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


                                    Form 10-Q

                             Amended March 19, 1997
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, 1996

     |_|      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 12, 1996

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

                                                   Page 1 of 21


<PAGE>


<TABLE>
<CAPTION>

PART I.           FINANCIAL INFORMATION
ITEM 1.           FINANCIAL STATEMENTS

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



                                                                                 September 30,            December 31,
                                                                                   1996                     1995

CURRENT ASSETS
<S>                                                                                 <C>                      <C>
     Cash and cash equivalents                                                      $    7,499               $   4,977
     Accounts receivable:
         Oil and gas sales                                                               6,913                   6,767
         Trade                                                                           4,103                   2,860
     Due from affiliates                                                                                         1,833
     Prepaid expenses and other current assets                                           1,153                   1,091
     Net working capital of affiliates                                                     144
                                                                                    ----------
                  Total                                                                 19,812                  17,528
                                                                                      --------                 -------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
     method):
         Proved mineral interests                                                      604,276                 601,323
         Unproved mineral interests                                                      1,280                     684
     Furniture, fixtures and other                                                       3,278                   3,090
                                                                                    ----------               ---------
                  Total                                                                608,834                 605,097

     Less accumulated depreciation, depletion,
         amortization and property impairment                                         (520,920)               (510,171)
                                                                                       -------                 -------
                  Total                                                                 87,914                  94,926
                                                                                      --------                --------

OTHER ASSETS
     Investment in common stock of HCRC                                                 13,159                  11,491
     Deferred expenses and other assets                                                    208                     232
                                                                                    ----------              ----------
                  Total                                                                 13,367                  11,723
                                                                                      --------                --------

TOTAL ASSETS                                                                          $121,093                $124,177
                                                                                       =======                 =======










<FN>

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

                                                        -2-

<PAGE>
<TABLE>
<CAPTION>



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




                                                                                    September 30,           December 31,
                                                                                       1996                     1995

CURRENT LIABILITIES
<S>                                                                                  <C>                      <C>
     Accounts payable and accrued liabilities                                        $  15,603                $ 16,369
     Net working capital deficit of affiliates                                                                   5,061
     Due to affiliates                                                                     861
     Current portion of contract settlement                                                                        374
     Current portion of long-term debt                                                   3,873                      87
                                                                                     ---------             -----------
                  Total                                                                 20,337                  21,891
                                                                                      --------                --------

NONCURRENT LIABILITIES
     Long-term debt                                                                     31,398                  37,557
     Contract settlement                                                                 2,456                   2,397
     Deferred liability                                                                  1,530                   1,718
                                                                                     ---------               ---------
                  Total                                                                 35,384                  41,672
                                                                                      --------                --------
                      Total Liabilities                                                 55,721                  63,563
                                                                                      --------                --------

MINORITY INTEREST IN SUBSIDIARIES                                                        3,356                   3,042
                                                                                     ---------               ---------

PARTNERS' CAPITAL
     Class A Units - 9,977,254 Units issued,  9,077,496  outstanding in 1996 and
         9,193,159 outstanding
         in 1995                                                                        59,504                  59,614
     Class B Subordinated Units - 143,773 Units
         outstanding in 1996 and 1995                                                    1,154                   1,062
     Class C Units - 664,063 outstanding in 1996 and
         -0- outstanding in 1995                                                         5,146
     General Partner                                                                     3,194                   2,981
     Treasury Units - 899,758 Units in 1996 and
         784,095 Units in 1995                                                          (6,982)                 (6,085)
                                                                                     ---------               ---------
                  Partners' Capital - Net                                               62,016                  57,572
                                                                                      --------               ---------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                               $121,093                $124,177
                                                                                       =======                 =======






<FN>

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

                                                        -3-

<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,
                                                                                          1996                    1995

REVENUES:
<S>                                                                                  <C>                     <C>
     Oil revenue                                                                     $   4,478               $   4,607
     Gas revenue                                                                         6,593                   6,188
     Pipeline, facilities and other                                                        607                     388
     Interest                                                                              125                      71
                                                                                    ----------              ----------
                                                                                        11,803                  11,254
                                                                                      --------                 -------

EXPENSES:
     Production operating                                                                2,687                   3,119
     Facilities operating                                                                  119                     213
     General and administrative                                                          1,215                   1,089
     Depreciation, depletion and amortization                                            3,226                   4,057
     Interest                                                                              928                   1,056
                                                                                    ----------                --------
                                                                                         8,175                   9,534
                                                                                     ---------                 -------

OTHER INCOME (EXPENSES):
     Equity in income of HCRC                                                              500                   1,304
     Minority interest in net income of subsidiaries                                      (621)                   (349)
     Litigation settlement                                                                  (2)                   (363)
                                                                                  ------------               ---------
                                                                                          (123)                    592
                                                                                    ----------               ---------

NET INCOME                                                                               3,505                   2,312
                                                                                     ---------                --------

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

NET INCOME FOR GENERAL PARTNER,
     CLASS A AND CLASS B LIMITED PARTNERS                                           $    3,339               $   2,312
                                                                                     =========                ========

