consolidated  Financial Statements.  As a result of the settlement proposal, the
Company recorded a pre-tax charge of approximately $4.5 million.

     In the second quarter of 1995, the Company initiated a workforce  reduction
and  consolidation  with the savings reflected in lower operating  expenses.  As
part of this action,  Seagull recorded one-time pre-tax charges of $8 million in
general  and  administrative  expenses.   General  and  administrative  expenses
increased  approximately  $4 million to $17 million in 1996 as compared to 1995,
excluding the $8 million charge for workforce reduction and consolidation,  as a
result of an increase  in  incentive  compensation  expenses  and the  Company's
expanding international operations.

     Interest  expense declined from $53 million in 1995 and $45 million in 1996
to $39 million for 1997 through utilization of the proceeds from the sale of the
Company's  Canadian  operations in late 1997 and Pipeline Assets in late 1995 to
repay  amounts  outstanding  under the  Company's  existing  credit  facilities.
Interest  cost  capitalized  as  property,   plant  and  equipment  amounted  to
approximately  $7  million,  $3 million  and $1 million in 1997,  1996 and 1995,
respectively.

     As discussed earlier,  the Company and Global completed a merger in October
1996,  which was  accounted  for as a  pooling-of-interests.  As a result of the
merger, expenses of $10 million ($9 million after taxes) representing investment
banking fees, legal, accounting and other expenses were recorded.

     Gain on  sales  of  assets  is  primarily  comprised  of  pre-tax  gains of
approximately $12 million related to the 1997 sale of the Company's Canadian oil
and gas  operations  and $82  million  related to the 1995 sale of the  Pipeline
Assets.

     Seagull's  effective tax rate for 1997 of 43% decreased  from the effective
tax rate of 47% for 1996 primarily due to an income tax benefit  associated with
the gain on the sale of the Company's Canadian operations.  With the increase in
the Company's  international  activities with their associated  higher effective
tax rates,  Seagull's  1997  effective  tax rate had been  expected to increase.
However  substantial  increases  in domestic  O&G income  before  taxes kept the
domestic to  international  proportion of income before taxes (and therefore the
effective  tax  rate  before  the  sale of the  Company's  Canadian  operations)
unchanged. In 1996, the increasing proportion of international  operations,  and
an  increase  in income  before  taxes,  did lead to an  increase  in income tax
expense from $3 million in 1995 to $26 million in 1996.

31                         Seagull Energy Corporation
<PAGE>


                         LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
                      CAPITAL EXPENDITURES AND ACQUISITIONS
                             (Amounts in Thousands)
                                                                                            Year Ended December 31,
                                                                           ---------------------------------------------------------
                                                                                  1997                1996                1995
                                                                           ------------------  -----------------   -----------------
<S>                                                                        <C>                 <C>                 <C>
  Capital Expenditures:
    Exploration and production:
       Lease acquisitions................................................     $     23,141         $     12,986       $    18,000
       Exploration.......................................................           95,681               77,774            46,575
       Development.......................................................          137,806              108,763            69,260
                                                                           ------------------  -----------------   -----------------
                                                                                   256,628              199,523           133,835
    Other oil and gas operations.........................................              885                  228               441
                                                                           -------------------  -----------------  -----------------
       Total oil and gas operations......................................          257,513              199,751           134,276
    Alaska transmission and distribution.................................            9,607                9,287             7,611
    Corporate............................................................            8,488                4,424             2,214
                                                                           -------------------  -----------------  -----------------
                                                                              $    275,608         $    213,462       $   144,101
                                                                           ===================  =================   ================

  Acquisitions...........................................................     $     17,665         $    104,420       $         -
                                                                           ===================  =================   ================
</TABLE>


     Seagull's  long-term goal is to grow its reserve base and its crude oil and
natural gas production  capacity while  maintaining a strong balance sheet.  The
Company  seeks a balanced  approach  of growing  through  its  drilling  efforts
complemented  by strategic  acquisitions of additional oil and gas assets in its
core  operating  areas.  This desire to grow more  through  drilling has led the
Company in the last few years to broaden its  exploration  focus beyond the Gulf
Coast  offshore  area where  Seagull  originally  concentrated  its  exploration
efforts.  Seagull also has  endeavored to bring more balance to its mix of crude
oil and natural gas assets,  thereby  lessening its dependence  upon natural gas
and  increasing  (i) the  percentage of crude oil  represented  in the Company's
total portfolio of proved reserves, (ii) its capacity to produce those reserves,
and (iii) the international  orientation of its reserve base. To these ends, the
Company  completed two business  combinations in 1996 that reflect this shift in
strategy - the purchase of two Egyptian  concessions from Exxon  Corporation and
the  stock-for-stock  Global merger.  These  combinations  brought a substantial
number  of  exploratory  prospects  to  the  Company,  complementing  its  large
portfolio of long-lived  domestic natural gas producing  properties and a large,
stable cash flow base generated  from oil and gas sales and its  non-exploration
and  production  activities.  These  combinations  also  increased the Company's
ability to generate

32                         Seagull Energy Corporation

<PAGE>

growth  through its drilling  efforts  over the next  several  years in both its
proved reserves and its crude oil and natural gas production capacity.

     Seagull's capital expenditures increased by $62 million to $276 million for
1997  versus  almost  $214  million in 1996.  Of this  amount,  exploration  and
production capital  expenditures in 1997 totaled $257 million,  up substantially
from $200  million in 1996 and $134  million  in 1995.  Spending  outside  North
America  totaled $103 million,  of which $43 million was for exploration and $60
million for exploitation.


DATA FROM GRAPHICS

<TABLE>
<CAPTION>

     <S>                                                                                <C>
     (In Millions)
     1998 Plan for E&P Expenditures of $257 Million
        Domestic........................................................................$151
        Egypt.............................................................................94
        Other.............................................................................12


     1997 Actual E&P Expenditures of $257 Million
        Domestic........................................................................$141
        Egypt.............................................................................83
        Canada............................................................................13
        Other.............................................................................20


     1996 Actual E&P Expenditures of $200 Million
        Domestic........................................................................$140
        Egypt.............................................................................33
        Canada............................................................................15
        Other.............................................................................12

</TABLE>

     Plans for 1998 call for capital expenditures of approximately $274 million,
including about $257 million in E&P. Seagull anticipates spending  approximately
$154 million for development, $22 million for lease acquisitions and $81 million
will be devoted to exploration. Of this total, about $106 million is expected to

<PAGE>

be  spent  outside  the U.S.  The  1998  capital  program  anticipates  about 60
exploratory wells, of which approximately half would be drilled in the U.S.


                                    LIQUIDITY

     Combined with the Company's long-term goal to grow its reserve base through
its drilling efforts and complementary strategic acquisitions,  a strong balance
sheet is also a specific  objective of management.  To that end, Seagull reduced
its  borrowings  under  existing bank  facilities in 1997 by $133 million with a
portion of the proceeds from the sale of the Company's  Canadian  operations and
in 1995 by $143 million with the proceeds  from the sale of the Pipeline  Assets
and the Section 29  Properties.  At December  31,  1997,  there were no balances
outstanding  under the Company's $500 million credit  facility and the Company's
debt to  capitalization  ratio was 42%,  compared with 49% at December 31, 1996.
With this stronger balance sheet in place,  management believes that the Company
is well  positioned  to  achieve  its  reserve  growth and  production  capacity
objectives  even in times when declining  commodity  prices result in lower cash
flows from operations.

     On  September  30, 1997,  Seagull  issued $150 million of senior notes (the
"1997 Senior Notes") at a public  offering  price of 99.544% of face value.  The
1997 Senior Notes have a coupon of 7.5% and mature  September 15, 2027. The 1997
Senior  Notes are not  redeemable  prior to maturity  and are not subject to any
sinking fund. The net proceeds of approximately  $146 million were used to repay
existing  debt  and for  general  corporate  purposes.  The  1997  Senior  Notes
represent  unsecured  obligations  of the  Company  and rank pari passu with all
other unsecured, unsubordinated obligations of the Company.

     The Company also has a $500 million  revolving credit facility  ("Revolving
Credit  Facility").  During 1997, the Company amended and restated the Revolving
Credit Facility to, among other things, change the maturity date to December 31,
2002,  reduce  stated  interest  rate  margins  and remove,  or modify,  various
financial covenants.  At December 31, 1997, there were no amounts borrowed under
the  Revolving  Credit  Facility,  however  standby  letters of credit  totaling
approximately  $19  million  were  outstanding.  See  Notes 4 and 6 of  Notes to
Consolidated   Financial  Statements  for  additional  information  relating  to
acquisitions and debt.

     The Company has money market facilities with two U.S. banks with a combined
maximum commitment of $100 million. These lines of cred-

33                         Seagull Energy Corporation
<PAGE>


it bear interest at rates made available by the banks at their option and may be
canceled  at either  Seagull's  or the  banks'  option.  There  were no  amounts
outstanding under these money market facilities at December 31, 1997.


ENVIRONMENTAL

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

YEAR 2000

     Historically,  most computer systems  (including  microprocessors  embedded
into field  equipment and other  machinery)  utilized  software  that  processed
transactions using two digits to represent the year of the transaction (i.e., 97
represents the year 1997). This software (including software built into embedded
microprocessors) requires modification to properly process dates beyond December
31,  1999 (the "Year 2000  Issue").  In the first  quarter of 1997,  the Company
completed  its   assessment  of  the  Year  2000  Issue  and   determined   that
modifications  or replacements  of a portion of its software were required.  The
Company's Year 2000 remediation was substantially complete at December 31, 1997.
The Company  utilized  both  internal and external  resources to  reprogram,  or
replace, and test the software for Year 2000 Issue  modifications.  To date, the
Company  has  incurred  and  expensed  approximately  $300,000  related  to  the
assessment  and  remediation  of the Year  2000  Issue.  The  Company  presently
believes  that,  as a result of these  modifications  to existing  software  and
conversions  to new  software,  the Year  2000  Issue  will not have a  material
adverse effect attributable to the Company's systems.

     The Company has initiated formal communications with all of its significant
suppliers  and large  customers to determine  the extent to which the Company is
vulnerable to those third parties' potential failure to remediate their own Year
2000  Issue.  However,  there  can be no  guarantee  that the  systems  of other
companies,  on which the Company's  systems rely, will be timely  converted,  or
that  a  failure  to  convert  by  another  company,  or a  conversion  that  is
incompatible  with the  Company's  systems,  would not have a  material  adverse
effect on the Company.


ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting  Comprehensive Income." This statement establishes standards
for  reporting  and display of  comprehensive  income and its  components in the
Company's financial statements. Comprehensive income includes all changes in the
Company's equity except investments by and distributions to owners and includes,
among other things, foreign currency translation adjustments.  In June 1997, the
FASB also issued SFAS No. 131,  "Disclosures about Segments of an Enterprise and
Related   Information."  This  statement  establishes  standards  for  reporting
information about operating segments in annual financial statements and requires
selected infor-

34                         Seagull Energy Corporation
<PAGE>

mation  about  operating  segments to be included in interim  reports  issued to
shareholders.  Both of these  statements are effective for financial  statements
for periods  beginning  after  December 15, 1997. As both SFAS No's. 130 and 131
establish  standards for reporting and display,  the Company does not expect the
adoption  of  these  statements  to  have a  material  impact  on its  financial
condition or results of operations.


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 thousands of barrels  ("Mbbl").
MMcfe and Mcfe  represent the  equivalent of one million and one thousand  cubic
feet of natural gas, respectively.  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, one thousand and one barrel
of oil equivalent,  respectively, with six Mcf of gas converted to one barrel of
liquid.


                        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>
1997:
  Revenues.......................     $    159,573          $    122,180          $    120,655              $     146,959
  Operating Profit...............     $     46,606          $     17,811          $     13,456              $      32,603
  Net Income.....................     $     17,254          $      2,621          $      3,202              $      26,053     (2)
  Earnings per Share:
    Basic........................     $       0.27          $       0.04          $       0.05              $        0.41
    Diluted(1)...................     $       0.27          $       0.04          $       0.05              $        0.41

1996:
  Revenues.......................     $    136,575          $    112,289          $    109,931              $     158,416
  Operating Profit...............     $     37,375          $     13,616          $     19,200              $      33,252
  Net Income (Loss)..............     $     18,312          $     (2,934)         $      7,458              $       6,125     (3)
  Earnings (Loss) per Share:
    Basic........................     $       0.29          $      (0.05)         $       0.12              $        0.10
    Diluted(1)...................     $       0.29          $      (0.05)         $       0.12              $        0.10

</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  $12  million  pre-tax  gain  on  sale  of  Canadian  oil  and gas
operations.

(3) Includes $10 million pre-tax merger expenses relating to the Global merger.

35                         Seagull Energy Corporation
<PAGE>


                      REPORT OF MANAGEMENT TO SHAREHOLDERS

     The  management  of  Seagull  Energy  Corporation  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 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 auditing staff which reviews the adequacy
of the internal  accounting  controls and compliance  with them.  Management has
considered  the  recommendations  of the internal  auditing  staff and KPMG Peat
Marwick  LLP  concerning  the  Company's  system of  internal  controls  and has
responded appropriately to those recommendations.

     The  accompanying  consolidated  financial  statements  of  Seagull  Energy
Corporation  and  Subsidiaries as of December 31, 1997 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants,  and their report is
included  herein.  Their audits were 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,  the
internal auditing staff 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 the internal  auditing staff have full and free access
to, and meet with, the Audit Committee, with and without management present.

/s/ Barry J. Galt
Barry J. Galt
Chairman and
Chief Executive Officer

/s/ William L. Transier
William L. Transier
Senior Vice President and
Chief Financial Officer

/s/ Gordon L. McConnell
Gordon L. McConnell
Vice President and Controller

January 28, 1998

36                         Seagull Energy Corporation
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Seagull Energy Corporation:

     We have audited the  accompanying  consolidated  balance  sheets of Seagull
Energy  Corporation  and  Subsidiaries as of December 31, 1997 and 1996, and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the years in the  three-year  period ended  December 31, 1997.
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 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 consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Seagull
Energy  Corporation  and  Subsidiaries as of December 31, 1997 and 1996, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally  accepted
accounting principles.



