<PAGE>   1
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                   SECURITIES EXCHANGE ACT OF 1934

                          COMMISSION FILE NUMBER 1-8094
                           SEAGULL ENERGY CORPORATION
             (Exact name of registrant as specified in its charter)


<TABLE>
<S>                                                                    <C>
                             TEXAS                                                  74-1764876
(State or other jurisdiction of incorporation or organization)         (I.R.S. Employer Identification No.)
                    1001 FANNIN, SUITE 1700
                        HOUSTON, TEXAS                                              77002-6714
           (Address of principal executive offices)                                 (Zip Code)
</TABLE>

       Registrant's telephone number, including area code: (713) 951-4700

           Securities registered pursuant to Section 12(b) of the Act:

                                                        NAME OF EACH EXCHANGE ON
         TITLE OF EACH CLASS                                WHICH REGISTERED
Common Stock, par value $.10 per share                  New York Stock Exchange
    Preferred Stock Purchase Rights                     New York Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES   X   NO 
                                              ----     ----

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

         As of February 9, 1999, the aggregate market value of the outstanding
shares of Common Stock of the Company held by non-affiliates (based on the
closing price of these shares on the New York Stock Exchange) was approximately
$300,557,000.

         As of February 9, 1999, 64,158,444 shares of Common Stock, par value
$0.10 per share, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                DOCUMENT                                   PART OF FORM 10-K
                --------                                   -----------------
   Proxy Statement for Annual Meeting                           PART III
of Shareholders to be held in June 1999


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


<PAGE>   2



                           SEAGULL ENERGY CORPORATION


                                      INDEX

<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----
                                                      PART I
<S>      <C>                                                                                                  <C>
Item 1.  Business:
     Proposed Merger with Ocean Energy, Inc.................................................................      1
     Oil and Gas Operations.................................................................................      2
     Alaska Transmission and Distribution...................................................................     13
     Corporate..............................................................................................     16
     Environmental Matters..................................................................................     17
     Employees..............................................................................................     17
     Executive Officers of the Company......................................................................     18
     Certain Oil and Gas Terms..............................................................................     19
Item 2.  Properties.........................................................................................     20
Item 3.  Legal Proceedings..................................................................................     20
Item 4.  Submission of Matters to a Vote of Security Holders................................................     20

                                                      PART II
Item 5.  Market for Registrant's Common Stock and Related Shareholder Matters...............................     21
Item 6.  Selected Financial Data............................................................................     22
Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.....................................................................     23
Item 8.  Financial Statements and Supplementary Data........................................................     41
Item 9.  Changes in and Disagreements with Accountants on Accounting and
              Financial Disclosure..........................................................................     79

                                                     PART III
Item 10.  Directors and Executive Officers of the Registrant................................................     79
Item 11.  Executive Compensation............................................................................     79
Item 12.  Security Ownership of Certain Beneficial Owners and Management....................................     79
Item 13.  Certain Relationships and Related Transactions....................................................     79

                                                      PART IV
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................     80
Signatures..................................................................................................     85
</TABLE>


                                      (i)

<PAGE>   3

                           SEAGULL ENERGY CORPORATION


                                     PART I

ITEM 1.  BUSINESS

         Seagull Energy Corporation (the "Company" or "Seagull") is an
international oil and gas company engaged primarily in exploration and
development activities in the United States, Egypt, Cote d'Ivoire, Indonesia and
the Russian Republic of Tatarstan. The Company also transports and distributes
natural gas in the Anchorage, Alaska metropolitan area. Seagull's long-range
goal is to grow its reserve base and its crude oil and natural gas production
capacity. The Company seeks a balanced approach of growing through its internal
drilling efforts complemented by strategic acquisitions of additional oil and
gas assets in its core operating areas.

                     PROPOSED MERGER WITH OCEAN ENERGY, INC.

         On November 24, 1998, Seagull and Ocean Energy, Inc. ("OEI") executed
an Agreement and Plan of Merger. The merger must be approved by the shareholders
of both OEI and Seagull and the Alaska Public Utilities Commission ("APUC")
which regulates Seagull's operations in the Anchorage, Alaska area. If the
merger is approved, OEI stockholders would receive one share of Seagull common
stock in exchange for each share of OEI common stock they own. Management
expects the transaction will close during the first quarter of 1999.

         Pursuant to the merger agreement, OEI will merge into Seagull. In
connection with the merger, Seagull will be renamed "Ocean Energy, Inc." This
combined company is referred to herein as "New Ocean." However, unless expressly
stated in this Annual Report, the financial statements, business description and
other information contained herein relate to the Company on a pre-merger basis.

         After the merger New Ocean will be organized into three business units:
Onshore North America, Gulf of Mexico and International. New Ocean's asset base
will be comprised of complementary domestic assets, primarily in the Gulf of
Mexico region where the combined company will hold interests in more than 324
offshore lease blocks, including 62 deepwater blocks. In addition, New Ocean
will own interests in approximately 36 production sharing contracts including
interests in Angola, Equatorial Guinea, Cote d'Ivoire, Yemen, Egypt, Indonesia,
Tatarstan, Pakistan and Bangladesh. Seagull and OEI believe that the stable cash
flow generated from their North American onshore operations will enable New
Ocean to continue to fund and develop its portfolio of international and
deepwater Gulf of Mexico exploration and development projects.

         Seagull and OEI are developing plans to integrate their operations
immediately after the merger to take full advantage of the benefits and
synergies the merger will create that would not have been available to either
company on a stand-alone basis. Those benefits include substantial 


                                       1
<PAGE>   4

                           SEAGULL ENERGY CORPORATION



cost savings, a more geographically diversified reserve composition, a larger
capital base, greater financial strength and flexibility and an enhanced ability
to make further acquisitions.


                             OIL AND GAS OPERATIONS

         Revenues from the Oil and Gas Operations ("O&G") segment accounted for
78%, 83%, and 81% of the Company's consolidated revenues for 1998, 1997 and
1996, respectively. Production of gas and liquids for 1998 averaged 302 MMcf per
day and 21,271 Bbl per day, respectively, compared to 357 MMcf per day and
20,711 Bbl per day, respectively, in 1997.

         For additional financial information relating to industry segments, see
Note 15 of Notes to Consolidated Financial Statements of Seagull Energy
Corporation for the year ended December 31, 1998 (the "Consolidated Financial
Statements").

         Seagull's principal oil and gas producing areas include the following:

<TABLE>
<CAPTION>
                                                 Proved Reserves at December 31, 1998
                                              ------------------------------------------
                                              Gas (MMcf)      Oil (Mbbl)         MBOE
                                              ----------      ----------      ----------
<S>                                              <C>               <C>            <C>   
UNITED STATES:
   Mid-Continent (Anadarko Basin) ......         149,330           3,202          28,090
   Mid-South:
     Arkansas ..........................         122,649               1          20,442
     Carthage Area .....................         183,852           6,678          37,320
     East Texas/North Louisiana ........         172,493           1,185          29,934
     Other Mid-south ...................          37,864               2           6,313
   Gulf Coast ..........................         129,756           3,026          24,652
                                              ----------      ----------      ----------
                                                 795,944          14,094         146,751
EGYPT:
   East Zeit ...........................            --            12,433          12,433
   Qarun ...............................           2,345           9,326           9,717
   Other ...............................            --             5,822           5,822
                                              ----------      ----------      ----------
                                                   2,345          27,581          27,972
COTE D'IVOIRE ..........................          22,932           1,097           4,919
TATARSTAN ..............................            --            13,030          13,030
INDONESIA ..............................          62,020           1,281          11,618
                                              ----------      ----------      ----------
                                                 883,241          57,083         204,290
                                              ==========      ==========      ==========
</TABLE>


         For additional information relating to the Company's oil and gas
reserves, based substantially upon reports of DeGolyer and MacNaughton,
Netherland, Sewell & Associates, Inc. and Ryder Scott Company, independent
petroleum engineers (collectively the "Engineers"), see Note 17 to Consolidated
Financial Statements. All information in Note 17 not provided by the Engineers
was supplied by the Company. The Company's reserve estimates in Indonesia have
been obtained from a public source which, although not independently verified,
the Company 


                                       2
<PAGE>   5

                           SEAGULL ENERGY CORPORATION



believes to be reliable. As required, Seagull also files estimates of oil and
gas reserve data with various governmental regulatory authorities and agencies.
These estimates were not materially different from the reserve estimates
reported in the Consolidated Financial Statements.

UNITED STATES

         In excess of 70% of the Company's proved oil and gas reserves and
annual production are contributed by properties in the United States. These
domestic properties are generally located in three geographic areas -- the
Mid-South, Mid-Continent and Gulf Coast regions.

         Mid-South -- The Company's Mid-South properties are situated generally
in the Arkoma Basin of eastern Oklahoma and western Arkansas and the Arklatex
area of east Texas and northwest Louisiana. The Company's interests in the
Mid-South region provide production from long-lived assets where ongoing
activities are devoted principally to exploitation. At year-end 1998, the
Mid-South region had production of approximately 165 MMcf per day and 1,800 Bbl
per day.

         Mid-Continent -- The Company's Mid-Continent properties are situated
generally in the Anadarko Basin of the Texas Panhandle and western Oklahoma. The
Mid-Continent region also provides production from long-lived assets where
ongoing activities are devoted principally to exploitation. At year-end 1998,
the Mid-Continent region had production of approximately 51 MMcf per day and 700
Bbl per day.

         Gulf Coast -- The Company's Gulf Coast properties are located onshore
in south Texas and south Louisiana and offshore waters off the coasts of the
same two states. Both exploration and exploitation activities are conducted in
this region. In 1997, the Company purchased its first interests in the Deep
Water Gulf of Mexico play where the Company plans to be an active participant in
the future. At year-end 1998, the Gulf Coast region had production of
approximately 37 MMcf per day and 950 Bbl per day. During 1998 the Company
participated in drilling of two deep water exploratory wells in which we have a
non-operated interest. One was unsuccessful and the other is currently being
evaluated for development.

EGYPT

         The Company's Egyptian operations consist of working interests in seven
concessions -- Qarun, East Beni Suef, East Zeit, Southwest Gebel el Zeit, South
Hurghada, Southeast Gulf of Suez and West Abu Gharadig. The interests in
Southwest Gebel el Zeit and Southeast Gulf of Suez were acquired in 1998 as
exploratory concessions. The interest in West Abu Gharadig was purchased in 1997
while the East Zeit and South Hurghada interests were acquired in 1996.

         Each concession is governed by a concession agreement (collectively,
the "Egyptian Concession Agreements") between the working interest partners, the
Egyptian national oil company ("EGPC") and the Egyptian government. Under the
Egyptian Concession Agreements, 


                                       3
<PAGE>   6

                           SEAGULL ENERGY CORPORATION



the working interest partners pay 100% of capital and operating costs and
production is split between EGPC and the working interest partners. Working
interest partners recover costs from a percentage, ranging from 25% to 40%
depending upon the concession, of the oil and gas produced and sold from the
applicable concession ("Cost Recovery Petroleum"). Cost Recovery Petroleum forms
a single unified pool for the entire concession from which costs of all fields,
zones, products and types may be recovered without differentiation, except that
operating costs are recovered prior to the recovery of any capital costs.
Capital costs (which include exploration, development and other equipment and
facilities costs) are amortized for recovery over four or five years while
operating expenses are recoverable on a current basis. To the extent that the
costs eligible for recovery in any quarter exceed the amount of Cost Recovery
Petroleum produced and sold in that quarter, such costs are recoverable from
Cost Recovery Petroleum in future quarters with no limit on the ability to carry
forward such costs.

         The remaining oil and gas produced and sold is divided between EGPC and
the working interest partners. Depending on the concession and varying with
production levels, the working interest partners receive 12% to 30% of the
remaining oil and up to 29% of the remaining gas. Included in EGPC's share of
this remaining oil or gas are all Egyptian government royalties as well as the
applicable Egyptian income taxes of the working interest partners.

         In January 1999, the Egyptian government issued a mandate to cease
trucking of production of crude oil in all of Egypt. The Company is currently
working to resolve this issue. The mandate affects net oil production from
portions of the Company's Qarun concession and all of the East Beni Suef and the
South Hurghada concessions, for a total of approximately 820 Bbl per day.

         Qarun -- The Company has a 25% non-operated working interest in the
Qarun Concession Agreement. The concession covers approximately 1.5 million
gross acres located 45 miles southwest of Cairo, Egypt. Initial oil production,
via trucking, began in late 1995 while conventional production facilities became
fully operational in 1997. With the completion of these production facilities,
Qarun became one of the Company's largest producing concessions. At year-end
1998, the Company had net production at Qarun of approximately 5,700 Bbl per
day.

         East Zeit -- The Company, as the operator, has a 100% working interest
in the 6,672-acre East Zeit concession which is located offshore in the Gulf of
Suez. The Company acquired its interest primarily as a producing concession and
it continues to be one of the largest producing concessions among the Company's
Egyptian interests. At year-end 1998, Seagull had net production at East Zeit of
approximately 4,700 Bbl per day.

         East Beni Suef -- Seagull has a 50% non-operated working interest in
the East Beni Suef Concession Agreement. The concession covers approximately 6.8
million gross acres lying adjacent and to the south of the Qarun concession.
Initial oil production, via trucking, began in mid 1998. In January 1999,
production from this concession was temporarily suspended while the Company
revises its development plan to increase operating efficiencies.



                                       4
<PAGE>   7

                           SEAGULL ENERGY CORPORATION



         South Hurghada -- Seagull, as the operator, has a 100% working interest
in the 61,000-acre concession, located onshore on the coast of the Gulf of Suez
approximately 250 miles south of Cairo. After the completion of two successful
exploratory wells in mid-1997, oil production was trucked to the nearby East
Zeit production terminal. Seagull's production from this concession was 450 Bbl
per day at the end of 1998. Due to the mandate related to trucking described
above, production from this concession is suspended.

         West Abu Gharadig -- In October 1997, the Company purchased a 30%
non-operating working interest in the West Abu Gharadig concession, covering 3.5
million gross acres in upper Egypt. Seagull's net production from this
concession was 230 Bbl per day at the end of 1998.

         Southwest Gebel el Zeit and Southeast Gulf of Suez -- In July 1998, the
Company entered into farmout agreements to obtain working interests in these
concessions. Seagull holds a 43.75% working interest in Southwest Gebel el Zeit,
which is a 52,385 gross (22,919 net) acre concession located offshore in the
Gulf of Suez. Seagull holds a 25% working interest in Southeast Gulf of Suez,
which is a 203,858 gross (50,965 net) acre concession also located offshore in
the Gulf of Suez. Both concessions are exploratory and currently have no
production.

COTE D'IVOIRE

         Seagull's operations in Cote d'Ivoire, West Africa consist of working
interests in two blocks: CI-11 and CI-12. The CI-11 concession, where the
Company has a nearly 13% unitized working interest, extends from the western
coast to approximately eight miles offshore Cote d'Ivoire. The Company also has
an approximately 17% working interest in CI-12, which lies adjacent to and west
of block CI-11. At year-end 1998, the Company had production at CI-11 of
approximately 8,400 Mcf per day and 950 Bbl per day.

         Each block is subject to a production sharing contract whereby the
working interest partners pay 100% of capital and operating costs, and
production is split between the Ivorian government and the working interest
partners. Working interest partners recover costs from a percentage, ranging
from 50% to 63% depending upon the concession, of produced and sold petroleum.
The remaining oil and gas produced and sold, and any portion of cost recovery
not used to recover costs, is divided between the Ivorian government and the
working interest partners. Included in the Ivorian government's share of
remaining petroleum are all Ivorian government royalties as well as the
applicable Ivorian income taxes for the working interest partners.

TATARSTAN

         The Company has a net 45% interest in a joint venture in Tatarstan, a
republic in the Russian Federation located west of the Ural Mountains and east
of the Volga River. This joint venture with Tatneft, a Russian closed joint
stock company, operates various oil fields in 


                                       5
<PAGE>   8

                           SEAGULL ENERGY CORPORATION



Tatarstan. Under the terms of the joint venture and various supplemental
agreements, the funding for the joint venture is supplied by the Company and
Tatneft through various credit agreements.

         During 1998, the joint venture's activities included vapor recovery
projects and the development and operation of the Onbysk field, near the city of
Almetyevsk. Plans for 1999 will be consistent with 1998 activity.

INDONESIA

         Seagull has a 1.7% interest in the Indonesia Joint Venture ("IJV") for
the exploration, development and production of oil and gas in East Kalimantan,
Indonesia, under a production sharing contract ("PSC") with the state petroleum
enterprise of Indonesia. The majority of the revenue derived from the IJV
results from the sale of liquefied natural gas. Under the terms of the PSC, the
IJV is authorized to explore for, develop and produce petroleum reserves in an
approximately 1.1 million acre area in East Kalimantan.

         The original PSC between the IJV and the state petroleum enterprise of
Indonesia expired on August 7, 1998 after a 30-year period. The amended and
extended PSC became effective on August 8, 1998 for an additional 20-year
period. Under terms of the extended PSC, the IJV's after-tax share of gas has
been reduced from 35% to 30% (or 25% for certain contracts), while the IJV's
after-tax share of oil remains unchanged at 15%. The applicable Indonesian tax
rate has been reduced from 56% to 48%.

         The IJV participants are entitled to recover cumulative operating and
certain capital costs out of the oil and gas produced each year, and to receive
a share of the remaining oil and gas revenues. 

PRODUCTION

         The following table summarizes the Company's production, average sales
prices and operating costs for the periods indicated:



                                       6
<PAGE>   9

                           SEAGULL ENERGY CORPORATION



<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                        ---------------------------------------------
                                                            1998             1997             1996
                                                        -----------      -----------      -----------
<S>                                                     <C>              <C>              <C>        
UNITED STATES:
   Net production:
     Gas (MMcf) ..................................          104,023          110,595          116,238
     Oil, condensate and NGL (Mbbl) ..............            1,834            1,763            1,561
   Average sales price: (1)
     Gas (per Mcf) ...............................      $      2.05      $      2.34      $      2.17
     Oil, condensate and NGL (per Bbl) ...........      $     11.41      $     17.60      $     19.03
   Average operating costs (per BOE) (2) .........      $      3.99      $      3.75      $      3.27
CANADA (SOLD IN OCTOBER 1997):
   Net production:
     Gas (MMcf) ..................................             --             13,510           21,203
     Oil, condensate and NGL (Mbbl) ..............             --                243              361
   Average sales price: (1)
     Gas (per Mcf) ...............................             --        $      1.63      $      1.32
     Oil, condensate and NGL (per Bbl) ...........             --        $     16.46      $     16.77
   Average operating costs (per BOE) (2) .........             --        $      3.42      $      3.57
EGYPT:
   Net oil production (Mbbl) .....................            4,002            3,383            1,305
   Average oil sales price (per Bbl) (1) .........      $     11.92      $     18.26      $     21.56
   Average operating costs (per BOE) (2) .........      $      4.31      $      3.46      $      4.45
COTE D'IVOIRE:
   Net production:
     Gas (MMcf) ..................................            3,106            2,245            1,445
     Oil (Mbbl) ..................................              360              603              511
   Average sales price: (1)
     Gas (per Mcf) ...............................      $      1.59      $      1.93      $      1.77
     Oil (per Bbl) ...............................      $     10.51      $     19.34      $     20.04
   Average operating costs (per BOE) (2) .........      $      3.11      $      3.95      $      3.56
TATARSTAN:
   Net oil production (Mbbl) .....................            1,496            1,512            1,117
   Average oil sales price (per Bbl) (1) .........      $      7.67      $     14.26      $     13.98
   Average operating costs (per BOE) (2) .........      $      8.02      $      9.25      $     10.17
INDONESIA AND OTHER:
   Net production:
     Gas (MMcf) ..................................            3,168            3,965            4,429
     Oil (Mbbl) ..................................               72               56               51
   Average sales price: (1)
     Gas (per Mcf) ...............................      $      2.23      $      3.18      $      3.36
     Oil (per Bbl) ...............................      $     13.38      $     19.31      $     19.58
   Average operating costs (per BOE ) (2) ........             --               --               --
</TABLE>

(1)  Average sales prices are before deduction of production, severance, and
     other taxes.

(2)  Operating costs represent costs incurred to operate and maintain wells
     and related equipment and facilities. These costs include, among other
     things, repairs and maintenance, workover expenses, labor, materials,
     supplies, property taxes, insurance, severance taxes, transportation
     costs and general operating expenses.



                                       7
<PAGE>   10

                           SEAGULL ENERGY CORPORATION



OIL AND GAS DRILLING ACTIVITIES

         Seagull's oil and gas exploratory and developmental drilling activities
are as follows for the periods indicated. A well is considered productive for
purposes of the following table if it justifies the installation of permanent
equipment for the production of oil or gas. The term "gross wells" means the
total number of wells in which Seagull owns an interest, while the term "net
wells" means the sum of the fractional working interests Seagull owns in gross
wells. The information should not be considered indicative of future
performance, nor should it be assumed that there is necessarily any correlation
between the number of productive wells drilled, quantities of reserves found or
economic value.



                                       8
<PAGE>   11

                           SEAGULL ENERGY CORPORATION



<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                         -----------------------------------------------------------------------------
                                                 1998                        1997                       1996
                                         ----------------------      ----------------------     ----------------------
                                          GROSS         NET           Gross          Net         Gross         Net
                                         ---------    ---------      --------     ---------     ---------    ---------
<S>                                           <C>         <C>            <C>          <C>            <C>         <C> 
UNITED STATES:
 Exploratory Drilling:
   Productive Wells.................            7          1.5            18           9.5            14          6.2
   Dry Holes........................           12          5.0            12           4.2            15          6.6
 Development Drilling:
   Productive Wells.................          138         60.9           142          73.9           123         54.2
   Dry Holes........................           11          7.0            12           6.3            13          8.2
CANADA (SOLD IN OCTOBER 1997):
 Exploratory Drilling:
   Productive Wells.................            -            -             3           1.7             5          0.8
   Dry Holes........................            -            -             1           1.0             2          2.0
 Development Drilling:
   Productive Wells.................            -            -            57          28.9            17          8.6
   Dry Holes........................            -            -             1           0.3             2          1.5
EGYPT:
 Exploratory Drilling:
   Productive Wells.................            4          1.3             4           2.8             2          0.5
   Dry Holes........................           13          5.1            11           3.0             5          1.3
 Development Drilling:
   Productive Wells.................            7          2.8            14           3.5            14          3.5
   Dry Holes........................            3          1.3             -             -             -            -
COTE D'IVOIRE:
 Exploratory Drilling:
   Productive Wells.................            1          0.1             1           0.1             2          0.3
   Dry Holes........................            1          0.2             2           0.3             1          0.1
 Development Drilling:
   Productive Wells.................            -            -             3           0.4             1          0.1
   Dry Holes........................            -            -             -             -             -            -
TATARSTAN:
 Exploratory Drilling:
   Productive Wells.................            -            -             1           0.5             -            -
   Dry Holes........................            -            -             -             -             -            -
 Development Drilling:
   Productive Wells.................           10          5.0            21          10.5            20         10.0
   Dry Holes........................            1          0.5             -             -             -            -
OTHER INTERNATIONAL:
 Exploratory Drilling:
   Productive Wells.................            -            -             -             -             -            -
   Dry Holes........................            -            -             1           0.2             -            -
TOTAL:
 Exploratory Drilling:
   Productive Wells.................           12          2.9            27          14.6            23          7.8
   Dry Holes........................           26         10.3            27           8.7            23         10.0
 Development Drilling:
   Productive Wells.................          155         68.7           237         117.2           175         76.4
   Dry Holes........................           15          8.8            13           6.6            15          9.7
</TABLE>

         The Company had 10 gross (3.8 net) exploratory wells and 12 gross (6.3
net) development wells in progress at December 31, 1998. Wells classified as "in
progress" at year-end 


                                       9
<PAGE>   12
                           SEAGULL ENERGY CORPORATION

represent wells where drilling activity is ongoing, wells awaiting installation
of permanent equipment and wells awaiting the drilling of additional delineation
wells.