ALLOCATION OF NET INCOME:
     General partner                                                               $       590              $      361
                                                                                    ==========               =========
     Class A and Class B Limited partners                                           $    2,749               $   1,951
                                                                                     =========                ========
     Per Class A Unit and Class B Unit                                            $        .30             $       .20
                                                                                   ===========              ==========
     Weighted average Class A Units and
         Class B Units outstanding                                                       9,221                   9,793
                                                                                     =========                ========



<FN>

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

                                                        -4-

<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,
                                                                                         1996                  1995

REVENUES:
<S>                                                                                  <C>                      <C>
     Oil revenue                                                                     $  14,600                $ 12,796
     Gas revenue                                                                        21,322                  16,899
     Pipeline, facilities and other                                                      2,039                   1,806
     Interest                                                                              331                     247
                                                                                    ----------              ----------
                                                                                        38,292                  31,748
                                                                                      --------                --------

EXPENSES:
     Production operating                                                                8,379                   8,208
     Facilities operating                                                                  551                     591
     General and administrative                                                          3,133                   3,736
     Depreciation, depletion and amortization                                           10,554                  12,081
     Impairment of oil and gas properties                                                                       11,051
     Interest                                                                            3,047                   3,103
                                                                                     ---------               ---------
                                                                                        25,664                  38,770
                                                                                      --------                --------

OTHER INCOME (EXPENSES):
     Equity in income (loss) of HCRC                                                     1,227                  (1,049)
     Minority interest in net income of subsidiaries                                    (2,092)                   (987)
     Litigation settlement                                                                (230)                   (393)
                                                                                    ----------              ----------
                                                                                        (1,095)                 (2,429)
                                                                                     ---------               ---------

NET INCOME (LOSS)                                                                       11,533                  (9,451)

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

NET INCOME (LOSS) FOR GENERAL PARTNER,
     CLASS A AND CLASS B LIMITED PARTNERS                                            $  11,035               $  (9,451)
                                                                                      ========                ========

ALLOCATION OF NET INCOME (LOSS):
     General partner                                                                $    1,923             $       840
                                                                                     =========              ==========
     Class A and Class B Limited partners                                           $    9,112                $(10,291)
                                                                                     =========                 =======
     Per Class A Unit and Class B Unit                                            $        .99             $    (1.05)
                                                                                   ===========              =========
     Weighted average Class A Units and
         Class B Units outstanding                                                       9,246                   9,800
                                                                                      ========               =========


<FN>

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

                                                        -5-

<PAGE>

<TABLE>
<CAPTION>


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


                                                                                             For the Nine Months Ended
                                                                                                  September 30,
                                                                                          1996                    1995

OPERATING ACTIVITIES:
<S>                                                                                   <C>                     <C>
Net income (loss)                                                                     $ 11,533                $ (9,451)
     Adjustments  to  reconcile  net  income  (loss)  to net  cash  provided  by
          operating activities:
              Depreciation, depletion, amortization and impairment                      10,554                  22,980
              Depreciation charged to affiliates                                           195                     200
              Amortization of deferred loan costs and other assets                         122                     152
              Noncash interest expense                                                     163                     227
              Equity in (earnings) loss of HCRC                                         (1,227)                  1,049
              Minority interest in net income of subsidiaries                            2,092                     987
              Undistributed earnings of affiliates                                        (553)                   (414)
              Recoupment of take-or-pay liability                                         (331)                   (422)
                                                                                     ---------                --------

                      Cash provided by operations before
                           working capital changes                                      22,548                  15,308

     Changes in operating  assets and  liabilities  provided  (used) cash net of
         noncash activity:
              Oil and gas sales receivable                                                (146)                    116
              Trade receivables                                                         (1,243)                 (1,029)
              Due from affiliates                                                        2,287                   1,591
              Prepaid expenses and other current assets                                   (339)                    (48)
              Accounts payable and accrued liabilities                                  (1,220)                 (3,302)
              Due to affiliates                                                            861
                                                                                     ---------
                  Net cash provided by operating activities                             22,748                  12,636
                                                                                       -------                --------

INVESTING ACTIVITIES:
     Additions to property, plant and equipment                                         (2,667)                 (1,715)
     Exploration and development costs incurred                                         (6,838)                 (6,842)
     Proceeds from sales of property, plant and equipment                                5,287                     248
     Refinance of Spraberry investment                                                  (4,715)
     Investment in affiliates                                                             (517)                    (15)
                                                                                     ---------              ----------
                  Net cash used in investing activities                                 (9,450)                 (8,324)
                                                                                      --------                --------

FINANCING ACTIVITIES:
     Payments of long-term debt                                                         (8,373)                 (7,355)
     Proceeds from long-term debt                                                        6,000                  15,000
     Distributions paid                                                                 (6,180)                 (7,515)
     Distributions paid by consolidated subsidiaries to minority shareholders           (1,778)                   (932)
     Payments of contract settlement                                                      (305)                 (1,015)
     Syndication costs and capital contributions                                           (12)                    (53)
     Other financing activities                                                           (128)                    (25)
                                                                                     ---------              ----------
                  Net cash used in financing activities                                (10,776)                 (1,895)
                                                                                       -------                --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                2,522                   2,417

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                                      4,977                   2,409
                                                                                      --------               ---------

END OF PERIOD                                                                        $   7,499               $   4,826
                                                                                     =========                ========

<FN>


                                          The     accompanying   notes   are  an
                                                  integral part of the financial
                                                  statements.