/s/ KPMG Peat Marwick LLP

Houston, Texas
January 28, 1998

37                         Seagull Energy Corporation
<PAGE>


<TABLE>
<CAPTION>
                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (Amounts in Thousands Except Per Share Amounts)

                                                                        Year Ended December 31,
                                                          ---------------------------------------------------
                                                               1997               1996              1995
                                                          --------------    ---------------   ---------------
<S>                                                       <C>               <C>               <C>
Revenues:
    Oil and gas operations............................     $    453,648      $     419,595     $     308,510
    Alaska transmission and distribution..............           95,719             97,616            97,770
                                                          --------------    ---------------   ---------------
                                                                549,367            517,211           406,280
                                                          --------------    ---------------   ---------------

Costs of Operations:
    Operations and maintenance........................          165,462            147,294           136,203
    Alaska transmission and distribution cost of gas
      sold............................................           43,684             42,600            46,328
    Exploration charges...............................           42,085             50,772            40,223
    Depreciation, depletion and amortization..........          171,516            155,669           149,685
    Impairment of long-lived assets...................                -                  -            48,842
    General and administrative........................           16,144             17,433            21,768
                                                          --------------    ---------------   ---------------
                                                                438,891            413,768           443,049
                                                          --------------    ---------------   ---------------

Operating Profit (Loss)...............................          110,476            103,443           (36,769)

Other (Income) Expense:
    Interest expense..................................           38,533             44,842            52,978
    Merger expenses...................................                -              9,982                 -
    Gain on sales of assets, net......................          (11,311)            (1,088)          (83,388)
    Interest income and other.........................           (2,946)            (5,149)           (7,403)
                                                          --------------    ---------------   ---------------
                                                                 24,276             48,587           (37,813)
                                                          --------------    ---------------   ---------------

Income Before Income Taxes............................           86,200             54,856             1,044
Income Tax Expense....................................           37,070             25,895             2,782
                                                          --------------    ---------------   ---------------

Net Income (Loss).....................................     $     49,130      $      28,961     $      (1,738)
                                                          ==============    ===============   ===============

Earnings (Loss) Per Share:
    Basic.............................................     $       0.78      $        0.46     $       (0.03)
                                                          ==============    ===============   ===============
    Diluted...........................................     $       0.77      $        0.46     $       (0.03)
                                                          ==============    ===============   ===============

Weighted Average Number of Common
    Shares Outstanding:
       Basic..........................................           63,022             62,584            62,107
                                                          ==============    ===============   ===============
       Diluted........................................           63,791             63,552            62,107

                                                         ==============    ===============   ===============


</TABLE>

See accompanying Notes to Consolidated Financial Statements.


38                         Seagull Energy Corporation

<PAGE>


<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEETS
             (Amounts in Thousands Except Share and Per Share Data)

                                                                                         December 31,
                                                                              ------------------------------------
                                                                                   1997                1996
                                                                              ---------------     ----------------
<S>                                                                           <C>                 <C>
ASSETS
    Current Assets:
        Cash and cash equivalents.........................................     $      45,654       $       15,284
        Accounts receivable, net..........................................           147,442              193,659
        Inventories.......................................................            13,635               12,285
        Prepaid expenses and other........................................            16,240                6,389
                                                                              ---------------     ----------------
           Total Current Assets...........................................           222,971              227,617

    Property, Plant and Equipment:
        Oil and gas properties (successful efforts method)................         1,742,725            1,750,784
        Utility plant.....................................................           246,670              238,091
        Other.............................................................            64,288               60,481
                                                                              ---------------     ----------------
                                                                                   2,053,683            2,049,356
    Accumulated Depreciation, Depletion and Amortization..................           908,849              804,715
                                                                              ---------------     ----------------
                                                                                   1,144,834            1,244,641
    Other Assets..........................................................            43,261               42,805
                                                                              ---------------     ----------------

    Total Assets..........................................................     $   1,411,066       $    1,515,063
                                                                              ===============     ================

LIABILITIES AND SHAREHOLDERS' EQUITY
    Current Liabilities:
        Accounts and note payable.........................................     $     159,138       $      166,775
        Accrued expenses..................................................            47,625               57,368
        Current maturities of long-term debt..............................             7,097                7,227
                                                                              ---------------     ----------------
           Total Current Liabilities......................................           213,860              231,370

    Long-Term Debt........................................................           469,017              573,455
    Other Noncurrent Liabilities..........................................            51,168               65,428
    Deferred Income Taxes.................................................            14,126               31,021

    Redeemable Bearer Shares..............................................            15,691               16,059

    Commitments and Contingencies.........................................                 -                    -

    Shareholders' Equity:
        Common Stock, $.10 par value; authorized 100,000,000
           shares; issued 63,877,442 in 1997 and 63,073,287 in 1996.......             6,388                6,307
        Additional paid-in capital........................................           493,829              483,118
        Retained earnings.................................................           164,935              115,805
        Foreign currency translation adjustment...........................                 -                   51
        Less:  note receivable from employee stock
           ownership plan.................................................            (2,990)              (4,284)
        Less:  treasury stock, at cost; 861,314 shares in 1997
           and 361,314 shares in 1996.....................................           (14,958)              (3,267)
                                                                              ---------------     ----------------
    Total Shareholders' Equity............................................           647,204              597,730
                                                                              ---------------     ----------------

    Total Liabilities and Shareholders' Equity............................     $   1,411,066       $    1,515,063
                                                                              ===============     ================

</TABLE>
See accompanying Notes to Consolidated Financial Statements.

39                         Seagull Energy Corporation
<PAGE>


<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in Thousands)
                                   (Unaudited)
                                                                                                 Year Ended December 31,
                                                                                      ----------------------------------------------

                                                                                          1997             1996            1995
                                                                                      --------------   -------------  --------------
<S>                                                                                   <C>              <C>            <C>
Operating Activities:
   Net income (loss)...............................................................   $   49,130        $   28,961     $    (1,738)
   Adjustments to reconcile net income (loss) to net cash provided by
    operating activities:
      Depreciation, depletion and amortization.....................................      171,516           155,669         149,685
      Impairment of long-lived assets..............................................            -                 -          48,842
      Amortization of deferred financing costs.....................................        2,037             2,969           3,429
      Deferred income taxes........................................................        9,418             8,701         (16,292)
      Dry hole expense.............................................................       20,062            23,671          22,153
      Gains on sale of assets, net.................................................      (11,311)           (1,088)        (83,388)
      Other........................................................................        8,735             1,660           2,131
                                                                                      --------------   -------------  --------------
                                                                                         249,587           220,543         124,822

      Changes in operating assets and liabilities, net of acquisitions:
        Decrease in short-term liquid investments..................................            -             5,014          28,538
        Decrease (increase) in accounts receivable.................................       39,211           (53,531)        (21,721)
        Decrease (increase) in inventories, prepaid expenses and other.............      (10,797)            9,731           1,793
        Increase (decrease) in accounts payable....................................        9,779            53,281         (15,551)
        Increase (decrease) in accrued expenses and other..........................      (25,031)           23,401            (154)
                                                                                      --------------   -------------  --------------
     Net Cash Provided By Operating Activities.....................................      262,749           258,439         117,727

Investing Activities:
   Capital expenditures............................................................     (275,608)         (213,462)       (144,101)
   Acquisitions of oil and gas properties..........................................      (17,665)          (90,867)              -
   Acquisitions of other assets and liabilities, net of cash acquired..............            -           (13,553)              -
   Proceeds from sale of assets, net...............................................      186,494            10,557         107,960
                                                                                      --------------   -------------  --------------
     Net Cash Used In Investing Activities.........................................     (106,779)         (307,325)        (36,141)

Financing Activities:
   Proceeds from debt..............................................................      821,097           407,738         668,815
   Principal payments on debt......................................................     (938,554)         (368,754)       (737,473)
   Proceeds from sales of common stock.............................................        7,422             4,401           2,241
   Purchase of treasury stock......................................................      (11,691)                -               -
   Other..........................................................................       (3,846)           (1,051)         (3,957)
                                                                                      --------------   -------------  --------------
     Net Cash Provided By (Used In) Financing Activities...........................     (125,572)           42,334         (70,374)

Effect of exchange rate changes on cash............................................          (28)              359             (48)
                                                                                      --------------   -------------  --------------

   Increase (Decrease) In Cash and Cash Equivalents................................       30,370            (6,193)         11,164
Cash and Cash Equivalents at Beginning of Year.....................................       15,284            21,477          10,313
                                                                                      --------------   -------------  --------------

Cash and Cash Equivalents at End of Year...........................................   $   45,654       $    15,284    $     21,477
                                                                                      ==============   =============  ==============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

40                         Seagull Energy Corporation
<PAGE>


<TABLE>
<CAPTION>
                                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                            (Amounts in Thousands)

                                                                             Foreign        Note
                                              Additional                     Currency     Receivable
                                   Common       Paid-in       Retained      Translation     From        Treasury
                                   Stock        Capital       Earnings      Adjustment      ESOP          Stock          Total
                                 ----------  -------------  -------------  ------------  -----------  -------------  -------------

<S>                              <C>         <C>            <C>            <C>           <C>          <C>            <C>
 January 1, 1995...............   $  6,577    $ 493,578      $  88,582      $  (2,684)    $(5,502)     $ (22,902)     $ 557,649
    Net loss for the period....          -            -         (1,738)             -           -              -         (1,738)
    Exercise of employee
       stock options...........         21        2,220              -              -           -              -          2,241
    Foreign currency
       translation adjustment..          -            -              -          3,073           -              -          3,073
    Repayment of ESOP note.....          -            -              -              -         580              -            580
    Other......................          -          579              -              -           -            237            816
                                 ----------  -------------  -------------  ------------  -----------  -------------  -------------

 December 31, 1995.............      6,598      496,377         86,844            389      (4,922)       (22,665)       562,621
    Net income for the period..          -            -         28,961              -           -              -         28,961
    Retirement of treasury
       stock pursuant to the
       Global Merger...........       (335)     (19,021)             -              -           -         19,356              -
    Exercise of employee
       stock options...........         44        4,357              -              -           -              -          4,401
    Foreign currency
       translation adjustment..          -            -              -           (338)          -              -           (338)
    Repayment of ESOP note ....          -            -              -              -         638              -            638
    Other......................          -        1,405              -              -           -             42          1,447
                                 ----------  -------------  -------------  ------------  -----------  -------------  -------------

 December 31, 1996.............      6,307      483,118        115,805             51      (4,284)        (3,267)       597,730
    Net income for the period..          -            -         49,130              -           -               -        49,130
    Purchase of treasury stock.          -            -              -              -           -        (11,691)       (11,691)
    Exercise of employee
       stock options...........         81        7,341              -              -           -               -         7,422
    Foreign currency
       translation adjustment..          -            -              -            (51)          -               -           (51)
    Repayment of ESOP note ....          -            -              -              -       1,294               -         1,294
    Other......................          -        3,370              -              -           -                         3,370
                                 ----------  -------------  -------------  ------------  -----------  -------------  -------------

 December 31, 1997.............   $  6,388    $ 493,829      $ 164,935      $       -     $(2,990)     $  (14,958)    $ 647,204
                                 ==========  =============  =============  ============  ===========  =============  =============
</TABLE>


 See accompanying Notes to Consolidated Financial Statements.

41                         Seagull Energy Corporation
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       ORGANIZATION

     Seagull Energy Corporation (the "Company" or "Seagull") is an international
oil and gas company  engaged in exploration  and  development  activities in the
United  States,  Egypt,  Cote  d'Ivoire,  Indonesia and the Russian  Republic of
Tatarstan. It also transports, distributes and markets natural gas, liquids
products and petrochemicals.

     Merger  with  Global  Natural  Resources  Inc.  -- On October 3, 1996,  the
shareholders of Seagull and Global Natural Resources Inc.  ("Global") approved a
merger  of a wholly  owned  subsidiary  of  Seagull  into  Global  (the  "Global
Merger"),  with each share of Global common stock  converted into 0.88 shares of
Seagull  common  stock.  The  Global  Merger was  accounted  for as a pooling of
interests.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     General -- The accompanying  consolidated  financial  statements of Seagull
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  have been made in the 1996 and 1995  financial  statements to
conform to the presentation used in 1997.

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

     Regulation  -- The  Company  operates  in Alaska  through a division of the
Company  and a wholly  owned  subsidiary  (collectively  referred  to  herein as
"ENSTAR  Alaska").  ENSTAR  Alaska is subject to regulation by the Alaska Public
Utilities Commission ("APUC"),  which has jurisdiction over, among other things,
rates, accounting procedures and standards of service.

     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 uses the successful efforts method of
accounting  for its  oil  and  gas  operations  whereby  acquisition  costs  and
exploratory  drilling costs related to properties  with proved  reserves and all
development  costs including  development dry holes are capitalized.  Under this
method,  all costs to acquire  mineral  interest in oil and gas  properties,  to
acquire  production  sharing  contracts with foreign  governments,  to drill and
equip  exploratory  wells  which  find  proved  reserves  and to drill and equip
development wells are capitalized. Exploratory charges, including

42                         Seagull Energy Corporation
<PAGE>


exploratory  dry holes,  geological  and  geophysical  costs,  delay rentals and
technical support, are expensed as incurred. Other internal costs related to oil
and gas activities are generally expensed as operations and maintenance  expense
or exploration charges.  Unproved leaseholds with significant  acquisition costs
are  assessed  periodically,  on a  property-by-property  basis,  and a loss  is
recognized  to the  extent,  if any,  that  the  cost of the  property  has been
impaired.  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.  Capitalized  costs are
depleted using the unit-of-production  method based upon estimates of proved oil
and gas reserves on a  depletable  unit basis.  Estimated  costs (net of salvage
value) of  dismantling  and  abandoning  oil and gas  production  facilities are
computed by the Company's  engineers and included when calculating  depreciation
and depletion using the  unit-of-production  method.  The total estimated future
dismantlement  and abandonment  cost being amortized as of December 31, 1997 was
approximately $26 million.