         The following table sets forth information regarding the number of
productive wells in which the Company held a working interest at December 31,
1998. Productive wells are either producing wells or wells capable of commercial
production although currently shut-in. One or more completions in the same
borehole are counted as one well.

<TABLE>
<CAPTION>
                                           Gross Wells                                         Net Wells
                          ----------------------------------------------      ----------------------------------------------
                                                                Multiple                                            Multiple
                            Gas          Oil         Total     Completions     Gas           Oil         Total      Completions
                          -------      -------      -------      -------      -------      -------      -------      -------
<S>                         <C>            <C>        <C>            <C>      <C>            <C>        <C>            <C>  
United States ......        2,257          309        2,566          259      1,136.6        192.7      1,329.3        133.9
Egypt ..............         --             60           60           11         --           27.2         27.2          3.0
Cote d'Ivoire ......            4           12           16            2          0.5          1.6          2.1          0.3
Tatarstan ..........         --            174          174         --           --           87.0         87.0         --
                          -------      -------      -------      -------      -------      -------      -------      -------
                            2,261          555        2,816          272      1,137.1        308.5      1,445.6        137.2
                          =======      =======      =======      =======      =======      =======      =======      =======
</TABLE>


         During the fourth quarter of 1998, Seagull sold some of its less
strategic E&P properties located away from its various core assets and various
nonstrategic pipeline assets. These nonstrategic E&P property sales included
nearly 2,500 gross wells (300 net wells) with approximately 300 of those wells
operated by Seagull. As a result of these nonstrategic E&P property sales,
Seagull's average working interest on domestic properties increased from 29% to
52%.

DEVELOPED AND UNDEVELOPED OIL AND GAS ACREAGE

         As of December 31, 1998, the Company owned working interests in the
following developed and undeveloped oil and gas acreage:

<TABLE>
<CAPTION>
                                              Developed                            Undeveloped
                                    ------------------------------      ------------------------------
                                        Gross              Net             Gross               Net
                                    ------------      ------------      ------------      ------------
<S>                                    <C>                 <C>            <C>                <C>      
UNITED STATES:
   Oklahoma ..................           269,218           127,922            27,369            12,015
   Texas .....................           271,350           145,029           198,360            73,237
   Arkansas ..................           211,620            71,650            10,828             7,079
   Louisiana .................            40,713            20,282             5,362             3,947
   Other .....................            20,235             9,794            35,320            16,236
   Federal Offshore:
     Louisiana ...............            59,850            24,716           241,092           118,697
     Texas ...................           149,549            58,269           297,532           181,641
EGYPT ........................           461,427           142,629        11,729,926         4,849,174
COTE D'IVOIRE ................            11,860             1,537           573,963            89,061
TATARSTAN ....................            12,630             6,315            26,159            12,729
INDONESIA ....................            97,000             1,663         1,156,780            19,827
OTHER INTERNATIONAL ..........              --                --           2,152,819           393,653
                                    ------------      ------------      ------------      ------------
                                       1,605,452           609,806        16,455,510         5,777,296
                                    ============      ============      ============      ============
</TABLE>


                                       10
<PAGE>   13

                           SEAGULL ENERGY CORPORATION



         Additionally, as of December 31, 1998, the Company owned mineral and/or
royalty interests in 550,693 gross (40,350 net) developed and 2,997,145 gross
(117,910 net) undeveloped oil and gas acres, located primarily in the United
States.

         For additional information relating to oil and gas producing
activities, see Note 17 to the Consolidated Financial Statements.

REGULATION

         The availability of a ready market for oil and natural gas production
depends upon numerous regulatory factors beyond the Company's control. These
factors include regulation of oil and natural gas production, federal and state
regulations governing environmental quality and pollution control and state
limits on allowable rates of production by a well or proration unit. State and
federal regulations generally are intended to prevent waste of oil and natural
gas, protect rights to produce oil and natural gas between owners in a common
reservoir, control the amount of oil and natural gas produced by assigning
allowable rates of production and control contamination of the environment.

         Regulation of Oil and Natural Gas Exploration and Production.
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulation
includes requiring permits for the drilling of wells, maintaining bonding
requirements in order to drill or operate wells, and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilling and the plugging and abandonment of
wells. The Company's operations are also subject to various conservation laws
and regulations. These include the regulation of the size of drilling and
spacing units or proration units and the density of wells which may be drilled
and unitization or pooling of oil and gas properties. In this regard, some
states allow the forced pooling or integration of tracts to facilitate
exploration while other states rely on voluntary pooling of lands and leases. In
addition, state conservation laws establish maximum rates of production
requirements regarding the ratability of production.

         The Federal Energy Regulatory Commission ("FERC") regulates interstate
natural gas transportation rates and service conditions, which affect the
marketing of natural gas produced by the Company. Some states regulate gathering
which affects the marketing of the Company's production.

         The FERC is currently considering proposals to deregulate or
restructure not only all offshore transportation but also onshore interstate
transportation markets. Additional proposals and proceedings that might affect
the natural gas industry and the Company's production are considered from time
to time by Congress, the FERC, state regulatory bodies and the courts. The
Company cannot predict when or if any of the current or additional proposals
might become effective, or their effect, if any, on the Company's production.



                                       11
<PAGE>   14

                           SEAGULL ENERGY CORPORATION



         Offshore Leasing. Offshore operations the Company conducts are on
federal oil and gas leases. Seagull must comply with regulatory restrictions
from numerous agencies, including the U.S. Minerals Management Service ("MMS"),
U.S. Bureau of Land Management, U.S. Coast Guard and U.S. Environmental
Protection Agency. For offshore operations, the Company must obtain regulatory
approval for exploration plans and development and production plans prior to the
commencement of such operations. These agencies have stringent engineering and
construction specifications, safety-related regulations concerning the design
and operating procedures for offshore production platforms and pipelines,
regulations to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization, regulations governing the plugging and abandonment of wells
located offshore and the removal of all production facilities and other rules
and regulations governing many phases of offshore exploration and production. To
cover the various obligations of lessees, governmental agencies generally
require substantial bonds or other acceptable assurances that such obligations
will be met.

         The restructuring of oil and gas markets has resulted in a shifting of
markets downstream from the wells. Deregulation has altered the marketplace such
that lessors, including the MMS, are challenging the methods of valuation of
production for royalty purposes. In addition, the MMS is conducting an inquiry
into certain contract settlement agreements from which producers on MMS leases
have received settlement proceeds that are royalty bearing and the extent to
which producers have paid the appropriate royalties on those proceeds.

COMPETITION

         The Company's competitors in oil and gas exploration, development and
production include major oil companies, as well as numerous independent oil and
gas companies, individuals and drilling programs. Some of these competitors have
financial and personnel resources substantially in excess of those available to
the Company and, therefore, the Company may be placed at a competitive
disadvantage. The Company's success in discovering reserves will depend on its
ability to select suitable prospects for future exploration in today's
competitive environment.

INTERNATIONAL OPERATIONS

         Seagull's interests in countries outside the United States are subject
to the various risks inherent in foreign operations. Operations in foreign
countries, particularly in the oil and gas business, are subject to political,
economic and other uncertainties, including: - the risk of war, revolution,
border disputes, expropriation, renegotiation or modification of existing
contracts, import, export and transportation regulations and tariffs; - taxation
policies, including royalty and tax increases and retroactive tax claims; and
exchange controls and currency fluctuations. In addition, in the event of a
dispute arising from foreign operations, the Company may be subject to the
exclusive jurisdiction of foreign courts or may not be successful in subjecting
foreign persons to the jurisdiction of the courts of the United States. The
Company's international operations may also be adversely affected by laws and
policies of the United States affecting 


                                       12
<PAGE>   15
                           SEAGULL ENERGY CORPORATION

foreign trade, taxation and investment. The Company seeks to manage these risks
by among other things, concentrating its international exploration efforts in
areas where the Company believes that the existing government is stable and
favorably disposed towards United States exploration and production companies.

         If a country claims superior rights to oil and gas leases or
concessions granted to the Company by another country, the Company's interests
could be lost or decreased in value. Certain regions of Africa and other regions
of the world have a history of political and economic instability. This
instability could result in new governments or the adoption of new policies that
might assume a substantially more hostile attitude toward foreign investment. In
an extreme case, such a change could result in termination of contract rights
and expropriation of foreign-owned assets. This could adversely affect the
Company's interests.

                      ALASKA TRANSMISSION AND DISTRIBUTION

         The Company operates in Alaska as a single business unit, ENSTAR
Alaska, which is regulated by the Alaska Public Utilities Commission. ENSTAR
Alaska engages in the intrastate transmission of natural gas in South-Central
Alaska and the distribution of natural gas in Anchorage and other nearby
communities in Alaska. Revenues from ENSTAR Alaska accounted for 22%, 17% and
19% of the Company's consolidated revenues for 1998, 1997 and 1996,
respectively.

GAS TRANSMISSION SYSTEM

         ENSTAR Alaska owns and operates the only natural gas transmission lines
in its service area that are operated for utility purposes. The pipeline
transmission system is composed of approximately 277 miles of 12 to 20-inch
diameter pipeline and approximately 74 miles of smaller diameter pipeline. The
system's present design delivery capacity is approximately 410 MMcf/d. The
average throughput of the system in 1998, 1997 and 1996 was 120, 124 and 131
MMcf/d, respectively.

GAS DISTRIBUTION SYSTEM

         ENSTAR Alaska distributes natural gas through approximately 2,175 miles
of gas mains to approximately 99,800 residential, commercial, industrial and
electric power generation customers in Anchorage, Alaska and other nearby
cities. During the year ended December 31, 1998, ENSTAR Alaska added
approximately 67 miles of new gas distribution mains and added approximately
3,000 net customers. ENSTAR Alaska anticipates relatively modest growth in its
residential customer base and will install additional main and service lines to
accommodate this growth.



                                       13
<PAGE>   16

                           SEAGULL ENERGY CORPORATION



         ENSTAR Alaska distributes gas to its customers under tariffs and
contracts which provide for varying delivery priorities. ENSTAR Alaska's
business is seasonal with approximately 65-70% of its revenues earned in the
first and fourth quarters of each year.

         In 1998, purchase/resale volumes represented 52% of ENSTAR Alaska's
throughput and 76% of ENSTAR Alaska's operating margin. The remaining volumes
are transported for power, industrial and large commercial customers for a
transportation fee under tariffs approved by the APUC.

GAS SUPPLY

         ENSTAR Alaska has an APUC-approved gas purchase contract (the "Marathon
Contract") with Marathon Oil Company ("Marathon") that is a "requirements"
contract with no specified daily deliverability or annual take-or-pay
quantities. ENSTAR Alaska has agreed to purchase and Marathon has agreed to
deliver all of ENSTAR Alaska's gas requirements in excess of those provided for
in other presently existing gas supply contracts, subject to certain exceptions,
until the commitment has been exhausted and without limit as to time; however,
Marathon's delivery obligations are subject to certain specified annual
limitations after 2001. The contract has a base price, subject to annual
adjustment based on changes in the price of certain traded oil futures
contracts, of $1.55 per Mcf plus reimbursements for any severance taxes and
other charges. During 1998, the cost of gas purchased under the Marathon
Contract averaged $1.81 per Mcf, including reimbursements for severance taxes.

         ENSTAR Alaska also has an APUC-approved gas purchase contract with the
Municipality of Anchorage, Chevron U.S.A., Inc. and ARCO Alaska, Inc. (the
"Beluga Contract") which provides for the delivery of up to approximately 220
Bcf of gas through the year 2009. The pricing mechanism in the Beluga Contract
is similar to that contained in the Marathon Contract. The 1998 price under the
Beluga Contract, after application of contractual adjustments, averaged $1.80
per Mcf, including reimbursements for severance taxes.

         Based on gas purchases during the twelve months ended December 31,
1998, which are not necessarily indicative of the volume of future purchases,
gas reserves committed to ENSTAR Alaska under the Marathon and Beluga Contracts
are sufficient to supply all of ENSTAR Alaska's expected gas supply requirements
through the year 2001. After that time supplies will still be available under
the Marathon and Beluga contracts in accordance with their terms, but at least a
portion of ENSTAR Alaska's requirements are expected to be satisfied outside the
terms of these contracts, as currently in effect.

         Currently, ENSTAR Alaska's supply source, primarily through the
Marathon and Beluga Contracts, is confined to the Cook Inlet area with no direct
access to other natural gas pipelines. During 1997, two of the Cook Inlet area's
major suppliers filed for regulatory approval to export certain quantities of
gas to overseas liquefied natural gas markets. ENSTAR Alaska has filed as an
intervenor in these proceedings and is actively working with regulatory
authorities to insure that the supply needs of its customers are met.



                                       14
<PAGE>   17

                           SEAGULL ENERGY CORPORATION



         ENSTAR Alaska's average cost of gas sold in 1998, 1997 and 1996 was
$1.84, $1.89 and $1.59 per Mcf, respectively. ENSTAR Alaska's average gas sales
price in 1998, 1997 and 1996 was $3.63, $3.65 and $3.29 per Mcf, respectively.

         As stated above, 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 oil prices due to worldwide political
events and changing market conditions.

COMPETITION

         ENSTAR Alaska competes primarily with municipal and cooperative
electric power distributors and with various suppliers of fuel oil and propane
for the available energy market. There are also extensive coal reserves
proximate to ENSTAR Alaska's operating area; however, such reserves are not
presently being produced.

         During the last nine years, ENSTAR Alaska's natural gas volumes
delivered on a purchase/resale basis have declined. Beginning in 1989, several
of its major customers began purchasing gas directly from gas producers or gas
marketers. However, the APUC has approved tariffs allowing ENSTAR Alaska to
transport these volumes for a transportation fee that approximates the margin
that would have been earned had the customer remained a sales customer rather
than becoming a transportation customer. Consequently, ENSTAR Alaska anticipates
no adverse economic impact to result from these transportation arrangements.

         If any other existing large customer of ENSTAR Alaska chooses to
purchase gas directly from producers, ENSTAR Alaska would expect to collect a
fee for transporting that gas equivalent to the margin earned on sales volumes
for those customers because the large distance of remaining user facilities from
producing fields would preclude the by-pass of ENSTAR Alaska's pipelines.

         ENSTAR Alaska supplies natural gas to its customers at prices that at
the present time economically preclude substitution of alternative fuels. Since
the Beluga Contract and the Marathon Contract include prices that fluctuate
based on oil indices, a competitive margin favoring natural gas over oil-based
energy sources is expected to continue. However, there is no assurance that the
competitive advantage over other alternative fuels will not be reduced or
eliminated by the development of new energy technology, by changes in the price
of oil or refined products or by decreased gas supply if additional exports are
allowed out of the Cook Inlet area.



                                       15
<PAGE>   18

                           SEAGULL ENERGY CORPORATION



REGULATION

         The APUC has jurisdiction as to rates and charges for gas sales,
construction of new facilities, extensions and abandonments of service and
certain other matters. Rates are generally designed to permit the recovery of
the cost of providing service, including purchased gas costs, and a return on
investment in plant.

         As a result of a proceeding filed in 1984, which was concluded in May
1986, the APUC granted ENSTAR Alaska an aggregate rate increase of 20.27% and
authorized a regulatory rate of return on common equity of 15.65%. Except as
described below in connection with the pending merger with OEI, ENSTAR Alaska
has no significant regulatory issues pending before the APUC. Since its
inception in 1961, ENSTAR Alaska has participated in only three formal rate
proceedings.

         Through its wholly-owned subsidiary, Alaska Pipeline Company ("APC"),
and its ENSTAR Natural Gas Division ("ENSTAR"), Seagull owns and operates
"ENSTAR Alaska". APC and ENSTAR each holds a certificate of public convenience
and necessity issued by the APUC, which regulates their activities. On December
14, 1998, Seagull applied to the APUC for approval of Seagull's merger with OEI,
which will require a change in ENSTAR's certificate to reflect the name change
from Seagull Energy Corporation to Ocean Energy, Inc. The merger may also be
deemed by the APUC to involve a change in control of both APC and ENSTAR, which
requires further APUC approval. Public notice of the application has been given
by the APUC for 30 days to permit public comment. The APUC staff will analyze
the application and make a report to the commissioners of the APUC with its
recommendation. If the APUC staff recommends approval and no third party objects
to the application, approval is expected in February 1999. The Company does not
believe that this approval will result in any rate decreases or other impact on
the business of ENSTAR Alaska.


                                    CORPORATE

REGULATION

         The Company is a "public utility company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended (the "1935 Act").
Accordingly, if any "company" (as defined for purposes of the 1935 Act and
therefore including so-called "organized groups") becomes the owner of 10% or
more of the Company's outstanding voting stock, that company would be required
to register as a "holding company" under the 1935 Act, in the absence of an
exemption of the type described below. Section 9(a)(2) also requires a person
(including both individuals and "companies") to obtain prior approval from the
Securities and Exchange Commission (the "SEC") in connection with the
acquisition of 5% or more of the outstanding voting stock of a public utility if
that person is also the owner of 5% or more of the outstanding voting stock of
another public utility. Based upon publicly available filings with the SEC, the


                                       16
<PAGE>   19

                           SEAGULL ENERGY CORPORATION



Company does not believe that any person owns 10% or more of Seagull's
outstanding common stock.


                              ENVIRONMENTAL MATTERS

         Seagull's operations are subject to federal, state and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. These laws and regulations may require the
acquisition of a permit before drilling or production commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, restrict the rate of oil and gas production
and impose substantial liabilities for pollution resulting from the Company's
operations. State laws often require some form of remedial action to prevent
pollution from former operations, such as pit closure and plugging abandoned
wells. In addition, these laws and regulations may impose substantial
liabilities and penalties for the Company's failure to comply with them or for
any contamination resulting from the Company's operations.

         The Company has established policies and procedures for continuing
compliance with environmental laws and regulations; however the Company does not
believe costs relating to these laws and regulations have had a material adverse
effect on the Company's operations or financial condition in the past. As these
laws and regulations are becoming more stringent and complex, there is no
assurance that changes in or additions to laws or regulations regarding the
protection of the environment will not have such an impact in the future. The
requirements imposed by these laws and regulations are frequently changed and
subject to new interpretations. It is likely that the costs of compliance could
increase the cost of operating offshore drilling equipment or significantly
limit drilling activity.


                                    EMPLOYEES

         As of February 1, 1999, the Company had 814 full time employees. In
addition to the services of its full time employees, the Company employs, as
needed, the services of consulting geologists, engineers, regulatory
consultants, contract pumpers and certain other temporary employees.

         ENSTAR Alaska operates under collective bargaining agreements with
separate bargaining units for operating and clerical employees. These units
represent approximately 80% of ENSTAR Alaska's work force. Contracts have been
negotiated that set wages and work relationships for the two units. The
operating bargaining unit contract is effective from April 1, 1996 through April
1, 2000. The clerical bargaining unit contract is effective from April 1, 1995


                                       17
<PAGE>   20

                           SEAGULL ENERGY CORPORATION



through April 1, 2000. The Company is not a party to any other collective
bargaining agreements. The Company has never had a work stoppage.

         The Company considers its relations with its employees to be
satisfactory.


                        EXECUTIVE OFFICERS OF THE COMPANY

         The executive officers of the Company, each of whom has been elected to
serve until his successor is elected and qualified, are as follows:

<TABLE>
<CAPTION>
            Name                Age                    Present Position and Prior Business Experience
            ----                ---                    ----------------------------------------------

<S>                              <C>   <C>
JAMES T. HACKETT...........      45    PRESIDENT AND CHIEF  EXECUTIVE  OFFICER  SINCE  SEPTEMBER  1998 AND CHAIRMAN OF
                                       THE BOARD FROM  JANUARY  1999;  President  of  Duke  Energy's  Energy  Services
                                       Division  from January 1996 to September  1998.  Prior  to joining Duke Energy,
                                       he  was  senior  vice  president  of  NGC  Corporation  (formerly  Natural  Gas
                                       Clearinghouse)  and  president  of NGC's  gathering,  processing  and   liquids
                                       marketing  division.  He  joined  Natural  Gas  Clearinghouse  as  senior  vice
                                       president and partner in 1990 and  became  executive  vice  president,  partner
                                       and a  member  of the  management  committee  in 1993.  Previously,  he held  a
                                       number of senior  positions at  Meridian  Oil  Incorporated,  a  subsidiary  of
                                       Burlington  Resources  Incorporated,  and  Texas Gas Resources  Corporation,  a
                                       subsidiary of CSX Corporation.

WILLIAM L. TRANSIER........      44    EXECUTIVE VICE PRESIDENT AND CHIEF  FINANCIAL  OFFICER  SINCE  SEPTEMBER  1998;
                                       Senior Vice President and Chief  Financial  Officer from  May 1996 to September
                                       1998;  For the  previous 20 years,  he held a variety of  positions at KPMG LLP
                                       and was promoted to partner in July 1986.

GERALD R. COLLEY...........      47    SENIOR  VICE  PRESIDENT,   INTERNATIONAL   EXPLORATION  AND  PRODUCTION   SINCE
                                       NOVEMBER  1996;  Senior Vice President -  International  Exploration  of Global
                                       from  December  1994  to  November  1996;    Vice  President  -   International
                                       Exploration  of Global  from July 1993  to  December  1994;  Vice  President  -
                                       International  Exploration of Global  Natural  Resources  Corporation of Nevada
                                       ("GNRC"),  a wholly owned  subsidiary  of  Global,  since  October  1992;  Vice
                                       President and Exploration  Director of Hadson  Europe, Inc. from August 1986 to
                                       October 1992.

SCOTT A. GRIFFITHS.........      45    SENIOR VICE  PRESIDENT OF DOMESTIC  EXPLORATION  SINCE  SEPTEMBER  1998;   Vice
                                       President of Domestic Exploration from October 1996 to May 1997; Vice President
                                       of Exploration of Global from 1992 to October 1996;  Exploration  Geologist for
                                       Global from October 1984 to 1992.

CARL B. KING...............      56    SENIOR VICE PRESIDENT AND GENERAL  COUNSEL SINCE  FEBRUARY  1998;  Senior  Vice
                                       President and General  Counsel of PanEnergy  Corp from 1991 to  February  1998;
                                       For the  previous 16 years,  he served in a variety of  positions  with  Cooper
                                       Industries/Cameron Iron Works.


</TABLE>


                                       18
<PAGE>   21

                           SEAGULL ENERGY CORPORATION



<TABLE>
<CAPTION>
            Name                Age                    Present Position and Prior Business Experience
            ----                ---                    ----------------------------------------------

<S>                              <C>   <C>

JOHN D. SCHILLER, JR.......      39    SENIOR VICE PRESIDENT,  OPERATIONS SINCE SEPTEMBER 1998;  Production  Manger -
                                       Gulf Coast Division of Burlington  Resources from October 1997 to August 1998;
                                       Engineering  Manager - Offshore  Division of Burlington  Resources  from April
                                       1994 to September  1997;  Acquisition  Manager of  Burlington  Resources  from
                                       November 1992 to March 1994.

RICHARD F. BARNES..........      55    PRESIDENT OF ENSTAR ALASKA SINCE SEPTEMBER 1987.

MATTHIAS BEIER.............      46    VICE  PRESIDENT  AND CHIEF  INFORMATION  OFFICER  SINCE APRIL 1998;  Mr. Beier
                                       joined Seagull from El Paso Energy Corp.  where he had served since 1987, most
                                       recently as Director,  Computer  Services and  Infrastructure.  Earlier in his
                                       career at El Paso Energy he was Manager, Information Systems.

JOHN H. CAMPBELL, JR.......      41    VICE  PRESIDENT AND CHIEF  ENGINEER  SINCE OCTOBER 1998;  Regional  Engineer -
                                       Offshore Division from 1994 to 1998 with Burlington Resources; New Ventures
                                       Engineer from 1993 to 1994 with Burlington Resources.

