UNITED STATES
                                         SECURITIES AND EXCHANGE COMMISSION
                                               Washington, D.C. 20549


                                                      Form 10-Q


MARK ONE
     [x]     QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                For the Quarterly Period Ended September 30, 1997

     [  ]    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                          Commission File Number 1-8921


                         HALLWOOD ENERGY PARTNERS, L. P.
             (Exact name of registrant as specified in its charter)



         Delaware                                                    84-0987088
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

  4582 South Ulster Street Parkway
             Suite 1700
           Denver, Colorado                                                80237
(Address of principal executive offices)                              (Zip Code)

       Registrant's telephone number, including area code: (303) 850-7373

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 [ ]

The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).

Number of Units outstanding as of November 14, 1997

                                            9,977,254
Class A
                                              143,773
Class B
                                              664,063
Class C

                                                   Page 1 of 22


<PAGE>

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                                  (In thousands)



                                                                             September 30,          December 31,
                                                                                1997                   1996


CURRENT ASSETS
<S>                                                                            <C>              <C>       
     Cash and cash equivalents                                                 $  1,769             $    5,540
     Accounts receivable:
         Oil and gas revenues                                                     7,429                  9,405
         Trade                                                                    4,812                  4,507
     Due from affiliates                                                            996
     Prepaid expenses and other current assets                                    1,959                    928
                                                                                 --------               ------
              Total                                                              16,965                 20,380
                                                                                 --------               ------

PROPERTY, PLANT AND EQUIPMENT, at cost
     Oil and gas properties (full cost method):
         Proved mineral interests                                               620,049                607,875
         Unproved mineral interests                                               1,710                  1,244
     Furniture, fixtures and other                                                3,498                  3,366
                                                                                 ------                  -----
              Total                                                             625,257                612,485

     Less accumulated depreciation, depletion,
         amortization and property impairment                                 (532,758)               (523,936)
                                                                              ---------                --------
              Total                                                              92,499                 88,549

OTHER ASSETS
     Investment in common stock of HCRC                                          15,084                 13,700
     Deferred expenses and other assets                                             102                    163
                                                                                -------                 ------
              Total                                                              15,186                 13,863
                                                                                -------                -------

TOTAL ASSETS                                                                   $124,650               $122,792
                                                                               ========               ========










<FN>

                                          (Continued on the following page)
</FN>
</TABLE>

<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                            CONSOLIDATED BALANCE SHEETS
                                                    (Unaudited)
                                            (In thousands except Units)




                                                                          September 30,         December 31,
                                                                              1997                   1996


CURRENT LIABILITIES
<S>                                                                           <C>                 <C>      
     Accounts payable and accrued liabilities                                 $  16,767           $  15,185
     Net working capital deficit of affiliate                                       383                 581
     Due to affiliates                                                                                  159
     Current portion of contract settlement                                       2,690
     Current portion of long-term debt                                                                5,810
                                                                                -------              -------
              Total                                                              19,840              21,735
                                                                                -------              -------

NONCURRENT LIABILITIES
     Long-term debt                                                              31,986              29,461
     Contract settlement                                                                              2,512
     Deferred liability                                                           1,209               1,533
                                                                                 ------              ------
              Total                                                              33,195              33,506
                                                                                 ------              ------

              Total liabilities                                                  53,035              55,241
                                                                                 ------              ------

MINORITY INTEREST IN AFFILIATES                                                   3,174               3,336
                                                                                 ------              ------

PARTNERS' CAPITAL

     Class A Units - 9,977,254 Units issued, 9,077,949                           
         outstanding in 1997 and 1996                                            65,374              61,487
     Class B Subordinated Units - 143,773 Units issued                            
         and outstanding in 1997 and 1996                                         1,379               1,254
     Class C Units - 664,063 Units issued and outstanding                        
         in 1997 and 1996                                                         5,146               5,146
     General Partner                                                              3,521               3,307
     Treasury Units - 899,305 Units in 1997 and 1996                             (6,979)             (6,979)
                                                                                --------             ------
              Partners' capital - net                                            68,441              64,215
                                                                                --------             ------


TOTAL LIABILITIES AND PARTNERS' CAPITAL                                        $124,650            $122,792
                                                                               ========            ========







<FN>

                                    The    accompanying  notes  are an  integral
                                           part of the financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
                                        (In thousands except per Unit data)



                                                                                   For the Three Months Ended
                                                                                            September 30,
                                                                                 1997                     1996
                                                                                 -----                    ----


REVENUES:
<S>                                                                            <C>                    <C>     
     Oil revenue                                                               $  3,564               $  4,478
     Gas revenue                                                                  6,639                  6,593
     Pipeline, facilities and other                                                 523                    607
     Interest                                                                        69                    125
                                                                                 ------                 -------
                                                                                 10,795                 11,803
                                                                                 ------                --------

EXPENSES:
     Production operating                                                         2,882                  2,687
     Facilities operating                                                           190                    119
     General and administrative                                                     996                  1,215
     Depreciation, depletion and amortization                                     3,165                  3,226
     Interest                                                                       716                    928
                                                                                  -----                  -----
                                                                                  7,949                  8,175
                                                                                  -----                  -----

OTHER INCOME (EXPENSES):
     Equity in earnings of HCRC                                                     138                    500
     Minority interest in net income of affiliates                                 (449)                  (621)
     Litigation settlement                                                          (33)                    (2)
                                                                                   ------                  ----
                                                                                    (344)                 (123)
                                                                                    -----                  ----

NET INCOME                                                                        2,502                  3,505

CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT)                                          166                    166
                                                                                  ------                   ---



NET INCOME ATTRIBUTABLE TO GENERAL
     PARTNER, CLASS A AND CLASS B LIMITED PARTNERS                             $  2,336               $  3,339
                                                                                =======                =======
ALLOCATION OF NET INCOME:
     General partner                                                          $     532              $     590
                                                                              =========               ========
     Class A and Class B limited partners                                     $   1,804               $  2,749
                                                                              =========                =======
     Per Class A Unit and Class B Unit                                        $      .19               $    .30
                                                                              =========                ========

     Weighted average Class A Units and Class B Units                            
         and equivalent Units outstanding                                         9,335                  9,221
                                                                               ========                 ======

<FN>

                                    The    accompanying  notes  are an  integral
                                           part of the financial statements.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                          HALLWOOD ENERGY PARTNERS, L. P.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                    (Unaudited)
                                        (In thousands except per Unit data)