     The  Company  performs  a  review  for  impairment  of  proved  oil and gas
properties on a depletable unit basis when circumstances suggest there is a need
for such a review.  For each  depletable  unit  determined  to be  impaired,  an
impairment loss equal to the difference  between the carrying value and the fair
value of the  depletable  unit will be recognized.  Fair value,  on a depletable
unit basis,  is estimated to be the present value of expected  future cash flows
computed  by applying  estimated  future oil and gas prices,  as  determined  by
management,  to estimated  future  production  of oil and gas reserves  over the
economic  lives of the  reserves.  As a result  of the  impairment  review,  the
Company  recognized  a non-cash  pre-tax  charge  against  income in 1995 of $46
million related to oil and gas properties.  No impairment  charges were recorded
during 1996 and 1997.

     Interest cost  capitalized  as property,  plant and  equipment  amounted to
approximately  $7  million,  $3 million  and $1 million in 1997,  1996 and 1995,
respectively.

     Other  Property,  Plant And Equipment -- Depreciation of the utility plant,
gas gathering  pipeline  facility,  gas  processing  plant and other property is
computed  principally using the straight-line method over their estimated useful
lives, which vary from 3 to 33 years.

     Utility  plant  facilities  are subject to APUC  regulation.  When  utility
facilities  are  disposed of or  otherwise  retired,  the  original  cost of the
facilities,  plus  cost  of  retirement,  less  salvage  value,  is  charged  to
accumulated depreciation.

     The Company groups and evaluates  other  property,  plant and equipment for
impairment  based on the  ability to  identify  separate  cash  flows  generated
therefrom.  As a result of the  impairment  review,  the  Company  recognized  a
pre-tax  non-cash  charge against income in 1995 of $3 million for impairment of
other property,  plant and equipment. No impairment charges were recorded during
1996 and 1997.

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

43                         Seagull Energy Corporation
<PAGE>

condition caused by past operations,  and do not contribute to current or future
revenue  generation,  are expensed.  Liabilities are recorded 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 average cost method of accounting
for treasury stock transactions.

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

     ENSTAR  Alaska's  operating  revenues are based on rates  authorized by the
APUC which are applied to customers'  consumption of natural gas.  ENSTAR Alaska
records unbilled  revenue,  including amounts to be billed under a purchased gas
adjustment clause, at the end of each accounting period.

     Derivative  Financial  Instruments  -- The Company enters into a variety of
commodity derivative financial  instruments (futures contracts,  price swaps and
options) only for non-trading purposes as a hedging strategy to manage commodity
prices  associated  with oil and gas  sales and to  reduce  the  impact of price
fluctuations.  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.  The Company  uses the hedge or  deferral  method of
accounting for these instruments and, as a result, gains and losses on commodity
derivative financial  instruments are generally offset by similar changes in the
realized  prices of the  commodities.  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 and any margin accounts for futures contracts
are  included  as net  current  assets.  While  commodity  derivative  financial
instruments  are  intended to reduce the  Company's  exposure to declines in the
market  price  of oil  and  natural  gas,  the  commodity  derivative  financial
instruments  may also limit the  Company's  gain from  increases in those market
prices.

     The Company  recorded  $10  million,  $9 million and $0.5 million for 1997,
1996 and 1995,  respectively,  in costs related to equity hedging activities and
$3 million in costs and $0.5 million in income for 1997 and 1996,  respectively,
related to third-party marketing activities.  By the end of the first quarter of
1997, the Company's equity hedging  activities had been  substantially  reduced,
leaving  primarily  the  commodity  hedges in place as required by the  monetary
production  payment  (related to the 1995 sale of the  Company's  Section 29 tax
credit-bearing  properties) for  approximately  11 MMcf per day through December
1998.  The equity  hedging  costs  discussed  above include costs related to the
monetary production payment hedges of

44                         Seagull Energy Corporation
<PAGE>

approximately  $3 million and $4 million in 1997 and 1996,  respectively.  Total
equity hedging costs had the effect of reducing  average gas prices by $0.06 per
Mcfe for both 1997 and 1996 and $0.004 per Mcfe for 1995.  At December 31, 1997,
the Company had open natural gas futures,  swaps and option contracts related to
its third-party marketing efforts totaling 6 Bcf and 14 Bcf related to purchases
and sales,  respectively,  for the period from January through December 1998. At
December 31, 1997,  the fair value  related to the Company's  commodity  hedging
activities was $1 million of unrealized costs related to open contracts.

     From  time  to  time,  the  Company  has  entered  into  various  financial
instruments,  such as interest rate swaps and interest rate lock agreements,  to
manage the impact of changes in  interest  rates.  To qualify as a hedge,  these
instruments  must highly  correlate to  anticipated  future  changes in interest
rates such that the  Company's  exposure to the effects of interest rate changes
is reduced.  The Company  uses the hedge or deferral  method of  accounting  for
these  instruments  and,  as a  result,  gains  and  losses  on these  financial
instruments  are generally  offset by similar  changes in the realized  interest
rate.  The  differential  interest to be paid or received is accrued as interest
rates change and is recognized over the life of the agreements as a component of
interest expense. Currently,  Seagull has no open interest rate swap or interest
rate lock  agreements.  The Company  recorded no costs  related to interest rate
hedging  activities  during 1997 and $1.7  million and $0.6 million for 1996 and
1995, respectively.

     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 functional  currency for the Company's
Canadian operations was the applicable local 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.  Deferred  income taxes were not provided on  translation
adjustments  because any unremitted income from Seagull's foreign operations was
considered to be permanently  invested.  The Company's Canadian  operations were
sold in October 1997 (see Note 4).

     The  U.S.  dollar  is  the  functional   currency  for  all  other  foreign
operations,   as   predominantly   all  transactions  in  those  operations  are
denominated in U.S. dollars.

     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 the fair market value of Seagull's  common
stock on the day of grant.

45                         Seagull Energy Corporation
<PAGE>


     Earnings Per Share -- Effective  December  31,  1997,  the Company  adopted
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  per
Share." This  statement  establishes  standards  for  computing  and  presenting
earnings per share and requires,  among other things, dual presentation of basic
and diluted  earnings per share on the face of the statement of  operations.  In
accordance  with SFAS No. 128,  earnings per share and weighted  average  shares
outstanding  have been  restated  to conform to this  statement  for all periods
presented.

     The following  table  provides a  reconciliation  between basic and diluted
earnings (loss) per share (stated in thousands except per share data):

<TABLE>
<CAPTION>

                                                                                          Weighted Average
                                                                                           Common Shares            Per-Share
                                                                 Net Income (Loss)          Outstanding              Amount
                                                                --------------------    ---------------------    ----------------
<S>                                                              <C>                     <C>                       <C>
Year Ended December 31, 1997:
     Basic earnings per share ...........................            $   49,130                  63,022               $ 0.78
     Effect of dilutive stock options....................                     -                     769
                                                                --------------------    ---------------------
     Diluted earnings per share .........................            $   49,130                  63,791               $ 0.77
                                                                ====================    =====================

Year Ended December 31, 1996:
     Basic earnings per share ...........................            $   28,961                  62,584               $ 0.46
     Effect of dilutive stock options....................                     -                     968
                                                                --------------------    ---------------------
     Diluted earnings per share .........................            $   28,961                  63,552               $ 0.46
                                                                ====================    =====================

Year Ended December 31, 1995:
     Basic loss per share ...............................            $   (1,738)                 62,107               $(0.03)
     Effect of dilutive stock options....................                     -                       -
                                                                --------------------    ---------------------
     Diluted loss per share .............................            $   (1,738)                 62,107               $(0.03)
                                                                ====================    =====================

</TABLE>


     Options to  purchase  1,610,100  and  1,685,500  shares of common  stock at
$21.13 to $26.38 per share were outstanding during 1997 and 1996,  respectively,
but were not included in the  computation of diluted  earnings per share because
the options'  exercise  prices were greater than the average market price of the
common shares.  These options,  which expire at various dates from 2003 to 2007,
remained  outstanding at the end of 1997 and 1996. At December 31, 1995, options
to purchase  4,501,920  shares of common stock were outstanding but 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 on the computation of diluted loss per share. These options
had exercise  prices  ranging  from $5.89 to $26.38 and expire at various  dates
through 2005.

     Concentrations  Of Market  Risk -- The  future  results  of the oil and gas
operations segment 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

46                         Seagull Energy Corporation
<PAGE>


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
with  sales to  resellers  such as  pipeline  companies  and local  distribution
companies  as well as to end-users  such as  commercial  businesses,  industrial
concerns and residential  consumers.  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 periodic  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.  The
Company had one customer,  the Egyptian  national oil company ("EGPC") with 11%,
who accounted for more than 10% of total revenues during 1997.

     The  Company  has a  significant  portion  of  its  operations  in  various
geographic  areas of the world.  The  Company's  activities  in these  areas are
subject to the usual 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  1997,  the  Financial  Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting  Comprehensive Income."
This statement  establishes standards for reporting and display of comprehensive
income and its components in the Company's financial  statements.  Comprehensive
income  includes all changes in the Company's  equity except  investments by and
distributions  to owners and  includes,  among other  things,  foreign  currency
translation  adjustments.  In June  1997,  the FASB also  issued  SFAS No.  131,
"Disclosures  about  Segments of an Enterprise  and Related  Information."  This
statement  establishes  standards  for  reporting  information  about  operating
segments in annual

47                         Seagull Energy Corporation
<PAGE>


financial  statements and requires selected information about operating segments
be included in interim reports issued to shareholders.  Both of these statements
are effective for financial  statements for periods beginning after December 15,
1997.  As both SFAS Nos.  130 and 131  establish  standards  for  reporting  and
display,  the Company does not expect the adoption of these statements to have a
material impact on its financial condition or results of operations.

3.       SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

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

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                        ------------------------------------------------------------
                                                                              1997                   1996                 1995
                                                                        ------------------     -----------------     ---------------
<S>                                                                     <C>                    <C>                   <C>
Cash paid during the year for:
    Interest, net of amount capitalized..............................          $34,947              $44,033               $46,804
    Income taxes.....................................................          $25,684              $12,046               $14,074

</TABLE>

4.       ACQUISITION AND DISPOSITION OF ASSETS

     Sale of Canadian Oil and Gas Properties -- On October 6, 1997, Seagull sold
its  Canadian  oil and gas  subsidiary,  Seagull  Energy  Canada Ltd.  ("Seagull
Canada"),  to Rio Alto  Exploration Ltd.  Seagull  realized  approximately  $185
million of net sales proceeds and recognized a pre-tax gain of approximately $12
million in the fourth  quarter of 1997.  The sales  proceeds  were used to repay
existing  long-term  debt,  including all U.S. and Canadian  bank debt,  and for
general corporate purposes.

     The Company's operations in Canada consisted of oil and gas exploration and
production  activities  through  interests in fields located in Alberta,  Canada
with proved reserves of  approximately  60 million barrels of oil equivalents at
the  date  of  the  sale.   The  Company's   Canadian   operations   contributed
approximately  $26  million,  $34  million  and $29  million in  revenue  and $6
million,  $(5) million and $(11)  million in income  (loss) before taxes for the
years ended December 31, 1997, 1996 and 1995, respectively.

     The following  table  presents the  unaudited pro forma results  (stated in
thousands except per share data) of Seagull as though the disposition of Seagull
Canada had occurred on January 1, 1996:

<TABLE>
<CAPTION>
                                                            UNAUDITED PRO FORMA INFORMATION

                                                                                             Year Ended December 31,
                                                                              ------------------------------------------------------
                                                                                      1997                            1996
                                                                              ----------------------         -----------------------
<S>                                                                           <C>                            <C>
Revenues ...................................................................            $523,411                         $483,395
Net income..................................................................              36,520                           39,168
Basic earnings per share....................................................                0.58                             0.63
Diluted earnings per share..................................................                0.57                             0.62

</TABLE>


48                           Seagull Energy Corporation
<PAGE>


     The  unaudited pro forma  information  does not purport to be indicative of
actual results,  if the disposition of Seagull Canada had been in effect for the
periods indicated, or of future results.

     Purchase of Egyptian  Concessions -- In September 1996,  Seagull  purchased
interests in two Egyptian  concessions from units of Exxon Corporation for a net
purchase price of approximately $74 million in cash financed through  additional
borrowings  under  Seagull's  revolving  credit  facility.  The  transaction was
accounted  for as a purchase.  The Company  acquired a 100% working  interest in
both the East Zeit oil producing concession in the offshore Gulf of Suez and the
South Hurghada  exploratory  concession located onshore on the coast of the Gulf
of Suez approximately 250 miles southeast of Cairo.

     Sale of Pipeline  Assets -- In September  1995, the Company and three other
sellers  completed  the sale of their  disparate  interests  in 19  natural  gas
gathering systems and a gas processing plant (the "Pipeline  Assets").  From its
share  of  the  proceeds,   Seagull   realized  a  one-time,   pre-tax  gain  of
approximately  $82 million  recorded in the third quarter of 1995.  For the year
ended  December 31, 1995,  the Pipeline  Assets  contributed  approximately  $18
million to the  revenues and $6 million to the  operating  profit of the Oil and
Gas Operations segment.