GORDON L. MCCONNELL........      52    VICE  PRESIDENT  AND  CONTROLLER   SINCE  NOVEMBER  1996;   Vice  President  -
                                       Accounting of Global from January 1996 to November 1996;  Controller of Global
                                       from July  1993 to  January  1996;  Controller  of GNRC  since  October  1991;
                                       Assistant Controller of GNRC from July 1991 to October 1991.

H. ALAN PAYNE..............      57    VICE PRESIDENT,  INVESTOR  RELATIONS SINCE NOVEMBER 1996;  Director,  Investor
                                       Relations from December 1984 to November 1996.

JACK M. ROBERTSON..........      55    VICE  PRESIDENT,   HUMAN  RESOURCES  SINCE  NOVEMBER  1996;  Director,   Human
                                       Resources from November 1990 to November 1996.

STEPHEN A. THORINGTON......      43    VICE  PRESIDENT,  FINANCE AND TREASURER SINCE MAY 1996;  Managing  Director of
                                       Chase Securities Inc. from April 1994 to May 1996;  Managing  Director for The
                                       Chase Manhattan Bank, N.A. from June 1991 through April 1994.

M. LEE VAN WINKLE..........      46    VICE  PRESIDENT,  CORPORATE  PLANNING SINCE  NOVEMBER  1996;  Vice President -
                                       Corporate  Planning of Global from July 1993 to November 1996;  Vice President
                                       - Corporate  Planning of GNRC since August 1992;  Corporate Manager - Planning
                                       and Budget for Adobe  Resources  Corporation for more than five years prior to
                                       August 1992.

CARL E. VOLKE..............      55    VICE PRESIDENT,  ADMINISTRATION SINCE NOVEMBER 1996; Director,  Administration
                                       from November 1986 to November 1996.
</TABLE>


                            CERTAIN OIL AND GAS TERMS

         The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and this document. Unless otherwise indicated in
this document, natural gas volumes are stated at the legal pressure base of the
state or area in which the reserves are located and at 60 degrees Fahrenheit.



                                       19
<PAGE>   22

                           SEAGULL ENERGY CORPORATION



o        "Bbl" means a barrel of 42 U.S. gallons of oil.

o        "Bcf" means billion cubic feet of natural gas.

o        "BOE" means barrels of oil equivalent, which is determined using the
         ratio of six Mcf of natural gas to one Bbl of oil.

o        "BOEPD" means barrels of oil equivalent per day.

o        "Btu" or "British Thermal Unit" means the quantity of heat required to
         raise the temperature of one pound of water by one degree Fahrenheit.

o        "MBbl" means thousands of barrels of oil.

o        "MBOE" means a thousand barrels of oil equivalent.

o        "Mcf" means thousand cubic feet of natural gas.

o        "Mcfe" means a thousand cubic feet equivalent, which is determined
         using the ratio of one barrel of oil to six Mcf of natural gas.

o        "MMbbl" means millions of barrels of oil.

o        "MMBOE" means million barrels of oil equivalent.

o        "MMBtu" means one million British Thermal Units.

o        "MMcf" means million cubic feet of natural gas.

o        "Net" acres, production or wells refers to the total acres, production
         or wells in which the Company has a working interest, multiplied by the
         percentage working interest owned by the Company.


ITEM 2. PROPERTIES

         Incorporated herein by reference to Item 1 of this Annual Report on
Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

         Incorporated herein by reference to Note 16 of the Consolidated
Financial Statements.

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

         None.




                                       20
<PAGE>   23

                           SEAGULL ENERGY CORPORATION

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         A. The Company's Common Stock (the "Common Stock") is traded on the New
York Stock Exchange under the ticker symbol "SGO." The high and low sales prices
on the New York Stock Exchange Composite Tape for each quarterly period during
the last two fiscal years were as follows:

<TABLE>
<CAPTION>
                                                1998                                          1997
                               ---------------------------------------       ---------------------------------------
                                     HIGH                  LOW                     High                  Low
                               -----------------     -----------------       -----------------     -----------------
<S>                                 <C>                   <C>                     <C>                   <C>   
First Quarter.............          $20.94                $15.44                  $24.13                $17.88
Second Quarter............           19.44                 13.94                   19.25                 15.75
Third Quarter.............           17.69                  7.63                   25.88                 17.75
Fourth Quarter............           12.44                  5.69                   27.63                 19.06
</TABLE>

         B. As of February 9, 1999, there were approximately 3,972 holders of
record of Common Stock.

         C. Seagull has not declared any cash dividends on its Common Stock
since it became a public entity in 1981. The decision to pay Common Stock
dividends in the future will depend upon the Company's earnings and financial
condition and such other factors as the Company's Board of Directors deems
relevant. The Company's revolving credit agreement (the "Revolving Credit
Facility") restricts the Company's declaration or payment of dividends on and
repurchases of Common Stock unless each of the following tests has been met: (i)
the Company's Total Debt/Capitalization Ratio cannot be more than 60% and (ii)
no Default or Event of Default shall have occurred and be continuing. The
capitalized terms used herein to describe the restrictions contained in the
Revolving Credit Facility have the meanings assigned to them in the Revolving
Credit Facility. Under the most restrictive of these tests, as of December 31,
1998, approximately $130 million was available for payment of dividends or
repurchase of Common Stock. In addition, certain debt instruments of ENSTAR
Alaska restrict the ability of ENSTAR Alaska to transfer funds to the Company in
the form of cash dividends, loans or advances. For a description of such
restrictions, reference is made to Note 8 of the Consolidated Financial
Statements.





                                       21
<PAGE>   24
                           SEAGULL ENERGY CORPORATION


ITEM 6.  SELECTED FINANCIAL DATA


                          SELECTED FINANCIAL DATA (1)
                  (Amounts in Thousands Except Per Share Data)

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                     ---------------------------------------------------------------------------------
                                         1998             1997            1996             1995             1994
                                     -------------    -------------   --------------   --------------   --------------
<S>                                   <C>             <C>             <C>               <C>              <C>
Revenues ............................  $   426,171      $   549,367     $   517,211     $   406,280      $   467,579
Net income (loss)(2) ................      (96,696)          49,130          28,961          (1,738)          (4,405)
Earnings (loss) per share(2):
   Basic ............................        (1.53)            0.78            0.46           (0.03)           (0.07)
   Diluted ..........................        (1.53)            0.77            0.46           (0.03)           (0.07)
Net cash provided by operating      
  activities before changes in
  operating assets and liabilities...      147,184          249,587         220,543         124,822          182,413
Net cash provided by operating
  activities ........................      148,718          262,749         258,439         117,727          207,339
Total assets ........................    1,416,090        1,411,066       1,515,063       1,359,125        1,454,050
Long-term debt ......................      582,675          469,017         573,455         557,107          622,080
Shareholders' equity ................      555,091          647,204         597,730         562,621          557,646
Capital expenditures ................      275,297          275,608         213,462         144,101          202,553
Acquisitions, net of cash acquired ..      129,276           17,665         104,420              --          193,859
Standardized measure of
  discounted future net  cash
  flows before income taxes .........      776,180        1,219,363       2,137,870       1,103,962          865,047
</TABLE>

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

   
(2) 1998 includes a non-cash pre-tax charge for the impairment of long-lived
    assets of $78 million, a one-time pre-tax charge for compensation expenses
    of $6 million and an extraordinary loss of $1 million or $ 0.02 per basic
    and diluted share. 1995 includes a non-cash pre-tax charge for the
    impairment of long-lived assets of $49 million.
    


                                      22
<PAGE>   25
                           SEAGULL ENERGY CORPORATION


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS

         The following discussion is intended to assist in an understanding of
the financial position and results of operations of Seagull for each of the
periods indicated. The accompanying Consolidated Financial Statements contain
detailed information that should be referred to in conjunction with the
following discussion.

                            CONSOLIDATED HIGHLIGHTS
                            (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                              --------------------------------------------
                                                                  1998           1997           1996
                                                              -------------  -------------  --------------
<S>                                                             <C>            <C>           <C>
Revenues:
   Oil and gas operations .................................     $ 332,579      $ 453,648      $ 419,595
   Alaska transmission and distribution ...................        93,592         95,719         97,616
                                                                ---------      ---------      ---------
                                                                $ 426,171      $ 549,367      $ 517,211
                                                                =========      =========      =========
Operating profit (loss):
   Oil and gas operations .................................     $ (99,544)     $ 106,983      $  97,192
   Alaska transmission and distribution ...................        23,143         22,588         25,781
   Corporate ..............................................       (21,803)       (19,095)       (19,530)
                                                                ---------      ---------      ---------
                                                                $ (98,204)     $ 110,476      $ 103,443
                                                                =========      =========      =========
Net income (loss) .........................................     $ (96,696)     $  49,130      $  28,961

Net cash provided by operating activities before changes in
   operating assets and liabilities .......................     $ 147,184      $ 249,587      $ 220,543
Net cash provided by operating activities .................     $ 148,718      $ 262,749      $ 258,439
</TABLE>

         During 1998, the oil prices realized by Seagull dropped 37%, from
1997's $17.34 per barrel to $10.93 per barrel. These low oil prices in 1998
represent the lowest oil prices received in a number of years and were a major
contributing factor to the $46 million, or 35%, decrease in oil revenues from
1997 to $85 million for the year ended December 31, 1998. Additionally,
domestic natural gas prices decreased 12% from $2.29 per Mcf in 1997 to $2.04
per Mcf for 1998. This gas price decrease and a 6% decrease in domestic gas
production combined to create a $46 million decrease in domestic natural gas
revenues.

         These decreases in oil and gas prices in combination with other key
factors led to significant decreases in revenues, operating profit, net income
and net cash provided by operating activities as compared to 1997. The other
key items affecting 1998 results include the following:

o    Seagull recorded noncash charges of $78 million in the third quarter of
     1998 related to the impairment of the Company's oil and gas assets and
     nonstrategic pipeline assets;


                                      23
<PAGE>   26
                           SEAGULL ENERGY CORPORATION


o   Oil and gas reserves decreased from 217 MMBOE to 204 MMBOE at December 31,
    1997 and 1998, respectively; 

o   Substantial increases in exploration charges for 1998 versus 1997 due to 
    increases in dry hole expenses and leasehold impairments;

o   The sale of the Company's Canadian oil and gas operations in October 1997;

o   One-time compensation costs of approximately $6 million associated with the
    retirement of Barry J. Galt and the appointment of James T. Hackett as the
    Company's Chief Executive Officer; and

o   Income tax benefit of 29% of the loss before taxes for 1998, reflecting
    primarily the tax benefits of the impairment of long-lived assets and
    one-time compensation matters, versus 1997's tax expense of 43% of earnings
    before taxes.

         During 1997, as a result of the addition of Seagull's Egyptian
properties 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 increase in net
income and cash flow was concentrated in the O&G segment.

                             OIL AND GAS OPERATIONS
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                           ------------------------------------------
                                               1998          1997           1996
                                           ------------  -------------  -------------
<S>                                          <C>            <C>           <C>
Revenues:
     Natural gas .........................   $ 225,055      $ 298,223     $ 298,235
     Oil and NGL .........................      84,866        131,096        90,779
     Pipeline and marketing ..............      22,658         24,329        30,581
                                             ---------      ---------     ---------
                                               332,579        453,648       419,595
                                             ---------      ---------     ---------

Production expenses ......................     110,426        115,713       102,158
Pipeline and marketing expenses ..........      27,178         28,670        24,091
Exploration charges ......................      59,787         42,085        50,772
Depreciation, depletion and amortization..     156,905        160,197       145,382
Impairment of long-lived assets ..........      77,827             --            --
                                             ---------      ---------     ---------
Operating profit (loss) ..................   $ (99,544)     $ 106,983     $  97,192
                                             =========      =========     =========
</TABLE>

         Exploration and Production Revenue -- The decline in commodity prices
was the significant factor in the 27% decrease in revenues for the O&G segment
to $333 million for 1998. The 12% gas price decrease and a 6% decrease in
domestic gas production combined to create a $46 million decrease in domestic
natural gas revenues. While the declining oil prices mentioned previously were
the primary factor for the decrease in oil revenues, this was slightly offset
by a 13% increase in oil and NGL production in the U.S. and Egypt combined as
Seagull 


                                      24
<PAGE>   27
                           SEAGULL ENERGY CORPORATION


realized additional contributions from several new domestic wells and three
Egyptian concessions - Qarun, where additional facilities became operational
during mid-1997; East Beni Suef, where production began in mid-1998; and West
Abu Gharadig, which was purchased in late 1997.

         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.
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.

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

         Pipeline and Marketing -- Pipeline and marketing revenues declined
$1.7 million for the year ended 1998 as compared to 1997 due primarily to lower
revenues related to the Company's gas gathering and processing facilities
caused by the lower natural gas prices in 1998 as compared to 1997. This
decrease in revenues was partially offset by an increase in marketing revenues
due to higher margins realized and by a decrease in the related cost of gas,
resulting in a constant operating margin from 1997 to 1998.

         Pipeline and marketing revenues declined from $31 million in 1996 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.

         A decision to dispose of the pipeline assets was made in September
1998. At that time, the Company also announced its intentions to exit its
third-party marketing business and to explore alternatives for marketing its
equity production, including outsourcing. Subsequent to year-end, Seagull
entered into an agreement with a third-party to buy substantially all of the
Company's domestic production. With the elimination of the pipeline and
marketing function, Seagull was able to reduce staff by approximately 25
employees and effectively closed all derivative financial positions prior to
December 31, 1998.

         Income and costs related to the Company's commodity hedging activities
were recognized in oil and gas revenues when the commodities were produced. The
Company recorded $1 million, $10 million, and $9 million for 1998, 1997 and
1996, respectively, in costs 


                                      25
<PAGE>   28
                           SEAGULL ENERGY CORPORATION


related to equity hedging activities, including costs related to the monetary
production payment hedges of approximately $1 million, $3 million and $4
million in 1998, 1997 and 1996, respectively. The Company also recorded hedging
costs related to third-party marketing activities of $5 million in costs, $3
million in costs and $0.5 million in income for 1998, 1997 and 1996,
respectively.

<TABLE>
<CAPTION>
                                                 PRODUCTION AND UNIT PRICE BY AREA

                                         Net Daily Production                              Unit Price
                               -----------------------------------------    -----------------------------------------
                                       Year Ended December 31,                      Year Ended December 31,
                               -----------------------------------------    -----------------------------------------
                                  1998           1997           1996           1998            1997          1996
                               -----------     ----------    -----------    -----------     -----------    ----------
<S>                             <C>              <C>           <C>            <C>             <C>            <C>
Gas Sales(*):
     Domestic ..............        285             303           318         $ 2.05           $ 2.34         $ 2.17
     Canada (sold in 1997) .         --              37            58             --             1.63           1.32 
     Cote d'Ivoire .........          9               6             4           1.59             1.93           1.77 
     Indonesia and other ...          8              11            12           2.23             3.18           3.36 
                                 ------          ------        ------         ------           ------         ------ 
                                    302             357           392         $ 2.04           $ 2.29         $ 2.08 
                                 ======          ======        ======         ======           ======         ====== 
Oil and NGL Sales(*):
      Domestic .............      5,025           4,830         4,264         $11.41           $17.60         $19.03
      Canada
       (sold in 1997).......         --             665           985             --            16.46          16.77 
      Egypt ................     10,965           9,268         3,565          11.92            18.26          21.56 
      Cote d'Ivoire ........        986           1,653         1,395          10.51            19.34          20.04 
      Tatarstan ............      4,099           4,143         3,053           7.67            14.26          13.98 
      Indonesia and other ..        196             152           147          13.38            19.31          19.58 
                                 ------          ------        ------         ------           ------         ------ 
                                 21,271          20,711        13,409         $10.93           $17.34         $18.50 
                                 ======          ======        ======         ======           ======         ======
</TABLE>
                                                                              
(*)  Natural gas is stated in MMcf and $ per Mcf. Oil and NGLs are stated in 
     Bbl and $ per Bbl.

         Production Expenses -- Production expenses for 1998 decreased $5
million from 1997's $116 million, primarily due to the sale of the Company's
Canadian operations in October 1997, partially offset by increases in
production expenses in Egypt. Production expenses increased to $4.22 per BOE
for 1998 from $3.95 per BOE for 1997.

         Production expenses for 1997 increased approximately $14 million over
1996, primarily due to the increased production associated with the Company's
Egyptian operations and increased domestic operating expenses. This increase in
production expenses associated with the Company's domestic operations was the
primary reason for the $0.40 per BOE increase in production expense per
equivalent unit of production to $3.95 per BOE for 1997 over 1996. 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.

         Exploration Charges -- In comparison to 1997, exploration charges for
1998 were approximately $18 million higher for the year primarily due to
increases in dry hole expense and 


                                      26
<PAGE>   29
                           SEAGULL ENERGY CORPORATION


impairment of leaseholds, both domestically and on certain of the Company's
Egyptian concessions.

         Exploration charges declined $8.7 million for the year ended 1997 as
compared to 1996 due to decreases in dry hole costs, domestically and in
Canada, and in G&G expense, primarily in Cote d'Ivoire.

         Depreciation, Depletion and Amortization -- The decrease in
depreciation, depletion and amortization ("DD&A") expense to $157 million for
1998 from $160 million for the prior year is primarily due to the decrease in
domestic gas production and the sale of the Company's Canadian operations,
partially offset by increased oil production in Egypt and an increase in the
DD&A expense per equivalent unit of production related to the Company's
Egyptian operations. The downward revision of reserves in the Egyptian
concessions previously discussed and the sale of Canadian properties, which had
an average DD&A expense of less than $3.00 per BOE, combined to increase DD&A
expense per equivalent unit of production for oil and gas producing activities
to $5.93 per BOE from $5.42 per BOE for 1998 and 1997, respectively.

         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.

         Noncash Impairments -- During the third quarter of 1998, the Company
recorded noncash impairment charges of $74 million related to its oil and gas
assets located in Egypt. The impairments of the oil and gas assets were
primarily a result of disappointing well performance, much lower oil and
natural gas prices and a lack of any perceived significant near-term
improvement in oil prices that led to a reduction in reserves at Seagull's East
Zeit, South Hurghada and East Beni Suef concessions.

         The oil and gas impairment tests were based upon estimates of future
cash flows using an initial crude oil price of approximately $11 per barrel,
escalated by quoted forward market prices when available and moderate escalation
thereafter. There are no future cash flows from gas, as there is no gas
production from these assets. Future cash flows at September 30, 1998 were based
upon the Company's estimate of proved reserves. No probable and possible
reserves were taken into consideration in this particular circumstance because
they were not justified by economic conditions, actual or planned drilling.

         During this quarter, the Company also decided to dispose of
nonstrategic pipeline assets, which resulted in an additional noncash impairment
of $4 million related to those assets. The impairment reflected the difference
between the recorded book value of the pipeline assets and the net realizable
value expected to be received upon disposal of the assets.


                                      27
<PAGE>   30
                           SEAGULL ENERGY CORPORATION


CAPITAL SPENDING AND OIL AND GAS RESERVES

          OIL AND GAS OPERATIONS CAPITAL EXPENDITURES AND ACQUISITIONS
                             (Amounts in Thousands)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                           ------------------------------------------
                                               1998          1997           1996
                                           ------------  -------------  -------------
<S>                                        <C>            <C>           <C>
Capital Expenditures:
   Lease acquisitions ................       $ 40,718      $ 23,141       $ 12,986   
   Exploration .......................         83,526        95,681         77,774   
   Development .......................        132,331       137,806        108,763   
                                             --------      --------       --------   
                                              256,575       256,628        199,523   
   Other oil and gas operations ......            788           885            228   
                                             --------      --------       --------   
   Total oil and gas operations ......       $257,363      $257,513       $199,751   
                                             ========      ========       ========   
                                                                                     
Acquisitions of oil and gas properties       $126,895      $ 17,665       $ 90,867   
                                             ========      ========       ========
</TABLE>

         Capital expenditures in 1998, excluding acquisitions, remained
unchanged from 1997. The absence of the Company's Canadian operations, which
had expenditures of $13 million in 1997, and a decline in Egyptian capital
expenditures were offset by increased expenditures related to the Company's
domestic operations. Spending outside North America in 1998 totaled $87
million, of which $28 million was for exploration, $48 million for exploitation
and $11 million for leasehold acquisitions. Seagull participated in the
drilling of 38 exploratory wells during 1998, of which 12 were successful.
Another 10 exploratory wells were in progress at year-end. Of the successes,
seven were in the U.S., four in Egypt and one in Cote d'Ivoire.

         O&G capital expenditures increased to $257 million in 1997, up 29%
from $200 million in 1996. Spending outside North America totaled $103 million,
of which $43 million was for exploration and $60 million for exploitation.

         On June 1, 1998, the Company completed the purchase of the stock of
BRG Petroleum, Inc. and its related partnership interests for $103 million in
cash, net of cash acquired of $2 million and noncash deferred tax liabilities
of $25 million. The assets acquired include proved oil and gas reserves of 102
Bcfe. BRG operated approximately 70 percent of its 600 oil and gas wells
located in approximately 140 fields. At year-end 1998, daily production from
these acquired properties averaged approximately 20 MMcf of gas and 450 barrels
of oil and natural gas liquids. The most significant of these assets are
concentrated in East Texas, primarily in Freestone, Upshur, Rusk and
Nacogdoches counties.

         During the fourth quarter of 1998, Seagull sold some of its less
strategic E&P properties and various nonstrategic pipeline assets. The sale of
these assets, and the additional pipeline asset sales expected to occur in early
1999, were steps taken to reduce debt and focus the Company's attention on
assets within core areas. Prior to the sales, daily production from the E&P
properties sold averaged approximately 18 MMcf of gas and 480 barrels of oil and
natural gas liquids. The total reserves sold associated with these 


                                      28
<PAGE>   31
                           SEAGULL ENERGY CORPORATION


properties was approximately 12 MMBOE. The pipeline assets contributed $3
million, $5 million and $4 million in revenues for the years ended December 31,
1998, 1997 and 1996, respectively, but did not have a material effect on
operating profit for any of these periods.

         Through drilling and proved property acquisitions, the Company
replaced 90% of its production during 1998, including downward revisions of 11
MMBOE, at a cost of $16.32 per BOE and 158% of its production over the
five-year period ended December 31, 1998 at a cost of $6.86 per BOE. Seagull's
proved oil and gas reserves decreased from 217 MMBOE at year-end 1997 to 204
MMBOE at December 31, 1998, because of reserve declines due to lower commodity
prices, disappointing well performance in certain Egyptian concessions and the
nonstrategic property sales, partially offset by the 17 MMBOE purchased from
BRG Petroleum.

         The standardized measure of discounted future net cash flows before
taxes for Seagull's proved oil and gas reserves, calculated based on Securities
and Exchange Commission criteria, decreased to $776 million at December 31,
1998 compared with $1.2 billion at the end of 1997. This decrease was primarily
the result of significantly lower year-end commodity prices at December 31,
1998 compared to December 31, 1997. Year-end calculations were made using an
average price of $9.06 and $15.41 per Bbl for oil, condensate and NGL and $2.03
and $2.42 per Mcf for gas for 1998 and 1997, respectively. The Company's
average realized prices for the year ended December 31, 1998 were $10.93 per
Bbl for oil, condensate and NGL and $2.04 per Mcf for gas. The Company's
average realized prices for the month ended January 31, 1999 were $9.63 per Bbl
for oil, condensate and NGL and $1.79 per Mcf for gas. Because the disclosure
requirements for discounted future net cash flows are standardized by the SEC,
significant changes can occur in these estimates based upon oil and gas prices
in effect at year-end. The above estimates should not be viewed as an estimate
of fair market value. See Note 17 to Consolidated Financial Statements.

OUTLOOK

         As the O&G segment represents the majority of the Company's
operations, continued depressed commodity prices will have a significant
negative impact on the Company's total operating results. Oil prices in
particular have reached multi-year lows in some markets in recent months and
gas prices for the current winter season have been lower than in recent
winters.