</FN>
</TABLE>

                                                              -6-

<PAGE>



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


NOTE 1 - GENERAL

Hallwood Energy  Partners,  L. P. ("HEP") is a publicly traded Delaware  limited
partnership engaged in the development,  production,  sale and transportation of
oil and gas and in the  acquisition,  exploration,  development and operation of
oil and gas properties.  The principal  objectives of HEP are to maintain and to
expand its  reserve  base and to provide  cash  distributions  to holders of its
units representing limited partner interests  ("Units").  The general partner of
HEP is Hallwood Energy Corporation ("HEC") which has been engaged in oil and gas
exploration and development since its incorporation in 1968.

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
HEC is the sole  general  partner of HEPO.  Hallwood  G. P.,  Inc.  ("HGPI"),  a
wholly-owned subsidiary of HEC, is the sole general partner, and HEP is the sole
limited  partner 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  footnotes included in HEP's December
31, 1995 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").

Treasury Units

HEP owns  approximately 46% and 40% of the outstanding  common stock of HCRC, at
September  30,  1996 and  December  31,  1995,  respectively,  while  HCRC  owns
approximately  19% of HEP's Units at  September  30, 1996 and December 31, 1995.
Consequently,  HEP has an  interest  in 899,758  and 784,095 of its own Units at
September 30, 1996 and December 31, 1995, respectively.  These Units are treated
as treasury units in the accompanying financial statements.

Reclassifications

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


                                                        -7-

<PAGE>



NOTE 2 - DEBT

During the first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit  Agreement  ("Credit  Agreement") to extend the term
date of its line of credit to May 31, 1997.  Under the Credit  Agreement  and an
Amended  and  Restated  Note  Purchase  Agreement  ("Note  Purchase  Agreement")
(collectively  referred to as the "Credit  Facilities") HEP has a borrowing base
of $48,000,000. HEP has amounts outstanding at September 30, 1996 of $26,700,000
under the Credit  Agreement and  $8,571,000  under the Note Purchase  Agreement.
HEP's  borrowing base is further reduced by an outstanding  contract  settlement
obligation  of  $2,456,000;   therefore,   its  unused  borrowing  base  totaled
$10,273,000 at November 12, 1996.

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 1997  through  additional
borrowings under the Credit  Agreement;  thus, no portion of HEP's Note Purchase
Agreement is classified as current as of September 30, 1996.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75%  (7.2% at  September  30,  1996).  Interest is payable  monthly,  and
quarterly  principal  payments of  $1,937,000,  as adjusted for the  anticipated
borrowings  to fund the  Note  Purchase  Agreement  payment  due in April  1997,
commence May 31, 1997.

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 distributions received from affiliates.

HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and  $5,000,000 for 1998. 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 two 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 other is an interest rate swap with a fixed rate
of 7.49%. 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 - STATEMENT OF CASH FLOWS

Cash paid for interest  during the nine months ended September 30, 1996 and 1995
was $2,761,000 and $2,495,000, respectively.


NOTE 4 - PROPERTY INTEREST ACQUISITION

On July 1, 1996, HEP and HCRC completed a transaction  involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interests in 38 coal bed
methane wells located in La Plata County,  Colorado and Rio Arriba  County,  New
Mexico.  Thirty-four  of the wells,  estimated to have  reserves of 53 BCF, were
assigned to 44 Canyon LLC ("44  Canyon"),  a special  purpose  entity owned by a
large east coast financial institution.  The wells qualify for tax credits under
Section  29 of the  Internal  Revenue  Code.  HPI will  manage and  operate  the
properties on behalf of 44 Canyon.  The $27.8 million  purchase price was funded
by 44 Canyon through the sale of a volumetric production payment to an affiliate
of Enron Capital & Trade Resources  Corp., a subsidiary of Enron Corp., the sale
of a subordinated  production  payment and certain other property  interests for
$3.45 million to an affiliate of HEP and HCRC, and additional  cash  contributed
by the owners of 44

                                                        -8-

<PAGE>



Canyon.  The  affiliate  of  HEP  and  HCRC  which  purchased  the  subordinated
production  payment and other  property  interests  is owned  equally by HEP and
HCRC.  The  interests  in the four  wells in Rio  Arriba  County  were  acquired
directly by HEP and HCRC. As a result of the transaction, HEP expects to add 9.8
BCF of gas  to its  reserve  base,  which  represents  approximately  50% of its
estimated 1996 production.


NOTE 5 - LEGAL PROCEEDINGS

In June 1996, HEP and the other parties to the lawsuits styled Lamson  Petroleum
Corporation  v.  Hallwood  Petroleum,  Inc.  et al.  settled the  lawsuits.  The
plaintiffs in the lawsuits  claimed they had valid leases  covering  streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille  #1  well,  Evangeline  Shrine  Club #1 well and  Duhon #1 well,  which
represented approximately .4% to 2.3% of HEP's interest in these properties, and
they were  entitled to a portion of the  production  from the wells  dating from
February 1990. In the settlement,  HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000.  HEP has not recognized  revenue  attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000, had
been placed in escrow pending the resolution of the lawsuits.  The excess of the
cash paid over the  escrowed  amounts,  is reflected  as  litigation  settlement
expense in the accompanying  financial  statements.  The cross-conveyance of the
interests in the leases will result in a decrease in HEP's  reserves of $374,000
in future net revenues, discounted at 10%.