     Sale of Section 29  Properties  -- In  September  1995,  the  Company  sold
certain Internal Revenue Code Section 29 Tax  Credit-bearing gas properties (the
"Section  29  Properties")  to an  investment  group  which  includes  a Seagull
subsidiary and two financial investors. For accounting purposes, the Company has
treated the sale as a  non-recourse  monetary  production  payment  reflected in
long-term debt on the balance sheet (see Note 6).


5.       OTHER NONCURRENT ASSETS

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

<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                              -------------------------------------
                                                                                                   1997                  1996
                                                                                              ----------------      ---------------
<S>                                                                                           <C>                   <C>
Oil, gas and marketing imbalances............................................................   $   27,428            $   24,673
Deferred financing costs.....................................................................       10,437                10,935
Other........................................................................................        5,396                 7,197
                                                                                              ----------------      ---------------
                                                                                                $   43,261            $   42,805
                                                                                              ================      ===============
</TABLE>

49                         Seagull Energy Corporation
<PAGE>


     Oil, Gas and  Marketing  Imbalances  -- As discussed in Note 2, the Company
records oil and gas revenues  following the entitlement method of accounting for
production. The Company records revenue from gas marketing sales net of the cost
of gas and third-party  delivery fees, with any resulting imbalances recorded as
a current receivable or payable.  The Company's oil, gas and marketing imbalance
assets and liabilities (stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                     -------------------------------------------------------------------------------
                                                                     1997                                   1996
                                                     ---------------------------------------   -------------------------------------
                                                                                Volume                                   Volume
                                                          Amount                (Bcfe)               Amount              (Bcfe)
                                                      ----------------     ----------------     ----------------     ---------------
<S>                                                   <C>                  <C>                  <C>                   <C>
Assets:
    Current........................................     $ 13,117                  6.5             $   17,650                9.8
    Noncurrent.....................................       27,428                 16.8                 24,673               15.9
                                                      ----------------     ----------------     ----------------     ---------------
                                                        $ 40,545                 23.3             $   42,323               25.7
                                                      ================     ================     ================     ===============
Liabilities:
    Current........................................    $   8,009                  5.5             $   12,060                6.5
    Noncurrent.....................................       16,405                 10.4                 20,047               13.4
                                                      ----------------     ----------------     ----------------     ---------------
                                                        $ 24,414                 15.9             $   32,107               19.9
                                                      ================     ================     ================     ===============

</TABLE>

     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.


6.       DEBT

     Money Market  Facilities  -- Seagull has money market  facilities  with two
U.S. banks with a combined maximum commitment of $100 million.  These facilities
bear interest at rates made available by the banks at their  discretion (7.5% at
December  31,  1996) and may be  canceled  at  either  Seagull's  or the  banks'
discretion.  At December 31, 1997 and 1996, the total amounts  outstanding under
the  money  market  facilities  of none  and  $17  million,  respectively,  were
classified  as a current  liability  and included in accounts and notes  payable
since it was Seagull's intent to repay these amounts within the following year.

Long-term debt (stated in thousands) for 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                          -----------------------------------------
                                                                                                1997                    1996
                                                                                          ------------------      -----------------
<S>                                                                                       <C>                     <C>
Revolving credit....................................................................        $         -                   $236,620
1997 Senior notes...................................................................            150,000                          -
1993 Senior notes...................................................................            100,000                    100,000
1993 Senior subordinated notes......................................................            150,000                    150,000
Monetary production payment.........................................................             25,384                     34,378
ENSTAR Alaska:
    Unsecured industrial development bonds..........................................              9,305                     10,230
    Other unsecured notes...........................................................             44,158                     50,460
                                                                                          ------------------      -----------------
                                                                                                478,847                    581,688
Less:  Current maturities...........................................................              7,097                      7,227
       Unamortized debt discount....................................................              2,733                      1,006
                                                                                          ------------------      -----------------
                                                                                            $   469,017                   $573,455
                                                                                          ==================      =================

</TABLE>

50                         Seagull Energy Corporation
<PAGE>


     Revolving  Credit  -- The  Company  has a  $500  million  revolving  credit
facility  ("Revolving  Credit  Facility").  During 1997, the Company amended and
restated  the  Revolving  Credit  Facility to,  among other  things,  change the
maturity  date to December 31, 2002,  reduce  stated  interest  rate margins and
remove, or modify, various financial covenants. At December 31, 1997, there were
no amounts  borrowed under the Revolving Credit Facility and $481 million of the
unused commitment was immediately available. The Revolving Credit Facility bears
interest,  at Seagull's option, at LIBOR or prime rates plus applicable margins,
ranging  from none to 0.45% or  competitive  bid rates.  Actual  interest  rates
varied from 3.7% to 6.3% at December 31, 1996.

     The Revolving Credit Facility  contains  certain  covenants and restrictive
provisions, including limitations on the incurrence of additional debt or liens,
the  declaration  or payment of dividends  and the  repurchase  or redemption of
capital stock and the maintenance of certain  financial  ratios.  Under the most
restrictive of these  provisions,  approximately  $344 million was available for
payment of cash  dividends on common stock or to  repurchase  common stock as of
December 31, 1997.

     1997 Senior Notes -- On September 30, 1997,  Seagull issued $150 million of
senior notes (the "1997 Senior  Notes")  offered at a public  offering  price of
99.544%  of face  value.  The  1997  Senior  Notes  have a coupon  of 7.5%  paid
semiannually  and mature  September  15,  2027.  The 1997  Senior  Notes are not
redeemable  prior to maturity and are not subject to any sinking  fund.  The net
proceeds of approximately  $146 million were used to repay existing debt and for
general  corporate   purposes.   The  1997  Senior  Notes  represent   unsecured
obligations  of the  Company  and rank  pari  passu  with all  other  unsecured,
unsubordinated  obligations  of the  Company.  The  1997  Senior  Notes  contain
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.

     1993 Senior and Senior  Subordinated  Notes -- In July 1993,  Seagull  sold
$100  million of senior  notes (the "1993  Senior  Notes")  and $150  million of
senior subordinated notes (the "1993 Senior Subordinated  Notes")  (collectively
the "1993 Notes").  The 1993 Senior Notes bear interest at 7 7/8% per annum, are
not  redeemable  prior to maturity or subject to any sinking  fund and mature on
August 1, 2003. The 1993 Senior  Subordinated  Notes bear interest at 8 5/8% per
annum,  are not subject to any sinking fund and mature on August 1, 2005.  On or
after August 1, 2000, the 1993 Senior  Subordinated  Notes are redeemable at the
option of the Company,  in whole or in part, at redemption prices declining from
102.59% in 2000 to 100.00% in 2003 and thereafter  (expressed as a percentage of
principal amount),  plus accrued interest to the redemption date. The 1993 Notes
were issued at par and interest is paid semiannually.

     The 1993 Notes  represent  unsecured  obligations of the Company.  The 1993
Senior Notes rank pari passu with senior  indebtedness  of the Company while the
1993  Senior  Subordinated  Notes are  subordinate  in right of  payment  to all
existing and future senior  indebtedness of the Company.  The 1993 Notes contain
conditions   and   restrictive   provisions   including,   among  other  things,
restrictions on additional  indebtedness by the Company and by its subsidiaries,
the right of

51                         Seagull Energy Corporation
<PAGE>

each note  holder to have the notes  repurchased  by the  Company at 101% of the
principal  amount  upon a change  in  control,  as well as  restrictions  on the
incurrence of secured debt and entering into sale and leaseback transactions.

     Monetary  Production  Payment -- In  September  1995,  the Company sold the
Section  29  Properties  for  approximately  $46  million in net  proceeds.  The
transaction  was  recorded  as a  monetary  production  payment  for  accounting
purposes.  The investors  receive the operating  cash flow from the  properties,
less funds  required for working  capital  purposes,  and are expected to recoup
their investment plus their required after-tax rate of return by 2000. Seagull's
pre-tax effective interest rate is currently estimated to be approximately 4%.

     ENSTAR Alaska -- All long-term  debt of ENSTAR Alaska is issued by a wholly
owned subsidiary of Seagull in the form of senior unsecured notes.  These senior
unsecured notes bear interest at various fixed rates ranging from 7.75% to 12.8%
with principal  payments due 1998 through 2009.  These senior unsecured notes of
the subsidiary provide for restrictions on dividends,  additional borrowings and
purchases,  redemptions or retirements of shares of capital stock, other than in
stock  of the  subsidiary.  Under  the  most  restrictive  provisions  of  these
financing  arrangements,  ENSTAR Alaska had  approximately $12 million available
for  the  making  of  restricted  investments,  restricted  stock  payments  and
restricted subordinated debt payments as of December 31, 1997.

     Interest  Rate Swap  Agreements  -- The  Company  periodically  enters into
interest rate swap agreements to manage the impact of changes in interest rates.
At December  31, 1997,  the Company had no  outstanding  interest  rate swaps in
place.  At December 31, 1996,  the Company had  outstanding  interest rate swaps
with a notional  amount of $100  million  whereby  the  Company  paid a floating
interest  rate and received a fixed  interest rate ranging from 5.43% to 5.635%.
These  interest  rate  swaps  expired  on  January  31,  1997 and did not have a
material impact on the Company's results of operations or cash flow for 1997.

     Annual  Maturities -- At December 31, 1997, the Company's  aggregate annual
maturities of long-term debt are $7 million,  $7 million, $9 million, $9 million
and $3 million for the years 1998, 1999, 2000, 2001 and 2002, respectively.


7.       OTHER NONCURRENT LIABILITIES

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

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                              -------------------------------------
                                                                                                    1997                 1996
                                                                                              -----------------     ---------------
<S>                                                                                           <C>                   <C>
Oil, gas and marketing imbalances (see Note 5)...............................................   $   16,405             $20,047
Refundable customer advances for construction................................................       11,940              11,567
Other........................................................................................       22,823              33,814
                                                                                              -----------------     ---------------
                                                                                                $   51,168             $65,428
                                                                                              =================     ===============
</TABLE>

     Refundable  Customer  Advances  for  Construction  --  Refundable  customer
advances for construction  represent customer deposits received by ENSTAR Alaska
for construction of main extensions  refundable  either wholly or in part over a
period not to exceed 10 years.


52                         Seagull Energy Corporation
<PAGE>


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,
                                                ------------------------------------------------------------------------------------
                                                                1997                                        1996
                                                -------------------------------------     ------------------------------------------
                                                    Carrying            Estimated              Carrying               Estimated
                                                     Amount            Fair Value               Amount               Fair Value
                                                -----------------    ----------------     --------------------    ------------------
<S>                                             <C>                  <C>                  <C>                     <C>
Assets:
     Cash and cash equivalents.................   $     45,654        $    45,654          $      15,284            $    15,284

Liabilities:
     Refundable customer advances
         and deposits..........................        (14,725)           (11,880)               (14,075)               (11,405)
     Debt......................................       (476,114)          (497,382)              (580,682)              (589,815)
Redeemable bearer shares.......................        (15,691)                NA                (16,059)                    NA
Derivative transactions:
     Payable for interest rate swaps...........              -                  -                      -                   (107)
Commodity hedging instruments:
     In a receivable position..................              -                278                    (42)                   247
     In a payable position.....................           (287)            (1,219)                  (291)               (10,798)
</TABLE>

     Cash And Cash  Equivalents -- The carrying amount  approximates  fair value
because of the short maturity of these instruments.

     Refundable  Customer  Advances  And  Deposits -- The fair value is based on
discounted  cash flow  analyses  utilizing a discount  rate of 8.5% and 8.25% at
December 31, 1997 and 1996, respectively, with monthly payments ratably over the
estimated period of deposit or advance refunding.

     Debt -- The fair  value of the 1993  Notes,  1997  Senior  Notes and ENSTAR
Alaska debt is estimated  based on quoted  market prices for the same or similar
issues.  The fair value of the monetary  production  payment is estimated  using
discounted cash flow analyses  utilizing a discount rate of  approximately 4% at
December 31, 1997 and 1996. The carrying  amount of all other debt  approximates
fair value  because  these  instruments  bear  interest at rates tied to current
market rates.

     Redeemable  Bearer  Shares -- The fair  value is not  determinable  because
reductions in the outstanding balance are on demand only to the extent necessary
to  redeem  bearer  shares  presented  for  exchange  until  July  2008 with any
remaining balance reverting to the Company. The Company is not able to determine
when the bearer shares will be presented or how many will be presented.

     Interest  Rate Swap  Agreements  -- The fair values are  obtained  from the
financial institutions that are counterparties to the transactions. These values
represent the estimated amount the Company would pay or receive to terminate the
agreements, taking into consideration

53                         Seagull Energy Corporation
<PAGE>


current interest rates and the current  creditworthiness  of the counterparties.
Seagull's interest rate swap agreements were off balance sheet transactions and,
accordingly, no respective carrying amounts for these transactions were included
in the accompanying consolidated balance sheets as of December 31, 1996.

     Commodity Related Transactions -- 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 New York  Mercantile  Exchange  ("NYMEX")
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, 1997 and
1996.


9.       REDEEMABLE BEARER SHARES

     In 1983,  the  Company  became  the  successor  issuer  to  Global  Natural
Resources  PLC, a United Kingdom  company,  pursuant to the terms of a Scheme of
Arrangement (the "Arrangement")  under Section 206 of the English Companies Act.
The effect of the  Arrangement was to move the domicile of the parent company to
the United States from the United Kingdom.

     Under the terms of the Arrangement, 24,270,876 common shares of Global were
registered in the name of Hambros Trust ("Trust Shares").  The Trust Shares were
held for the owners of bearer share warrants issued by Global Natural  Resources
PLC. The Arrangement  provided that Trust Shares not claimed by July 26, 1988 be
sold by the Trust and the sale proceeds  together  with earned  interest used to
satisfy  subsequent  claims by the holders of bearer share warrants.  Holders of
bearer shares were entitled to receive at their  election  either cash or Global
shares on a share-for-share basis until July 1993 and only cash thereafter.