         Faced with continued depressed oil prices, if the OEI merger is
completed, Seagull and New Ocean plan to spend significantly less on capital
expenditures in 1999. Capital expenditures will focus on contractually
obligated expenditures and drilling results that will yield immediate cash flow
opportunities. With this decrease in capital expenditures, the Company may not
be able to replace reserves or maintain production at current levels.


                                      29
<PAGE>   32
                           SEAGULL ENERGY CORPORATION


                      ALASKA TRANSMISSION AND DISTRIBUTION
                   (Amounts in Thousands Except Degree Days)

<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                           ------------------------------------------
                                               1998          1997           1996
                                           ------------  -------------  -------------
<S>                                          <C>           <C>            <C>       
Revenues ...............................       $93,592      $95,719        $97,616  
Cost of gas sold .......................        41,232       43,684         42,600  
                                               -------      -------        -------  
Gross margin ...........................        52,360       52,035         55,016  
Operations and maintenance expense .....        20,688       21,079         21,045  
Depreciation, depletion and amortization         8,529        8,368          8,190  
                                               -------      -------        -------  
Operating profit .......................       $23,143      $22,588        $25,781  
                                               =======      =======        =======  
Operating Data:                                                                     
   Degree days (*) .....................        10,026        9,727         10,975
</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 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 1998 and 1997 as the percentage
change in operating profit (2% increase in 1998 versus 1997 and 12% decrease in
1997 versus 1996) was approximately equal to the percentage change in degree
days (3% increase in 1998 and 11% decrease in 1997).

OUTLOOK

         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 1998
degree days were 3% under the previous 30-year average degree days. The Company
expects customer growth to continue at a modest 2% to 3% rate. During the 1998
summer construction season, approximately 67 miles of new distribution
pipelines were installed to connect some 3,000 new customers (a 3% increase in
customers over 1997).

         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.


                                      30
<PAGE>   33
                           SEAGULL ENERGY CORPORATION


         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 liquified
natural gas 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.

                                    OTHER

         General and administrative ("G&A") expense increased from $16 million
to $18 million for 1998 primarily due to the $6 million in one-time
compensation charges, partially offset by decreases in G&A expense from
compensation plans that are tied directly to the market price of Seagull's
common stock. The closing price of Seagull's common stock was $6.31 and $20.63
at December 31, 1998 and 1997, respectively.

         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 G&A expenses from 1996 to
1997 was primarily 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 certain litigation. The final settlement
was signed in 1998 and was substantially the same as the initial settlement
proposal. The payments to NorAm and other parties settled complex litigation
over contract terms, conditions and conduct for the period October 1, 1994 to
the date of the settlement.

         Interest expense increased only slightly from $38.5 million for 1997
to $39.2 million for 1998. Despite the increase in outstanding long-term debt
from $469 million at December 31, 1997 to $583 million at December 31, 1998,
average debt outstanding, and therefore interest expense, was approximately the
same for each of the years.

         Interest expense declined from $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 to repay amounts outstanding under the
Company's existing credit facilities. Interest cost capitalized as property,
plant and equipment amounted to approximately $7 million, $7 million and $3
million in 1998, 1997 and 1996, respectively.

         The Company and Global Natural Resources, Inc. 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.


                                      31
<PAGE>   34
                           SEAGULL ENERGY CORPORATION


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

         Seagull's tax expense changed from approximately 43% of earnings
before taxes for the year ended December 31, 1997 to an approximate 29% benefit
for 1998, reflecting primarily the tax benefits of the impairment of long-lived
assets and one-time compensation matters.

         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.

OUTLOOK

         In the current low commodity price environment, Seagull has begun
implementing cost cutting measures, such as the elimination of the pipeline and
marketing function and an additional reduction of approximately 100 employees,
approximately 11% of total employees, in January 1999. These personnel
reductions are expected to generate an annual savings of approximately $14
million, excluding severance costs of $6 million.

         In addition, Seagull and OEI are developing plans to integrate their
operations immediately after the merger to take full advantage of the benefits
and synergies the merger will create. Seagull and OEI believe that New Ocean's
organizational structure will allow for substantial overhead cost savings
through the consolidation of duplicative corporate and field offices and staff.

                        LIQUIDITY AND CAPITAL RESOURCES

         Seagull's capital resources primarily consist of a revolving credit
facility (the "Revolving Credit Facility") with a maximum commitment of $500
million, $350 million of senior, unsecured debt and money market facilities
with three U.S. banks with a combined maximum commitment of $110 million. The
major changes in these obligations are as follows:

o    The repurchase of $50 million of senior debt in the third quarter of 1998,
     financed through additional borrowings under the Revolving Credit
     Facility;

o    The purchase of the BRG properties for $103 million in the second quarter
     of 1998, financed through additional borrowings under the Revolving Credit
     Facility; and

o    The issuance of $150 million of senior notes, due 2027, in September 1997.

         At December 31, 1998, there was $175 million borrowed under the
Revolving Credit Facility and $307 million of the unused commitment was
immediately available. 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 


                                      32
<PAGE>   35
                           SEAGULL ENERGY CORPORATION


or redemption of capital stock and the maintenance of certain financial ratios.
Under the most restrictive of these provisions, approximately $130 million was
available for payment of cash dividends on common stock or to repurchase common
stock as of December 31, 1998.

         During the third quarter of 1998, the Company repurchased in open
market transactions approximately $50 million in aggregate principal amount of
its 8 5/8% Senior Subordinated Notes due 2005. These purchases were funded
using borrowings under the Credit Facility. In connection with this repurchase,
the Company recorded an after-tax extraordinary loss of $1 million, or $0.02
per basic and diluted share. At current interest rates under the Revolving
Credit Facility, the Company expects to save approximately $1.6 million in
annual interest expense by refinancing the $50 million of Senior Subordinated
Notes under the Revolving Credit Facility.

         On June 1, 1998, the Company completed the purchase of the stock of
BRG Petroleum, Inc. and its related partnership interests for $103 million in
cash, excluding cash acquired of $2 million and noncash deferred tax
liabilities of $25 million. The Company funded this acquisition through its
existing credit facility.

         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 1/2% 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 has money market facilities with three U.S. banks with a
combined maximum commitment of $110 million. These lines of credit 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 was $48 million
outstanding under these money market facilities at December 31, 1998, included
in accounts and notes payable.


                     CAPITAL EXPENDITURES AND ACQUISITIONS
                             (Amounts in Thousands)


<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                           ------------------------------------------
                                               1998          1997           1996
                                           ------------  -------------  -------------
<S>                                          <C>            <C>           <C>        
Capital Expenditures:                                                                
   Oil and gas operations .............       $257,363      $257,513       $199,751  
   Alaska transmission and distribution          9,626         9,607          9,287  
   Corporate ..........................          8,308         8,488          4,424  
                                              --------      --------       --------  
                                              $275,297      $275,608       $213,462  
                                              ========      ========       ========  
                                                                                     
Acquisitions ..........................       $129,276      $ 17,665       $104,420  
                                              ========      ========       ========
</TABLE>

                                      33
<PAGE>   36
                           SEAGULL ENERGY CORPORATION


         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. In its present low
commodity price environment, Seagull began a series of nonstrategic properties
sales in late 1998. In 1997, Seagull also reduced its borrowings under existing
bank facilities by $133 million with a portion of the proceeds from the sale of
the Company's Canadian operations.

         During the fourth quarter of 1998, Seagull sold some of its less
strategic E&P properties located away from its various core assets. During the
third quarter of 1998, the Company also decided to liquidate its nonstrategic
pipeline assets. As of December 31, 1998, approximately 25% of these pipeline
assets had been sold. The E&P and pipeline sales generated approximately $53
million in net proceeds. Seagull is in final negotiations to sell the remaining
75% of the pipeline assets.

OUTLOOK

         After the merger with OEI, New Ocean will have higher levels of debt
and interest expense than Seagull on a stand-alone basis. This increased debt
level will require the use of a substantial portion of New Ocean's cash flow to
pay interest and principal on New Ocean's debt. Within the low commodity price
environment, New Ocean anticipates substantially reduced capital expenditures
and expects to keep capital expenditures at a level below cash flow from
operations.

         New Ocean will have higher levels of debt and interest expense than
Seagull on a stand-alone basis. The following table compares debt and leverage
for Seagull and New Ocean, based on December 31, 1998 information, giving pro
forma effect to the merger in the case of New Ocean:

<TABLE>
<CAPTION>

                                             Seagull             New Ocean
                                        ------------------   ------------------
<S>                                       <C>                  <C>
Total Debt.........................       $590 million         $1,939 million
Debt/capitalization ratio..........                 52%                  67%
</TABLE>

         The increase in total indebtedness and leverage of the combined
company after the merger may have a negative impact on New Ocean's ability to
realize the expected benefits of the merger, including a possible downgrade in
the credit rating of the combined company. In this regard, Standard & Poor's
has announced that, because of the higher leverage of the combined company and
the current uncertain commodity price environment, upon completion of the
merger, it will reduce Seagull's corporate credit and senior unsecured debt
ratings from "BBB-" to "BB+," with a stable outlook.


                                      34
<PAGE>   37
                           SEAGULL ENERGY CORPORATION


FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

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

         Although Seagull believes that such forward-looking statements are
based on reasonable assumptions, it can give no assurance that its expectations
will in fact occur. Important factors could cause actual results to differ
materially from those in the forward-looking statements. Forward-looking
statements are subject to risks and uncertainties and include whether the
merger with OEI is actually completed, information concerning cost savings from
the merger, integration of the businesses of OEI and Seagull, general economic
conditions and possible or assumed future results of operations of Seagull or
New Ocean, estimates of oil and gas production and reserves, drilling plans,
future cash flows, anticipated capital expenditures and management's
strategies, plans and objectives as set forth herein.

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

o   Risks incident to the drilling and operation of oil and gas wells;

o   Future production and development costs;

o   The effect of existing and future laws and regulatory actions;

o   The political and economic climate in the foreign jurisdictions in which
    Seagull conducts oil and gas operations;

o   The effect of changes in commodity prices, hedging activities and 
    conditions in the capital markets; 

o   A significant delay in the expected
    closing of the merger (or a failure to consummate the merger); and 

o   Competition from others in the energy industry.

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 


                                      35
<PAGE>   38
                           SEAGULL ENERGY CORPORATION


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
recognized a calendar year by its last two digits. Beginning in the year 2000,
these systems will require modification to distinguish twenty-first century
dates from twentieth century dates ("Year 2000 issues").

         Accordingly, the Company has initiated a comprehensive plan to address
the Year 2000 issues associated with its operations and business (the "Year
2000 plan"). Seagull's Board of Directors has been briefed about the Year 2000
problem generally and as it may affect Seagull. The Board has created a
committee consisting of senior executives and a representative from the Board
to oversee the adoption and implementation of the Year 2000 plan covering all
of Seagull's business units. The plan has been developed with an aim towards
taking reasonable steps to prevent Seagull's mission-critical functions from
being impaired due to the Year 2000 problem.

         The plan includes several phases - (i) assessment of all of the
Company's systems and technology; (ii) implementation and testing of
modifications to or replacements of existing systems and technology, both
financial and operational; (iii) communication with key business partners
regarding Year 2000 issues; and (iv) contingency planning.

         In planning and developing the project, Seagull has considered both
its information technology ("IT") and its non-IT systems. The term "computer
equipment and software" includes systems that are commonly thought of as IT
systems, including accounting, data processing, telephone systems, scanning
equipment, and other miscellaneous systems. Non-IT systems include alarm
systems, fax machines, monitors for field operations, and other miscellaneous
systems. Both IT and non-IT systems may contain embedded technology, which
complicates Seagull's Year 2000 identification, assessment, remediation, and
testing efforts. Based upon its identification and assessment efforts to date,
Seagull is in the process of replacing the computer equipment and software it
currently uses to become Year 2000 compliant. In addition, in the ordinary
course of replacing computer equipment and software, Seagull plans to obtain
replacements that are Year 2000 compliant.

         During 1997, the Company utilized both internal and external resources
to test, reprogram or replace many of its IT systems, primarily financial and
operational software, for necessary modifications identified in its assessment
of Year 2000 issues. As of the date of this filing, the Company estimates that
approximately 80% of its Year 2000 plan related to these IT systems has been
implemented and anticipates that the remainder of the plan, including any
necessary remedial action, will be completed by June 30, 1999. During September
1998, the Company 


                                      36
<PAGE>   39
                           SEAGULL ENERGY CORPORATION


began utilizing internal and external resources to evaluate its vulnerability
to Year 2000 issues related to its non-IT systems, primarily field operational
systems and equipment.

         The Company is working with Stone & Webster to identify embedded chips
that may need to be replaced or avoided. Stone & Webster is an internationally
recognized engineering firm that has developed and maintains a database of
systems that are susceptible to Year 2000 problems. The database comparisons
that have been completed to date have not revealed any material problems. This
effort should be completed by the end of the first quarter of 1999. Areas that
will require contingency plans will be determined as part of these efforts
relative to embedded chips and microcontrollers and as a result of our
correspondence and meetings with key business partners. This effort should be
completed by the end of the second quarter of 1999.

         The Company has also initiated formal communications with all of its
key business partners to determine the extent to which the Company is
vulnerable to those third parties' potential failure to remediate their own
Year 2000 issues. Key business partners were identified in four categories of
companies including: (a) major vendors and contractors (including banks and
other financial service companies); (b) major customers; (c) utility companies;
and (d) third party operators of major oil and gas properties. Questionnaires
were sent to the Company's key business partners to confirm their Year 2000
activities and follow-up letters, telephone calls, and meetings are being used,
as appropriate, to obtain additional information.

         During the fourth quarter of 1998, the Company began developing
contingency plans for its financial and operational systems. Seagull's
contingency plans are being designed to minimize the disruptions or other
adverse effects resulting from Year 2000 incompatibilities regarding these
systems, and to facilitate the early identification and remediation of Year
2000 problems that first manifest themselves after January 1, 2000.

         The failure to correct a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities, resulting
in a material, adverse affect on the Company's results of operations, liquidity
and financial position. The Company's remediation efforts are expected to
reduce significantly the Company's level of uncertainty about Year 2000
compliance and the possibility of interruptions of normal operations. However,
there can be no guarantee that other companies' systems, 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. Disruptions to the oil and
gas transportation networks controlled by third-party carriers could result in
reduced production volumes delivered to market.

         In addition, risks associated with foreign operations may increase
with the uncertainty of Year 2000 compliance by foreign governments and their
supporting infrastructures. The Company's Year 2000 task force members have
been asked to investigate the compliance activities of certain third parties
and foreign governments to determine the risks to the Company. This
investigation is in progress.


                                      37
<PAGE>   40
                           SEAGULL ENERGY CORPORATION


         In a recent Securities and Exchange Commission release regarding Year
2000 disclosures, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenarios
Seagull may face leads to contemplation of the following possibilities which,
though unlikely in some or many cases, must be included in any consideration of
worst cases: widespread failure of electrical, gas, and similar supplies by
utilities serving Seagull domestically and internationally; widespread
disruption of the services of communications common carriers domestically and
internationally; similar disruption to means and modes of transportation for
Seagull and its employees, contractors, suppliers, and customers; significant
disruption to Seagull's ability to gain access to, and remain working in,
office buildings and other facilities; the failure of substantial numbers of
Seagull's mission-critical information (computer) hardware and software
systems, including both internal business systems and systems (such as those
with embedded chips) controlling operational facilities such as onshore and
offshore oil and gas rigs, oil and gas pipelines and gas plants domestically
and internationally, the effects of which would have a cumulative material
adverse impact on Seagull. Among other things, Seagull could face substantial
claims by customers or loss of revenues due to service interruptions, inability
to fulfill contractual obligations, inability to account for certain revenues
or obligations or to bill customers accurately and on a timely basis, and
increased expenses associated with litigation, stabilization of operations
following mission-critical failures, and the execution of contingency plans.
Seagull could also experience an inability by customers, traders, and others to
pay, on a timely basis or at all, obligations owed to Seagull. Under these
circumstances, the adverse effect on Seagull, and the diminution of Seagull's
revenues, would be material, although not quantifiable at this time. Further in
this scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on Seagull, and the diminution of Seagull's revenues, from a domestic or
global recession or depression is also likely to be material, although not
quantifiable at this time.

         The total costs for the Year 2000 compliance review, evaluation,
assessment and remediation efforts are not expected to be in excess of $1
million. Of this amount, approximately $0.3 million had been incurred as of
December 31, 1998.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes standards of
accounting for and disclosures of derivative instruments and hedging
activities. This statement is effective for fiscal years beginning after June
15, 1999. The Company has not yet determined the impact of this statement on
the Company's financial condition or results of operations.


                                      38
<PAGE>   41
                           SEAGULL ENERGY CORPORATION

                       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>          
1998:                                                                                                            
  REVENUES ...................          $ 122,325          $ 103,529            $  93,099            $ 107,218   
  OPERATING PROFIT (LOSS) (2)           $  14,201          $   5,575            $(108,817)           $  (9,163)  
  NET INCOME (LOSS) BEFORE                                                                                       
     EXTRAORDINARY ITEM(2) ...          $   3,155          $  (1,051)           $ (86,607)           $ (11,162)  
  EARNINGS (LOSS) PER SHARE                                                                                      
    BEFORE EXTRAORDINARY ITEM:                                                                                   
    BASIC ....................          $    0.05          $   (0.02)           $   (1.37)           $   (0.18)  
    DILUTED(1) ...............          $    0.05          $   (0.02)           $   (1.37)           $   (0.18)  
  NET INCOME (LOSS) (2) ......          $   3,155          $  (1,051)           $ (87,638)           $ (11,162)  
  EARNINGS (LOSS) PER SHARE:                                                                                     
    BASIC ....................          $    0.05          $   (0.02)           $   (1.39)           $   (0.18)  
    DILUTED(1) ...............          $    0.05          $   (0.02)           $   (1.39)           $   (0.18)  
                                                                                                                 
1997:                                                                                                            
  Revenues ...................          $ 159,573          $ 122,180            $ 120,655            $ 146,959   
  Operating Profit ...........          $  46,606          $  17,811            $  13,456            $  32,603   
  Net Income(3) ..............          $  17,254          $   2,621            $   3,202            $  26,053   
  Earnings per Share:                                                                                            
    Basic ....................          $    0.27          $    0.04            $    0.05            $    0.41   
    Diluted(1) ...............          $    0.27          $    0.04            $    0.05            $    0.41
</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 $78 million pre-tax noncash impairment of long-lived assets and $6
    million one-time pre-tax compensation charges during the quarter ended
    September 30, 1998.

(3) Includes $12 million pre-tax gain on sale of Canadian oil and gas
    operations during the quarter ended December 31, 1997.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DISCLOSURES ABOUT MARKET RISK

         Seagull is exposed to market risk, including adverse changes in
commodity prices, interest rates and foreign currency exchange rates as
discussed below.

         Commodity Price Risk -- The Company produces, purchases and sells
natural gas, crude oil, and NGLs. As a result, the Company's financial results
can be significantly affected as these commodity prices fluctuate widely in
response to changing market forces. The Company made a limited use of a variety
of derivative financial instruments only for non-trading purposes as a 


                                      39
<PAGE>   42
                           SEAGULL ENERGY CORPORATION


hedging strategy to manage commodity prices associated with oil and gas sales
and to reduce the impact of commodity price fluctuations. The Company used the
hedge or deferral method of accounting for these instruments and, as a result,
gains and losses on commodity derivative financial instruments were generally
offset by similar changes in the realized prices of the commodities. As
discussed earlier, Seagull effectively closed all derivative financial
positions prior to December 31, 1998.

         Interest Rate Risk -- 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. Currently,
Seagull has no open interest rate swap or interest rate lock agreements.

         Therefore, the Company's exposure to changes in interest rates
primarily results from its short-term and long-term debt with both fixed and
floating interest rates. The following table presents principal or notional
amounts (stated in thousands) and related average interest rates by year of
maturity for the Company's debt obligations at December 31, 1998:

<TABLE>
<CAPTION>
                             1999        2000        2001        2002        2003     Thereafter    Total    Fair Value
                             ----        ----        ----        ----        ----     ----------    -----    ----------
<S>                       <C>         <C>         <C>        <C>         <C>         <C>         <C>         <C>
Notes payable:
     Variable rate         $ 47,800    $      -   $      -    $      -    $      -    $      -    $ 47,800    $ 47,800
     Average interest rate      6.5%          -          -           -           -           -         6.5%

Long-term debt, including 
 current maturities:
     Variable rate         $      -    $      -   $      -    $      -    $175,000    $      -    $175,000    $175,000
     Average interest rate        -           -          -           -         5.4%          -         5.4%

     Fixed rate            $  7,147    $ 30,180   $  9,220    $  3,265    $  3,315    $364,230    $417,357    $390,368
     Average interest rate      8.1%        5.3%       8.2%        8.3%        8.3%        8.0%        7.6%
</TABLE>

         Foreign Currency Exchange Rate Risk -- The Company conducts business
in several foreign currencies and is subject to foreign currency exchange rate
risk on cash flows related to sales, expenses, financing and investing
transactions. However, because predominantly all transactions in Seagull's
existing foreign operations, other than Tatarstan, are denominated in U.S.
dollars, the U.S. dollar is the functional currency for all those operations.
Exposure from market rate fluctuations related to activities in Tatarstan is
not material.


                                      40
<PAGE>   43


                           SEAGULL ENERGY CORPORATION

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                      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 on Form 10-K, whether audited or unaudited. The financial
statements were prepared in conformity with generally accepted accounting
principles and include certain estimates and judgments which management believes
are reasonable under the circumstances.

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

         The accompanying consolidated financial statements of Seagull Energy
Corporation as of December 31, 1998 have been audited by KPMG 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/JAMES T. HACKETT        /S/WILLIAM L. TRANSIER         /S/GORDON L. MCCONNELL
-------------------        ----------------------         ----------------------
JAMES T. HACKETT           WILLIAM L. TRANSIER            GORDON L. MCCONNELL
Chairman of the Board,     Executive Vice President       Vice President and 
President and Chief        and Chief Financial Officer    Controller
Executive Officer

February 15, 1999



                                       41
<PAGE>   44


                           SEAGULL ENERGY CORPORATION
                          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, 1998 and 1997,
and the related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.



/S/ KPMG LLP
------------

Houston, Texas
February 9, 1999




                                       42
<PAGE>   45


                           SEAGULL ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (Amounts in Thousands Except Per Share Data)


<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                    ---------------------------------------
                                                                       1998           1997           1996
                                                                    ---------      ---------      ---------
<S>                                                                 <C>            <C>            <C>      
Revenues:
   Oil and gas operations .....................................     $ 332,579      $ 453,648      $ 419,595
   Alaska transmission and distribution .......................        93,592         95,719         97,616
                                                                    ---------      ---------      ---------
                                                                      426,171        549,367        517,211
Costs of Operations:
   Operations and maintenance .................................       158,292        165,462        147,294
   Alaska transmission and distribution cost of gas sold ......        41,232         43,684         42,600
   Exploration charges ........................................        59,787         42,085         50,772
   Depreciation, depletion and amortization ...................       169,369        171,516        155,669
   Impairment of long-lived assets ............................        77,827             --             --
   General and administrative .................................        17,868         16,144         17,433
                                                                    ---------      ---------      ---------
                                                                      524,375        438,891        413,768
                                                                    ---------      ---------      ---------

Operating Profit (Loss) .......................................       (98,204)       110,476        103,443

Other (Income) Expense:
   Interest expense ...........................................        39,184         38,533         44,842
   Merger expenses ............................................            --             --          9,982
   Gain on sales of assets, net ...............................          (127)       (11,311)        (1,088)
   Interest income and other ..................................        (3,340)        (2,946)        (5,149)
                                                                    ---------      ---------      ---------
                                                                       35,717         24,276         48,587
                                                                    ---------      ---------      ---------
Income (Loss) Before Income Taxes and Extraordinary Item ......      (133,921)        86,200         54,856

Income Tax Expense (Benefit) ..................................       (38,256)        37,070         25,895
                                                                    ---------      ---------      ---------

Income (Loss) Before Extraordinary Item .......................       (95,665)        49,130         28,961
Extraordinary Item ............................................        (1,031)            --             --
                                                                    ---------      ---------      ---------

Net Income (Loss) .............................................     $ (96,696)     $  49,130      $  28,961
                                                                    =========      =========      =========

Earnings (Loss) Per Share Before Extraordinary Item:
   Basic ......................................................     $   (1.51)     $    0.78      $    0.46
                                                                    =========      =========      =========
   Diluted ....................................................     $   (1.51)     $    0.77      $    0.46
                                                                    =========      =========      =========

Earnings (Loss) Per Share:
   Basic ......................................................     $   (1.53)     $    0.78      $    0.46
                                                                    =========      =========      =========
   Diluted ....................................................     $   (1.53)     $    0.77      $    0.46
                                                                    =========      =========      =========

Weighted Average Number of Common Shares Outstanding:
   Basic ......................................................        63,159         63,022         62,584
                                                                    =========      =========      =========
   Diluted ....................................................        63,159         63,791         63,552
                                                                    =========      =========      =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.