                                                                                  For the Nine Months Ended
                                                                                         September 30,
                                                                                1997                     1996
                                                                                -----                    ----

REVENUES:
<S>                                                                             <C>                    <C>    
     Oil revenue                                                                $11,157                $14,600
     Gas revenue                                                                 19,073                 21,322
     Pipeline, facilities and other                                               2,072                  2,039
     Interest                                                                       328                    331
                                                                                 ------                 -------
                                                                                 32,630                 38,292
                                                                                 ------                --------

EXPENSES:
     Production operating                                                         8,207                  8,379
     Facilities operating                                                           560                    551
     General and administrative                                                   3,250                  3,133
     Depreciation, depletion and amortization                                     8,657                 10,554
     Interest                                                                     2,315                  3,047
                                                                                 ------                 ------
                                                                                 22,989                 25,664
                                                                                 ------                 ------

OTHER INCOME (EXPENSES):
     Equity in earnings of HCRC                                                   1,384                  1,227
     Minority interest in net income of affiliates                               (1,341)                (2,092)
     Litigation settlement                                                          240                   (230)
                                                                                 ------                 -------
                                                                                    283                 (1,095)
                                                                                  ------                -------

NET INCOME                                                                        9,924                 11,533


CLASS C UNIT DISTRIBUTIONS ($.75 PER UNIT)                                          498                    498
                                                                                    ----                   ---

NET INCOME ATTRIBUTABLE TO GENERAL
     PARTNER, CLASS A AND CLASS B LIMITED PARTNERS                             $  9,426                $11,035
                                                                                =======                 ======

ALLOCATION OF NET INCOME:
     General partner                                                           $  1,408               $  1,923
                                                                               ========                =======
     Class A and Class B limited partners                                      $  8,018               $  9,112
                                                                               =========               =======
     Per Class A Unit and Class B Unit                                       $      .86             $      .99
                                                                              ==========             =========

     Weighted average Class A Units and Class B Units         
         and equivalent Units outstanding                                         9,348                  9,246
                                                                                 ======                 ======

<FN>

                                    The    accompanying  notes  are an  integral
                                           part of the financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                                          HALLWOOD ENERGY PARTNERS, L. P.
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (Unaudited)
                                                  (In thousands)


                                                                                 For the Nine Months Ended
                                                                                         September 30,
                                                                              1997                    1996
                                                                              -----                   ----



OPERATING ACTIVITIES:
<S>                                                                       <C>                       <C>      
Net income                                                                $    9,924                $  11,533
Adjustments  to  reconcile   net  income  to  net  cash  provided  by  operating
      activities:
         Depreciation, depletion and amortization                              8,657                   10,554
         Depreciation charged to affiliates                                      165                      195
         Amortization of deferred loan costs and other assets                     61                      122
         Noncash interest expense                                                178                      163
         Equity in earnings of HCRC                                           (1,384)                   (1,227)
         Minority interest in net income of affiliates                         1,341                    2,092
         Undistributed earnings of affiliates                                     73                     (553)
         Recoupment of take-or-pay liability                                     (97)                    (331)
                                                                               ------                    -----
              Cash from operations before working capital changes             18,918                   22,548

Changes in operating assets and liabilities  provided (used) cash net of noncash
     activity:
         Oil and gas revenues receivable                                       1,976                     (146)
         Trade receivables                                                      (305)                  (1,243)
         Due from affiliates                                                    (996)                   2,287
         Prepaid expenses and other current assets                             (1,031)                   (339)
         Accounts payable and accrued liabilities                              1,488                   (1,220)
         Due to affiliates                                                     (1,772)                    861
                                                                              -------                  -------
              Net cash provided by operating activities                       18,278                   22,748
                                                                              -------                  ------

INVESTING ACTIVITIES:
     Additions to property, plant and equipment                                (2,499)                 (2,667)
     Exploration and development costs incurred                                (9,073)                 (6,838)
     Proceeds from sales of property, plant and equipment                          85                   5,287
     Refinance of Spraberry investment                                                                 (4,715)
     Investment in affiliates                                                     (76)                   (517)
                                                                               -------                 -------
              Net cash used in investing activities                           (11,563)                 (9,450)
                                                                              ---------                ------

FINANCING ACTIVITIES:
     Payments of long-term debt                                                (5,288)                  (8,373)
     Proceeds from long-term debt                                                2,000                  6,000
     Distributions paid                                                        (5,583)                 (6,180)
     Distributions paid by consolidated affiliates to minority interest        (1,503)                 (1,778)
     Payment of contract settlement                                                                      (305)
     Syndication costs and capital contributions                                                          (12)
     Other financing activities                                                  (115)                   (128)
                                                                              --------              ---------
              Net cash used in financing activities                           (10,486)                (10,776)
                                                                             ---------               --------

                                                                               (3,771)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                    2,522


CASH AND CASH EQUIVALENTS:


BEGINNING OF PERIOD                                                            5,540                    4,977


END OF PERIOD                                                              $   1,769                $   7,499
                                                                           =========                 ========

<FN>

                                        The    accompanying    notes    are   an
                                               integral  part  of the  financial
                                               statements.
</FN>
</TABLE>


<PAGE>


                         HALLWOOD ENERGY PARTNERS, L. P.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


NOTE 1 -  GENERAL

Hallwood  Energy  Partners,  L. P.  ("HEP" or the  "Partnership")  is a publicly
traded Delaware limited partnership engaged in the development,  acquisition and
production of oil and gas properties in the  continental  United  States.  HEP=s
objective  is to  provide  its  partners  with an  attractive  return  through a
combination  of cash  distributions  and  capital  appreciation.  To achieve its
objective, HEP utilizes operating cash flow, first, to reinvest in operations to
maintain  its  reserve  base  and  production;   second,  to  make  stable  cash
distributions  to Unitholders;  and third, to grow HEP=s reserve base over time.
HEP's future growth will be driven by a combination  of  development of existing
projects,  exploration  for new  reserves and select  acquisitions.  The general
partner of HEP is HEPGP Ltd.

The  activities  of HEP are  conducted  through  HEP  Operating  Partners,  L.P.
("HEPO") and EDP Operating,  Ltd. ("EDPO").  HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and of EDPO.  Solely for purposes
of simplicity  herein,  unless  otherwise  indicated,  all  references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.