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  $22,748,000  of cash flow from  operating  activities  during the
first nine months of 1996.

The other primary cash inflow was:

     o   $5,287,000 in proceeds from the sale of property

     o   $6,000,000 in proceeds from long-term debt

Cash was used primarily for:

     o   Additions to property and development costs incurred of $9,505,000

     o   Payments of long-term debt of $8,373,000

     o   Refinance of Spraberry investment of $4,715,000

     o   Distributions to Unitholders of $6,180,000

     o   Payments of contract settlement of $305,000

When combined with  miscellaneous  other cash  activity  during the period,  the
result was an increase of $2,522,000  in HEP's cash from  $4,977,000 at December
31, 1995 to $7,499,000 at September 30, 1996.


                                                        -9-

<PAGE>



Development Projects and Acquisitions

Through September 30, 1996, HEP incurred approximately $441,000 for the purchase
of shares of Hallwood Consolidated Resources Corporation ("HCRC") and $9,505,000
for  exploration,  development  and  acquisition  costs  toward the revised 1996
capital budget of $12,700,000.  The expenditures were comprised of approximately
$6,838,000  for  exploration  and  development  expenditures  and  approximately
$2,667,000 for property acquisitions.  A description of significant  exploration
and development projects to date in 1996 follows.

During the second quarter of 1996,  HEP purchased  12,965 shares of HCRC for $34
per share.  The shares were  originally  purchased by HCRC in connection with an
odd lot  repurchase  offer and then were resold to HEP at the price paid by HCRC
for such shares.

HEP continues to devote capital resources to the West Texas Kermit area in 1996.
HEP drilled or participated in the drilling of fourteen wells, thirteen of which
were  successful,  and participated in four  recompletions,  three of which were
successful,  in the first nine months of 1996, for a total cost of approximately
$1,100,000.  The wells in this area are currently  producing  approximately  700
gross equivalent  barrels of oil per day. HEP's interest in these wells averages
27%. HEP plans to drill or recomplete up to nine additional wells by year end.

HEP  acquired 106 square miles of three  dimensional  (3-D)  seismic data on the
Cowden  Ranch in Crane  County,  Texas.  The prospect is operated by a major oil
company,  and HEP has a 12.5% working interest.  HEP's share of costs to date is
$455,000.  Seismic  interpretation was recently  completed,  and two exploratory
wells are planned for the fourth quarter of 1996,  with  additional  exploratory
activity to follow in 1997.

HEP  acquired 3-D seismic  data and related  acreage in the Merkel  Project Area
which  covers  18 square  miles in Jones,  Taylor  and  Nolan  Counties,  Texas.
Expenditures  in the first nine months of 1996 totaled  $567,000.  Thus far, HEP
has  participated  in drilling  five wells on four  exploration  prospects for a
total cost of $135,000,  including  one well  drilled in late 1995.  Four of the
wells are each  producing at average  rates of 70 gross  barrels of oil per day,
two of the wells  encountered  multiple pay zones but only one zone is currently
producing, and one well was unsuccessful.  HEP's interest in the wells is 12.5%.
Two wells are  planned  for the fourth  quarter of 1996,  and an  additional  10
prospects  will be tested in 1997 and beyond.  An  additional 74 square miles of
3-D seismic data, which is presently being interpreted, was acquired in the same
area.  HEP's  working  interest  in  this  area  averages  27.5%,  and  prospect
exploratory  drilling will begin in the first quarter of 1997.  Preliminary work
indicates as many as 25 wells may be drilled.

HEP  participated in the drilling of two nonoperated  wells in Williams  County,
North  Dakota in the latter part of 1995 and the first  quarter of 1996,  one of
which was dry and the other  only  marginally  successful,  for a total  cost of
approximately  $300,000.  HEP also drilled an  exploratory  dry hole in Richland
County,  Montana,  at a cost of $150,000.  HEP completed an Interlake  Formation
development  well,  drilled in the second  quarter,  at a cost of  approximately
$535,000. This well is currently producing at a rate of 130 gross barrels of oil
per day, and HEP's interest is 45%.

HEP incurred approximately $230,000 in the first quarter, net to HEP's interest,
for four  recompletions  and one drilled  well in the Rocker "b" Ranch in Reagan
County,  Texas.  This  activity has  increased  HEP's share of  production by 44
equivalent  barrels of oil per day. During the first quarter,  HEP also acquired
interests  in five  additional  producing  leases on the  Rocker "b" Ranch for a
total of $93,000.  Effective  April 1, 1996, HEP repaid its share of the debt of
Hallwood   Spraberry  Drilling  Company,   L.L.C.   ("HSD")  through  additional
borrowings  under its bank credit  agreement and assumed direct ownership of its
share of HSD's  properties.  In the  second  and  third  quarters  of 1996,  HEP
recompleted  five  wells,  four  of  which  were  successful,  and  drilled  one
additional  well for a total cost of $230,000.  This  activity  increased  HEP's
share of  production  by 57  equivalent  barrels  of oil per day.  HEP  plans to
recomplete  at least five more wells  before  year end and will  consider  other
work, if the capital is available. Exploitation in this area is expected to slow
toward the end of 1997 as HEP's undeveloped acreage position declines.