                                       43
<PAGE>   46


                           SEAGULL ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                    (Amounts in Thousands Except Share Data)


<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                     ----------------------------
                                                                                        1998             1997
                                                                                     -----------      -----------
                                     ASSETS
<S>                                                                                  <C>              <C>        
Current Assets:
   Cash and cash equivalents ...................................................     $    25,734      $    45,654
   Accounts receivable, net ....................................................          95,620          147,442
   Inventories .................................................................          15,663           13,635
   Prepaid expenses and other ..................................................          15,764           16,240
                                                                                     -----------      -----------
     Total Current Assets ......................................................         152,781          222,971

Property, Plant and Equipment - at cost:
   Oil and gas properties (successful efforts method) ..........................       1,977,208        1,742,725
   Utility plant ...............................................................         254,699          246,670
   Other .......................................................................          69,275           64,288
                                                                                     -----------      -----------
                                                                                       2,301,182        2,053,683
Accumulated Depreciation, Depletion and Amortization ...........................       1,090,855          908,849
                                                                                     -----------      -----------
                                                                                       1,210,327        1,144,834

Other Assets ...................................................................          52,982           43,261
                                                                                     -----------      -----------

Total Assets ...................................................................     $ 1,416,090      $ 1,411,066
                                                                                     ===========      ===========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
   Accounts and notes payable ..................................................     $   171,642      $   159,138
   Accrued expenses ............................................................          32,905           47,625
   Current maturities of long-term debt ........................................           7,147            7,097
                                                                                     -----------      -----------
     Total Current Liabilities .................................................         211,694          213,860

Long-Term Debt .................................................................         582,675          469,017
Other Noncurrent Liabilities ...................................................          51,168           51,168
Deferred Income Taxes ..........................................................              --           14,126
Redeemable Bearer Shares .......................................................          15,462           15,691
Commitments and Contingencies ..................................................              --               --

Shareholders' Equity:
   Common stock, $.10 par value; authorized 100,000,000 shares; issued
      64,387,824 and 63,877,442 shares, respectively ...........................           6,439            6,388
   Additional paid-in capital ..................................................         493,914          493,829
   Retained earnings ...........................................................          68,239          164,935
   Less - note receivable from employee stock ownership plan ...................          (2,178)          (2,990)
   Less - treasury stock, at cost; 471,376 and 861,314 shares, respectively ....          (8,187)         (14,958)
   Less - notes receivable for stock ...........................................          (2,083)              --
   Less - deferred compensation ................................................          (1,053)              --
                                                                                     -----------      -----------
     Total Shareholders' Equity ................................................         555,091          647,204
                                                                                     -----------      -----------

    Total Liabilities and Shareholders' Equity .................................     $ 1,416,090      $ 1,411,066
                                                                                     ===========      ===========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.



                                       44
<PAGE>   47


                           SEAGULL ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in Thousands)


<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                               ---------------------------------------
                                                                                  1998           1997           1996
                                                                               ---------      ---------      ---------
<S>                                                                            <C>            <C>            <C>      
OPERATING ACTIVITIES:
Net income (loss) ........................................................     $ (96,696)     $  49,130      $  28,961
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
   Depreciation, depletion and amortization ..............................       169,369        171,516        155,669
   Impairment of long-lived assets .......................................        77,827             --             --
   Amortization of deferred financing costs ..............................         1,918          2,037          2,969
   Deferred income taxes .................................................       (47,465)         9,418          8,701
   Dry hole expense ......................................................        36,760         20,062         23,671
   Gain on sales of assets, net ..........................................          (127)       (11,311)        (1,088)
   Extraordinary item ....................................................         1,031             --             --
   Other .................................................................         4,567          8,735          1,660
                                                                               ---------      ---------      ---------
                                                                                 147,184        249,587        220,543
   Changes in operating assets and liabilities, net of acquisitions:
     Decrease in short-term securities ...................................            --             --          5,014
     Decrease (increase) in accounts receivable ..........................        54,754         39,211        (53,531)
     Decrease (increase) in inventories, prepaid
       expenses and other ................................................        (4,683)       (10,797)         9,731
     Increase (decrease) in accounts and notes payable ...................       (32,893)         9,779         53,281
     Increase (decrease) in accrued expenses and other ...................       (15,644)       (25,031)        23,401
                                                                               ---------      ---------      ---------
   Net Cash Provided By Operating Activities .............................       148,718        262,749        258,439

INVESTING ACTIVITIES:
Capital expenditures .....................................................      (275,297)      (275,608)      (213,462)
Acquisitions of oil and gas properties, net of cash acquired .............      (102,317)       (17,665)       (90,867)
Acquisitions of other assets and liabilities, net of cash
   acquired ..............................................................        (2,381)            --        (13,553)
Proceeds from sales of property, plant and equipment .....................        53,008        186,494         10,557
                                                                               ---------      ---------      ---------
   Net Cash Used In Investing Activities .................................      (326,987)      (106,779)      (307,325)

FINANCING ACTIVITIES:
Proceeds from debt .......................................................       553,555        821,097        407,738
Principal payments on debt ...............................................      (394,744)      (938,554)      (368,754)
Proceeds from sales of common stock ......................................           617          7,422          4,401
Purchase of treasury stock ...............................................            --        (11,691)            --
Premiums paid on debt purchased ..........................................          (934)            --             --
Other ....................................................................          (145)        (3,846)        (1,051)
                                                                               ---------      ---------      ---------
   Net Cash Provided By (Used In) Financing Activities ...................       158,349       (125,572)        42,334

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

Increase (Decrease) In Cash And Cash Equivalents .........................       (19,920)        30,370         (6,193)
Cash And Cash Equivalents At Beginning Of Year ...........................        45,654         15,284         21,477
                                                                               ---------      ---------      ---------

Cash And Cash Equivalents At End Of Year .................................     $  25,734      $  45,654      $  15,284
                                                                               =========      =========      =========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.



                                       45
<PAGE>   48


                           SEAGULL ENERGY CORPORATION
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                             (Amounts in Thousands)


<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                       ------------------------------------
                                                         1998          1997          1996
                                                       --------      --------      --------
<S>                                                    <C>           <C>           <C>     
Net Income (Loss) ................................     $(96,696)     $ 49,130      $ 28,961

Other Comprehensive Income, Net of Tax:
   Foreign currency translation adjustment .......           --           (51)         (338)
                                                       --------      --------      --------

Comprehensive Income (Loss) ......................     $(96,696)     $ 49,079      $ 28,623
                                                       ========      ========      ========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.



                                       46
<PAGE>   49


                           SEAGULL ENERGY CORPORATION
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (Amounts in Thousands)


<TABLE>
<CAPTION>
                                                                        1998           1997            1996
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>      
COMMON STOCK:
Beginning of Year ...............................................     $   6,388      $   6,307      $   6,598
Issuance of Common Stock ........................................            51             81             44
Retirement of Treasury Stock Pursuant to the Global Merger ......            --             --           (335)
                                                                      ---------      ---------      ---------
End of Year .....................................................     $   6,439      $   6,388      $   6,307
                                                                      =========      =========      =========

ADDITIONAL PAID-IN CAPITAL:
Beginning of Year ...............................................     $ 493,829      $ 483,118      $ 496,377
Exercise of Employee Stock Options ..............................         2,662          7,341          4,357
Deferred Compensation ...........................................         1,564             --             --
Treasury Stock Contribution to ESOP .............................        (4,310)            --             --
Retirement of Treasury Stock Pursuant to the Global Merger ......            --             --        (19,021)
Other ...........................................................           169          3,370          1,405
                                                                      ---------      ---------      ---------
End of Year .....................................................     $ 493,914      $ 493,829      $ 483,118
                                                                      =========      =========      =========

RETAINED EARNINGS:
Beginning of Year ...............................................     $ 164,935      $ 115,805      $  86,844
Net Income (Loss) for the Year ..................................       (96,696)        49,130         28,961
                                                                      ---------      ---------      ---------
End of Year .....................................................     $  68,239      $ 164,935      $ 115,805
                                                                      =========      =========      =========

ACCUMULATED OTHER COMPREHENSIVE INCOME:
Beginning of Year ...............................................     $      --      $      51      $     389
Foreign Currency Translation Adjustment, Net of Tax:
   Loss arising during the year .................................            --           (769)          (338)
   Reclassification adjustment ..................................            --            718             --
                                                                      ---------      ---------      ---------
End of Year .....................................................     $      --      $      --      $      51
                                                                      =========      =========      =========

NOTE RECEIVABLE FROM ESOP:
Beginning of Year ...............................................     $  (2,990)     $  (4,284)     $  (4,922)
Repayment of Note Receivable ....................................           812          1,294            638
                                                                      ---------      ---------      ---------
End of Year .....................................................     $  (2,178)     $  (2,990)     $  (4,284)
                                                                      =========      =========      =========

TREASURY STOCK:
Beginning of Year ...............................................     $ (14,958)     $  (3,267)     $ (22,665)
Treasury Stock Contribution to ESOP .............................         6,771             --             --
Purchase of Treasury Stock ......................................            --        (11,691)            --
Retirement of Treasury Stock Pursuant to the Global Merger ......            --             --         19,356
Other ...........................................................            --             --             42
                                                                      ---------      ---------      ---------
End of Year .....................................................     $  (8,187)     $ (14,958)     $  (3,267)
                                                                      =========      =========      =========

NOTES RECEIVABLE FOR STOCK:
Beginning of Year ...............................................     $      --      $      --      $      --
Issuance of Stock for Notes Receivable ..........................        (2,083)            --             --
                                                                      ---------      ---------      ---------
End of Year .....................................................     $  (2,083)     $      --      $      --
                                                                      =========      =========      =========
</TABLE>


                                       47
<PAGE>   50


                           SEAGULL ENERGY CORPORATION
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
                             (Amounts in Thousands)


<TABLE>
<CAPTION>
                                                                         1998           1997           1996
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>      
DEFERRED COMPENSATION:
Beginning of Year ...............................................     $      --      $      --      $      --
Issuance of Restricted Stock ....................................        (1,658)            --             --
Amortization of Compensation Expense ............................           605             --             --
                                                                      ---------      ---------      ---------
End of Year .....................................................     $  (1,053)     $      --      $      --
                                                                      =========      =========      =========

TOTAL SHAREHOLDERS' EQUITY, END OF YEAR .........................     $ 555,091      $ 647,204      $ 597,730
                                                                      =========      =========      =========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.



                                       48
<PAGE>   51


                           SEAGULL ENERGY CORPORATION
                   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 and distributes natural gas in the
Anchorage, Alaska metropolitan area.

         On November 24, 1998, Seagull and Ocean Energy, Inc. ("OEI") executed
an Agreement and Plan of Merger. The merger must be approved by the shareholders
of both OEI and Seagull and the Alaska Public Utilities Commission ("APUC")
which regulates Seagull's operations in the Anchorage, Alaska metropolitan area.
If the merger is approved, OEI stockholders would receive one share of Seagull
common stock in exchange for each share of OEI common stock that they own.
Management expects that the transaction will close during the first quarter of
1999. See Note 18 for additional discussion.


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.

         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 APUC, which has
jurisdiction over, among other things, rates, accounting procedures and
standards of service. The Company follows Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 71 for ENSTAR
Alaska, however the provisions of SFAS No. 71 do not materially impact the
Company's operating results.

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




                                       49
<PAGE>   52


                           SEAGULL ENERGY CORPORATION

         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 interests 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 are capitalized pending
determination of whether adequate proved reserves are found. Geological and
geophysical costs, delay rentals, technical support and other internal costs
related to oil and gas activities are generally accounted for as exploration
charges or operations and maintenance expense. 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, 1998 was
approximately $18 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. Future cash flows are based upon the Company's
estimate of proved reserves. In addition, probable and possible reserves are
taken into consideration when justified by economic conditions and actual or
planned drilling. Pricing assumptions are based on internal forecasts that are
prepared considering information from outside consultants and industry analysts.

         During 1998, the Company recorded impairment charges of approximately
$74 million related to its oil and gas properties. The oil and gas asset
impairment charges resulted primarily from disappointing well performance, much
lower oil and natural gas prices and a lack of any perceived significant
near-term improvement in oil prices that has led to a reduction in reserves at
three of Seagull's Egyptian concessions, East Zeit, South Hurghada and East Beni
Suef. No impairment charges were recorded during 1997 and 1996.




                                       50
<PAGE>   53
                           SEAGULL ENERGY CORPORATION

         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. During 1998, the Company recorded impairment charges of approximately
$4 million related to certain of its pipeline assets. The impairment of the
pipeline assets is a result of the Company's decision to dispose of these
assets. See Note 6 for additional discussion. No impairment charges were
recorded during 1997 and 1996.

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

         Interest cost capitalized as property, plant and equipment amounted to
approximately $7 million, $7 million and $3 million in 1998, 1997 and 1996,
respectively.

         Environmental Liabilities -- Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
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 at the end of each accounting period.

         Derivative Financial Instruments -- The Company entered into a variety
of commodity derivative financial instruments (futures, swaps and options
contracts) only for non-trading purposes. The Company made a limited use of
these derivative financial instruments as a hedging strategy to manage commodity
prices associated with oil and gas sales and to reduce the impact of commodity
price fluctuations. While commodity derivative financial instruments were
intended to reduce the Company's exposure to declines in the market price of oil
and natural gas,


                                       51
<PAGE>   54

                           SEAGULL ENERGY CORPORATION

the commodity derivative financial instruments may also limit the Company's gain
from increases in those market prices.

         The Company used the hedge or deferral method of accounting for these
instruments and, as a result, gains and losses on commodity derivative financial
instruments were generally offset by similar changes in the realized prices of
the commodities. 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 was reduced. Income and costs related to these hedging
activities were recognized in oil and gas revenues when the commodities were
produced. Income and costs on commodity derivative financial instruments that
were closed before the hedged production occurs were 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 were
recognized currently to the extent the financial instrument has not offset
changes in actual oil and gas prices. Any realized income and costs that were
deferred at the balance sheet date and any margin accounts for futures contracts
were included as net current assets.

         The Company recorded $1 million, $10 million and $9 million for 1998,
1997 and 1996, respectively, in costs related to equity hedging activities,
including costs related to the monetary production payment hedges of
approximately $1 million, $3 million and $4 million for 1998, 1997 and 1996,
respectively. The Company also recorded hedging costs related to third-party
marketing activities of $5 million, $3 million and $0.5 million for 1998, 1997
and 1996, respectively. At December 31, 1998, the fair value of unrealized costs
related to the Company's commodity hedging activities related to open contracts
was immaterial as substantially all commodity derivative financial positions had
been effectively closed.

         From time to time, the Company has entered into various financial
instruments, such as interest rate swap 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.

         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.




                                       52
<PAGE>   55
                           SEAGULL ENERGY CORPORATION

         Foreign Currency Translation -- The U.S. dollar is the functional
currency for all of the Seagull's existing foreign operations, as predominantly
all transactions in those operations are denominated in U.S. dollars. Before its
sale in October 1997, the Company's Canadian operations used the applicable
local currency as the functional currency. Translation from Canadian dollars to
U. S. dollars was performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using
primarily a weighted average exchange rate during the period. Adjustments
resulting from such translation were included as a separate component of
shareholders' equity. Deferred income taxes were not provided on translation
adjustments because any unremitted income from Seagull's foreign operations was
considered to be permanently invested.

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

         Comprehensive Income -- Effective January 1, 1998, the Company adopted
SFAS No. 130, "Reporting Comprehensive Income." This statement established
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 those resulting from investments by and
distributions to owners. The Company's only other comprehensive item relates to
foreign currency translation adjustments for its Canadian operations, which were
sold in 1997.

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

         The Company operates in various phases of the oil and natural gas
industry 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 also
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 




                                       53
<PAGE>   56
                           SEAGULL ENERGY CORPORATION

credit positions prior to extending credit. At December 31, 1998 and 1997,
Seagull had allowances for doubtful accounts receivable of $1.7 million and $1.2
million, respectively. The Company had one customer, the Egyptian national oil
company ("EGPC") with 11% of total revenues during both 1998 and 1997, who
accounted for more than 10% of total revenues.

         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 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes standards of accounting for and disclosures of derivative
instruments and hedging activities. This statement is effective for fiscal years
beginning after June 15, 1999. The Company has not yet determined the impact of
this statement on the Company's financial condition or results of operations.




                                       54
<PAGE>   57
                           SEAGULL ENERGY CORPORATION

3.       EARNINGS PER  SHARE

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

<TABLE>
<CAPTION>
                                                      Income (Loss)                                                 
                                                         Before        Weighted Average                      
                                                      Extraordinary      Common Shares     Per-Share
                                                           Item           Outstanding       Amount
                                                      -------------    ----------------    ---------
<S>                                                     <C>                  <C>            <C>      
YEAR ENDED DECEMBER 31, 1998:
     BASIC LOSS PER SHARE ........................      $(95,665)            63,159         $  (1.51)
     EFFECT OF DILUTIVE STOCK OPTIONS ............            --                 --
                                                      -------------    ----------------   
     DILUTED LOSS PER SHARE ......................      $(95,665)            63,159         $  (1.51)
                                                      =============    ================

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
                                                      =============    ================
</TABLE>

         At December 31, 1998, options to purchase 5,527,320 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 2008. 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.


4.       ONE-TIME COMPENSATION CHARGES

         During 1998, Seagull recorded general and administrative ("G&A")
expenses of approximately $6 million in compensation expenses, related to the
retirement of Barry J. Galt and the election of James T. Hackett as the
Company's President and Chief Executive Officer. These charges included (i) $1.8
million in supplemental retirement benefits paid to Mr. Galt in 1998; (ii) $2.3
million to be paid to Mr. Galt at various dates through May 2002 representing
contractually provided retirement benefits; (iii) $1.3 million representing the
vested portion of Mr. Hackett's supplemental retirement plan; and (iv) $0.6
million in phantom stock granted to Mr. Hackett upon his employment.



                                       55
<PAGE>   58
                           SEAGULL ENERGY CORPORATION


5.       SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

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

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                       -------------------------------
                                                          1998        1997        1996
                                                       -------     -------     -------
<S> ..............................................         <C>         <C>         <C>
Cash paid during the year for:
 Interest, net of amount capitalized .............     $37,998     $34,947     $44,033
 Income taxes ....................................     $12,991     $25,684     $12,046
</TABLE>


6.       ACQUISITION AND DISPOSITION OF ASSETS

         Acquisition of BRG Interests -- On June 1, 1998, the Company completed
the purchase of the stock of BRG Petroleum, Inc. ("BRG"), a closely held private
company, and the assets of BRG's limited partnerships and programs for $103
million in cash, excluding cash acquired of $2 million and noncash deferred tax
liabilities of $25 million. The Company funded this acquisition through existing
credit facilities.

         The following table presents the unaudited pro forma results (stated in
thousands except per share data) of Seagull as though the acquisition of the
acquired assets had occurred on January 1, 1997:


                         UNAUDITED PRO FORMA INFORMATION

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                       ----------------------------
                                                            1998             1997
                                                       -----------      -----------
<S>                                                    <C>              <C>        
Revenues .........................................     $   434,842      $   573,559
Net income (loss) ................................         (97,999)          48,115
Basic earnings (loss) per share ..................           (1.55)            0.76
Diluted earnings (loss) per share ................           (1.55)            0.75
</TABLE>


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

         Relinquishment of Darag Concession -- The Company's Egyptian assets
included a 50%, non-operated working interest in the Darag concession, which is
located in the northern portion of the Gulf of Suez. Future plans for this
concession have been uncertain as the working interest owners and EGPC have been
unable to secure the necessary drilling permits from marine authorities. In the
third quarter of 1998, the working interest owners agreed to relinquish the
concession to EGPC in exchange for reimbursement of substantially all of their
costs incurred in connection with the concession. Seagull's share of the
reimbursement is approximately $6 



                                       56
<PAGE>   59
                           SEAGULL ENERGY CORPORATION

million, with $4 million of this received by December 31, 1998 and the remainder
in January 1999. The effect of this reimbursement did not have a material effect
on the Company's results of operations.

         Disposition of Pipeline Assets -- During the third quarter of 1998, the
Company decided to liquidate its nonstrategic pipeline assets in late 1998 or
early 1999. As a result of this decision, the Company recorded a noncash
impairment of pipeline assets of approximately $4 million during the third
quarter of 1998 to reduce the asset carrying value to estimated net realizable
value. The pipeline assets to be disposed of contributed $3 million, $5 million
and $4 million in revenues for the years ended December 31, 1998, 1997 and 1996,
respectively, but did not have a material effect on operating profit for any of
these periods. These assets have a net book value of approximately $3 million at
December 31, 1998.

         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 Canadian operations contributed
approximately $26 million and $34 million in revenue and $6 million and $(5)
million in income (loss) before taxes for the years ended December 31, 1997 and
1996, respectively.

         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.

         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.


7.       OTHER NONCURRENT ASSETS

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

<TABLE>
<CAPTION>
                                                          December 31,
                                                       -------------------
                                                          1998        1997
                                                       -------     -------
<S>                                                    <C>         <C>    
Oil and gas imbalances ...........................     $26,866     $27,428
Deferred tax asset (see Note 14) .................      12,805          --
Deferred financing costs .........................       8,151      10,437
Other ............................................       5,160       5,396
                                                       -------     -------
                                                       $52,982     $43,261
                                                       =======     =======
</TABLE>



                                       57
<PAGE>   60
                           SEAGULL ENERGY CORPORATION

         Oil and Gas Imbalances -- As discussed in Note 2, the Company records
oil and gas revenues following the entitlement method of accounting for
production. The Company's oil and gas imbalance assets and liabilities (stated
in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                           -----------------------------------------
                                                                                  1998                   1997
                                                                           ------------------     ------------------
                                                                                       VOLUME                 Volume 
                                                                            AMOUNT     (Bcfe)      Amount     (Bcfe)
                                                                           -------     ------     -------     ------
<S>                                                                        <C>            <C>     <C>            <C>
ASSETS:
   Current ...........................................................     $ 9,552        5.8     $13,117        6.5
   Noncurrent ........................................................      26,866       16.3      27,428       16.8
                                                                           -------     ------     -------     ------
                                                                           $36,418       22.1     $40,545       23.3
                                                                           =======     ======     =======     ======
LIABILITIES:
   Current ...........................................................     $ 5,919        3.8     $ 8,009        5.5
   Noncurrent ........................................................      14,834        9.4      16,405       10.4
                                                                           -------     ------     -------     ------
                                                                           $20,753       13.2     $24,414       15.9
                                                                           =======     ======     =======     ======
</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.