The interim financial data are unaudited; however, in the opinion of the general
partner,  the interim data include all  adjustments,  consisting  only of normal
recurring adjustments,  necessary for a fair presentation of the results for the
interim periods.  These financial  statements should be read in conjunction with
the financial  statements and accompanying  notes included in HEP's December 31,
1996 Annual Report on Form 10-K.

Accounting Policies

Consolidation

HEP fully consolidates  majority owned entities and reflects a minority interest
in the consolidated  financial statements.  HEP accounts for its interest in 50%
or less  owned  affiliated  oil  and  gas  partnerships  and  limited  liability
companies  using the  proportionate  consolidation  method of accounting.  HEP's
investment in the common stock of its affiliate, Hallwood Consolidated Resources
Corporation ("HCRC"), is accounted for under the equity method.

The  accompanying  financial  statements  include  the  activities  of HEP,  its
subsidiaries  Hallwood  Petroleum,  Inc.  ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood  Oil"), and majority owned affiliates,  the May Limited  Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").

Computation of Net Income Per Unit

Net  income  per Class A and Class B Unit is  computed  by  dividing  net income
attributable to the Class A and Class B limited  partners'  interest (net income
excluding  income  attributable to the general partner and Class C Units) by the
weighted  average number of Class A Units,  Class B Units and equivalent Class A
and Class B Units outstanding.  The options to acquire Class A Units, which were
issued during 1995, are considered to be Unit equivalents  since January 1, 1997
because the market price of the Class A Units has exceeded the exercise price of
the options since that date.  The number of equivalent  Units was computed using
the treasury stock method which assumes that the increase in the number of Units
is reduced  by the number of Units  which  could  have been  repurchased  by the
Partnership  with the  proceeds  from the  exercise of the  options  (which were
assumed  to have  been  made at the  average  market  price of the Class A Units
during the reporting period).



<PAGE>


HEP owns  approximately 46% of the outstanding  common stock of HCRC, while HCRC
owns  approximately  19% of HEP's  Units.  Consequently,  HEP has an interest in
899,305 of its own Units at September  30, 1997 and  December  31,  1996.  These
Units are treated as treasury units in the accompanying financial statements.

During February 1997, the Financial  Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share (ASFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related  interpretations.  It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution,  and  requires  dual  presentation  of basic and  diluted  EPS for all
entities with complex capital  structures.  Diluted EPS is computed similarly to
fully  diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after  December 15, 1997,  including  interim  periods,  and will require
restatement of all prior period EPS data presented;  earlier  application is not
permitted.

A comparison of EPS shown in the accompanying  financial statements with the pro
forma amounts that would have been  determined in accordance with SFAS 128 is as
follows:
<TABLE>
<CAPTION>

                                   For the Quarter Ended September 30,       For the Nine Months Ended September 30,
                                        1997                 1996                  1997                  1996

Primary (Basic):
<S>                                     <C>                  <C>                   <C>                   <C> 
     As reported                        $.19                 $.30                  $.86                  $.99
     Pro forma                          $.20                 $.30                  $.87                  $.99

Fully Diluted (Diluted):
     As reported                        $.19                 $.30                  $.86                  $.99
     Pro forma                          $.19                 $.30                  $.86                  $.99
</TABLE>

Reclassifications

Certain  reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.


NOTE 2 - DEBT

During the second  quarter of 1997,  HEP and its lenders  amended  and  restated
HEP's Second  Amended and Restated  Credit  Agreement  (as amended,  the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase  Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP=s
borrowing base is  $46,000,000 at October 31, 1997. HEP had amounts  outstanding
at September 30, 1997 of $27,700,000  under the Credit  Agreement and $4,286,000
under the Note Purchase Agreement. HEP's borrowing base is further reduced by an
outstanding  contract  settlement  obligation  of $2,690,000  and  borrowings of
$2,000,000  made  subsequent  to  September  30,  1997;  therefore,  its  unused
borrowing base totaled $11,324,000 at October 31, 1997.

Borrowings under the Note Purchase  Agreement bear interest at an annual rate of
11.85%,  which is payable  quarterly.  Annual  principal  payments of $4,286,000
began April 30,  1992,  and the debt is required to be paid in full on April 30,
1998.  HEP  intends to fund the  payment  due in April 1998  through  additional
borrowings under the Credit  Agreement;  thus, no portion of HEP=s Note Purchase
Agreement is classified as current as of September 30, 1997.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at September 30, 1997.  Interest is payable  monthly,  and  quarterly  principal
payments of  $2,124,000,  as adjusted  for the  $2,000,000  of  borrowings  made
subsequent to September 30, 1997 as well as the  anticipated  borrowings to fund
the Note Purchase Agreement payment due in April 1998, commence May 31, 1999.


<PAGE>


                                                       -16-
The borrowing base for the Credit Facilities is redetermined  semiannually.  The
Credit  Facilities are secured by a first lien on approximately  80% in value of
HEP's oil and gas properties.  Additionally, aggregate distributions paid by HEP
in any 12 month  period are limited to 50% of cash flow from  operations  before
working capital changes and 50% of distributions  received from  affiliates,  if
the  principal  amount  of debt of HEP is 50% or  more  of the  borrowing  base.
Aggregate  distributions  paid  by HEP are  limited  to 65% of  cash  flow  from
operations before working capital changes and 65% of distributions received from
affiliates,  if the  principal  amount of debt is less than 50% of the borrowing
base.

HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for each of 1997 and 1998 and  $10,000,000  for each of 1999 and  2000.
HEP does not use the hedges for trading purposes,  but rather for the purpose of
providing a measure of  predictability  for a portion of HEP's interest payments
under its debt agreement,  which has a floating interest rate. In general, it is
HEP's  goal to hedge  50% of the  principal  amount of its debt for the next two
years and 25% for each year of the remaining  term of the debt.  HEP has entered
into four hedges,  one of which is an interest rate collar  pursuant to which it
pays a floor  rate of 7.55% and a  ceiling  rate of 9.85%,  and the  others  are
interest  rate swaps with fixed rates  ranging from 5.75% to 6.57%.  The amounts
received  or paid  upon  settlement  of these  transactions  are  recognized  as
interest expense at the time the interest payments are due.


NOTE 3 - STATEMENTS OF CASH FLOWS

Cash paid for interest  during the nine months ended September 30, 1997 and 1996
was $2,077,000 and $2,761,000, respectively.