                                                       -10-

<PAGE>



In the San Juan Basin area of  Colorado,  HEP,  through  an  affiliate  La Plata
Associates LLC ("LPA"),  acquired interests in 34 coal bed methane wells located
in La Plata  County,  Colorado for  $1,734,000.  HEP's  interest in the wells is
expected  to  add  9.8  bcf  of  gas  to  its  reserve  base,  which  represents
approximately  52%  of  its  estimated  1996  production.  The  acquisition  was
completed on July 1, 1996. Seven refracs/recompletions have been completed since
July  1 at  a  net  cost  to  HEP  of  approximately  $300,000.  Numerous  other
recompletion  and facility  projects are planned for the remainder of 1996 at an
estimated net cost to HEP of $490,000.  Gross  production has increased by 2,500
mcf of gas per day as a result  of the work  done  thus  far.  Similar  activity
levels in 1997 are  anticipated  on these newly  acquired  properties.  In other
parts of the New Mexico portion of the San Juan Basin, HEP has recompleted three
wells, two of which were successful, drilled two wells and is converting another
well to be a  disposal  well.  The total  cost for this work was  $497,000,  and
production  has  increased  by  2,000  mcf of gas per day.  HEP's  share of this
production is approximately 50%.

HEP participated in a 13 square mile 3-D seismic shoot at the Packsaddle Project
in the Big Horn Basin of Wyoming. The data is now being processed and additional
development  and  exploration is expected in the area  following  HEP's previous
discovery. HEP's ownership in the Big Horn Basin continues to increase through a
joint venture  created to evaluate a 4,000 mile 2-D Seismic Data Base from which
HEP hopes to create additional drillable prospects.

In September,  HEP spent $225,000 for a recompletion of the A. L. Boudreaux well
into a  shallower  interval  of the  Bol  Mex 3  Formation  after  the  previous
completion  in the  Bol  Mex 3  Formation  began  to  produce  water  and  sand.
Production  after the  recompletion is currently 22 mmcf per day and 475 barrels
of condensate per day.

Numerous other  projects,  which are  individually  less  significant  have been
completed or are underway in Kansas, Louisiana,  Texas and New Mexico, including
participation in five other 3-D seismic data  acquisition  programs not included
in the above activity.

Property Sales

During the first quarter of 1996, HEP received approximately  $1,300,000 for the
sale of its  interests in the Hoople  Field in Crosby  County,  Texas.  HEP also
received  another  $88,000 in early  April for the sale of various  nonstrategic
properties at auction.  In June 1996, HEP completed the sale of its interests in
the Bethany  Longstreet  area of  Louisiana  (approximately  575,000  equivalent
barrels of oil,  measured  using  December 31, 1995  pricing) for  approximately
$3,800,000.

Distributions

HEP declared  distributions  of $.13 per Class A Unit and $.25 per Class C Unit,
payable on November 15, 1996 to Unitholders of record on September 30, 1996.

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 first quarter of 1995, HEP and its lenders amended and restated HEP's
Amended and Restated Credit  Agreement  ("Credit  Agreement") to extend the term
date of its line of credit to May 31, 1997.  Under the Credit  Agreement  and an
Amended  and  Restated  Note  Purchase  Agreement  ("Note  Purchase  Agreement")
(collectively  referred to as the "Credit  Facilities") HEP has a borrowing base
of $48,000,000. HEP has amounts outstanding at September 30, 1996 of $26,700,000
under the Credit  Agreement and  $8,571,000  under the Note Purchase  Agreement.
HEP's  borrowing base is further reduced by an outstanding  contract  settlement
obligation  of  $2,456,000;   therefore,   its  unused  borrowing  base  totaled
$10,273,000 at November 12,1996.


                                                       -11-

<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 1997  through  additional
borrowings under the Credit  Agreement;  thus, no portion of HEP's Note Purchase
Agreement is classified as current as of September 30, 1996.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate of Deposit rate plus 1.875%, prime plus 1/2% or the Euro-Dollar rate
plus 1.75%  (7.2% at  September  30,  1996).  Interest is payable  monthly,  and
quarterly  principal  payments of  $1,937,000,  as adjusted for the  anticipated
borrowings  to fund the  Note  Purchase  Agreement  payment  due in April  1997,
commence May 31, 1997.

The borrowing base for the Credit  Facilities is  redetermined  semiannually  in
March and September of each year.  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
distributions received from affiliates.

HEP entered into contracts to hedge its interest rate payments on $10,000,000 of
its debt for 1996 and 1997 and  $5,000,000 for 1998. 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 two 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 other is an interest rate swap with a fixed rate
of 7.49%. The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.