     In August 1993, Global received  approximately  $19 million,  the remaining
cash  held by the  Trust,  in the  form of an  interest-free  loan.  The loan is
repayable on demand only to the extent necessary to redeem bearer share warrants
presented  for exchange  until July 2008.  Each bearer share  warrant  presented
during this period will be redeemed for $6.66. As of December 31, 1997 and 1996,
there  were  2,418,868  and  2,463,008   outstanding   bearer  share   warrants,
respectively.  The loan is  secured  by a letter  of  credit  issued  under  the
Revolving Credit Facility. During 1997 and 1996 there were no drawings under the
letter of credit.  In July 2008,  the  obligation  of the  Company to holders of
bearer share warrants will cease, the interest-free loan will terminate, and any
remaining cash will revert to the Company and be accounted for as an increase in
additional paid-in capital.

54                         Seagull Energy Corporation

<PAGE>


10.      SHAREHOLDERS' EQUITY

     The following table reflects the activity in shares of the Company's Common
Stock and Treasury Stock during the three years ended December 31, 1997:

<TABLE>
<CAPTION>
                                                                             1997                  1996                 1995
                                                                       ------------------    -----------------     ----------------
<S>                                                                    <C>                   <C>                   <C>
Common Stock Outstanding:
    Shares at beginning of year......................................      63,073,287            65,983,199           65,767,743
    Exercise of employee stock options...............................         804,155               449,256              215,104
    Executive incentive compensation.................................               -                 3,000                    -
    Retirement of treasury stock pursuant to Global Merger                          -            (3,361,185)                   -
    Other............................................................               -                  (983)                 352
                                                                       ------------------    -----------------     ----------------
    Shares at end of year............................................      63,877,442            63,073,287           65,983,199
                                                                       ==================    =================     ================

Treasury Stock Outstanding:
    Shares at beginning of year......................................         361,314             3,729,823            3,759,425
    Acquisition of treasury stock....................................         500,000                     -                    -
    Issuance of treasury stock to 401(k) plan........................               -                (7,324)             (11,602)
    Executive incentive compensation.................................               -                     -              (18,000)
    Retirement of treasury stock pursuant to Global Merger                          -            (3,361,185)                   -
                                                                       ------------------    -----------------     ---------------
    Shares at end of year............................................         861,314               361,314            3,729,823
                                                                       ==================    =================     ===============
</TABLE>


     Preferred Stock -- The Company is authorized to issue  5,000,000  shares of
preferred stock, par value $1.00 per share, in one or more series. There were no
shares issued or outstanding as of December 31, 1997 and 1996.

     Preferred Share Purchase Rights -- Seagull 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 December 1997, the Company amended the Share Purchase
Rights Plan whereby,  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 Seagull's
Board of  Directors  at a price of $0.01 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 March 22, 1999.


55                         Seagull Energy Corporation
<PAGE>


11.      BENEFIT PLANS

     Stock Option Plans -- The Company currently has various stock option plans.
The stock  options  become  exercisable  over a three to six year period and all
options  expire  10 years  after  the  date of  grant.  At  December  31,  1997,
approximately  0.8  million  shares of Common  Stock were  available  for grant.
Information relating to stock options is summarized as follows:

<TABLE>
<CAPTION>

                                          1997                               1996                                1995
                           ---------------------------------- --------------------------------- -----------------------------------
                                           Weighted Average                       Weighted                             Weighted
                                               Exercise                       Average Exercise                     Average Exercise
                                                 Price                              Price                                Price
                              Shares           Per Share          Shares          Per Share          Shares           Per Share
                           -------------- ------------------- ------------- ------------------- --------------  -------------------
<S>                        <C>            <C>                 <C>           <C>                 <C>             <C>
Balance outstanding -
  Beginning of year........  4,746,792          $  16.15         4,501,920          $ 14.67         4,065,084            $   14.52
    Granted................    983,200          $  19.13           844,000          $ 21.79           766,640            $   16.08
    Exercised..............   (809,764)         $   9.16          (449,256)         $  9.80          (215,104)           $   10.40
    Forfeited..............   (321,976)         $  21.33          (149,872)         $ 22.36          (114,700)           $   25.59
                           -------------- ------------------- ------------- ------------------- --------------  -------------------
Balance outstanding -
  End of year..............  4,598,252          $  17.63         4,746,792          $ 16.15         4,501,920            $   14.67
                           ============== =================== ============= =================== ==============  ===================
Options exercisable -
  End of year..............  2,355,972          $  14.97         2,417,492          $ 11.19         2,265,809            $   10.02
                           ============== =================== ============= =================== ==============  ===================
</TABLE>

     The weighted  average fair value of stock options granted during 1997, 1996
and 1995 was $9.28, $10.77 and $8.36 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 44%, 43% and
41%,  weighted  average  risk-free  interest  rates of 6.3%,  6.5% and 6.1%, for
grants in 1997, 1996 and 1995, respectively, and an expected life of three years
after the vesting term. As Seagull has not declared  dividends since it became a
public entity,  no dividend yield was used.  Actual value  realized,  if any, is
dependent on the future  performance  of Seagull  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, 1997 is
summarized as follows:

<TABLE>
<CAPTION>
                                        Options Outstanding                                         Options Exercisable
                   -------------------- --------------------- ---------------------   ----------------------------------------------
                                                                      Weighted
                   Number Outstanding      Weighted Average           Average                                         Weighted
    Range of         at December 31,          Remaining            Exercise Price       Number Exercisable        Average Exercise
 Exercise Prices          1997             Contractual Life          Per Share         at December 31, 1997       Price Per Share
                   --------------------   -------------------     -----------------   ---------------------    ---------------------
<S>                <C>                    <C>                     <C>                 <C>                      <C>
$ 5.89 - $ 9.45              961,084           2 years                 $ 8.05                   921,660                $ 7.99
$ 9.46 - $18.00            1,114,768           5 years                 $14.54                   680,512                $13.19
$18.01 - $21.49              924,300           9 years                 $18.84                    26,400                $19.13
$21.50 - $25.50            1,120,100           8 years                 $24.21                   400,200                $24.49
$25.51 - $26.38              478,000           5 years                 $26.38                   327,200                $26.38
                   --------------------   -------------------     -----------------   ---------------------    ---------------------
$  5.89 - $26.38           4,598,252           6 years                 $17.63                 2,355,972                $14.97
                   ====================   ===================     =================   =====================    =====================
</TABLE>

56                         Seagull Energy Corporation
<PAGE>


     The majority of Seagull's  options must be granted at the fair market value
of Seagull's  Common Stock on the New York Stock  Exchange on the date of grant.
The remaining  stock options may have an exercise price not less than 50% of the
fair  market  value  of  Seagull's  Common  Stock  on the  date  of  grant.  All
outstanding options, other than 44,000 granted by Global in 1993, were issued at
the fair market value of Seagull's  Common  Stock.  Accordingly  as discussed in
Note 2 for the years ending  December 31, 1997,  1996 and 1995, no  compensation
expense  relating to these options is  recognized  in the  Company's  results of
operations.  Had  compensation  cost 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,
                                                        ----------------------------------------------------------------------------
                                                                1997                        1996                       1995
                                                        --------------------       ---------------------      ----------------------
<S>                                                     <C>                        <C>                        <C>
Net income (loss)                  As reported.........          $49,130                    $28,961                  $(1,738)
                                   Pro forma...........           44,641                     26,429                   (2,443)

Earnings (loss) per share:
     Basic                         As reported.........             0.78                       0.46                    (0.03)
                                   Pro forma...........             0.71                       0.42                    (0.04)

     Diluted                       As reported.........             0.77                       0.46                    (0.03)
                                   Pro forma...........             0.70                       0.42                    (0.04)

</TABLE>

     Under the  provisions  of SFAS No.  123,  the pro forma  disclosures  above
include  only the  effects of stock  options  granted by Seagull  subsequent  to
December  31,  1994.  During  this  initial  phase-in  period,   the  pro  forma
disclosures as required by SFAS No. 123 are not representative of the effects on
reported  net income for future  years as options  vest over  several  years and
additional awards are generally made each year.

     Profit Sharing Plans -- ENSTAR Alaska has trusteed profit sharing plans for
salaried employees and union employees.  Annual  contributions for each plan are
determined  by the  Company's  Board of  Directors  pursuant to  formulae  which
contain   minimum   contribution   requirements.   Profit  sharing  expense  was
approximately  $0.3  million,  $0.4 million and $0.3 million for 1997,  1996 and
1995, respectively, and is included in operations and maintenance expenses.

     Thrift Plans -- The Company has various  thrift  plans which are  qualified
employee  savings plans in accordance  with the  provisions of Section 401(k) of
the Internal  Revenue Code of 1986, as amended.  Company  contributions to these
plans (collectively,  the "Thrift Plans") were approximately $2 million for each
of the years  1997,  1996 and 1995.  The Thrift  Plans'  costs are  included  in
operations and maintenance expenses and general and administrative expenses.

     One of the Thrift Plans, the Employees  401(k) Savings Plan ("ESP"),  was a
defined  contribu-

57                         Seagull Energy Corporation
<PAGE>


tion plan which covered substantially all of Global's U.S. employees. Employees'
contributions  were matched by the Company with treasury shares of common stock.
The Company recorded expense of approximately  $0.1 million in both of the years
1996  and  1995  relating  to its  contributions  of 7,324  and  11,602  shares,
respectively,  of common  stock to the ESP.  Subsequent  to December  31,  1996,
contributions  to the  ESP  were  suspended  and  those  employees  eligible  to
contribute  to the ESP prior to the Global Merger were eligible to contribute to
the Seagull Thrift Plan.

     Defined Benefit Plans -- The Company has an unfunded  retirement plan which
provides for supplemental benefits to certain officers and key employees.  As of
December 31, 1997,  only one person was  designated to participate in such plan.
Total expenses of the plan were approximately $0.2 million for each of the years
1997,  1996 and 1995.  The  retirement  plan's costs are included in general and
administrative expenses.

     ENSTAR  Alaska  has  two  defined  benefit  retirement  plans  which  cover
salaried,  clerical and operating  employees.  Determination of benefits for the
salaried  employees  is based upon a  combination  of years of service and final
monthly compensation. Benefits for operating employees are based solely on years
of service. ENSTAR Alaska's policy is to fund the minimum contributions required
by applicable regulations.  The net pension costs are included in operations and
maintenance expenses.

     Global sponsored a defined benefit pension plan which covered substantially
all of  Global's  U.S.  employees.  The  plan  provided  benefits  based  on the
employee's  years of  service  and  compensation  during  the years  immediately
preceding  retirement.  Global made annual  contributions  to the plan to comply
with the minimum funding  provisions of the Employee  Retirement Income Security
Act.  The plan  investments  consisted  primarily  of common  equities and fixed
income  securities.  During 1997, the Company  terminated  this defined  benefit
pension  plan and  participants  were paid the  present  value of their  accrued
benefits.  Termination of this plan did not have a material  effect on Seagull's
financial position or results of operations.

58                         Seagull Energy Corporation
<PAGE>


     The following table (stated in thousands) details the components of pension
income and expense, the funded status of the Company's plans, amounts recognized
in the  Company's  consolidated  balance  sheets and major  assumptions  used to
determine these projected benefit obligations.  Certain assumptions are based on
factors,  such as interest rates and long-term  rates of return on  investments,
which are subject to change due to forces beyond the Company's control.  Changes
in the  various  assumptions  utilized  could have a  significant  effect on the
amounts reported.

<TABLE>
<CAPTION>

                                                                                                        December 31,
                                                                                           ---------------------------------------
                                                                                                 1997                  1996
                                                                                           -----------------      ----------------
<S>                                                                                        <C>                    <C>
Actuarial present value of benefit obligations:
    Vested benefit obligation...........................................................    $   (11,896)            $  (16,242)
                                                                                           =================      ================
    Accumulated benefit obligation......................................................    $   (11,955)            $  (16,278)
                                                                                           =================      ================
Projected benefit obligation for services rendered to date..............................    $   (13,623)            $  (17,740)
Plan assets at fair value, primarily listed stocks and
    corporate and U. S. bonds...........................................................         13,859                 15,520
                                                                                           -----------------      ----------------
Plan  assets  at  fair  value  in  excess  of  (less  than)  projected   benefit
obligation.........
                                                                                                    236                 (2,220)
Unrecognized prior service cost.........................................................             80                     91
Unrecognized net (gain) loss............................................................         (1,045)                   753
Unrecognized net obligation arising out of the initial application of
    SFAS No. 87, amortized over 15 years to 18 years ...................................            309                    394
                                                                                           -----------------      ----------------
Accrued pension cost....................................................................    $      (420)            $     (982)
                                                                                           =================      ================
Net pension cost includes the following components:
    Service cost-benefits earned during the period......................................    $       479             $    1,025
    Interest cost on projected benefit obligation.......................................            901                  1,212
    Actual return on plan assets .......................................................         (3,320)                (2,605)
    Net amortization and deferral.......................................................          2,578                  1,835
                                                                                           -----------------      ----------------
Net periodic pension cost...............................................................    $       638             $    1,467
                                                                                           =================      ================
Assumptions:
    Discount rate.......................................................................              7%                     7%
    Rate of increase in future compensation.............................................              3%                     2%
    Expected long-term rate of return on plan assets....................................              8%                     8%

</TABLE>

     Employee  Stock  Ownership Plan -- On November 15, 1989, the Company formed
the Seagull  Employee  Stock  Ownership Plan (the "ESOP") for the benefit of the
non-Alaskan  employees of the  Company.  The ESOP  borrowed  from the Company $8
million at an interest rate of 10 percent per annum to be repaid in twelve equal
annual installments of principal and interest.  The ESOP used the borrowed funds
and the 1989 contributions from the Company to purchase 948,150 shares of Common
Stock at $8.438 per share from Seagull's treasury.  The purchase price was based
upon the closing price of the Common Stock on the New York Stock Exchange on the
date the ESOP was formed.