NOTE 4 - SUBSEQUENT EVENT

In  October  1997  the  Partnership  filed  with  the  Securities  and  Exchange
Commission a  registration  statement  covering the sale by the  Partnership  of
1,500,000  newly issued Class C Units.  The  Partnership  intends to use the net
proceeds from the offering to accelerate  the drilling of its project  inventory
and, in the interim,  to repay a portion of its outstanding  indebtedness  under
its Credit Agreement. A registration statement relating to the Class C Units has
been filed with the  Securities  and Exchange  Commission but has not yet become
effective.  The Class C Units may not be sold nor may offers to buy be  accepted
prior to the time the registration statement becomes effective. This information
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall  there be any sale of the Class C Units in any State in which such  offer,
solicitation or sale would be unlawful prior to  registration  or  qualification
under the securities laws of any such State.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES 

Liquidity and Capital Resources

Cash Flow

HEP generated  $18,278,000  of cash flow from  operating  activities  during the
first nine months of 1997.

Cash was used primarily for:

     !   Additions to property and development costs incurred of $11,572,000

     !   Payments of long-term debt of $5,285,000, and

     !   Distributions to Unitholders of $5,583,000.


When combined with long-term  borrowings of $2,000,000 and  miscellaneous  other
cash  activity  during the period,  the result was a decrease of  $3,771,000  in
HEP's cash from  $5,540,000  at December 31, 1996 to $1,769,000 at September 30,
1997.

Development Projects and Acquisitions

Through  September  30,  1997,  HEP  incurred   approximately   $11,572,000  for
exploration, development and acquisition costs toward the 1997 capital budget of
$15,500,000.  The expenditures  were comprised of  approximately  $9,073,000 for
exploration   and  development   and   approximately   $2,499,000  for  property
acquisitions.   As  of  September  30,  1997,  HEP's  reserve  replacement  from
extensions, purchases and revisions totals 75% of its estimated 1997 production.

HEP's  1997  capital  budget is  allocated  to the  following:  Permian/Delaware
Basins, Gulf Coast Region, Rocky Mountain Region, and other areas. A description
of HEP's  significant  exploration  and development  projects  through the third
quarter of 1997 follows.

Permian/Delaware Basins

HEP has allocated 37%  (approximately  $5,750,000) of its 1997 capital budget to
the Permian/Delaware  Basins located in Texas and Southeast New Mexico.  Through
the end of the third quarter,  HEP spent  approximately  $3,800,000  drilling 19
development  wells  and  16  exploration   wells,  and  on  the  acquisition  of
undeveloped  acreage and geological and geophysical data. Of the wells that were
drilled,  25 (71%) are a success.  During the last quarter of 1997, HEP plans to
drill 18 additional  development wells and 14 exploration wells. A discussion of
several of the larger projects within the Basins follows.

HEP  spent  approximately  $815,000  successfully  recompleting  two  wells  and
drilling  two  unsuccessful  exploration  wells in the Catclaw Draw area in Eddy
County,  New Mexico.  HEP has a 70%  working  interest in the wells and plans to
workover one well in the fourth quarter of 1997.

The Partnership's  nonoperated interest in the Merkel Project includes 10 square
miles of  proprietary  3-D  seismic  data in Jones,  Taylor and Nolan  Counties,
Texas.  HEP began  its  involvement  in this  area in 1995  with the  successful
completion  of one well.  In 1996,  HEP  participated  in the  drilling of eight
additional  wells,  seven of which were  successful.  In 1997, HEP continued its
participation  with the drilling of three development and two exploration wells.
Four of the wells are a success.  HEP plans to  participate  in the  drilling of
three more  exploration  wells  during the fourth  quarter of 1997 and has seven
potential locations. HEP's 1997 costs for the area total approximately $135,000.
HEP owns an average 10% working interest in this area.

Based on the success in the nonoperated  Merkel area, HEP acquired 74 additional
square miles of proprietary 3-D seismic data adjacent to the  nonoperated  area.
HEP owns an average 25% working  interest in the area,  and HPI is the operator.
HEP has drilled four successful and three unsuccessful  exploration wells in the
area.  Four  exploration  wells are  scheduled  to be drilled  during the fourth
quarter of 1997, and 22 potential  locations  exist for drilling in 1998.  HEP's
1997 costs for drilling and acreage in the area are approximately $450,000.

HEP purchased an interest in proprietary  3-D seismic data and selected  acreage
within  an 85  square  mile  area,  referred  to as  the  Griffin  Project,  for
approximately  $460,000.  HEP has developed a number of prospects in the Griffin
Project which it plans to pursue in the fourth quarter of 1997 and future years.
Through  the  third  quarter,   HEP  has  drilled  two  exploratory  wells,  for
approximately  $390,000,  one of which is  successful.  HEP  plans to drill  two
exploration  wells  during  the  remainder  of 1997  and  future  plans  will be
developed based on the results of the exploration wells. HEP owns an approximate
25% working interest in the area.

HEP spent  approximately  $260,000 in 1997 to drill four successful  development
wells in the  Spraberry  area of West Texas.  In July,  HEP acquired  additional
interests in 34 of its existing wells at a cost of approximately  $510,000.  HEP
plans to drill eight additional development wells in the fourth quarter of 1997.
HEP owns an approximate  55% working  interest in these wells.  During the first
nine  months  of  1997,  HEP  successfully  drilled  two and  recompleted  eight
development wells, all of which were successful, in the East Keystone project in
Winkler County, Texas, at a cost of approximately  $245,000.  HEP plans to drill
two and  recomplete  three  development  wells and to initiate  pilot  secondary
recovery  operations  during the fourth  quarter of 1997.  HEP has a 35% working
interest in the wells.

In 1996,  HEP  acquired 106 square miles of 3-D seismic data on the Cowden Ranch
in Crane  County,  Texas.  In early 1997, an  exploratory  well was drilled at a
total cost of approximately  $230,000.  This well was dry, and HEP does not plan
to continue exploration in this area.

In 1996, HEP became active in the Garden City/Mills project in Glasscock County,
Texas.  This  project  included  the   interpretation  of  66  square  miles  of
nonproprietary  3-D seismic data and the drilling of one successful  exploratory
well prior to the end of 1996.  In the first nine months of 1997,  HEP drilled a
second successful delineation well. HEP's costs incurred to drill one successful
exploration well,  through September 30, 1997 are  approximately  $225,000.  HEP
will attempt to drill one  additional  exploration  well during the remainder of
1997 and future plans will be developed  based on the results of the exploration
wells. HEP's working interest in the well is 25%.