8.       DEBT

         Money Market Facilities -- Seagull has money market facilities with
three U.S. banks with a combined maximum commitment of $110 million. These
facilities bear interest at rates made available by the banks at their
discretion and may be canceled at either Seagull's or the banks' discretion. At
December 31, 1998 and 1997, the total amounts outstanding under the money market
facilities of $48 million and none, 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.



                                       58
<PAGE>   61
                           SEAGULL ENERGY CORPORATION

Long-term debt (stated in thousands) for 1998 and 1997 was as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                            ---------------------
                                                                1998         1997
                                                            --------     --------
<S>                                                         <C>          <C>     
Revolving credit ......................................     $175,000     $     --
1997 Senior notes .....................................      150,000      150,000
1993 Senior notes .....................................      100,000      100,000
1993 Senior subordinated notes ........................      100,000      150,000
Monetary production payment ...........................       20,994       25,384
ENSTAR Alaska:
   Unsecured industrial development bonds .............        8,360        9,305
   Other unsecured notes ..............................       38,003       44,158
                                                            --------     --------
                                                             592,357      478,847
Less:  Current maturities .............................        7,147        7,097
       Unamortized debt discount ......................        2,535        2,733
                                                            --------     --------
                                                            $582,675     $469,017
                                                            ========     ========
</TABLE>


         Revolving Credit -- The Company has a $500 million revolving credit
facility ("Revolving Credit Facility"). At December 31, 1998, there was $175
million borrowed under the Revolving Credit Facility and $307 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 5.3% to 6.4% for the year ended December 31, 1998.

         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 $130 million was
available for payment of cash dividends on common stock or to repurchase common
stock as of December 31, 1998.

         1997 Senior Notes -- In September 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 1/2% 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 




                                       59
<PAGE>   62
                           SEAGULL ENERGY CORPORATION

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.

         During 1998, the Company repurchased in open-market transactions
approximately $50 million in aggregate principal amount of its Senior
Subordinated Notes. These purchases were funded using borrowings under the
Revolving Credit Facility. In connection with this repurchase, the Company
recorded an after-tax extraordinary loss of $1 million, or $0.02 per basic and
diluted share, during 1998. The extraordinary item includes a tax benefit of
approximately $0.6 million.

         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 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
certain Internal Revenue Code Section 29 tax credit-bearing 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 8.81% with principal payments due 1999 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 $14 million
available for the making of restricted investments, restricted stock payments
and restricted subordinated debt payments as of December 31, 1998.

         Annual Maturities -- At December 31, 1998, the Company's aggregate
annual maturities of long-term debt are $7 million, $30 million, $9 million, $3
million and $178 million for the years 1999, 2000, 2001, 2002 and 2003,
respectively.



                                       60
<PAGE>   63
                           SEAGULL ENERGY CORPORATION


9.       OTHER NONCURRENT LIABILITIES

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

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                 -------------------
                                                                    1998        1997
                                                                 -------     -------
<S>                                                              <C>         <C>    
Oil and gas imbalances (see Note 7) ........................     $14,834     $16,405
Refundable customer advances for construction ..............      12,978      11,940
Other ......................................................      23,356      22,823
                                                                 -------     -------
                                                                 $51,168     $51,168
                                                                 =======     =======
</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.


10.      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,
                                                                      ------------------------------------------------------
                                                                                 1998                        1997
                                                                      ------------------------      ------------------------
                                                                       CARRYING     ESTIMATED       Carrying      Estimated
                                                                        AMOUNT      FAIR VALUE        Amount      Fair Value
                                                                      ---------     ----------      ---------     ----------
<S>                                                                   <C>            <C>            <C>            <C>      
Assets:
   Cash and cash equivalents ....................................     $  25,734      $  25,734      $  45,654      $  45,654

Liabilities:
   Refundable customer advances and deposits ....................       (15,799)       (14,705)       (14,725)       (11,880)
   Long-term debt ...............................................      (589,822)      (565,368)      (476,114)      (497,382)
Redeemable bearer shares ........................................       (15,462)        (6,556)       (15,691)        (6,186)
Commodity hedging instruments:
   In a receivable position .....................................            --             --             --            278
   In a payable position ........................................            --            (34)          (287)        (1,219)
</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 7.75% and 8.5% at
December 31, 1998 and 1997, 


                                       61
<PAGE>   64
                           SEAGULL ENERGY CORPORATION

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, 1998 and 1997. 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 determined based on the
Company's estimate of the number of bearer shares that will be presented for
redemption.

         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, 1998
and 1997.


11.      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, 1998
and 1997, there were 2,384,140 and 2,418,868 outstanding bearer share warrants,
respectively. The loan is secured by a letter of credit issued under the
Revolving Credit Facility. During 1998 and 1997 there were no drawings under the
letter of credit. In July 2008, the obligation of the 



                                       62
<PAGE>   65
                           SEAGULL ENERGY CORPORATION

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.


12.      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, 1998:

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                           --------------------------------------------
                                                                               1998             1997            1996
                                                                           -----------      -----------     -----------
<S>                                                                         <C>              <C>             <C>       
COMMON STOCK OUTSTANDING:
   Shares at beginning of year .......................................      63,877,442       63,073,287      65,983,199
   Exercise of employee stock options ................................         375,503          804,155         449,256
   Executive incentive compensation ..................................         134,879               --           3,000
   Retirement of treasury stock pursuant to Global Merger ............              --               --      (3,361,185)
   Other .............................................................              --               --            (983)
                                                                           -----------     -----------      -----------
   Shares at end of year .............................................      64,387,824       63,877,442      63,073,287
                                                                           ===========      ===========     ===========

TREASURY STOCK OUTSTANDING:
   Shares at beginning of year .......................................         861,314          361,314       3,729,823
   Acquisition of treasury stock .....................................              --          500,000              --
   Issuance of treasury stock to benefit plans .......................        (389,906)              --          (7,324)
   Retirement of treasury stock pursuant to Global Merger ............              --               --      (3,361,185)
   Other .............................................................             (32)              --              --
                                                                           -----------      -----------     -----------
   Shares at end of year .............................................         471,376          861,314         361,314
                                                                           ===========      ===========     ===========
</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, 1998 and 1997.

         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 



                                       63
<PAGE>   66
                           SEAGULL ENERGY CORPORATION

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.


13.      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, 1998,
approximately two million shares of common stock were available for grant.
Information relating to stock options is summarized as follows:

<TABLE>
<CAPTION>
                                                      1998                         1997                    1996
                                             ----------------------     -----------------------    ----------------------
                                                          WEIGHTED                    Weighted                  Weighted
                                                           AVERAGE                     Average                   Average
                                                          EXERCISE                    Exercise                  Exercise
                                                          PRICE PER                   Price Per                 Price Per
                                               SHARES       SHARE         Shares        Share        Shares       Share
                                             ----------   ---------     ----------    ---------    ----------   ---------
<S>                                           <C>            <C>         <C>            <C>         <C>            <C>   
Balance outstanding -
  Beginning of year ....................      4,598,252      $17.63      4,746,792      $16.15      4,501,920      $14.67
    Granted ............................      2,693,103      $13.73        983,200      $19.13        844,000      $21.79
     Exercised .........................       (375,503)     $ 7.19       (809,764)     $ 9.16       (449,256)     $ 9.80
     Forfeited .........................     (1,388,532)     $18.49       (321,976)     $21.33       (149,872)     $22.36
                                             ----------      ------     ----------      ------     ----------      ------
Balance outstanding -
  End of year ..........................      5,527,320      $16.22      4,598,252      $17.63      4,746,792      $16.15
                                             ----------      ------     ----------      ------     ----------      ------
Options exercisable -
      End of year ......................      2,884,010      $16.17      2,355,972      $14.97      2,417,492      $11.19
                                             ==========      ======     ==========      ======     ==========      ======
</TABLE>


         The weighted average fair value of stock options granted during 1998,
1997 and 1996 was $6.87, $9.28 and $10.77 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
50%, 44% and 43%, weighted average risk-free interest rates of 5.2%, 6.3% and
6.5%, for grants in 1998, 1997 and 1996, 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.



                                       64
<PAGE>   67
                           SEAGULL ENERGY CORPORATION


         Information relating to stock options outstanding at December 31, 1998
is summarized as follows:

<TABLE>
<CAPTION>
                                     Options Outstanding                            Options Exercisable
                     ------------------------------------------------------  ---------------------------------
                                                                                                      
                                             Weighted           Weighted         Number                              
                     Number Outstanding      Average            Average      Exercisable at      Weighted
    Range of          at December 31,       Remaining        Exercise Price   December 31,    Average Exercise
Exercise Prices           1998           Contractual Life       Per Share         1998         Price Per Share    
---------------      ------------------  ----------------    --------------  --------------  -----------------
<S>                   <C>               <C>              <C>               <C>               <C>      
$ 5.89 - $11.25           753,896           2 years          $    8.50         731,680          $    8.48
$11.26 - $11.75         1,161,196          10 years          $   11.69         200,000          $   11.69
$11.76 - $16.50         1,132,040           5 years          $   14.04         679,776          $   13.24
$16.51 - $18.85         1,123,975           8 years          $   18.28         365,600          $   18.24
$18.86 - $26.38         1,356,213           6 years          $   24.51         906,954          $   24.74
                     ------------------  ----------------  -------------     --------------  -----------------
$5.89 - $26.38          5,527,320           6 years          $   16.22       2,884,010          $   16.17
                     ==================  ================  =============     ==============  =================
</TABLE>


         Substantially all 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 were issued at the fair market value of
Seagull's common stock. Accordingly as discussed in Note 2 for the years ended
December 31, 1998, 1997 and 1996, no compensation expense relating to these
options was 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,
                                                                  --------------------------------------------------
                                                                       1998             1997              1996
                                                                  ---------------   --------------    --------------
<S>                                                                 <C>               <C>               <C>       
Net income (loss):         As reported........................      $  (96,696)       $   49,130        $   28,961
                           Pro forma..........................        (102,351)           44,641            26,429

Earnings (loss) per share:
   Basic:                  As reported........................           (1.53)             0.78              0.46
                           Pro forma..........................           (1.62)             0.71              0.42

   Diluted:                As reported........................           (1.53)             0.77              0.46
                           Pro forma..........................           (1.62)             0.70              0.42
</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.

         Defined Benefit Plans - The Company has two defined benefit retirement
plans which cover ENSTAR Alaska's salaried, clerical and operating employees.
Determination of benefits



                                       65
<PAGE>   68
                           SEAGULL ENERGY CORPORATION

for the salaried employees is based upon a combination of years of service and
final monthly compensation. Benefits for operating and clerical employees are
based solely on years of service. The Company'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. 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.

         The following tables (stated in thousands) detail 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.





                                       66
<PAGE>   69
                           SEAGULL ENERGY CORPORATION

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                     -----------------------
                                                                                         1998           1997
                                                                                     --------       --------
<S>                                                                                  <C>            <C>     
Change in benefit obligation:
    Benefit obligation at beginning of year ....................................     $ 13,623       $ 17,994
    Service cost ...............................................................          535            479
    Interest cost ..............................................................          933          1,211
    Actuarial gain .............................................................          453            407
    Benefits paid ..............................................................         (388)          (654)
    Settlements ................................................................           --         (5,814)
                                                                                     --------       --------
    Benefit obligation at end of year ..........................................     $ 15,156       $ 13,623
                                                                                     ========       ========

Benefit obligation at end of year:
    Plans with benefit obligation in excess of assets ..........................     $     --       $  9,069
    Plans with assets in excess of benefit obligation ..........................       15,156          4,554
                                                                                     --------       --------
                                                                                     $ 15,156       $ 13,623
                                                                                     ========       ========

Change in plan assets:
    Fair value of plan assets at beginning of year .............................     $ 13,859       $ 16,453
    Actual return on plan assets ...............................................        3,241          3,355
    Employer contribution ......................................................           --            520
    Benefits paid ..............................................................         (388)          (655)
    Settlements ................................................................           --         (5,814)
                                                                                     --------       --------
    Fair value of plan assets at end of year ...................................       16,712       $ 13,859
                                                                                     ========       ========

Fair value of plan assets at end of year:
    Plans with benefit obligation in excess of assets ..........................     $     --       $  8,548
    Plans with assets in excess of benefit obligation ..........................       16,712          5,311
                                                                                     --------       --------
                                                                                     $ 16,712       $ 13,859
                                                                                     ========       ========

Funded status ..................................................................     $  1,556       $    236
Unamortized prior service cost .................................................           70             80
Unrecognized net (gain) loss ...................................................       (2,731)        (1,045)
Unrecognized net obligation arising out of the initial application of SFAS
   No. 87, amortized over 15 years to 18 years .................................          225            309
                                                                                     --------       --------
Accrued pension cost ...........................................................     $   (880)      $   (420)
                                                                                     ========       ========

Weighted average rate assumptions:
    Discount rate ..............................................................         6.75%             7%
    Rate of increase in future compensation ....................................            3%             3%
    Expected long-term rate of return on plan assets ...........................            8%             8%
</TABLE>


<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                 ---------------------------------
                                                                    1998         1997         1996
                                                                 -------      -------      -------
<S>                                                              <C>          <C>          <C>    
Components of net pension cost:
    Service cost-benefits earned during the period .........     $   535      $   479      $ 1,025
    Interest cost on projected benefit obligation ..........         932          900        1,212
    Expected return on plan assets .........................      (1,104)        (837)      (1,633)
    Net amortization and deferral ..........................          96           96          863
                                                                 -------      -------      -------
Net periodic pension cost ..................................     $   459      $   638      $ 1,467
                                                                 =======      =======      =======
</TABLE>



                                       67
<PAGE>   70
                           SEAGULL ENERGY CORPORATION

         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
maintenance expenses and administrative expenses, were approximately $0.8
million, $1.3 million and $0.6 million in 1998, 1997 and 1996, respectively. In
1997, the Company increased its contributions to the ESOP to reflect an
allocation to participants equal to approximately 10.5% of the eligible
participants' annual compensation. To meet this goal in 1998, the Company
contributed 389,906 shares of treasury stock to the ESOP and recorded additional
expense of $2.5 million.

         Other Benefit Plans -- The Company has various other benefit plans,
primarily in the form of profit sharing and thrift plans. Collectively, Company
contributions to these plans were approximately $4 million in 1998 and $3
million in both 1997 and 1996 and were included in operations and maintenance
expenses and general and administrative expenses.


14.      INCOME TAXES

         The income (loss) before income taxes and the components of income tax
expense (benefit) for each of the years ended December 31, 1998, 1997 and 1996
(stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                      ---------------------------------------
                                                                        1998           1997           1996
                                                                      ---------      ---------      ---------
<S>                                                                   <C>            <C>            <C>      
Income (loss) before income taxes and extraordinary item:
   Domestic .....................................................     $ (41,555)     $  43,530      $  38,200
   Foreign ......................................................       (92,366)        42,670         16,656
                                                                      ---------      ---------      ---------
                                                                      $(133,921)     $  86,200      $  54,856
                                                                      =========      =========      =========

Current income tax expense (benefit):
   Federal ......................................................     $     508      $   3,503      $    (643)
   Foreign ......................................................         9,476         22,899         17,737
   State ........................................................          (775)         1,250            100
                                                                      ---------      ---------      ---------
     Total current ..............................................         9,209         27,652         17,194
Deferred  income tax expense (benefit):
   Federal ......................................................       (41,446)         5,787          7,605
   Foreign ......................................................        (4,091)         3,893            815
   State ........................................................        (1,928)          (262)           281
                                                                      ---------      ---------      ---------
     Total deferred .............................................       (47,465)         9,418          8,701
                                                                      ---------      ---------      ---------
Income tax expense (benefit) ....................................     $ (38,256)     $  37,070      $  25,895
                                                                      =========      =========      =========
</TABLE>



                                       68
<PAGE>   71
                           SEAGULL ENERGY CORPORATION

         In addition to the income tax expense (benefit) detailed above, the
Company had income tax benefits, related to the tax effect of compensation
expense, of none, $3 million and $1 million for each of the years ended December
31, 1998, 1997 and 1996, respectively, which were recorded in additional paid-in
capital.

         Income tax expense (benefit) for each of the years ended December 31,
1998, 1997 and 1996 (stated in thousands) was different than the amount computed
using the federal statutory rate (35%) for the following reasons:

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                           ------------------------------------
                                                                             1998          1997          1996
                                                                           --------      --------      --------
<S>                                                                        <C>           <C>           <C>     
Amount computed using the statutory rate .............................     $(46,872)     $ 30,170      $ 19,200
Increase (reduction) in taxes resulting from:
   Utilization of Internal Revenue Code Section 29 credits ...........           --           (81)         (171)
   State income taxes, net of federal income tax benefits ............       (1,757)          642           248
   Taxation of foreign operations, net of federal income tax
     benefits ........................................................        2,139         6,209        13,613
   Increase (decrease) in deferred tax asset valuation allowance .....        7,380            --        (8,430)
   Other .............................................................          854           130         1,435
                                                                           --------      --------      --------
Income tax expense (benefit) .........................................     $(38,256)     $ 37,070      $ 25,895
                                                                           ========      ========      ========
</TABLE>


         The increase in the valuation allowance for the year ended December 31,
1998 of $7.4 million includes approximately $1.2 million for investment tax
credit carryforwards that will expire in the years 1999 and 2000, while the
remaining increase is related to net operating losses. Both increases are due to
management's belief that, due to events occurring in the year of change, it is
more likely than not that such deferred tax assets will not be realized.

         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 is
related to management's belief that, due to events occurring in the year of
change, it is more likely than not such deferred tax assets, for which a
valuation allowance had previously been established, will be realized.

         The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations for the years ended December
31, 1998, 1997 and 1996 (stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                           -----------------------------------
                                                                             1998          1997         1996
                                                                           --------      --------     --------
<S>                                                                        <C>           <C>          <C>     
Deferred tax expense (benefit) exclusive of the effects of
   other  components listed below ....................................     $(54,845)     $  9,418     $ 17,131
Increase (decrease) in deferred tax asset valuation allowance ........        7,380            --       (8,430)
                                                                           --------      --------     --------
                                                                           $(47,465)     $  9,418     $  8,701
                                                                           ========      ========     ========
</TABLE>



                                       69
<PAGE>   72
                           SEAGULL ENERGY CORPORATION

         The tax effects of temporary differences that gave rise to significant
portions of the deferred tax liabilities and deferred tax assets as of December
31, 1998, 1997 and 1996 (stated in thousands) were as follows:

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                           ------------------------------------
                                                                             1998          1997          1996
                                                                           --------      --------      --------
<S>                                                                        <C>           <C>           <C>     
Deferred tax liabilities:
   Property, plant and equipment, due to differences in
     depreciation, depletion and amortization ........................     $ 45,886      $ 49,815      $ 66,242
   Other .............................................................           --           456           583
                                                                           --------      --------      --------
Deferred tax liabilities .............................................       45,886        50,271        66,825
                                                                           --------      --------      --------

Deferred tax assets:
   Minimum tax credit carryforwards ..................................      (16,035)      (16,352)      (15,972)
   Investment tax credit carryforwards (expiring in 1999 and
     2000) ...........................................................       (1,168)       (1,462)       (1,851)
   Net operating loss carryforwards ..................................      (38,594)           --        (1,727)
   Capital loss carryback ............................................       (1,097)       (2,847)           --
   Deferred compensation/retirement related items ....................       (5,775)       (5,390)       (5,464)
   Contingent considerations .........................................       (1,081)       (4,897)       (5,018)
   Notes receivable ..................................................           --        (5,262)       (6,209)
   Other .............................................................       (5,485)       (4,364)       (3,636)
                                                                           --------      --------      --------
Deferred tax assets ..................................................      (69,235)      (40,574)      (39,877)
Less - valuation allowance ...........................................        7,380            --            --
                                                                           --------      --------      --------
Net deferred tax assets ..............................................      (61,855)      (40,574)      (39,877)
Less - reclassification to current deferred ..........................        3,164         4,429         4,073
                                                                           --------      --------      --------
Non-current deferred tax assets ......................................      (58,691)      (36,145)      (35,804)
                                                                           --------      --------      --------
Net non-current deferred tax liabilities (assets) ....................     $(12,805)     $ 14,126      $ 31,021
                                                                           ========      ========      ========
</TABLE>



                                       70
<PAGE>   73
                           SEAGULL ENERGY CORPORATION

15.      BUSINESS SEGMENTS

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                            ---------------------------------------------
                                                                1998             1997             1996
                                                            -----------      -----------      -----------
<S>                                                         <C>              <C>              <C>        
REVENUES:
   Oil and gas operations .............................     $   332,579      $   453,648      $   419,595
   Alaska transmission and distribution ...............          93,592           95,719           97,616
                                                            -----------      -----------      -----------
                                                            $   426,171      $   549,367      $   517,211
                                                            ===========      ===========      ===========

OPERATING PROFIT (LOSS):
   Oil and gas operations .............................     $   (99,544)     $   106,983      $    97,192
   Alaska transmission and distribution ...............          23,143           22,588           25,781
   Corporate ..........................................         (21,803)         (19,095)         (19,530)
                                                            -----------      -----------      -----------
                                                            $   (98,204)     $   110,476      $   103,443
                                                            ===========      ===========      ===========

DEPRECIATION, DEPLETION AND AMORTIZATION:
   Oil and gas operations .............................     $   156,905      $   160,197      $   145,382
   Alaska transmission and distribution ...............           8,529            8,368            8,190
   Corporate ..........................................           3,935            2,951            2,097
                                                            -----------      -----------      -----------
                                                            $   169,369      $   171,516      $   155,669
                                                            ===========      ===========      ===========

TOTAL ASSETS:
   Oil and gas operations .............................     $ 1,181,720      $ 1,161,108      $ 1,267,481
   Alaska transmission and distribution ...............         191,024          184,422          189,867
   Corporate ..........................................          43,346           65,536           57,715
                                                            -----------      -----------      -----------
                                                            $ 1,416,090      $ 1,411,066      $ 1,515,063
                                                            ===========      ===========      ===========

CAPITAL EXPENDITURES:
   Oil and gas operations:
     Leasehold ........................................     $    40,718      $    23,141      $    12,986
     Exploration ......................................          83,526           95,681           77,774
     Development ......................................         132,331          137,806          108,763
                                                            -----------      -----------      -----------
                                                                256,575          256,628          199,523
     Other oil and gas operations .....................             788              885              228
                                                            -----------      -----------      -----------
   Total oil and gas operations .......................         257,363          257,513          199,751
   Alaska transmission and distribution ...............           9,626            9,607            9,287
   Corporate ..........................................           8,308            8,488            4,424
                                                            -----------      -----------      -----------
                                                            $   275,297      $   275,608      $   213,462
                                                            ===========      ===========      ===========

ACQUISITIONS, NET OF CASH ACQUIRED:
   Acquisitions of oil and gas properties .............     $   126,895      $    17,665      $    90,867
   Acquisitions of other assets and liabilities .......           2,381               --           13,553
                                                            -----------      -----------      -----------
                                                            $   129,276      $    17,665      $   104,420
                                                            ===========      ===========      ===========
</TABLE>



                                       71
<PAGE>   74
                           SEAGULL ENERGY CORPORATION

16.      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 $3 million and $4 million in each of the years 1999-2003, and total $6
million for all subsequent years. Total rental expense under operating leases
was approximately $4 million in 1998 and $3 million in 1997 and 1996.

         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. The plaintiffs
sought a state-wide class certification in this case which was denied by the
court in April 1998. In October 1998, the plaintiffs filed a motion to again
seek class certification which Seagull timely objected to. In this case, the
plaintiffs seek additional royalties based upon the alleged deduction by Seagull
of post-production costs, such as those related to gathering, 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.

         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.