     The promissory note has been and will be funded  entirely by  contributions
from  Seagull.  Such  contributions,  included  in  operations  and

59                         Seagull Energy Corporation
<PAGE>


maintenance  expenses  and  administrative  expenses,  were  approximately  $1.3
million in 1997 and $0.6 million in both 1996 and 1995.

     Postretirement  Medical Plan -- ENSTAR Alaska has a postretirement  medical
plan which covers all of its salaried  employees.  Determination  of benefits is
based  upon a  combination  of  the  retiree's  age  and  years  of  service  at
retirement.  The  Company  accrues for such  benefits  during the years the plan
participants render service. Expenses related to the postretirement medical plan
of $0.2  million,  $0.3  million  and  $0.2  million  in 1997,  1996  and  1995,
respectively, are included in operations and maintenance expenses.


12.      INCOME TAXES

     The income  (loss)  before  income taxes and the  components  of income tax
expense (benefit) (stated in thousands) for each of the years ended December 31,
1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                                                            1997                  1996                   1995
                                                                      -----------------     ------------------    ------------------
<S>                                                                   <C>                   <C>                   <C>
Income (loss) before income taxes:
   Domestic.........................................................     $    43,530           $   38,200             $     6,841
   Foreign..........................................................          42,670               16,656                  (5,797)
                                                                      -----------------     ------------------    ------------------
                                                                        $     86,200           $   54,856             $     1,044
                                                                      =================     ==================    ==================
Current income tax expense (benefit):
    Federal.........................................................     $     3,503           $     (643)            $     6,236
    Foreign.........................................................          22,899               17,737                   9,376
    State...........................................................           1,250                  100                   3,462
                                                                      -----------------     ------------------   -------------------
       Total current................................................          27,652               17,194                  19,074
                                                                      -----------------     ------------------   -------------------
Deferred income tax expense (benefit):
    Federal.........................................................           5,787                7,605                 (13,570)
    Foreign.........................................................           3,893                  815                  (1,935)
    State...........................................................            (262)                 281                    (787)
                                                                      -----------------     ------------------   -------------------
       Total deferred...............................................           9,418                8,701                 (16,292)
                                                                      -----------------     ------------------    ------------------
Income tax expense..................................................     $    37,070           $   25,895             $     2,782
                                                                      =================     ==================    ==================
</TABLE>

     In  addition  to the income tax  expense  detailed  above,  the Company had
income tax benefits,  related to the tax effect of compensation  expense,  of $3
million,  $1 million and $0.4  million for each of the years ended  December 31,
1997,  1996 and 1995,  respectively,  which were  recorded  in paid-in  capital.
Seagull also had current income tax  receivables of $2 million and $1 million at
December 31, 1997 and 1996, respectively.

60                         Seagull Energy Corporation
<PAGE>


     The provision for income taxes (stated in thousands)  for each of the years
ended December 31, 1997,  1996 and 1995 was different  than the amount  computed
using the federal statutory rate (35%) for the following reasons:

<TABLE>
<CAPTION>
                                                                                   1997               1996                1995
                                                                              ----------------   ----------------    ---------------
<S>                                                                           <C>                <C>                 <C>
Amount computed using the statutory rate..................................      $   30,170          $   19,200          $      365
Increase (reduction) in taxes resulting from:
   Utilization of Internal Revenue Code Section 29 credits................             (81)               (171)             (3,096)
   State income taxes, net of federal income tax benefits.................             642                 248               1,739
   Taxation of foreign operations, net of
     federal income tax benefits..........................................           6,209              13,613               8,494
   Decrease in deferred tax asset valuation allowance.....................               -              (8,430)             (6,194)
   Adjustments to beginning-of-the-year tax bases
     per the 1995 tax returns and effects of IRS exam.....................               -                   -
                                                                                                                            (1,385)
   Other..................................................................             130               1,435               2,859
                                                                              ----------------   ----------------    ---------------
Income tax expense........................................................      $   37,070          $   25,895          $    2,782
                                                                              ================   ================    ===============

</TABLE>

     The net decrease in the valuation allowance for the year ended December 31,
1996 of  approximately $8 million included $6 million related to the utilization
in 1996 of net operating  losses.  The remaining  change for 1996 and the change
for 1995 are 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) (stated
in thousands)  attributable to income from  continuing  operations for the years
ended December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                                    1997               1996                1995
                                                                               ---------------    ----------------    --------------
<S>                                                                            <C>                <C>                 <C>
Deferred tax expense (benefit) (exclusive of the effects of other
     components listed below)................................................    $    9,418        $   17,131          $   (10,098)
Decrease in deferred tax asset valuation allowance...........................             -            (8,430)              (6,194)
                                                                               ---------------    ----------------    --------------
                                                                                 $    9,418        $    8,701          $   (16,292)
                                                                               ===============    ================    ==============
</TABLE>

61                         Seagull Energy Corporation
<PAGE>


     The tax effects of temporary  differences  (stated in thousands)  that gave
rise to significant  portions of the deferred tax  liabilities  and deferred tax
assets as of December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>

                                                                                         1997              1996            1995
                                                                                   ----------------  ---------------  --------------
<S>                                                                                <C>               <C>              <C>
Deferred tax liabilities:
    Property, plant and equipment, due to
      differences in depreciation, depletion and amortization...................      $   49,815      $   66,242         $ 50,783
    Other.......................................................................             456             583              197
                                                                                   ----------------  ---------------  --------------
Deferred tax liabilities........................................................          50,271          66,825           50,980
                                                                                   ----------------  ---------------  --------------
Deferred tax assets:
    Minimum tax credit carryforwards............................................         (16,352)        (15,972)         (18,950)
    Investment tax credit carryforwards (expiring in 1999 and 2000).............          (1,462)         (1,851)          (1,682)
    Net operating loss carryforwards............................................               -          (1,727)          (7,129)
    Capital loss carryback......................................................          (2,847)              -                -
    Deferred compensation/retirement related
      items accrued for financial reporting purposes............................          (5,390)         (5,464)          (4,349)
    Contingent considerations...................................................          (4,897)         (5,018)            (651)
    Notes receivable............................................................          (5,262)         (6,209)          (5,333)
    Other.......................................................................          (4,364)         (3,636)          (3,178)
                                                                                   ----------------  ---------------  --------------
Deferred tax assets.............................................................         (40,574)        (39,877)         (41,272)
Less - valuation allowance......................................................               -               -            8,430
                                                                                   ----------------  ---------------  --------------
Net deferred tax assets.........................................................         (40,574)        (39,877)         (32,842)
Less - reclassification to current deferred.....................................           4,429           4,073            5,239
                                                                                   ----------------  ---------------  --------------
Non-current deferred tax assets.................................................         (36,145)        (35,804)           (27,603)
                                                                                   ----------------  ---------------  --------------
Net non-current deferred tax liabilities........................................      $   14,126      $   31,021           $ 23,377
                                                                                   ================  ===============  ==============
</TABLE>

62                         Seagull Energy Corporation
<PAGE>



13.      BUSINESS SEGMENTS

     Information  on the  Company's  operations by business  segment  (stated in
thousands) is summarized as follows:

<TABLE>
<CAPTION>
                                                                                        Year ended December 31,
                                                                   -----------------------------------------------------------------
                                                                          1997                   1996                    1995
                                                                   -------------------    -------------------     ------------------
<S>                                                                <C>                    <C>                     <C>
Revenues:
    Oil and gas operations.....................................     $      453,648         $      419,595           $     308,510
    Alaska transmission and distribution.......................             95,719                 97,616                  97,770
                                                                   -------------------    -------------------     ------------------
                                                                    $      549,367         $      517,211           $     406,280
                                                                   ===================    ===================     ==================
Operating Profit (Loss):
    Oil and gas operations(*)..................................     $      106,983         $       97,192           $     (35,867)
    Alaska transmission and distribution.......................             22,588                 25,781                  22,896
    Corporate..................................................            (19,095)               (19,530)                (23,798)
                                                                   -------------------    -------------------     ------------------
                                                                    $      110,476         $      103,443           $     (36,769)
                                                                   ===================    ===================     ==================
Depreciation, Depletion And Amortization:
    Oil and gas operations(*)..................................     $      160,197         $      145,382           $     188,455
    Alaska transmission and distribution.......................              8,368                  8,190                   8,042
    Corporate..................................................              2,951                  2,097                   2,030
                                                                   -------------------    -------------------     ------------------
                                                                    $      171,516         $      155,669           $     198,527
                                                                   ===================    ===================     ==================
Identifiable Assets:
    Oil and gas operations.....................................     $    1,161,108         $    1,267,481           $   1,118,216
    Alaska transmission and distribution.......................            184,422                189,867                 189,081
    Corporate..................................................             65,536                 57,715                  51,828
                                                                   -------------------    -------------------     ------------------
                                                                    $    1,411,066         $    1,515,063           $   1,359,125
                                                                   ===================    ===================     ==================
Capital Expenditures:
   Oil and gas operations:
     Leasehold.................................................     $       23,141         $       12,986           $      18,000
     Exploration...............................................             95,681                 77,774                  46,575
     Development...............................................            137,806                108,763                  69,260
                                                                   -------------------    -------------------     ------------------
                                                                           256,628                199,523                 133,835
     Other oil and gas operations..............................                885                    228                     441
                                                                   -------------------    -------------------     ------------------
         Total oil and gas operations..........................            257,513                199,751                 134,276
   Alaska transmission and distribution........................              9,607                  9,287                   7,611
   Corporate...................................................              8,488                  4,424                   2,214
                                                                   -------------------    -------------------     ------------------
                                                                    $      275,608         $      213,462           $     144,101
                                                                   ===================    ===================     ==================

Acquisitions, Net of Cash Acquired:
    Acquisitions of oil and gas properties.....................     $       17,665         $       90,867           $           -
    Acquisitions of other assets and liabilities...............                  -                 13,553                       -
                                                                   -------------------    -------------------     ------------------
                                                                    $       17,665         $      104,420           $           -
                                                                   ===================    ===================     ==================
</TABLE>

     (*)  Includes $49 million  relating to the impairment of long-lived  assets
          for the year ended December 31, 1995.


63                         Seagull Energy Corporation
<PAGE>


Identifiable  assets (stated in thousands) by geographic  area are summarized as
follows:

<TABLE>
<CAPTION>

                                                                                             Year ended December 31,
                                                                         -----------------------------------------------------------
                                                                                1997                  1996                 1995
                                                                         ----------------      ----------------      ---------------
<S>                                                                      <C>                   <C>                   <C>
United States........................................................        $1,157,186            $1,138,619            $1,074,787
Canada...............................................................                 -               200,352               211,040
Egypt................................................................           190,321               119,680                11,003
Cote d'Ivoire........................................................            35,519                28,854                33,167
Tatarstan............................................................            25,051                21,152                21,120
Indonesia............................................................             2,956                 3,487                 4,237
Other(*).............................................................                33                 2,919                 3,771
                                                                         ----------------      ----------------      ---------------
                                                                             $1,411,066            $1,515,063            $1,359,125
                                                                         ================      ================      ===============
</TABLE>

(*)  Other includes Argentina, Malaysia, Turkey and the United Kingdom.


14.      COMMITMENTS AND CONTINGENCIES

     Lease  Commitments -- The Company leases certain office space and equipment
under operating lease  arrangements which contain renewal options and escalation
clauses.  Future  minimum  rental  payments  under these leases range between $2
million and $3 million in each of the years 1998-2002,  and total $7 million for
all  subsequent   years.   Total  rental  expense  under  operating  leases  was
approximately $3 million for each of the three years ended December 31, 1997.

     Royalty Litigation -- Increasingly, royalty owners under oil and gas leases
are challenging  valuation  methodology and  post-production  deductions used by
producers. These cases have arisen because oil and gas producers such as Seagull
have  begun  to  provide  services  that had  previously  been  provided  by the
interstate gas pipelines prior to the "unbundling" of gas services. For example,
in 1996,  Seagull was sued in Anne K. Barnaby,  et al. v. Seagull Mid-South Inc.
This case is pending in state court of Latimer County,  Oklahoma.  In this case,
the plaintiffs  seek additional  royalties  based upon the alleged  deduction by
Seagull of  post-production  costs,  such as those  related  to  transportation,
compression,   dehydration  and  treating.  In  addition,  the  plaintiffs  have
questioned the sales price used by Seagull as a basis for calculating  royalties
to the extent that sales were made to Seagull's gas marketing subsidiary.  While
Seagull  intends to vigorously  defend this case, the Company cannot predict the
outcome of these matters.

     NorAm Litigation -- Seagull also was sued in NorAm Gas Transmission Co., et
al. v. Seagull  Mid-South  Inc.  (the "NorAm  Litigation").  The case relates to
Seagull's  termination of a 1956 gas contract which provided for the sale of gas
by Seagull from certain  wells in the Aetna Field in Arkansas for  approximately
$0.16 per Mcf. NorAm Gas  Transmission  Co.  ("NorAm") and Arkansas  Western Gas
Company ("AWG") have sought a declaratory judgment that the gas contract remains
in effect with  respect to these wells or, in the  alternative,  money  damages.
Since the  termination by Seagull of the gas contract,  Seagull has been selling
the gas in question on the spot market.  Seagull believes that it had reasonable
grounds  for  terminating  the gas  contract.  NorAm and AWG have also  sought a
declaratory  judgment to the effect that certain  additional  wells in the Aetna
Field (including any new wells) would be subject to the $0.16 per Mcf price (the
"Additional Well Claim"). If NorAm and AWG were successful with the

65                         Seagull Energy Corporation
<PAGE>


Additional  Well  Claim,  Seagull's  operations  in the  Aetna  Field  would  be
materially  affected in an adverse  manner.  By mid - 1997,  the  plaintiffs had
alleged  losses in these matters of  approximately  $90 million plus  attorney's
fees.