Also in the fourth quarter of 1997, HEP plans to drill one and recomplete  three
development wells in the Carlsbad area in Lea County,  New Mexico. HEP has a 35%
working interest.

Rocky Mountain Region

HEP has  allocated  approximately  11%  (approximately  $1,700,000)  of its 1997
capital budget to the Rocky Mountain Region located in Colorado,  Montana, North
Dakota,  Northwest New Mexico and Wyoming.  Through the third quarter 1997,  HEP
spent approximately  $1,120,000 drilling seven development wells,  drilling four
exploration wells, and acquiring geological and geophysical data and land. Three
of the  wells  are a  success,  and HEP  plans  to  drill  an  additional  three
development  wells and two exploration  wells in this region in the last quarter
of 1997. A discussion of major projects within the region follows.

In the San Juan Basin in LaPlata  County,  Colorado and Rio Arriba  County,  New
Mexico,  HEP has an interest in a special  purpose  entity owned by a large east
cost financial  institution that has an interest in 34 wells.  Through September
30, 1997,  four successful  recompletions  were performed on these wells and two
additional development wells are planned to be recompleted in the fourth quarter
of 1997.  This work and other  activity  in the San Juan  region is  expected to
yield significant upward reserve revisions.

In the  Lone  Tree  area  of  Montana,  HEP  drilled  two  development  and  two
exploration  wells during the first nine months of 1997. One development and one
exploration  well are successful.  Total 1997 costs for the Montana project were
approximately  $360,000.  HEP plans to drill one exploration  well in the fourth
quarter 1997.

HEP  also  purchased  a  12.5%   interest  in  the  Hudson  Ranch   project,   a
multi-objective  exploration  project  generated  from 120  square  miles of 2-D
proprietary  seismic  data.  HEP's 1997 costs for the project are  approximately
$325,000.  A 3-D seismic data  acquisition  program is underway and  exploratory
drilling is anticipated to begin in 1998.

Gulf Coast Region

HEP's 1997 capital budget  allocation for the Gulf Coast Region in Louisiana and
South and East Texas is approximately 18% (approximately  $2,800,000).  In 1997,
HEP spent approximately  $2,250,000 drilling one development well, drilling four
exploration wells and acquiring  acreage.  Two of the wells are successful.  HEP
plans to  directionally  drill one 10,000 foot exploration well in the Bigeneria
Humblei  formation  from the shore to a bottom hole location under the waters of
the Gulf of Mexico.  The well is  planned  to be spud in the  fourth  quarter of
1997. HEP owns a 12.5% working interest.

In 1997,  HEP  spent  approximately  $771,000  for  tubing  repairs,  additional
perforations,  workovers,  and miscellaneous  maintenance  costs. HEP also spent
approximately  $630,000  in the first  nine  months of 1997 for two  exploration
wells in Louisiana which were unsuccessful.

HEP  participated  in the  developing  of two  Jeffress  Field  wells in Hidalgo
County,  Texas.  Both  wells  are  successful  and have  cost HEP  approximately
$685,000. The wells are nonoperated, and HEP owns a 10% interest.

HEP has been  active in the Mercy Field in San  Jacinto  County,  Texas where it
drilled an 11,000 foot  development  well and  deepened  an  existing  well to a
different  formation  during  the  first  nine  months of 1997.  Both  wells are
successful, and the estimated total costs to HEP were approximately $430,000.

Other

HEP's 1997 capital budget  allocation for all other areas is  approximately  34%
(approximately  $5,250,000).  Through  September  30,  1997,  HEP  has  incurred
approximately  $520,000  on  nine  successful  development  projects  and  three
unsuccessful  exploration wells. HEP plans to drill four additional  development
wells and six exploration wells during the fourth quarter of 1997.

At September 30, 1997, HEP is participating in an exploration prospect in Carter
County,  Oklahoma. The project is a 19,000 feet deep multi-formation  structural
test. For the first nine months of 1997,  HEP's cost is  approximately  $245,000
for its 5% interest in the well.

In September  1997,  HEP and an  unaffiliated  partner were awarded a deep-water
exploration  block offshore of northern  Peru. HEP has a 7.5% working  interest.
Its partner is proceeding with a 1,200 mile seismic program to further  evaluate
the project.  HEP's partner, a major oil company, is the operator, and HEP has a
carried interest until drilling begins.

Projects  begun in the  fourth  quarter  of 1996  have  cost  HEP  approximately
$800,000  through the third quarter of 1997. The additional  costs are comprised
primarily of approximately  $200,000 for two unsuccessful  exploratory  wells in
the Gulf Coast Region and in the Permian/Delaware Basins.

As a  result  of  environmental  and  title  problems,  HEP has  terminated  its
previously  disclosed  agreement to acquire for $9.8 million  properties located
principally in Texas.  The seller of the properties is disputing  HEP's right to
terminate  the   agreement  and  has  demanded  that  the  parties   proceed  to
arbitration.

Distributions

HEP declared  distributions  of $.13 per Class A Unit and $.25 per Class C Unit,
payable on November 14, 1997 to Unitholders of record on September 30, 1997.

Distributions  on the Class B Units are suspended if the Class A Units receive a
distribution  of less than $.20 per Class A Unit per  calendar  quarter.  In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.

Financing

During the second  quarter of 1997,  HEP and its lenders  amended  and  restated
HEP's Second  Amended and Restated  Credit  Agreement  (as amended,  the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase  Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP=s
borrowing  base  is  $46,000,000  as  of  October  31,  1997.  HEP  has  amounts
outstanding at September 30, 1997 of $27,700,000  under the Credit Agreement and
$4,286,000  under the Note Purchase  Agreement.  HEP's borrowing base is further
reduced by an  outstanding  contract  settlement  obligation of  $2,690,000  and
borrowings of $2,000,000 made subsequent to September 30, 1997;  therefore,  its
unused borrowing base totaled $11,324,000 at October 31, 1997.