                                       72
<PAGE>   75
                           SEAGULL ENERGY CORPORATION

17.      SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)

               CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING
                        ACTIVITIES (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                               United                         Cote                                                
                                               States          Egypt        d'Ivoire      Tatarstan         Other         Total
                                             ----------     ----------     ----------    -----------     ----------     ----------
<S>                                          <C>            <C>            <C>            <C>            <C>            <C>       
AT DECEMBER 31, 1998:
   PROVED ..............................     $1,556,757     $  240,897     $   48,358     $   25,745     $    3,962     $1,875,719
   UNPROVED ............................         84,890         16,599             --             --             --        101,489
                                             ----------     ----------     ----------     ----------     ----------     ----------
                                              1,641,647        257,496         48,358         25,745          3,962      1,977,208

   ACCUMULATED DEPRECIATION,
     DEPLETION AND AMORTIZATION ........        790,208        128,249         22,997         12,338          3,173        956,965
                                             ----------     ----------     ----------     ----------     ----------     ----------
                                             $  851,439     $  129,247     $   25,361     $   13,407     $      789     $1,020,243
                                             ==========     ==========     ==========     ==========     ==========     ==========

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
                                             ==========     ==========     ==========     ==========     ==========     ==========
</TABLE>


               COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION,
          EXPLORATION AND DEVELOPMENT ACTIVITIES (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>

                                              United                    Cote                                                
                                              States       Egypt       d'Ivoire    Tatarstan      Other         Total
                                             --------     --------     --------    ---------     --------     --------
<S>                                          <C>          <C>          <C>          <C>          <C>          <C>     
YEAR  ENDED DECEMBER 31, 1998:
ACQUISITION COSTS:
   PROVED ..............................     $126,739     $     --     $     --     $     --     $     --     $126,739
   UNPROVED ............................       29,986       10,880            8           --           --       40,874
EXPLORATION COSTS ......................       55,588       25,355        2,573           --           10       83,526
DEVELOPMENT COSTS ......................       84,726       42,966          995        3,644           --      132,331
                                             --------     --------     --------     --------     --------     --------
                                             $297,039     $ 79,201     $  3,576     $  3,644     $     10     $383,470
                                             ========     ========     ========     ========     ========     ========

Year ended December 31, 1997:
Acquisition costs:
   Proved ..............................     $  7,382     $  4,542     $     --     $     --     $     54     $ 11,978
   Unproved ............................       21,886        6,285           53           --          604       28,828
Exploration costs ......................       51,058       38,086        3,357          181        2,999       95,681
Development costs ......................       68,059       43,900       10,801        5,297        9,749      137,806
                                             --------     --------     --------     --------     --------     --------
                                             $148,385     $ 92,813     $ 14,211     $  5,478     $ 13,406     $274,293
                                             ========     ========     ========     ========     ========     ========

Year ended December 31, 1996:
Acquisition costs:
    Proved .............................     $ 29,102     $ 56,051     $     --     $     --     $  1,000     $ 86,153
    Unproved ...........................       10,371        5,584          782           --          963       17,700
Exploration costs ......................       64,066        6,934        2,823           --        3,951       77,774
Development costs ......................       65,309       25,176        3,255        4,031       10,992      108,763
                                             --------     --------     --------     --------     --------     --------
                                             $168,848     $ 93,745     $  6,860     $  4,031     $ 16,906     $290,390
                                             ========     ========     ========     ========     ========     ========
</TABLE>



                                       73
<PAGE>   76
                           SEAGULL ENERGY CORPORATION

                 RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING
                      ACTIVITIES (AMOUNTS IN THOUSANDS)(1)

<TABLE>
<CAPTION>
                                               United                        Cote                                                
                                               States         Egypt        d'Ivoire     Tatarstan        Other(2)       Total
                                             ---------     ---------      ---------     ----------      ---------     ---------
<S>                                          <C>           <C>            <C>            <C>            <C>           <C>      
 YEAR ENDED DECEMBER 31, 1998:
   REVENUES ............................     $ 233,989     $  48,155      $   8,709      $  11,475      $   7,593     $ 309,921
   OPERATING EXPENSE(3) ................        76,403        17,461          2,728         11,995          1,839       110,426
   EXPLORATION CHARGES .................        43,309        11,139          1,813            339          3,187        59,787
   DD&A(4) .............................       112,339        31,215          7,895          3,738            136       155,323
   IMPAIRMENT OF OIL AND
    GAS ASSETS .........................            --        73,629             --             --             --        73,629
   INCOME TAX EXPENSE
    (BENEFIT)(5) .......................           678       (21,708)        (1,304)        (2,133)         3,408       (21,059)
                                             ---------     ---------      ---------      ---------      ---------     ---------
   RESULTS OF ACTIVITIES ...............     $   1,260     $ (63,581)     $  (2,423)     $  (2,464)     $    (977)    $ (68,185)
                                             =========     =========      =========      =========      =========     =========

 Year Ended December 31, 1997:
   Revenues ............................     $ 290,337     $  61,772      $  15,995      $  21,558      $  39,657     $ 429,319
   Operating expense(3) ................        75,692        11,701          3,864         13,994         10,462       115,713
   Exploration charges .................        31,259         2,553          3,218            (48)         5,103        42,085
   DD&A(4) .............................       116,257        21,615          9,641          3,093          7,999       158,605
   Income tax expense(5) ...............        23,495        11,763          2,474            811         11,745        50,288
                                             ---------     ---------      ---------      ---------      ---------     ---------
   Results of activities ...............     $  43,634     $  14,140      $  (3,202)     $   3,708      $   4,348     $  62,628
                                             =========     =========      =========      =========      =========     =========

 Year Ended December 31, 1996:
   Revenues ............................     $ 282,508     $  28,126      $  12,798      $  15,626      $  49,956     $ 389,014
   Operating expense(3) ................        68,409         5,806          2,673         11,364         13,906       102,158
   Exploration charges .................        36,098         2,725          5,401           (133)         6,681        50,772
   DD&A(4) .............................       110,989         7,416          4,151          2,830         18,123       143,509
   Income tax expense(5) ...............        23,047         5,579          2,158            541         10,274        41,599
                                             ---------     ---------      ---------      ---------      ---------     ---------
   Results of activities ...............     $  43,965     $   6,600      $  (1,585)     $   1,024      $     972     $  50,976
                                             =========     =========      =========      =========      =========     =========
</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. 131, Disclosures about Segments of an Enterprise and
     Related Information, but are not part of Disclosures about Oil and Gas
     Producing Activities as defined by SFAS No. 69.

(2)  Includes the Company's Canadian oil and gas operations, which 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 and allowances.



                                       74
<PAGE>   77
                           SEAGULL ENERGY CORPORATION

                          RESERVE QUANTITY INFORMATION
<TABLE>
<CAPTION>

                                                United                     Cote                                                
                                                States      Egypt        d'Ivoire     Tatarstan       Other(2)       Total
                                             ---------     --------      --------     ---------      ---------     --------
<S>                                            <C>           <C>              <C>        <C>              <C>       <C>     
PROVED RESERVES (MBOE):
 JANUARY 1, 1998 .......................      148,549        35,301         5,351        16,455        11,294       216,950
   REVISIONS OF PREVIOUS ESTIMATES .....       (5,577)       (5,106)          281        (1,929)          873       (11,458)
   EXTENSIONS AND DISCOVERIES ..........       15,356         1,830           165            --            --        17,351
   PURCHASES OF RESERVES IN PLACE ......       17,600            --            --            --            --        17,600
   SALES OF RESERVES IN PLACE ..........      (10,006)           --            --            --            --       (10,006)
   PRODUCTION ..........................      (19,171)       (4,053)         (878)       (1,496)         (549)      (26,147)
                                             --------      --------      --------      --------      --------      --------
DECEMBER 31, 1998 (1) ..................      146,751        27,972         4,919        13,030        11,618       204,290
                                             ========      ========      ========      ========      ========      ========

 January 1, 1997 .......................      155,847        25,965         5,132        16,338        54,675       257,957
   Revisions of previous estimates .....       (1,744)        3,752           978        (3,155)        8,914         8,745
   Extensions and discoveries ..........       14,150         7,796           219         4,784        11,105        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)       (3,383)         (978)       (1,512)       (3,211)      (29,279)
                                             --------      --------      --------      --------      --------      --------
December 31, 1997 (1)...................      148,549        35,301         5,351        16,455        11,294       216,950
                                             ========      ========      ========      ========      ========      ========

 January 1, 1996 .......................      153,794         8,151         6,521        15,570        59,116       243,152
   Revisions of previous estimates .....        4,021           386          (900)          651        (3,231)          927
   Extensions and discoveries ..........       12,769         1,798           263         1,234         5,261        21,325
   Purchases of reserves in place ......        6,217        16,935            --            --           288        23,440
   Sales of reserves in place ..........          (20)           --            --            --        (2,075)       (2,095)
   Production ..........................      (20,934)       (1,305)         (752)       (1,117)       (4,684)      (28,792)
                                             --------      --------      --------      --------      --------      --------
December 31, 1996 (1)...................      155,847        25,965         5,132        16,338        54,675       257,957
                                             ========      ========      ========      ========      ========      ========

PROVED DEVELOPED RESERVES (MBOE):
   DECEMBER 31, 1998 ...................      123,907        16,534         3,572        10,170         8,748       162,931
   December 31, 1997 ...................      126,439        20,706         4,004        10,919        11,294       173,362
   December 31, 1996 ...................      127,871        14,502         3,092        10,806        46,678       202,949
</TABLE>

(1)  At December 31, 1998, 1997 and 1996, approximately 11,558 MBOE, 12,963 MBOE
     and 14,072 MBOE, respectively, were dedicated to the monetary production
     payment.

(2)  Other primarily includes Seagull's interests in Indonesia. For 1997 and
     1996, other also includes the Canadian oil and gas operations, which 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.



                                       75
<PAGE>   78
                           SEAGULL ENERGY CORPORATION

                          RESERVE QUANTITY INFORMATION

<TABLE>
<CAPTION>
                                                    United                    Cote                                             
                                                    States        Egypt     d'Ivoire     Tatarstan        Other(2)       Total
                                                  ----------   ----------   ----------   ----------      ----------   ----------
<S>                                                   <C>          <C>             <C>       <C>                <C>      <C>     
PROVED OIL RESERVES (MBBL):
JANUARY 1, 1998 .............................         18,541       35,003        1,212       16,455           1,074       72,285
   REVISIONS OF PREVIOUS ESTIMATES ..........         (3,401)      (5,248)         114       (1,929)            279      (10,185)
   EXTENSION AND DISCOVERIES ................            886        1,828          131           --              --        2,845
   PURCHASES OF RESERVES IN PLACE ...........          1,734           --           --           --              --        1,734
   SALES OF RESERVES IN PLACE ...............         (1,832)          --           --           --              --       (1,832)
   PRODUCTION ...............................         (1,834)      (4,002)        (360)      (1,496)            (72)      (7,764)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
DECEMBER 31, 1998 (1) .......................         14,094       27,581        1,097       13,030           1,281       57,083
                                                  ==========   ==========   ==========   ==========      ==========   ==========

January 1, 1997 .............................         19,885       25,724        1,525       16,338           4,850       68,322
   Revisions of previous estimates ..........           (487)       3,708          263       (3,155)          2,142        2,471
   Extension and discoveries ................            754        7,783           27        4,784             969       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)      (3,383)        (603)      (1,512)           (299)      (7,560)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
December 31, 1997 (1) .......................         18,541       35,003        1,212       16,455           1,074       72,285
                                                  ==========   ==========   ==========   ==========      ==========   ==========

January 1, 1996 .............................         20,163        7,918        3,010       15,570           4,820       51,481
   Revisions of previous estimates ..........           (800)         384       (1,038)         651             (24)        (827)
   Extension and discoveries ................          1,656        1,792           64        1,234             916        5,662
   Purchases of reserves in place ...........            429       16,935           --           --              21       17,385
   Sales of reserves in place ...............             (2)          --           --           --            (471)        (473)
   Production ...............................         (1,561)      (1,305)        (511)      (1,117)           (412)      (4,906)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
December 31, 1996 (1) .......................         19,885       25,724        1,525       16,338           4,850       68,322
                                                  ==========   ==========   ==========   ==========      ==========   ==========
PROVED DEVELOPED OIL RESERVES (MBBL):
   DECEMBER 31, 1998 ........................         10,810       16,252          761       10,170           1,052       39,045
   December 31, 1997 ........................         14,406       20,452          866       10,919           1,074       47,717
   December 31, 1996 ........................         12,855       14,336        1,035       10,806           3,849       42,881

PROVED GAS RESERVES (MMCF):
JANUARY 1, 1998 .............................        780,046        1,786       24,835           --          61,324      867,991
   REVISIONS OF PREVIOUS ESTIMATES ..........        (13,052)         854          997           --           3,563       (7,638)
   EXTENSION AND DISCOVERIES ................         86,821            6          206           --              --       87,033
   PURCHASES OF RESERVES IN PLACE ...........         95,195           --           --           --              --       95,195
   SALES OF RESERVES IN PLACE ...............        (49,044)          --           --           --              --      (49,044)
   PRODUCTION ...............................       (104,022)        (301)      (3,106)          --          (2,867)    (110,296)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
DECEMBER 31, 1998 (1) .......................        795,944        2,345       22,932           --          62,020      883,241
                                                  ==========   ==========   ==========   ==========      ==========   ==========

January 1, 1997 .............................        815,781        1,447       21,644           --         298,961    1,137,833
   Revisions of previous estimates ..........         (7,548)         256        4,287           --          40,630       37,625
   Extension and discoveries ................         80,372           83        1,149           --          60,817      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)          --       (2,245)          --         (17,475)    (130,315)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
December 31, 1997 (1) .......................        780,046        1,786       24,835           --          61,324      867,991
                                                  ==========   ==========   ==========   ==========      ==========   ==========

January 1, 1996 .............................        801,797        1,399       21,066           --         325,784    1,150,046
   Revisions of previous estimates ..........         28,925           13          828           --         (19,240)      10,526
   Extension and discoveries ................         66,678           35        1,195           --          26,071       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)          --       (1,445)          --         (25,632)    (143,315)
                                                  ----------   ----------   ----------   ----------      ----------   ----------
December 31, 1996 (1) .......................        815,781        1,447       21,644           --         298,961    1,137,833
                                                  ==========   ==========   ==========   ==========      ==========   ==========
PROVED DEVELOPED GAS RESERVES (MMCF):
   DECEMBER 31, 1998 ........................        678,579        1,693       16,868           --          46,175      743,315
   December 31, 1997 ........................        672,195        1,522       18,826           --          61,324      753,867
   December 31, 1996 ........................        690,095          993       12,344           --         256,976      960,408
</TABLE>

(1)  Year-end reserves include 1,888, 2,079 and 2,248 Mbbl of oil and 58,019,
     65,306 and 70,914 MMcf of gas dedicated to the monetary production payment
     for 1998, 1997 and 1996, respectively. 

(2)  Other primarily includes Seagull's interests in Indonesia. For 1997 and
     1996, other also includes the Canadian oil and gas operations, which were
     sold in October 1997.


                                       76
<PAGE>   79
                           SEAGULL ENERGY CORPORATION

         The Company's standardized measure of discounted future net cash flows
as of December 31, 1998 and 1997 and changes therein for each of the years 1998,
1997 and 1996 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 1998 calculations were made using prices
of $9.06 per Bbl and $2.03 per Mcf for oil and gas, respectively. The Company's
average realized prices for the year ended December 31, 1998 were $10.93 per Bbl
and $2.04 per Mcf for oil and gas, respectively. Seagull's average prices for
the month ended January 31, 1999 were $9.63 per Bbl and $1.79 per Mcf for oil
and gas, respectively. Because the disclosure requirements are standardized,
significant changes can occur in these estimates based upon oil and gas prices
in effect at year-end. The following estimates should not be viewed as an
estimate of fair market value. Income taxes are computed by applying the
statutory income tax rate in the jurisdiction to the net cash inflows relating
to proved oil and gas reserves less the tax bases of the properties involved and
giving effect to appropriate net operating loss carryforwards, tax credits and
allowances relating to such properties.


 STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                               United                        Cote                                                
                                               States         Egypt        d'Ivoire      Tatarstan         Other          Total
                                            -----------    -----------    -----------   ------------    -----------    -----------
<S>                                         <C>            <C>            <C>            <C>            <C>            <C>        
DECEMBER 31, 1998:
   FUTURE CASH INFLOWS ..................   $ 1,752,651    $   282,058    $    45,255    $    90,691    $   118,953    $ 2,289,608
   FUTURE DEVELOPMENT COSTS .............      (149,431)       (45,733)        (6,475)        (8,491)            --       (210,130)
   FUTURE PRODUCTION COSTS ..............      (524,808)      (121,427)       (16,608)       (54,341)       (43,007)      (760,191)
                                            -----------    -----------    -----------    -----------    -----------    -----------
   FUTURE NET CASH FLOWS BEFORE
     INCOME TAXES .......................     1,078,412        114,898         22,172         27,859         75,946      1,319,287
   10% ANNUAL DISCOUNT ..................      (452,171)       (31,647)        (5,505)       (13,119)       (40,665)      (543,107)
                                            -----------    -----------    -----------    -----------    -----------    -----------
   DISCOUNTED FUTURE NET CASH
     FLOWS BEFORE INCOME TAXES ..........       626,241         83,251         16,667         14,740         35,281        776,180
   DISCOUNTED INCOME TAXES ..............       (51,235)        (6,650)          (131)        (2,346)       (21,704)       (82,066)
                                            -----------    -----------    -----------    -----------    -----------    -----------
   STANDARDIZED MEASURE OF
     DISCOUNTED FUTURE NET CASH
     FLOWS ..............................   $   575,006    $    76,601    $    16,536    $    12,394    $    13,577    $   694,114
                                            ===========    ===========    ===========    ===========    ===========    ===========

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
     discounted future net cash flows ...   $   708,746    $   132,640    $    23,000    $    35,043    $    33,014    $   932,443
                                            ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>



                                       77
<PAGE>   80
                           SEAGULL ENERGY CORPORATION

           PRINCIPAL SOURCES OF CHANGE IN THE STANDARDIZED MEASURE OF
             DISCOUNTED FUTURE NET CASH FLOWS (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                         ---------------------------------------------
                                                                            1998             1997              1996
                                                                         -----------      -----------      -----------
<S>                                                                      <C>              <C>              <C>        
Beginning of Year ..................................................     $   932,443      $ 1,544,522      $   861,351
   Revisions of previous quantity estimates less related costs .....         (43,458)          58,132            3,825
   Extensions and discoveries less related costs ...................          80,455          196,358          209,860
   Purchases of reserves in place ..................................          65,392           12,082          219,510
   Sales of reserves in place ......................................         (52,745)        (212,125)          (6,593)
   Net changes in future prices and production costs ...............        (453,468)        (811,501)         785,928
   Development costs incurred during the period ....................         132,331          137,806          108,763
   Sales of oil and gas produced, net of production costs ..........        (199,495)        (313,606)        (299,702)
   Accretion of discount ...........................................         121,936          213,787          110,396
   Net changes in income taxes .....................................         204,854          306,428         (350,738)
   Changes in production, timing and other .........................         (94,131)        (199,440)         (98,078)
                                                                         -----------      -----------      -----------
                                                                            (238,329)        (612,079)         683,171
                                                                         -----------      -----------      -----------
End of Year ........................................................     $   694,114      $   932,443      $ 1,544,522
                                                                         ===========      ===========      ===========
</TABLE>


18.      SUBSEQUENT EVENT

         As discussed in Note 1, in November 1998, Seagull and OEI executed an
Agreement and Plan of Merger. Seagull and OEI will each hold a shareholder's
meeting where the respective shareholders will vote to approve or disapprove the
merger of Seagull and OEI.

         The merger will be accounted for under the "purchase" method of
accounting. Because OEI stockholders will own a majority of the combined company
common stock, the accounting treatment of the merger will reflect OEI acquiring
Seagull in a purchase business combination. Under this method of accounting, the
combined company's historical results for periods prior to the merger will be
the same as OEI's historical results.

         The following table presents the unaudited pro forma results (stated in
thousands except per share data) of Seagull and Ocean Energy as though the
merger had occurred on January 1, 1997 and to reflect New Ocean's operations
utilizing the full cost method of accounting for oil and gas activities:


                         UNAUDITED PRO FORMA INFORMATION

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                    --------------------------------
                                                                        1998               1997
                                                                    -------------      -------------
<S>                                                                 <C>                <C>          
Revenues ........................................................   $     958,101      $   1,099,797
Net income (loss) before extraordinary item .....................        (380,306)           145,729
Basic earnings (loss) per share before extraordinary item .......           (2.32)              0.93
Diluted earnings (loss) per share before extraordinary item .....           (2.32)              0.91
</TABLE>


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


                                       78
<PAGE>   81
                           SEAGULL ENERGY CORPORATION


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Incorporated herein by reference to "Election of Directors" included in
the Proxy Statement for the Company's Annual Meeting of Shareholders to be held
in May 1999 (the "Proxy Statement"). See also "Executive Officers of the
Company" included in Part I of this Annual Report on Form 10-K, which is
incorporated by reference herein.

ITEM 11. EXECUTIVE COMPENSATION

         Incorporated herein by reference to "Executive Compensation--Summary
Compensation Table," "--Compensation Arrangements," "--Option Exercises and
Fiscal Year-End Values," "--Option Grants," "--Executive Supplemental Retirement
Plan," "--ENSTAR Natural Gas Company Supplemental Executive Retirement Plan" and
"--ENSTAR Natural Gas Company Retirement Plan"; and "Election of
Directors--Compensation of Directors" included in the Proxy Statement.
Notwithstanding any provision in this Annual Report on Form 10-K to the
contrary, under no circumstances are the "Compensation Committee Report" or the
information under the heading "Shareholder Return Performance Presentation"
incorporated herein for any purpose.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Incorporated herein by reference to "Principal Shareholders" and
"Election of Directors--Security Ownership of Directors and Management" included
in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Incorporated herein by reference to "Election of Directors--Certain
Transactions" included in the Proxy Statement.


                                       79
<PAGE>   82
                           SEAGULL ENERGY CORPORATION

                                     PART IV

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

(a)      2.       SCHEDULES:

         All schedules have been omitted because the required information is
insignificant or not applicable.

         3.       EXHIBITS:

        3.1       Articles of Incorporation of the Company, as amended, and that
                  certain Statement of Resolution Establishing Series of Shares
                  of Series B Junior Participating Preferred Stock of Seagull
                  Energy Corporation filed March 21, 1989 with the Secretary of
                  State of the State of Texas (incorporated by reference to
                  Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1998).

        3.2       Bylaws of the Company, as amended through March 7, 1997
                  (incorporated by reference to Exhibit 4.9 to Form S-3 filed
                  with the Securities and Exchange Commission on September 18,
                  1997).

        4.1       $500,000,000 Revolving Credit and Competitive Bid Facility
                  among Seagull Energy Corporation, The Chase Manhattan Bank,
                  Morgan Guaranty Trust Company of New York, NationsBank of
                  Texas, N.A., and The Other Banks Signatory Thereto, dated
                  December 27, 1997 (incorporated by reference to Exhibit 4.1 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1997).

        4.2       Senior Indenture dated as of July 15, 1993 by and between the
                  Company and The Bank of New York, as Trustee (incorporated by
                  reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

        4.3       Senior Subordinated Indenture dated as of July 15, 1993 by and
                  between the Company and The Bank of New York, as Trustee
                  (incorporated by reference to Exhibit 4.2 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

        4.4       Senior Indenture among the Company and The Bank of New York,
                  as Trustee, and Specimen of 7 1/2% Senior Notes due September
                  15, 2027 (incorporated by reference to Exhibit 4.4 to Annual
                  Report on Form 10-K for the year ended December 31, 1997).

        4.5       Terms Agreement and the resolutions of adoption by the
                  Chairman of the Board of Directors related to Exhibit 4.4
                  (incorporated by reference to Exhibit 2.3 to Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  October 17, 1997).