     In November 1997, the Company , NorAm and AWG signed a Settlement  Proposal
that  ultimately  could lead to a final  settlement  and resolution of the NorAm
Litigation  discussed above. The Settlement Proposal calls for Seagull to make a
cash payment to deliver gas under a five-year gas sales contract. As a result of
this Settlement  Proposal,  the Company recorded in the fourth quarter of 1997 a
one-time pre-tax charge of approximately  $4.5 million,  included in general and
administrative expenses.

     Gulf Coast  Vacuum Site -- In 1993,  the  Environmental  Protection  Agency
("EPA")  notified the Company that a subsidiary  was a  potentially  responsible
party ("PRP") at the Gulf Coast Vacuum Services  Superfund Site (the "GCV Site")
in Vermilion Parish,  Louisiana.  Based upon the Company's investigation of this
claim, the Company believes that the basis for its alleged liability is a series
of  transactions  between the Company's  subsidiary  and the operator of the GCV
Site that occurred  during 1979 and 1980.  While the EPA's cleanup cost estimate
of the GCV Site is in the range of $17 million,  the Company  believes  that its
liability  is unlikely to be material  to its  financial  condition,  results of
operations or cash flows because of the large number of PRPs at the GCV Site and
the relative amount of  contamination,  if any, that may have been caused at the
GCV Site by the disposal of wastes by the Company during 1979 and 1980.

     Comstock Mill Site -- On February 21, 1996, the United States Department of
Interior  Bureau  of Land  Management  ("BLM")  sent a letter to  Houston  Oil &
Minerals Corporation ("HO&M"), a wholly owned subsidiary of Seagull,  requesting
HO&M to prepare and submit a plan for sampling and  analyzing  groundwater  at a
former mining operation  located near Virginia City,  Nevada (the "Comstock Mill
Site").  The  basis for the  BLM's  request  was the  alleged  operation  of the
Comstock  Mill Site by HO&M  between  1978 and 1982.  Pursuant  to an  indemnity
provision in the stock purchase agreement by which Seagull acquired HO&M in 1988
(the "HO&M Purchase  Agreement"),  Seagull  tendered the BLM's letter to Tenneco
Inc.  ("Tenneco")  with a demand for indemnity and notified the BLM that Tenneco
would  respond to the BLM letter on behalf of HO&M.  The BLM has also  indicated
that  Tenneco  and HO&M might be required to address  cyanide  contamination  of
groundwater at the Comstock Mill Site by separate  action of the Nevada Division
of Environmental Protection. Seagull believes that any liability associated with
the Comstock  Mill Site is the  responsibility  of Tenneco or its  successors in
liability pursuant to the HO&M Purchase Agreement.

     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.

65                         Seagull Energy Corporation
<PAGE>

15.  SUPPLEMENTAL OIL AND GAS INFORMATION (Unaudited)

Capitalized  Costs  Relating  to Oil and Gas  Producing  Activities  (amounts in
thousands)
<TABLE>
<CAPTION>

                                      United                               Cote
                                      States     Canada (*)     Egypt    d'Ivoire  Tatarstan   Indonesia   Other      Total
                                    ----------   ----------    --------  --------  ---------   ---------   -----   ----------
<S>                                  <C>         <C>          <C>       <C>        <C>         <C>         <C>     <C>

At December 31, 1997:
   Proved  . . . . . . . . . . . .  $1,421,004   $       -     $174,702  $ 45,343  $ 22,500    $   3,962   $    -  $1,667,511
   Unproved. . . . . . . . . . . .      52,449           -       22,101       664          -           -        -      75,214
                                    ----------   ----------    --------  --------  ---------   ---------   ------  ----------
                                     1,473,453           -      196,803    46,007     22,500       3,962        -   1,742,725

   Accumulated depreciation,
    depletion and amortization         732,627           -       28,769    15,835      8,810       3,042        -     789,083
                                    ----------   ----------    --------  --------  ---------   ---------   ------  ----------
                                    $  740,826   $       -     $168,034  $ 30,172  $  13,690   $     920   $    -     953,642
                                    ==========   ==========    ========  ========  =========   =========   ======  ==========

At December 31, 1996:
   Proved . . . . . . . . . . . .   $1,312,448     239,323       98,407  $ 32,648  $  17,056   $   3,962   $    -  $1,703,844
   Unproved . . . . . . . . . . .       33,959       2,525        5,584       664          -           -    4,208      46,940
                                    ----------   ---------     --------  --------  ---------   ---------   ------  ----------
                                     1,346,407     241,848      103,991    33,312     17,056       3,962    4,208   1,750,784

   Accumulated depreciation,
    depletion and amortization         620,602      49,561        7,442     6,245      4,979       2,911    1,441     693,181
                                    ----------   ---------     --------  --------  ---------   ---------   ------  ----------
                                     $ 725,805    $192,287     $ 96,549  $ 27,067  $  12,077   $   1,051   $2,767  $1,057,603
                                    ==========   =========     ========  ========  =========   =========   ======  ==========

(*)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

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

                                      United                               Cote
                                      States     Canada (*)     Egypt    d'Ivoire   Tatarstan   Indonesia   Other      Total
                                   ----------   ----------    --------  --------   ---------   ---------   -----   ----------

<S>                                 <C>          <C>           <C>       <C>        <C>         <C>         <C>     <C>
Year ended December 31, 1997:
Acquisition costs:
   Proved. . . . . . . . . . . . . $    7,382     $      54     $ 4,542   $     -   $       -   $       -   $    -  $   11,978
   Unproved. . . . . . . . . . . .     21,886           595       6,285        53           -           -        9      28,828
Exploration costs. . . . . . . . .     51,058         2,999      38,086     3,357         181           -        -      95,681
Development costs. . . . . . . . .     68,059         9,749      43,900    10,801       5,297           -        -     137,806
                                   ----------     ---------     -------  --------   ---------   ---------   ------  ----------
                                   $  148,385     $  13,397     $92,813   $14,211   $   5,478   $       -   $    9  $  274,293
                                   ==========     =========     =======  ========   =========   =========   ======  ==========
Year ended December 31, 1996:
Acquisition costs:
   Proved. . . . . . . . . . . . . $   29,102     $   1,000     $56,051   $     -   $       -   $       -   $   -   $   86,153
   Unproved. . . . . . . . . . . .     10,371           862       5,584       782           -           -      101      17,700
Exploration costs. . . . . . . . .     64,066         3,332       6,934     2,823           -           -      619      77,774
Development costs. . . . . . . . .     65,309        10,992      25,176     3,255       4,031           -        -     108,763
                                   ----------     ---------     -------   -------   ---------   ---------   ------  ----------
                                   $  168,848     $  16,186     $93,745   $ 6,860   $   4,031   $       -   $  720  $  290,390
                                   ==========     =========     =======  ========   =========   =========   ======  ==========

Year ended December 31, 1995:
Acquisition costs:
   Proved. . . . . . . . . . . . . $    3,193     $     553     $     -   $     -   $       -   $       -   $    -  $    3,746
   Unproved. . . . . . . . . . . .     13,036           873          13       126           -           -      206      14,254
Exploration costs. . . . . . . . .     38,762           764       3,412       (29)        312           -    3,354      46,575
Development costs. . . . . . . . .     39,669         2,507       4,792    18,359       3,933           -        -      69,260
                                   ----------     ---------     -------   -------   ---------   ---------   ------  ----------
                                   $   94,660     $   4,697     $ 8,217   $18,456   $   4,245   $       -   $3,560  $  133,835
                                   ==========     =========     =======  ========   =========   =========   ======  ==========

(*)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

</TABLE>

66                         Seagull Energy Corporation
<PAGE>

<TABLE>
<CAPTION>

Results  of  Operations  for  Oil  and  Gas  Producing  Activities  (amounts  in
thousands) (1)

                                      United                               Cote
                                      States     Canada (*)     Egypt    d'Ivoire   Tatarstan   Indonesia    Other      Total
                                   ----------   ----------    --------   --------   ---------   ---------   -------   ----------
<S>                                <C>          <C>           <C>        <C>        <C>         <C>         <C>     <C>
Year Ended December 31, 1997:
Revenues . . . . . . . . . . . . .  $ 290,337    $  25,956    $ 61,772   $ 15,995   $  21,558   $  13,551   $   150   $  429,319
Operating expense (3). . . . . . .     75,692        8,541      11,701      3,864      13,994           -     1,921      115,713
Exploration charges. . . . . . . .     31,259        2,193       2,553      3,218         (48)          -     2,910       42,085
DD&A (4) . . . . . . . . . . . . .    116,257        7,595      21,615      9,641       3,093         131       273      158,605
Income tax expense (5) . . . . . .     23,495        4,156      11,763      2,474         811       7,589         -       50,288
                                    ---------    ---------    --------   --------   ---------   ---------   -------   ----------
Results of activities. . . . . . .  $  43,634    $   3,471    $ 14,140   $ (3,202)  $   3,708   $   5,831   $(4,954)  $   62,628
                                    ==========   =========    ========   ========   =========   =========   =======   ==========
Year Ended December 31, 1996:
Revenues . . . . . . . . . . . . .  $ 282,508    $  34,006    $ 28,126   $ 12,798   $  15,626   $  15,892   $    58   $  389,014
Operating expense (3). . . . . . .     68,409       13,889       5,806      2,673      11,364           -        17      102,158
Exploration charges. . . . . . . .     36,098        4,295       2,725      5,401        (133)          -     2,386       50,772
DD&A (4) . . . . . . . . . . . . .    110,989       17,114       7,416      4,151       2,830         131       878      143,509
Income tax expense (5) . . . . . .     23,047        1,375       5,579      2,158         541       8,899         -       41,599
                                    ---------    ---------    --------   --------   ---------   ---------   -------   ----------
Results of activities. . . . . . .  $  43,965    $  (2,667)   $  6,600   $ (1,585)  $   1,024   $  6,862    $(3,223)  $   50,976
                                    ==========   =========    ========   ========   =========   =========   =======   ==========

Year Ended December 31, 1995:
Revenues . . . . . . . . . . . . .  $ 205,706    $  28,849    $    442   $  4,377   $  16,037   $  12,418   $     7   $  267,836
Operating expense (3). . . . . . .     61,784       12,934          56      1,400       8,872           -       (21)      85,025
Exploration charges. . . . . . . .     26,156        2,866       2,086        471         367           -     8,277       40,223
DD&A (4) . . . . . . . . . . . . .    113,430       18,046         136      2,106       2,111         131       536      136,496
Impairment of oil and gas
   properties. . . . . . . . . . .     46,122            -           -          -           -           -         -       46,122
Income tax expense (benefit)(5).      (20,776)      (2,233)          -        832       1,066       6,953         -      (14,158)
                                    ---------    ---------   ---------  ---------   ---------   ---------   -------   ----------
Results of activities. . . . . . .  $ (21,010)   $  (2,764)  $ (1,836)  $    (432)  $   3,621   $   5,334   $(8,785)  $  (25,872)
                                    ==========   =========   =========  =========   =========   =========   =======   ==========
</TABLE>

(1)  Excludes  revenues  and expenses  associated  with  pipeline and  marketing
     activities,  interest expense and general corporate expenses.  Revenues and
     expenses  associated  with pipeline and marketing  activities  are directly
     related  to Oil and Gas  Operations  with  regard to segment  reporting  as
     defined in SFAS No. 14,  Financial  Reporting  for  Segments  of a Business
     Enterprise,  but are not part of  Disclosures  about Oil and Gas  Producing
     Activities as defined by SFAS No. 69.

(2)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

(3)  Operating  expense  represents  cost 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,  transportation costs and all overhead
     expenses directly related to oil and gas producing activities.

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

(5)  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 or allowances.

67                         Seagull Energy Corporation
<PAGE>
<TABLE>
<CAPTION>

 Reserve Quantity Information - Thousand Equivalent Barrels of Proved Reserves (MBOE)

                                     United                                      Cote                      Indonesia
                                     States       Canada (2)       Egypt       d'Ivoire      Tatarstan     and Other       Total
                                    -----------   ------------  ------------  ------------  ------------  ------------   -----------
<S>                                <C>            <C>           <C>           <C>           <C>           <C>            <C>
 January 1, 1997 . . . . . . . . . .  155,847          42,682         25,965      5,132        16,338        11,993        257,957
   Revisions of previous estimates .   (1,744)          8,896          3,752        978        (3,155)           18          8,745
   Extensions and discoveries. . . .   14,150          11,105          7,796        219         4,784             -         38,054
   Purchases of reserves in place. .    1,157               -          1,171          -             -             -          2,328
   Sales of reserves in place. . . .     (666)        (60,189)             -          -             -             -        (60,855)
   Production. . . . . . . . . . . .  (20,195)         (2,494)        (3,383)      (978)       (1,512)         (717)       (29,279)
                                    -----------   ------------  ------------  ------------  ------------  ------------   -----------
December 31, 1997 (1). . . . . . . .  148,549               -         35,301      5,351        16,455        11,294        216,950
                                    ===========   ============  ============  ============  ============  ============   ===========

 January 1, 1996 . . . . . . . . . .  153,794          45,816          8,151      6,521        15,570        13,300        243,152
   Revisions of previous estimates .    4,021          (2,713)           386       (900)          651          (518)           927
   Extensions and discoveries. . . .   12,769           5,261          1,798        263         1,234             -         21,325
   Purchases of reserves in place. .    6,217             288         16,935          -             -             -         23,440
   Sales of reserves in place. . . .      (20)         (2,075)             -          -             -             -         (2,095)
   Production. . . . . . . . . . . .  (20,934)         (3,895)        (1,305)      (752)       (1,117)         (789)       (28,792)
                                    -----------   ------------  ------------  ------------  ------------  ------------   -----------
December 31, 1996 (1). . . . . . . .  155,847          42,682         25,965      5,132        16,338        11,993        257,957
                                    ===========   ============  ============  ============  ============  ============   ===========

 January 1, 1995 . . . . . . . . . .  158,848          48,714          3,520      5,282        13,157        14,397        243,918
   Revisions of previous estimates .    3,515             363          4,656        118         1,497          (396)         9,753
   Extensions and discoveries  . . .   11,242           1,054              -      1,416         1,978             -         15,690
   Purchases of reserves in place. .    1,254             323              -          -             -             -          1,577
   Sales of reserves in place. . . .     (748)           (563)             -          -             -             -         (1,311)
   Production  . . . . . . . . . . .  (20,317)         (4,075)           (25)      (295)       (1,062)         (701)       (26,475)
                                    -----------   ------------  ------------  ------------  ------------  ------------   -----------
December 31, 1995 (1). . . . . . . .  153,794          45,816          8,151      6,521        15,570        13,300        243,152
                                    ===========   ============  ============  ============  ============  ============   ===========

 Proved developed reserves (MBOE):
   December 31, 1997 . . . . . . . .  126,439               -         20,706      4,004        10,919        11,294        173,362
   December 31, 1996 . . . . . . . .  127,871          37,150         14,502      3,092        10,806         9,528        202,949
   December 31, 1995 . . . . . . . .  122,918          40,787            265      3,623         9,176        10,652        187,421
</TABLE>

(1)  At December 31, 1997, 1996 and 1995, approximately 12,963 MBOE, 14,072 MBOE
     and 14,733 MBOE,  respectively,  were dedicated to the monetary  production
     payment.