<PAGE>


Borrowings under the Note Purchase  Agreement bear interest at an annual rate of
11.85%,  which is payable  quarterly.  Annual  principal  payments of $4,286,000
began April 30,  1992,  and the debt is required to be paid in full on April 30,
1998.  HEP  intends to fund the  payment  due in April 1998  through  additional
borrowings under the Credit  Agreement;  thus, no portion of HEP=s Note Purchase
Agreement is classified as current as of September 30, 1997.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at September 30, 1997.  Interest is payable  monthly,  and  quarterly  principal
payments of  $2,124,000,  as adjusted  for the  $2,000,000  of  borrowings  made
subsequent to September 30, 1997 as well as the  anticipated  borrowings to fund
the Note Purchase Agreement payment due in April 1998, commence May 31, 1999.

The borrowing base for the Credit Facilities is redetermined  semiannually.  The
Credit  Facilities are secured by a first lien on approximately  80% in value of
HEP's oil and gas properties.  Additionally, aggregate distributions paid by HEP
in any 12 month  period are limited to 50% of cash flow from  operations  before
working capital changes and 50% of distributions  received from  affiliates,  if
the  principal  amount  of debt of HEP is 50% or  more  of the  borrowing  base.
Aggregate  distributions  paid  by HEP are  limited  to 65% of  cash  flow  from
operations before working capital changes and 65% of distributions received from
affiliates,  if the  principal  amount of debt is less than 50% of the borrowing
base.

HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for each of 1997 and 1998 and  $10,000,000  for each of 1999 and  2000.
HEP does not use the hedges for trading purposes,  but rather for the purpose of
providing a measure of  predictability  for a portion of HEP's interest payments
under its debt agreement,  which has a floating interest rate. In general, it is
HEP's  goal to hedge  50% of the  principal  amount of its debt for the next two
years and 25% for each year of the remaining  term of the debt.  HEP has entered
into four hedges,  one of which is an interest rate collar  pursuant to which it
pays a floor  rate of 7.55% and a  ceiling  rate of 9.85%,  and the  others  are
interest  rate swaps with fixed rates  ranging from 5.75% to 6.57%.  The amounts
received  or paid  upon  settlement  of these  transactions  are  recognized  as
interest expense at the time the interest payments are due.

In  October  1997  the  Partnership  filed  with  the  Securities  and  Exchange
Commission a  registration  statement  covering the sale by the  Partnership  of
1,500,000  newly issued Class C Units.  The  Partnership  intends to use the net
proceeds from the offering to accelerate  the drilling of its project  inventory
and, in the interim,  to repay a portion of its outstanding  indebtedness  under
its Credit Agreement. A registration statement relating to the Class C Units has
been filed with the  Securities  and Exchange  Commission but has not yet become
effective.  The Class C Units may not be sold nor may offers to buy be  accepted
prior to the time the registration statement becomes effective. This information
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall  there be any sale of the Class C Units in any State in which such  offer,
solicitation or sale would be unlawful prior to  registration  or  qualification
under the securities laws of any such State.

Inflation and Changing Prices

Prices

Prices received for oil and gas production depend upon numerous factors that are
beyond  the  control  of HEP,  including  the  extent of  domestic  and  foreign
production,  imports of foreign  oil,  market  demand,  domestic  and  worldwide
economic and political  conditions,  and  government  regulations  and tax laws.
Prices for both oil and gas fluctuated significantly throughout 1996 and through
the third quarter of 1997.  The following  table  presents the weighted  average
prices received each quarter by HEP and the effects of the hedging  transactions
discussed below.


<PAGE>
<TABLE>
<CAPTION>


                                       Oil                      Oil                  Gas                 Gas
                                  (excluding the          (including the       (excluding the       (including the
                                    effects of              effects of           effects of           effects of
                                     hedging                  hedging              hedging             hedging
                                   transactions)           transactions)        transactions)        transactions)

                                    (per bbl)                (per bbl)            (per mcf)           (per mcf)



<S>             <C>                     <C>                   <C>                    <C>                 <C>  
First quarter - 1996                    $18.05                $17.97                 $2.41               $2.30
Second quarter - 1996                    20.56                 20.15                  2.15                2.12
Third quarter - 1996                     21.66                 20.73                  2.17                2.11
Fourth quarter - 1996                    24.04                 22.23                  2.81                2.43
First quarter - 1997                     22.10                 21.08                  2.89                2.52
Second quarter - 1997                    17.71                 17.71                  2.02                1.98
Third quarter - 1997                     18.40                 18.47                  2.25                2.13

</TABLE>

HEP has entered into numerous financial  contracts to hedge the price of its oil
and  natural  gas.  The purpose of the hedges is to provide  protection  against
price  decreases  and  to  provide  a  measure  of  stability  in  the  volatile
environment  of oil and natural gas spot pricing.  The revenue  associated  with
these  contracts  is  recognized  as oil or gas  revenue  at the time the hedged
volumes are sold.

The following tables provide a summary of HEP's outstanding financial contracts:


                                                  Oil

                                   Percent of Production            Contract
             Period                        Hedged                 Floor Price
                                                                   (per bbl)



Last three months of 1997                   48%                      $17.78

1998                                        26%                      $17.12

1999                                         3%                      $15.88

Certain of HEP's financial  contracts for oil are  participating  hedges whereby
HEP will receive the contract  price if the posted  futures  price is lower than
the contract price, and will receive the contract price plus between 25% and 75%
of the difference between the contract price and the posted futures price if the
posted futures price is greater than the contract price.  Certain other of HEP's
financial  contracts for oil are collar agreements  whereby HEP will receive the
contract price if the spot price is lower than the contract price, the cap price
if the spot price is higher than the cap price, and the spot price if that price
is  between  the  contract  price and the cap price.  The cap prices  range from
$17.50 to $19.35.



<PAGE>



                                                  Gas

                                   Percent of Production            Contract
             Period                        Hedged                 Floor Price
                                                                   (per mcf)



Last three months of 1997                   46%                      $1.97

1998                                        46%                      $2.04

1999                                        27%                      $1.87

2000                                        16%                      $2.01

Certain of HEP's  financial  contracts  for  natural  gas are collar  agreements
whereby HEP will receive the contract  price if the spot price is lower than the
contract  price,  the cap price if the spot price is higher  than the cap price,
and the spot  price if that  price is  between  the  contract  price and the cap
price.  The cap  prices  range from  $2.78 to $2.93.  During the fourth  quarter
through October 31, 1997 the weighted average oil price (for barrels not hedged)
was approximately  $20.20 per barrel.  The weighted average price of natural gas
(for mcf not hedged) during that period was approximately $3.15 per mcf.