        4.6       Note Agreement dated May 14, 1992 by and among Alaska Pipeline
                  Company and each of the purchasers thereto (including forms of
                  notes and other exhibits thereto) and Inducement Agreement of
                  even date therewith by and among Seagull and Aid Association
                  for Lutherans, The Equitable Life Assurance Society of the
                  United States, Equitable Variable Life Insurance Company,
                  Provident Life & Accident Insurance Company and Teachers
                  Insurance & Annuity Association of America (including exhibits
                  thereto) (incorporated by reference to Exhibit 4.1 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1997).

                                       80
<PAGE>   83
                           SEAGULL ENERGY CORPORATION

        4.7       Trust Agreement dated as of September 1, 1995 for the Seagull
                  Series 1995 Trust (the Trust Agreement is incorporated by
                  reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1995; the Guaranty by Seagull
                  Energy Corporation in favor of the Seagull Series 1995 Trust
                  is incorporated by reference to Exhibit 10.2 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1995).

        4.8       Amended and Restated Rights Agreement dated March 17, 1989, as
                  amended effective June 13, 1992, and amended and restated as
                  of December 12, 1997, between the Company and BankBoston, N.A.
                  (as successor to NCNB Texas National Bank), including Form of
                  Statement of Resolution Establishing the Series B Junior
                  Participating Preferred Stock, the Form of Right Certificate
                  and Form of Summary of Rights to Purchase Preferred Shares
                  (the Agreement is incorporated by reference to Exhibit 2 to
                  Current Report on Form 8-K dated December 15, 1997; Amendment
                  No. 1 dated November 24, 1998 is incorporated by reference to
                  Exhibit 4.1 to Current Report on Form 8-K filed on December 1,
                  1998).

     # 10.1       Seagull Energy Corporation 1998 Executive Incentive Plan
                  (incorporated by reference to Exhibit 10.2 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

     # 10.2       Seagull Energy Corporation 1981 Stock Option Plan (Restated),
                  including forms of agreements, as amended (incorporated by
                  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

     # 10.3       Seagull Energy Corporation 1983 Stock Option Plan (Restated),
                  including forms of agreements, as amended (plan is
                  incorporated by reference to Exhibit 10.4 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

     # 10.4       Seagull Energy Corporation 1986 Stock Option Plan (Restated),
                  including forms of agreements, as amended (incorporated by
                  reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

     # 10.5       Seagull Energy Corporation 1990 Stock Option Plan, including
                  forms of agreements, as amended (incorporated by reference to
                  Exhibit 10.22 to Annual Report on Form 10-K for the year ended
                  December 31, 1995; Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.7 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.6       Global Natural Resources Inc. 1989 Key Employees Stock Option
                  Plan (the Plan is incorporated by reference to Exhibit 4.1 to
                  Registration Statement No. 33-31537 of Global Natural
                  Resources Inc.; the Form of Stock Option Agreement is
                  incorporated by reference to Exhibit 4.2 to Registration
                  Statement No. 33-31537 of Global Natural Resources Inc.; Form
                  of Amendment to Stock Option Agreement(s) is incorporated by
                  reference to Exhibit 10.8 to Annual Report on Form 10-K for
                  the year ended December 31, 1996).

     # 10.7       Global Natural Resources Inc. 1992 Stock Option Plan (the Plan
                  is incorporated by reference to Exhibit 10.47 to the Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 1992 of
                  Global Natural Resources Inc. (Registration No. 1-8674); the
                  Form of Stock Option Agreement is incorporated by reference to
                  Exhibit 10.48 to the Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1992 of Global Natural Resources Inc.
                  (Registration No. 1-8674); Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.9 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.8       Seagull Energy Corporation 1993 Nonemployee Directors' Stock
                  Option Plan, including forms of agreements, as amended
                  (incorporated by reference to Exhibit 10.1 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1997).

                                       81
<PAGE>   84
                           SEAGULL ENERGY CORPORATION

     # 10.9       Seagull Energy Corporation 1993 Stock Option Plan, as amended
                  (incorporated by reference to Exhibit 10.3 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1997).

     # 10.10      1995 Omnibus Stock Plan (the Plan is incorporated by reference
                  to Exhibit 10.3 to Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1995; Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.12 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.11      1998 Omnibus Stock Plan (incorporated by reference to Exhibit
                  10.1 to Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1998).

     # 10.12      Seagull Energy Corporation Management Stability Plan (the Plan
                  is incorporated by reference to Exhibit 10.35 to Annual Report
                  on Form 10-K for the year ended December 31, 1994; the First
                  Amendment is incorporated by reference to Exhibit 10.13 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996; the Second and Third Amendments are incorporated by
                  reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998; the Fourth Amendment is
                  filed herewith).

     # 10.13      Outside Directors Deferred Fee Plan of the Company, as amended
                  and restated (incorporated by reference to Exhibit 10.2 to
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1996; the Third Amendment is incorporated by reference to
                  Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 1998).

     # 10.14      Employment Agreement by and between the Company and James T.
                  Hackett (incorporated by reference to Exhibit 10.6 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1998).

     # 10.15      Executive Supplemental Retirement Plan Membership Agreement by
                  and between the Company and James T. Hackett (incorporated by
                  reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998).

     # 10.16      Severance Agreement between the Company and James T. Hackett
                  (incorporated by reference to Exhibit 10.8 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998).

     # 10.17      Employment and Consulting Agreement by and between the Company
                  and Barry J. Galt (incorporated by reference to Exhibit 10.1
                  to Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1998).

     # 10.18      Executive Supplemental Retirement Plan Membership Agreement
                  between the Company and Barry J. Galt dated as of February 3,
                  1986, as amended (incorporated by reference to Exhibit 10.2 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1996).

     # 10.19      Restricted Stock Agreement made and entered into as of March
                  17, 1995 between Seagull Energy Corporation and Barry J. Galt
                  (incorporated by reference to Exhibit 10.32 to Annual Report
                  on Form 10-K for the year ended December 31, 1994).

     # 10.20      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Barry J. Galt
                  (incorporated by reference to Exhibit 10.2 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998).

     # 10.21      Seagull Energy Corporation Executive Supplemental Retirement
                  Plan, as amended (incorporated by reference to Exhibit 10.1 to
                  Quarterly Report on Form 10-Q for the quarter ended 


                                       82
<PAGE>   85
                           SEAGULL ENERGY CORPORATION

                  September 30, 1996; the Third Amendment is incorporated by
                  reference to Exhibit 10.11 to Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 1998).

     # 10.22      Seagull Energy Corporation Supplemental Benefit Plan, as
                  amended, including the First Amendment thereto (incorporated
                  by reference to Exhibit 10.11 to Annual Report on Form 10-K
                  for the year ended December 31, 1995; the Third Amendment is
                  incorporated by reference to Exhibit 10.12 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998; the
                  Fourth Amendment is incorporated herein).

     # 10.23      Form of Severance Agreement, including Form of Amendment and
                  Second Amendment to Severance Agreement, between the Company
                  and Richard F. Barnes and William L. Transier (incorporated by
                  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998).

     # 10.24      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Gerald R.
                  Colley (incorporated by reference to Exhibit 10.9 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998).

     # 10.25      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Carl B. King
                  (incorporated by reference to Exhibit 10.10 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998).

     # 10.26      Consulting Agreement between Robert Vagt and Seagull Energy
                  Corporation (incorporated by reference to Exhibit 10.9 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1997; First Amendment is filed herewith).

       10.27      Royalty Incentive Plan, as amended (incorporated by reference
                  to Exhibit 1.4 to the Annual Report on Form 20-F for the year
                  ended December 31, 1981 of the U.K. Company).

       10.28      Share Sale Agreement, dated as of September 11, 1997, by and
                  between Seagull Energy Canada Holding Company, Seagull Energy
                  Corporation and Rio Alto Exploration Ltd. (incorporated by
                  reference to Exhibit 2.1 to Current Report on Form 8-K dated
                  September 11, 1997).

       10.29      Purchase and Sale Agreement, dated as of March 30, 1998, by
                  and between Seagull Energy Corporation and the shareholders of
                  BRG Petroleum, Inc. (incorporated by reference to Exhibit 10.6
                  to Quarterly Report on Form 10-Q for the quarter ended March
                  31, 1998).

       10.30      Agreement and Plan of Merger, dated as of November 24, 1998
                  among Seagull and OEI, including amendments (Agreement and
                  Plan of Merger is incorporated by reference to Exhibit 2.1 to
                  Current Report on Form 8-K filed on December 1, 1998;
                  Amendment No. 1 is incorporated by reference to Exhibit 2.2 to
                  the Company's Registration Statement on Form S-4 (Reg. No.
                  333-68679) filed with the SEC on December 10, 1998).

       10.31      Promissory Note between John D. Schiller, Jr. and Seagull.

       10.32      Promissory Note between William L. Transier and Seagull.

       10.33      Promissory Note between Barry J. Galt and Seagull.

       21         Subsidiaries of Seagull Energy Corporation.

       23.1       Consent of KPMG LLP.

       23.2       Consent of Ryder Scott Company, independent petroleum
                  engineers.

                                       83
<PAGE>   86
                           SEAGULL ENERGY CORPORATION

       23.3       Consent of DeGolyer and MacNaughton, independent petroleum
                  engineers.

       23.4       Consent of Netherland, Sewell and Associates, Inc.,
                  independent petroleum engineers.

       27.1       Financial Data Schedule.


----------

     #  Identifies management contracts and compensatory plans or arrangements.


(b) REPORTS ON FORM 8-K

         The Company filed a Current Report on Form 8-K, dated December 1, 1998,
with respect to its Agreement and Plan of Merger with OEI.


                                       84
<PAGE>   87
                           SEAGULL ENERGY CORPORATION

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SEAGULL ENERGY CORPORATION

Date: February 16, 1999                By: /s/ James T. Hackett
                                           -------------------------------------
                                           James T. Hackett, Chairman of the 
                                           Board and Chief Executive Officer

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

<TABLE>
<S>                                                      <C>
By:   /s/ James T. Hackett                               By:   /s/ Milton Carroll
      -----------------------------------------------          ------------------------------------------
      James T. Hackett, Chairman of the Board,                 Milton Carroll, Director
      President, Chief Executive Officer and Director    
      (Principal Executive Officer)                      Date: February 16, 1999

Date: February 16, 1999                                  
                                                         By:   /s/ Thomas H. Cruikshank
                                                               ------------------------------------------
By:   /s/ William L. Transier                                  Thomas H. Cruikshank, Director
      -----------------------------------------------
      William L. Transier, Executive Vice President      Date: February 16, 1999
      and Chief Financial Officer
      (Principal Financial Officer)
                                                         By:   /s/ Peter J. Fluor
Date: February 16, 1999                                        ------------------------------------------
                                                         Peter J. Fluor, Director

By:   /s/ Barry J. Galt                                  Date: February 16, 1999
      -----------------------------------------------
      Barry J. Galt, Vice Chairman of the Board          
      And Director                                       By:   /s/ Dee S. Osborne
                                                               ------------------------------------------
Date: February 16, 1999                                        Dee S. Osborne, Director

                                                         Date: February 16, 1999
By:   /s/ Gordon L. McConnell
      -----------------------------------------------    
      Gordon L. McConnell, Vice President and            By:   /s/ Sidney R. Petersen
      Controller (Principal Accounting Officer)                ------------------------------------------
                                                               Sidney R. Petersen, Director
Date: February 16, 1999
                                                         Date: February 16, 1999

By:   /s/ J. Evans Attwell
      -----------------------------------------------    By:   /s/ Sam F. Segnar
      J. Evans Attwell, Director                               ------------------------------------------
                                                               Sam F. Segnar, Director
Date: February 16, 1999
                                                         Date: February 16, 1999

By:   /s/ Richard J. Burgess
      -----------------------------------------------    By:   /s/ Robert F. Vagt
      Richard J. Burgess, Director                             ------------------------------------------
                                                               Robert F. Vagt, Director
Date: February 16, 1999
                                                         Date: February 16, 1999


                                                         By:   /s/ R. A. Walker
                                                               ------------------------------------------
                                                               R. A. Walker, Director

                                                         Date: February 16, 1999
</TABLE>


                                       85
<PAGE>   88

                               INDEX TO EXHIBITS


      Exhibit
        No.                             Description
      -------                           -----------   

        3.1       Articles of Incorporation of the Company, as amended, and that
                  certain Statement of Resolution Establishing Series of Shares
                  of Series B Junior Participating Preferred Stock of Seagull
                  Energy Corporation filed March 21, 1989 with the Secretary of
                  State of the State of Texas (incorporated by reference to
                  Exhibit 3.1 to Quarterly Report on Form 10-Q for the quarter
                  ended June 30, 1998).

        3.2       Bylaws of the Company, as amended through March 7, 1997
                  (incorporated by reference to Exhibit 4.9 to Form S-3 filed
                  with the Securities and Exchange Commission on September 18,
                  1997).

        4.1       $500,000,000 Revolving Credit and Competitive Bid Facility
                  among Seagull Energy Corporation, The Chase Manhattan Bank,
                  Morgan Guaranty Trust Company of New York, NationsBank of
                  Texas, N.A., and The Other Banks Signatory Thereto, dated
                  December 27, 1997 (incorporated by reference to Exhibit 4.1 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1997).

        4.2       Senior Indenture dated as of July 15, 1993 by and between the
                  Company and The Bank of New York, as Trustee (incorporated by
                  reference to Exhibit 4.1 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

        4.3       Senior Subordinated Indenture dated as of July 15, 1993 by and
                  between the Company and The Bank of New York, as Trustee
                  (incorporated by reference to Exhibit 4.2 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

        4.4       Senior Indenture among the Company and The Bank of New York,
                  as Trustee, and Specimen of 7 1/2% Senior Notes due September
                  15, 2027 (incorporated by reference to Exhibit 4.4 to Annual
                  Report on Form 10-K for the year ended December 31, 1997).

        4.5       Terms Agreement and the resolutions of adoption by the
                  Chairman of the Board of Directors related to Exhibit 4.4
                  (incorporated by reference to Exhibit 2.3 to Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  October 17, 1997).

        4.6       Note Agreement dated May 14, 1992 by and among Alaska Pipeline
                  Company and each of the purchasers thereto (including forms of
                  notes and other exhibits thereto) and Inducement Agreement of
                  even date therewith by and among Seagull and Aid Association
                  for Lutherans, The Equitable Life Assurance Society of the
                  United States, Equitable Variable Life Insurance Company,
                  Provident Life & Accident Insurance Company and Teachers
                  Insurance & Annuity Association of America (including exhibits
                  thereto) (incorporated by reference to Exhibit 4.1 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1997).

                                       
<PAGE>   89

        4.7       Trust Agreement dated as of September 1, 1995 for the Seagull
                  Series 1995 Trust (the Trust Agreement is incorporated by
                  reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1995; the Guaranty by Seagull
                  Energy Corporation in favor of the Seagull Series 1995 Trust
                  is incorporated by reference to Exhibit 10.2 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1995).

        4.8       Amended and Restated Rights Agreement dated March 17, 1989, as
                  amended effective June 13, 1992, and amended and restated as
                  of December 12, 1997, between the Company and BankBoston, N.A.
                  (as successor to NCNB Texas National Bank), including Form of
                  Statement of Resolution Establishing the Series B Junior
                  Participating Preferred Stock, the Form of Right Certificate
                  and Form of Summary of Rights to Purchase Preferred Shares
                  (the Agreement is incorporated by reference to Exhibit 2 to
                  Current Report on Form 8-K dated December 15, 1997; Amendment
                  No. 1 dated November 24, 1998 is incorporated by reference to
                  Exhibit 4.1 to Current Report on Form 8-K filed on December 1,
                  1998).

     # 10.1       Seagull Energy Corporation 1998 Executive Incentive Plan
                  (incorporated by reference to Exhibit 10.2 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

     # 10.2       Seagull Energy Corporation 1981 Stock Option Plan (Restated),
                  including forms of agreements, as amended (incorporated by
                  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

     # 10.3       Seagull Energy Corporation 1983 Stock Option Plan (Restated),
                  including forms of agreements, as amended (plan is
                  incorporated by reference to Exhibit 10.4 to Quarterly Report
                  on Form 10-Q for the quarter ended March 31, 1998).

     # 10.4       Seagull Energy Corporation 1986 Stock Option Plan (Restated),
                  including forms of agreements, as amended (incorporated by
                  reference to Exhibit 10.5 to Quarterly Report on Form 10-Q for
                  the quarter ended March 31, 1998).

     # 10.5       Seagull Energy Corporation 1990 Stock Option Plan, including
                  forms of agreements, as amended (incorporated by reference to
                  Exhibit 10.22 to Annual Report on Form 10-K for the year ended
                  December 31, 1995; Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.7 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.6       Global Natural Resources Inc. 1989 Key Employees Stock Option
                  Plan (the Plan is incorporated by reference to Exhibit 4.1 to
                  Registration Statement No. 33-31537 of Global Natural
                  Resources Inc.; the Form of Stock Option Agreement is
                  incorporated by reference to Exhibit 4.2 to Registration
                  Statement No. 33-31537 of Global Natural Resources Inc.; Form
                  of Amendment to Stock Option Agreement(s) is incorporated by
                  reference to Exhibit 10.8 to Annual Report on Form 10-K for
                  the year ended December 31, 1996).

     # 10.7       Global Natural Resources Inc. 1992 Stock Option Plan (the Plan
                  is incorporated by reference to Exhibit 10.47 to the Quarterly
                  Report on Form 10-Q for the quarter ended June 30, 1992 of
                  Global Natural Resources Inc. (Registration No. 1-8674); the
                  Form of Stock Option Agreement is incorporated by reference to
                  Exhibit 10.48 to the Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1992 of Global Natural Resources Inc.
                  (Registration No. 1-8674); Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.9 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.8       Seagull Energy Corporation 1993 Nonemployee Directors' Stock
                  Option Plan, including forms of agreements, as amended
                  (incorporated by reference to Exhibit 10.1 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1997).

<PAGE>   90
     # 10.9       Seagull Energy Corporation 1993 Stock Option Plan, as amended
                  (incorporated by reference to Exhibit 10.3 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1997).

     # 10.10      1995 Omnibus Stock Plan (the Plan is incorporated by reference
                  to Exhibit 10.3 to Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1995; Form of Amendment to Stock Option
                  Agreement(s) is incorporated by reference to Exhibit 10.12 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996).

     # 10.11      1998 Omnibus Stock Plan (incorporated by reference to Exhibit
                  10.1 to Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1998).

     # 10.12      Seagull Energy Corporation Management Stability Plan (the Plan
                  is incorporated by reference to Exhibit 10.35 to Annual Report
                  on Form 10-K for the year ended December 31, 1994; the First
                  Amendment is incorporated by reference to Exhibit 10.13 to
                  Annual Report on Form 10-K for the year ended December 31,
                  1996; the Second and Third Amendments are incorporated by
                  reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998; the Fourth Amendment is
                  filed herewith).

     # 10.13      Outside Directors Deferred Fee Plan of the Company, as amended
                  and restated (incorporated by reference to Exhibit 10.2 to
                  Quarterly Report on Form 10-Q for the quarter ended June 30,
                  1996; the Third Amendment is incorporated by reference to
                  Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 1998).

     # 10.14      Employment Agreement by and between the Company and James T.
                  Hackett (incorporated by reference to Exhibit 10.6 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1998).

     # 10.15      Executive Supplemental Retirement Plan Membership Agreement by
                  and between the Company and James T. Hackett (incorporated by
                  reference to Exhibit 10.7 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998).

     # 10.16      Severance Agreement between the Company and James T. Hackett
                  (incorporated by reference to Exhibit 10.8 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998).

     # 10.17      Employment and Consulting Agreement by and between the Company
                  and Barry J. Galt (incorporated by reference to Exhibit 10.1
                  to Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1998).

     # 10.18      Executive Supplemental Retirement Plan Membership Agreement
                  between the Company and Barry J. Galt dated as of February 3,
                  1986, as amended (incorporated by reference to Exhibit 10.2 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1996).

     # 10.19      Restricted Stock Agreement made and entered into as of March
                  17, 1995 between Seagull Energy Corporation and Barry J. Galt
                  (incorporated by reference to Exhibit 10.32 to Annual Report
                  on Form 10-K for the year ended December 31, 1994).

     # 10.20      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Barry J. Galt
                  (incorporated by reference to Exhibit 10.2 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998).

     # 10.21      Seagull Energy Corporation Executive Supplemental Retirement
                  Plan, as amended (incorporated by reference to Exhibit 10.1 to
                  Quarterly Report on Form 10-Q for the quarter ended 

<PAGE>   91
                  September 30, 1996; the Third Amendment is incorporated by
                  reference to Exhibit 10.11 to Quarterly Report on Form 10-Q
                  for the quarter ended September 30, 1998).

     # 10.22      Seagull Energy Corporation Supplemental Benefit Plan, as
                  amended, including the First Amendment thereto (incorporated
                  by reference to Exhibit 10.11 to Annual Report on Form 10-K
                  for the year ended December 31, 1995; the Third Amendment is
                  incorporated by reference to Exhibit 10.12 to Quarterly Report
                  on Form 10-Q for the quarter ended September 30, 1998; the
                  Fourth Amendment is incorporated herein).

     # 10.23      Form of Severance Agreement, including Form of Amendment and
                  Second Amendment to Severance Agreement, between the Company
                  and Richard F. Barnes and William L. Transier (incorporated by
                  reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for
                  the quarter ended September 30, 1998).

     # 10.24      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Gerald R.
                  Colley (incorporated by reference to Exhibit 10.9 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998).

     # 10.25      Severance Agreement, including Amendment and Second Amendment
                  to Severance Agreement, between the Company and Carl B. King
                  (incorporated by reference to Exhibit 10.10 to Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1998).

     # 10.26      Consulting Agreement between Robert Vagt and Seagull Energy
                  Corporation (incorporated by reference to Exhibit 10.9 to
                  Quarterly Report on Form 10-Q for the quarter ended September
                  30, 1997; First Amendment is filed herewith).

       10.27      Royalty Incentive Plan, as amended (incorporated by reference
                  to Exhibit 1.4 to the Annual Report on Form 20-F for the year
                  ended December 31, 1981 of the U.K. Company).

       10.28      Share Sale Agreement, dated as of September 11, 1997, by and
                  between Seagull Energy Canada Holding Company, Seagull Energy
                  Corporation and Rio Alto Exploration Ltd. (incorporated by
                  reference to Exhibit 2.1 to Current Report on Form 8-K dated
                  September 11, 1997).

       10.29      Purchase and Sale Agreement, dated as of March 30, 1998, by
                  and between Seagull Energy Corporation and the shareholders of
                  BRG Petroleum, Inc. (incorporated by reference to Exhibit 10.6
                  to Quarterly Report on Form 10-Q for the quarter ended March
                  31, 1998).

       10.30      Agreement and Plan of Merger, dated as of November 24, 1998
                  among Seagull and OEI, including amendments (Agreement and
                  Plan of Merger is incorporated by reference to Exhibit 2.1 to
                  Current Report on Form 8-K filed on December 1, 1998;
                  Amendment No. 1 is incorporated by reference to Exhibit 2.2 to
                  the Company's Registration Statement on Form S-4 (Reg. No.
                  333-68679) filed with the SEC on December 10, 1998).

       10.31      Promissory Note between John D. Schiller, Jr. and Seagull.

       10.32      Promissory Note between William L. Transier and Seagull.

       10.33      Promissory Note between Barry J. Galt and Seagull.

       21         Subsidiaries of Seagull Energy Corporation.

       23.1       Consent of KPMG LLP.

       23.2       Consent of Ryder Scott Company, independent petroleum
                  engineers.
<PAGE>   92
       23.3       Consent of DeGolyer and MacNaughton, independent petroleum
                  engineers.

       23.4       Consent of Netherland, Sewell and Associates, Inc.,
                  independent petroleum engineers.

       27.1       Financial Data Schedule.


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     #  Identifies management contracts and compensatory plans or arrangements.