Cautionary Statement Regarding Forward-Looking Statements

In the  interest  of  providing  the  Partnership's  unitholders  and  potential
investors with certain information  regarding the Partnership's future plans and
operations, certain statements setforth in this Form 10-Q relate to management's
future plans and objectives.  Such statements are  "forward-looking  statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
in Section 21E of the Securities Exchange act of 1934, as amended.  Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Partnership are, to the knowledge and in the judgment of the
officers  and  directors of the General  Partner,  expected to prove true and to
come to pass,  management  is not  able to  predict  the  future  with  absolute
certainty.  Forward-looking  statements  involve  known  and  unknown  risks and
uncertainties which may cause the Partnership's actual performance and financial
results in future periods to differ materially from any projection,  estimate or
forecasted result.  These risks and uncertainties  include,  among other things,
volatility  of  oil  and  gas  prices,   competition,   risks  inherent  in  the
Partnership's  oil and gas operations,  the inexact nature of  interpretation of
seismic  and other  geological  and  geophysical  data,  imprecision  of reserve
estimates,  the Partneship's ability to replace and expand oil and gas reserves,
and such  other  risks  and  uncertainties  described  from  time to time in the
Partnership's  periodic  reports and filings  with the  Securities  and Exchange
Commission. Accordingly,  unitholders and potential investors are cautioned that
certain events or circumstances  could cause actual results to differ materially
from those projected.

Inflation and Changing Prices

Prices

Prices obtained 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 1995 and 1996.
The following table presents the average prices received each quarter by HEP and
the effects of the hedging transactions discussed below.


                                                       -12-

<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)
                                     (bbl)                   (bbl)                    (mcf)                   (mcf)
<S>                                  <C>                    <C>                       <C>                     <C>

First quarter - 1995                 $16.79                  $17.22                    $1.51                   $1.81
Second quarter - 1995                 18.00                   18.14                     1.39                    1.64
Third quarter - 1995                  16.15                   16.63                     1.54                    1.84
Fourth quarter - 1995                 17.13                   17.57                     1.87                    1.99
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
</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 table provides a summary of HEP's outstanding financial contracts:

<TABLE>
<CAPTION>

                                                  Oil
                                                     Percent of Production             Contract
                     Period                                 Hedged                   Floor Price
                                                                                      (per bbl)
<S>                                                          <C>                        <C>

Last three months of 1996                                     64%                       $18.91
1997                                                          46%                       $17.78
1998                                                          16%                       $15.33
1999                                                           3%                       $15.88
</TABLE>

Between  15% and 100% of the oil  volumes  hedged in each year are  subject to a
participating  hedge  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.  Between  26% and 100% of the  volumes  hedged in each year are
subject to a collar agreement 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 $17.00 to $19.35.

<TABLE>
<CAPTION>

                                                  Gas
                                                     Percent of Production             Contract
                     Period                                 Hedged                   Floor Price
                                                                                      (per mcf)
<S>                                                          <C>                       <C>

Last three months of 1996                                     56%                       $1.96
1997                                                          55%                       $1.97
1998                                                          48%                       $2.02
1999                                                          24%                       $1.86
2000                                                          19%                       $2.01
</TABLE>



                                                       -13-

<PAGE>



Between  0% and 43% of the gas  volumes  hedged  in each year are  subject  to a
collar  agreement  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 $2.65 to $2.93.

During the fourth  quarter  through  October 25, 1996 the oil price (for barrels
not hedged) averaged between $22.00 and $24.00 per barrel.  The weighted average
price of natural gas (for mcf not hedged)  during that period was between  $1.50
and $2.10 per mcf.

Inflation

Inflation did not have a material  impact on HEP in 1995 and is not  anticipated
to have a material impact in 1996.

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 1996, HEP owned  interests which ranged from 54.5% to
68.3% of the Mays, and in 1995, HEP's ownership in the Mays ranged from 54.5% to
68.5%.


                                                       -14-

<PAGE>

<TABLE>
<CAPTION>




                 TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
                           (In thousands except price)
               For the Quarters Ended September 30, 1996 and 1995



                                         For the Quarter Ended September 30, 1996          For the Quarter Ended September 30, 1995
                                         ----------------------------------------          ----------------------------------------
                                              Direct                                           Direct
                                              Owned          Mays           Total              Owned          Mays           Total

<S>                                        <C>             <C>               <C>            <C>             <C>            <C>
Oil production (bbl)                           188             28            216                252             25            277
Gas production (mcf)                         2,692            435          3,127              2,960            408          3,368

Average oil price                           $20.54         $22.03         $20.73             $16.59         $17.08         $16.63
Average gas price                           $ 2.02         $ 2.66         $ 2.11             $ 1.86         $ 1.70         $ 1.84

Oil revenue                                $ 3,861       $    617       $  4,478            $ 4,180       $    427        $ 4,607
Gas revenue                                  5,434          1,159          6,593              5,495            693          6,188
Pipeline, facilities and other revenue         607                           607                388                           388
Interest income                                110             15            125                 56             15             71
                                           -------       --------       --------          ---------       --------      ---------

   Total revenue                            10,012          1,791         11,803             10,119          1,135         11,254
                                            ------         ------         ------             ------         ------         ------

Production operating expense                 2,511            176          2,687              2,941            178          3,119
Facilities operating expense                   119                           119                213                           213
General and administrative expense           1,140             75          1,215                979            110          1,089
Depreciation, depletion, and amortization    2,787            439          3,226              3,607            450          4,057
Interest expense                               928                           928              1,056                         1,056
Litigation settlement expense                    1              1              2                363                           363
Equity in income of HCRC                     (500)                         (500)            (1,304)                       (1,304)
Minority interest                                             621            621                               349            349
                                          --------        -------       --------        -----------        -------       --------