Inflation

Inflation did not have a material  impact on HEP in 1996 and is not  anticipated
to have a material impact in 1997.

Results of Operations

The  following  tables are  presented  to contrast  HEP's  revenue,  expense and
earnings for discussion purposes.  Significant fluctuations are discussed in the
accompanying  narrative.  The "direct  owned"  column  represents  HEP's  direct
royalty and  working  interests  in oil and gas  properties.  The "Mays"  column
represents the results of operations of six May Limited  Partnerships  which are
consolidated  with HEP. In 1997, HEP owned  interests which ranged from 57.5% to
68.2% of the Mays, and in 1996, HEP's ownership in the Mays ranged from 54.5% to
68.3%.


<PAGE>
<TABLE>
<CAPTION>


                                                                 TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
                                                                           (In thousands except price)



                                         For the Quarter Ended September 30, 1997       For the Quarter Ended September 30,1996
                                         ----------------------------------------       ---------------------------------------

                                              Direct                                  Direct
                                               Owned       Mays      Total             Owned             Mays             Total


<S>                                             <C>          <C>       <C>            <C>                 <C>              <C>
Oil production (bbl)                               171          22        193            188                 28               216
Gas production (mcf)                             2,734         380      3,114          2,692                435             3,127

Average oil price (per bbl)                   $  18.42    $  18.86   $  18.47       $  20.54           $  22.03          $  20.73
Average gas price (per mcf)                   $   2.08   $    2.54  $    2.13      $    2.02          $    2.66         $    2.11


Oil revenue                                   $  3,149   $     415   $  3,564       $  3,861          $     617          $  4,478
Gas revenue                                      5,675         964      6,639          5,434              1,159             6,593
Pipeline, facilities and other revenue             523                    523            607                                  607
Interest income                                     53          16         69            110                 15               125
                                                 -----        ----      -----          -----              -----             -----
   Total revenue                                 9,400       1,395     10,795         10,012              1,791            11,803
                                                 -----       -----     ------         ------              -----            ------

Production operating                             2,743         139      2,882          2,511                176             2,687
Facilities operating                               190                    190            119                                  119
General and administrative                         902          94        996          1,140                 75             1,215
Depreciation, depletion, and amortization        2,876         289      3,166          2,787                439             3,226
Interest                                           716                    716            928                                  928
Litigation settlement expense                        9          24         33              1                  1                 2
Equity in earnings of HCRC                        (138)                  (138)          (500)                                 (500)
Minority interest in net income of affiliates                  449        449                                621               621
                                                 ------      -----       -----           -----              ---                ---
   Total expense                                 7,298         995      8,293           6,986              1,312             8,298
                                                 -----       -----      ------          -----              -----            ------

Net income                                    $  2,102   $     400   $  2,502        $  3,026          $     479          $  3,505
                                              ========       =====   ========          =======           ========           =======
</TABLE>




<PAGE>
<TABLE>
<CAPTION>




                                                                 TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
                                                                           (In thousands except price)



                                   For the Nine Months Ended September 30, 1997       For the Nine Months Ended September 30,1996

                                              Direct                                Direct
                                               Owned      Mays      Total            Owned              Mays            Total


<S>                                             <C>         <C>       <C>              <C>              <C>             <C>
Oil production (bbl)                               521         60        581              663              86              749
Gas production (mcf)                             7,563      1,025      8,588            8,386           1,404            9,790

Average oil price (per bbl)                   $  19.06   $  20.47   $  19.20         $  19.34        $  20.64         $  19.49
Average gas price (per mcf)                   $   2.15    $  2.75   $   2.22       $    2.04       $    2.99        $    2.18


Oil revenue                                   $  9,929   $  1,228    $11,157          $12,825        $  1,775          $14,600
Gas revenue                                     16,255      2,818     19,073           17,123           4,199           21,322
Pipeline, facilities and other                   2,072                 2,072            2,039                            2,039
Interest                                           272         56        328              284              47              331
                                                ------       -----     -----           ------            ----            -----
   Total revenue                                28,528      4,102    32,630            32,271           6,021           38,292
                                                ------      ------   -------           ------           -------         ------
Production operating                             7,785        422      8,207            7,855             524            8,379
Facilities operating                               560                   560              551                              551
General and administrative                       2,958        292      3,250            2,826             307            3,133
Depreciation, depletion, and amortization        7,754        903      8,657            9,136           1,418           10,554
Interest                                         2,315                 2,315            3,047                            3,047
Litigation settlement (income) expense            (234)        (6)      (240)             223               7              230
Equity in earnings of HCRC                      (1,384)               (1,384)          (1,227)                         (1,227)
Minority interest in net income of affiliates               1,341      1,341                            2,092            2,092
                                                 ------     -----    -------            ----            -----            -----
   Total expense                                 19,754      2,952     22,706           22,411           4,348           26,759
                                                 ------     ------    -------          ------            -----           ------


      Net income                               $  8,774   $  1,150   $  9,924          $  9,860        $  1,673          $11,533
                                                ========   =======   =========          =======         =======           ======


</TABLE>

<PAGE>


Third Quarter of 1997 Compared to Third Quarter of 1996

Oil Revenue

Oil revenue decreased $914,000 during the third quarter of 1997 as compared with
the  third  quarter  of 1996.  The  decrease  is the  result  of a  decrease  in
production  from  216,000  barrels  in 1996 to  193,000  barrels  in 1997  and a
decrease  in the  average oil price from $20.73 per barrel in 1996 to $18.47 per
barrel in 1997.  The  decrease  in oil  production  is  primarily  due to normal
production declines.

The effect of HEP's hedging  transactions,  as described  under  "Inflation  and
Changing  Prices,"  during the third  quarter  of 1997,  was to  increase  HEP's
average oil price from $18.40 per barrel to $18.47 per  barrel,  resulting  in a
$14,000 increase in revenue from hedging transactions.

Gas Revenue

Gas revenue  increased $46,000 during the third quarter of 1997 as compared with
the third  quarter of 1996.  The  increase  is the result of an  increase in the
average gas price from $2.11 per mcf in 1996 to $2.13 per mcf in 1997  partially
offset by a decrease in production  from  3,127,000 mcf in 1996 to 3,114,000 mcf
in 1997. The decrease in production is due to normal production declines.