(2)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

     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.
 68                          Seagull Energy Corporation
<PAGE>
<TABLE>
<CAPTION>




                                      United                                     Cote                       Indonesia
                                      States       Canada (3)       Egypt      d'Ivoire      Tatarstan      and Other      Total
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
<S>                                <C>            <C>           <C>           <C>           <C>            <C>           <C>
Reserve Quantity Information -  Proved Oil Reserves (Mbbl)
January 1, 1997 . . . . . . . . . .   19,885          3,725        25,724         1,525        16,338          1,125        68,322
  Revisions of previous estimates .     (487)         2,137         3,708           263        (3,155)             5         2,471
  Extension and discoveries . . . .      754            969         7,783            27         4,784              -        14,317
  Purchases of reserves in place. .      204              -         1,171             -             -              -         1,375
  Sales of reserves in place. . . .      (52)        (6,588)            -             -             -              -        (6,640)
  Production. . . . . . . . . . . .   (1,763)          (243)       (3,383)         (603)       (1,512)           (56)       (7,560)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1997 (1) . . . . . . .   18,541              -        35,003         1,212        16,455          1,074        72,285
                                   =============  ============  ============  ============  ============   ============ ============

January 1, 1996 . . . . . . . . . .   20,163          3,667         7,918         3,010        15,570          1,153        51,481
  Revisions of previous estimates .     (800)           (47)          384        (1,038)          651             23          (827)
  Extension and discoveries . . . .    1,656            916         1,792            64         1,234              -         5,662
  Purchases of reserves in place. .      429             21        16,935             -             -              -        17,385
  Sales of reserves in place. . . .       (2)          (471)            -             -             -              -          (473)
  Production  . . . . . . . . . . .   (1,561)          (361)       (1,305)         (511)       (1,117)           (51)       (4,906)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1996 (1) . . . . . . .   19,885          3,725        25,724         1,525        16,338          1,125        68,322
                                   =============  ============  ============  ============  ============   ============ ============

January 1, 1995 . . . . . . . . . .   15,481          4,051         3,520         2,210        13,157          1,066        39,485
  Revisions of previous estimates .    4,000           (164)        4,423            72         1,497            132         9,960
  Extension and discoveries . . . .    1,382            258             -           989         1,978              -         4,607
  Purchases of reserves in place. .      781             74             -             -             -              -           855
  Sales of reserves in place. . . .      (78)          (153)            -             -             -              -          (231)
  Production. . . . . . . . . . . .   (1,403)          (399)          (25)         (261)       (1,062)           (45)       (3,195)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1995 (1) . . . . . . .   20,163          3,667         7,918         3,010        15,570          1,153        51,481
                                   =============  ============  ============  ============  ============   ============ ============

Reserve Quantity Information -  Proved Gas Reserves (Mmcf)
January 1, 1997 . . . . . . . . . .  815,781        233,744         1,447        21,644             -          65,217    1,137,833
  Revisions of previous estimates .   (7,548)        40,558           256         4,287             -              72       37,625
  Extension and discoveries . . . .   80,372         60,817            83         1,149             -               -      142,421
  Purchases of reserves in place. .    5,717             -              -             -             -               -        5,717
  Sales of reserves in place. . . .   (3,681)      (321,609)            -             -             -               -     (325,290)
  Production. . . . . . . . . . . . (110,595)       (13,510)            -        (2,245)            -          (3,965     (130,315)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1997 (2) . . . . . . .  780,046              -         1,786        24,835             -          61,324      867,991
                                   =============  ============  ============  ============  ============   ============ ============

January 1, 1996 . . . . . . . . . .  801,797        252,892         1,399        21,066             -          72,892    1,150,046
  Revisions of previous estimates .   28,925        (15,994)           13           828             -          (3,246)      10,526
  Extension and discoveries . . . .   66,678         26,071            35         1,195             -               -       93,979
  Purchases of reserves in place. .   34,729          1,603             -             -             -               -       36,332
  Sales of reserves in place. . . .     (110)        (9,625)            -             -             -               -       (9,735)
  Production. . . . . . . . . . . . (116,238)       (21,203)            -        (1,445)            -          (4,429)    (143,315)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1996 (2) . . . . . . .  815,781        233,744         1,447        21,644             -          65,217    1,137,833
                                   =============  ============  ============  ============  ============   ============ ============

January 1, 1995 . . . . . . . . . .  860,209        267,980             -        18,432             -          79,990    1,226,611
  Revisions of previous estimates .   (2,908)         3,159         1,399           278             -          (3,165)      (1,237)
  Extension and discoveries . . . .   59,157          4,773             -             -             -               -       63,930
  Purchases of reserves in place. .    2,840          1,494             -         2,559             -               -        6,893
  Sales of reserves in place. . . .   (4,019)        (2,457)            -             -             -               -       (6,476)
  Production. . . . . . . . . . . . (113,482)       (22,057)            -          (203)            -          (3,933)    (139,675)
                                   -------------  ------------  ------------  ------------  ------------   ------------ ------------
December 31, 1995 (2) . . . . . . .  801,797        252,892         1,399        21,066             -          72,892    1,150,046
                                   =============  ============  ============  ============  ============   ============ ============
</TABLE>

(1)  At December 31, 1997,  1996 and 1995,  includes  approximately  2,079 Mbbl,
     2,248 Mbbl and 2,281 Mbbl,  respectively,  of oil dedicated to the monetary
     production payment.
(2)  At December 31, 1997, 1996 and 1995,  includes  approximately  65,306 MMcf,
     70,914 MMcf and 74,713 MMcf, respectively, of gas dedicated to the monetary
     production payment.
(3)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.


69                            Seagul Energy Corporation
<PAGE>


<TABLE>
<CAPTION>


Reserve Quantity Information -  Proved Developed Reserves

                                      United                                     Cote                       Indonesia
                                      States      Canada (*)       Egypt       d'Ivoire      Tatarstan      and Other       Total
                                   -------------  ------------  ------------  ------------  ------------   ------------  -----------
<S>                                <C>            <C>           <C>           <C>           <C>            <C>           <C>
Proved developed oil reserves (Mbbl):
   December 31, 1997 . . . . . . .     14,406             -       20,452           866         10,919         1,074        47,717
   December 31, 1996 . . . . . . .     12,855         2,913       14,336         1,035         10,806           936        42,881
   December 31, 1995 . . . . . . .     11,205         3,196          265         1,720          9,176         1,022        26,584

Proved developed gas reserves (MMcf):
   December 31, 1997 . . . . . . .    672,195             -        1,522        18,826              -        61,324       753,867
   December 31, 1996 . . . . . . .    690,095       205,422          993        12,344              -        51,554       960,408
   December 31, 1995 . . . . . . .    670,277       225,544            -        11,415              -        57,777       965,013

</TABLE>

(*)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.


     The Company's  standardized  measure of discounted future net cash flows as
of December  31,  1997 and 1996 and changes  therein for each of the years 1997,
1996 and 1995 are  provided  based on the present  value of future net  revenues
from proved oil and gas reserves estimated by independent 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 1997 calculations were made using prices
of $15.41 per Bbl and $2.42 per Mcf for oil and gas, respectively. The Company's
average realized prices for the year ended December 31, 1997 were $17.34 per Bbl
and $2.29 per Mcf for oil and gas,  respectively.  Seagull's  average prices for
the month  ended  January 31, 1998 were $14.47 per Bbl and $2.21 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.

70                          Seagull Energy Corporation
<PAGE>

Standardized Measure of Discounted Future Net Cash Flows (amounts in thousands)
<TABLE>
<CAPTION>

                                         United                                   Cote                       Indonesia
                                         States       Canada (*)      Egypt      d'Ivoire     Tatarstan      and Other      Total
                                     --------------  -----------  ------------  -----------  -------------  ------------  ----------
<S>                                  <C>             <C>          <C>           <C>          <C>            <C>           <C>
December 31, 1997:
   Future cash inflows . . . . . . .  $2,174,296      $       -    $ 576,178    $  67,976     $ 227,401     $ 169,394    $3,215,245
   Future development costs. . . . .    (140,603)             -     (122,066)      (6,661)      (33,395)            -      (302,725)
   Future production costs . . . . .    (552,878)             -     (156,970)     (19,048)     (103,453)      (40,248)     (872,597)
                                     --------------  -----------  ------------  -----------  -------------  ------------  ----------
   Future net cash flows before
      income taxes . . . . . . . . .   1,480,815              -      297,142       42,267        90,553       129,146     2,039,923
   10% annual discount . . . . . . .    (606,449)             -      (93,567)     (11,239)      (42,846)      (66,459)     (820,560)
                                     --------------  -----------  ------------  -----------  -------------  ------------  ----------
   Discounted future net cash flows
      before income taxes. . . . . .     874,366              -      203,575       31,028        47,707        62,687     1,219,363
   Discounted income taxes . . . . .    (165,620)             -      (70,935)      (8,028)      (12,664)      (29,673)     (286,920)
                                     --------------  -----------  ------------  -----------  -------------  ------------  ----------
   Standardized measure of dis-
     counted future net cash flows .  $  708,746      $       -    $ 132,640    $  23,000     $  35,043     $  33,014    $  932,443
                                     ==============  ===========  ============  ===========  =============  ============  ==========


December 31, 1996:
   Future cash inflows . . . . . . .  $3,489,097      $ 481,159    $ 604,613    $  80,526     $ 266,304     $ 229,497    $5,151,196
   Future development costs. . . . .    (169,240)       (20,487)    (115,639)     (15,529)      (30,896)            -      (351,791)
   Future production costs . . . . .    (712,881)      (129,313)    (122,697)     (17,700)     (121,137)      (41,640)   (1,145,368)
                                     --------------  -----------  ------------  -----------  -------------  -----------  -----------
   Future net cash flows before
      income taxes . . . . . . . . .   2,606,976        331,359      366,277       47,297       114,271       187,857     3,654,037
   10% annual discount . . . . . . .  (1,086,947)      (153,161)    (114,772)     (11,121)      (54,171)      (95,995)   (1,516,167)
                                     --------------  -----------  ------------  -----------  -------------  -----------  -----------
   Discounted future net cash flows
      before income taxes. . . . . .   1,520,029        178,198      251,505       36,176        60,100        91,862     2,137,870
   Discounted income taxes . . . . .    (383,032)       (63,079)     (75,306)      (5,072)      (18,236)      (48,623)     (593,348)
                                     --------------  -----------  ------------  -----------  -------------  -----------  -----------
   Standardized measure of dis-
     counted future net cash flows .  $1,136,997      $ 115,119    $ 176,199    $  31,104     $  41,864     $  43,239    $1,544,522
                                     ==============  ===========  ============  ===========  =============  ===========  ===========
</TABLE>

(*)  All of the Company's  Canadian oil and gas operations  were sold in October
     1997.

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

                                                                                               Year Ended December 31,
                                                                                ----------------------------------------------------
                                                                                      1997              1996              1995
                                                                                ---------------   ---------------    ---------------
<S>                                                                             <C>                <C>              <C>
Beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $1,544,522         $  861,351        $  728,303
   Revisions of previous quantity estimates less related costs . . . . . . . . .      58,132              3,825            54,287
   Extensions and discoveries less related costs . . . . . . . . . . . . . . . .     196,358            209,860           163,131
   Purchases of reserves in place. . . . . . . . . . . . . . . . . . . . . . . .      12,082            219,510            11,967
   Sales of reserves in place. . . . . . . . . . . . . . . . . . . . . . . . . .    (212,125)            (6,593)           (5,238)
   Net changes in future prices and production costs . . . . . . . . . . . . . .    (811,501)           785,928           166,325
   Development costs incurred during the period  . . . . . . . . . . . . . . . .     137,806            108,763            69,260
   Sales of oil and gas produced, net of production costs. . . . . . . . . . . .    (313,606)          (299,702)         (196,123)
   Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . .     213,787            110,396            86,151
   Net changes in income taxes . . . . . . . . . . . . . . . . . . . . . . . . .     306,428           (350,738)         (105,655)
   Changes in production, timing and other . . . . . . . . . . . . . . . . . . .    (199,440)           (98,078)         (111,057)
                                                                                ---------------    ---------------   ---------------
                                                                                    (612,079)           683,171           133,048
                                                                                ---------------    ---------------   ---------------
End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  932,443         $1,544,522         $ 861,351
                                                                                ===============    ===============   ===============
</TABLE>


71                           Seagull Energy Corporation

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