   Total expense                             6,986          1,312          8,298              7,855          1,087          8,942
                                            ------         ------        -------             ------         ------         ------

      Net income                           $ 3,026       $    479        $ 3,505            $ 2,264       $      48        $ 2,312
                                            ======        =======         ======             ======        ========         ======

</TABLE>


                                                              -15-

<PAGE>


<TABLE>
<CAPTION>

                 TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
                           (In thousands except price)
              For the Nine Months Ended September 30, 1996 and 1995



                                         For the Nine Months Ended September 30, 1996   For the Nine Months Ended September 30, 1995
                                         --------------------------------------------   --------------------------------------------
                                               Direct                                     Direct
                                               Owned       Mays        Total              Owned       Mays           Total

<S>                                           <C>          <C>        <C>                <C>          <C>           <C>
Oil production (bbl)                              663          86         749                671          69            740
Gas production (mcf)                            8,386       1,404       9,790              8,479       1,108          9,587

Average oil price                              $19.34      $20.64      $19.49             $17.25      $17.72         $17.29
Average gas price                              $ 2.04      $ 2.99      $ 2.18             $ 1.76      $ 1.79         $ 1.76

Oil revenue                                   $12,825     $ 1,775     $14,600            $11,573     $ 1,223        $12,796
Gas revenue                                    17,123       4,199      21,322             14,921       1,978         16,899
Pipeline, facilities and other revenue          2,039                   2,039              1,806                      1,806
Interest income                                   284          47         331                200          47            247
                                             --------   ---------    --------           --------    --------       --------

   Total revenue                               32,271       6,021      38,292             28,500       3,248         31,748
                                               ------      ------      ------             ------      ------         ------

Production operating expense                    7,855         524       8,379              7,725         483          8,208
Facilities operating expense                      551                     551                591                        591
General and administrative expense              2,826         307       3,133              3,399         337          3,736
Depreciation, depletion, and amortization       9,136       1,418      10,554             10,770       1,311         12,081
Impairment of oil and gas properties                                                      11,051                     11,051
Interest expense                                3,047                   3,047              3,103                      3,103
Litigation settlement expense                     223           7         230                393                        393
Equity in (income) loss of HCRC               (1,227)                 (1,227)              1,049                      1,049
Minority interest                                           2,092       2,092                            987            987
                                             --------      ------     -------        -----------     -------       --------

   Total expense                               22,411       4,348      26,759             38,081       3,118         41,199
                                               ------      ------      ------             ------      ------         ------

      Net income (loss)                       $ 9,860     $ 1,673     $11,533           $(9,581)    $    130       $(9,451)
                                               ======      ======      ======            ======      =======        ======

</TABLE>


                                                            -16-

<PAGE>



Third Quarter of 1996 Compared to Third Quarter of 1995

Oil Revenue

Oil revenue  decreased by $129,000  during the third quarter of 1996 as compared
with the third  quarter of 1995.  The  decrease  is the result of a decrease  in
production from 277,000  barrels in 1995 to 216,000  barrels in 1996,  partially
offset by an increase in the average oil price from $16.63 per barrel in 1995 to
$20.73 per barrel in 1996.  The  decrease in oil  production  is due to property
sales and normal production declines.

The effect of HEP's hedging  transactions,  as described  under  "Inflation  and
Changing Prices," was to decrease HEP's average oil price from $21.66 per barrel
to  $20.73  per  barrel,  representing  a  reduction  in  revenue  from  hedging
transactions of $201,000.

Gas Revenue

Gas revenue  increased by $405,000  during the third quarter of 1996 as compared
with the third  quarter of 1995.  The  increase  is the result of an increase in
price from $1.84 per mcf in 1995 to $2.11 per mcf in 1996 partially  offset by a
decrease in production  from 3,368,000 mcf in 1995 to 3,127,000 mcf in 1996. The
decrease in production is due to property sales and normal production declines.

The effect of HEP's hedging transactions was to decrease HEP's average gas price
from  $2.17 per mcf to $2.11  per mcf,  representing  a  $188,000  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  and tax credit  payments  related to
certain coal bed methane wells. Pipeline,  facilities and other income increased
by $219,000  during the third quarter of 1996 as compared with the third quarter
of 1995,  primarily  as a result of a pay-out  adjustment  on one of HEP's wells
during the third quarter of 1995.

Interest Income

The increase in interest  income of $54,000  during the third quarter of 1996 as
compared  with the third  quarter of 1995  resulted  from a higher  average cash
balance during the third quarter of 1996 as compared with the same period during
1995.

Production Operating Expense

Production operating expense decreased $432,000 during the third quarter of 1996
as compared with the third quarter of 1995, primarily due to decreased operating
costs resulting from cost savings  measures  implemented  during 1995 as well as
the property sales and lower production described above.

Facilities Operating Expense

Facilities  operating expense  represents the costs of operating and maintaining
two gathering systems located in New Mexico.  Costs decreased $94,000 during the
third quarter of 1996 as compared  with the third quarter of 1995  primarily due
to the sale of a facility in Louisiana during the second quarter of 1996.