The effect of HEP's hedging  transactions  during the third quarter of 1997, was
to  decrease  HEP's  average  gas  price  from  $2.25  per mcf to $2.13 per mcf,
representing a $374,000 reduction in revenue from hedging transactions.

Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County,  New Mexico.  Pipeline,  facilities and other revenue  decreased $84,000
during the third  quarter of 1997 as compared with the third quarter of 1996 due
to fluctuations in numerous  miscellaneous items, none of which are individually
significant.

Interest Income

Interest income  decreased  $56,000 during the third quarter of 1997 as compared
with the third quarter of 1996 due to a lower average cash balance during 1997.

Production Operating Expense

Production operating expense increased $195,000 during the third quarter of 1997
as  compared  with  the  third  quarter  of  1996  primarily  due  to  increased
maintenance activity.

Facilities Operating Expense

Facilities  operating expense  represents the costs of operating and maintaining
two gathering systems located in New Mexico.  Costs increased $71,000 during the
third quarter of 1997 as compared  with the third quarter of 1996  primarily due
to increased maintenance activity during 1997.

General and Administrative

General  and   administrative   expense   includes  costs  incurred  for  direct
administrative  services  such as legal,  audit and  reserve  reports as well as
allocated  internal overhead incurred by the operating company on behalf of HEP.
These expenses  decreased  $219,000 during the third quarter of 1997 as compared
with the third  quarter of 1996  primarily  due to the timing of the  payment of
consulting fees.

Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense  decreased $61,000 during the
third quarter of 1997 as compared  with the third quarter of 1996.  The decrease
is primarily the result of a lower  depletion rate in 1997 due to the decline in
production previously discussed.

Interest Expense

Interest expense decreased $212,000 during the third quarter of 1997 as compared
with the third quarter of 1996,  primarily as a result of lower outstanding debt
during 1997.

Equity in Earnings of HCRC

Equity in earnings of HCRC decreased  $362,000  during the third quarter of 1997
as compared  with the third  quarter of 1996.  The decrease is primarily  due to
HCRC's increased income tax expense during 1997.

Minority Interest in Net Income of Affiliates

Minority interest in net income of affiliates represents  unaffiliated partners'
interest in the net income of the May Partnerships.  The decrease of $172,000 is
due to a decrease in the net income of the May Partnerships  resulting primarily
from decreased production on their properties.

Litigation Settlement Expense

Litigation  settlement  expense  during the third  quarters  of 1997 and 1996 is
comprised of the expense  incurred to settle several  property  related  claims,
none of which are individually significant.

First Nine Months of 1997 Compared to First Nine Months of 1996

The  comparisons  for the first nine months of 1997 and the first nine months of
1996 are consistent  with those  discussed in the third quarter of 1997 compared
to the third quarter 1996 except for the following:

Oil Revenue

Oil  revenue  decreased  $3,443,000  during  the  first  nine  months of 1997 as
compared  with the first nine  months of 1996.  The  decrease is the result of a
decrease in production  from 749,000  barrels in 1996 to 581,000 barrels in 1997
and a decrease in the average oil price from $19.49 per barrel in 1996 to $19.20
per barrel in 1997.  The  decrease  in oil  production  is due to the  temporary
shut-in of two wells in the  Louisiana  area  during the second  quarter of 1997
while  workover  procedures  were  performed  and  production  declines on wells
located in the West Texas area.

The effect of HEP=s  hedging  transactions  during the first nine months of 1997
was to  decrease  HEP=s  average  oil price from $19.56 per barrel to $19.20 per
barrel,  representing  a  reduction  in revenue  from  hedging  transactions  of
$209,000.

Gas Revenue

Gas  revenue  decreased  $2,249,000  during  the  first  nine  months of 1997 as
compared  with the first nine  months of 1996.  The  decrease is the result of a
decrease in  production  from  9,790,000  mcf in 1996 to  8,588,000  mcf in 1997
partially offset by an increase in price from $2.18 per mcf in 1996 to $2.22 per
mcf in 1997.  The decrease in production is due to the temporary  shut-in of two
wells in the  Louisiana  area during the second  quarter of 1997 while  workover
procedures  were performed and production  declines on wells located in the West
Texas area.



<PAGE>


The effect of HEP's  hedging  transactions  during the first nine months of 1997
was to  decrease  HEP's  average  gas price from $2.40 per mcf to $2.22 per mcf,
representing a $1,546,000 reduction in revenue from hedging transactions.

Production Operating Expense

Production  operating expense decreased $172,000 during the first nine months of
1997 as compared  with the first nine months of 1996.  The decrease is primarily
due to lower  production  taxes and  operating  expenses  due to the decrease in
production previously discussed.

Equity in Earnings of HCRC

Equity in earnings of HCRC  increased  $157,000  during the first nine months of
1997 as compared  with the first nine months of 1996.  The increase is primarily
due to lower operating  expenses  combined with lower  depletion  expense during
1997.

Litigation Settlement

Litigation  settlement  income during the first nine months of 1997 is comprised
of insurance  proceeds which reimbursed a portion of expense incurred in a prior
period to settle certain  litigation.  Litigation  settlement expense during the
first nine months of 1996  consists  primarily of expenses  incurred to settle a
property related lawsuit.



<PAGE>


PART II  -    OTHER INFORMATION


ITEM 1  -     LEGAL PROCEEDINGS

              Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
              year ended December 31, 1996.


ITEM 2  -     CHANGES IN SECURITIES

              None.


ITEM 3  -     DEFAULTS UPON SENIOR SECURITIES

              None.


ITEM 4  -     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
             
              None.


ITEM 5  -     OTHER INFORMATION

              None.


ITEM 6  -     EXHIBITS AND REPORTS ON FORM 8-K

              Exhibit

               10.16  Amendment  No.  1 to Third  Amended  and  Restated  Credit
               Agreement dated as of October 31, 1997.


<PAGE>


SIGNATURE

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


                                               HALLWOOD ENERGY PARTNERS, L.P.
                                                BY:    HEPGP LTD.
                                                       General Partner

                                                       BY:  HALLWOOD G.P., INC.
                                                             General Partner




Date:  November 14, 1977                                By: Robert S.Pfeiffer
                                                            Robert S. Pfeiffer,
                                                              Vice President
                                                       (Chief Financial Officer)