                                                       -17-

<PAGE>



General and Administrative Expense

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  increased  $126,000 during the third quarter of 1996 as compared
with the third quarter of 1995 primarily because certain bank fees were incurred
during the third quarter in 1996 and during the first quarter in 1995.

Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense decreased $831,000 during the
third quarter of 1996 as compared  with the third quarter of 1995.  The decrease
is  primarily  the result of lower  capitalized  costs in 1996 as compared  with
1995,  due to the property  impairments  recorded  during  1995,  as well as the
property sales discussed above.

Interest Expense

Interest expense decreased $128,000 during the third quarter of 1996 as compared
with the third  quarter of 1995,  primarily  as the result of lower  outstanding
debt during 1996.

Equity in Income of HCRC

Equity in income of HCRC decreased  $804,000 during the third quarter of 1996 as
compared with the third quarter of 1995.  The decrease is primarily due to a tax
adjustment on HCRC during 1995.

Minority Interest in Net Income of Subsidiaries

Minority  interest  in  net  income  of  subsidiaries   represents  unaffiliated
partners'  interest in the net income of the May  Partnerships.  The increase of
$272,000  is due to an  increase  in the  net  income  of the  May  Partnerships
resulting from increased  production on their properties,  as well as higher oil
and gas prices during 1996.

Litigation Settlement Expense

Litigation  settlement  expense  during  the  third  quarter  of  1995  consists
primarily  of expenses  incurred to settle  various  individually  insignificant
claims against HEP.

First Nine Months of 1996 Compared to the First Nine Months of 1995

The  comparisons  for the first nine months of 1996 and the first nine months of
1995 are consistent  with those  discussed in the third quarter of 1996 compared
to the third quarter of 1995 except for the following.

Oil Revenue

Oil  revenue  increased  $1,804,000  during  the  first  nine  months of 1996 as
compared  with the first nine months of 1995.  The  increase is  comprised of an
increase  in  average  oil prices  from  $17.29 per barrel in 1995 to $19.49 per
barrel in 1996 combined with an increase in production  from 740,000  barrels in
1995 to 749,000  barrels in 1996.  The  production  increase is due to increased
production  from  developmental  and exploratory  drilling  projects in Montana,
Wyoming and West Texas partially offset by property sales and normal  production
declines.

The effect of HEP's hedging transactions was to decrease HEP's average oil price
from $19.93 per barrel to $19.49 per barrel, representing a $330,000 decrease in
revenues.


                                                       -18-

<PAGE>



Gas Revenue

Gas  revenue  increased  $4,423,000  during  the  first  nine  months of 1996 as
compared  with the first nine months of 1995.  The  increase is  comprised of an
increase  in price from $1.76 per mcf in 1995 to $2.18 per mcf in 1996  combined
with an increase in  production  from  9,587,000 mcf in 1995 to 9,790,000 mcf in
1996. The production increase is due to higher state allowable production limits
in Louisiana as well as increased  production from exploratory and developmental
drilling projects in Montana, Wyoming and West Texas, which are partially offset
by property sales and normal production declines.

The effect of HEP's hedging transactions was to decrease HEP's average gas price
from  $2.24 per mcf to $2.18  per mcf,  representing  a  $587,000  reduction  in
revenue from hedging transactions.

Production Operating Expense

Production  operating expense increased $171,000 during the first nine months of
1996 as compared with the first nine months of 1995, primarily as a result of an
increase in production taxes and operating costs associated with the increase in
production as described above.

General and Administrative Expense

General and  administrative  expense  decreased  $603,000  during the first nine
months of 1996 as compared  with the first nine months of 1995  primarily due to
lower administrative costs due to personnel reductions during 1995.

Impairment of Oil and Gas Properties

Impairment  of oil and gas  properties  during  the  first  nine  months of 1995
includes the  write-off  of HEP's  Indonesian  operations  as well as a property
impairment  recorded  because  capitalized  costs at June 30, 1995  exceeded the
present value  (discounted at 10%) of estimated  future net revenues from proved
oil and gas reserves based on prices received at that date.

Equity in Income (Loss) of HCRC

Equity in income  (loss) of HCRC  increased  $2,276,000  during  the first  nine
months of 1996 as compared  with the first nine months of 1995.  The increase is
primarily due to HCRC's  impairment  expense resulting from the write-off of its
Indonesian operations during the first quarter of 1995 and a property impairment
recorded by HCRC during the second quarter of 1995.


                                                       -19-

<PAGE>



PART II  -    OTHER INFORMATION


ITEM 1  -     LEGAL PROCEEDINGS

                      Reference is made to Item 8 - Notes 13 and 14 of Form 10-K
                      for the year ended  December 31, 1995, and Item 1 - Note 5
                      of this Form 10-Q.


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

                      None.



                                                       -20-

<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: HALLWOOD ENERGY CORPORATION
                                 General Partner



Date:    March 19, 1997                      By:     /s/Robert S. Pfeiffer
     -----------------------------------        -----------------------------
                                             Robert S. Pfeiffer, Vice President
                            (Chief Financial Officer)



                                                       -21-

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