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 March 31, 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 May 13, 1997


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

                    Page 1 of 24 (Exhibit begins on Page 18)


<PAGE>

<TABLE>
<CAPTION>


PART I.           FINANCIAL INFORMATION
ITEM 1.           FINANCIAL STATEMENTS

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



                                                                                     March 31,              December 31,
                                                                                      1997                       1996

CURRENT ASSETS
<S>                                                                                  <C>                    <C>       
     Cash and cash equivalents                                                       $  13,373              $    5,540
     Accounts receivable:
         Oil and gas revenues                                                            7,190                   9,405
         Trade                                                                           3,496                   4,507
     Prepaid expenses and other current assets                                             961                     928
                                                                                    ----------              ----------
              Total                                                                     25,020                  20,380
                                                                                      --------                --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
     method):
         Proved mineral interests                                                      609,989                 607,875
         Unproved mineral interests - domestic                                           1,547                   1,244
     Furniture, fixtures and other                                                       3,394                   3,366
                                                                                     ---------               ---------
              Total                                                                    614,930                 612,485

     Less accumulated depreciation, depletion,
         amortization and property impairment                                         (526,943)              (523,936)
                                                                                       -------                -------
              Total                                                                     87,987                  88,549
                                                                                      --------                --------

OTHER ASSETS
     Investment in common stock of HCRC                                                 14,680                  13,700
     Deferred expenses and other assets                                                    143                     163
                                                                                    ----------              ----------
              Total                                                                     14,823                  13,863
                                                                                      --------                --------

TOTAL ASSETS                                                                          $127,830                $122,792
                                                                                       =======                 =======












<FN>

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

                                                        -2-

<PAGE>
<TABLE>
<CAPTION>



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




                                                                                     March 31,              December 31,
                                                                                        1997                    1996

CURRENT LIABILITIES
<S>                                                                                   <C>                    <C>      
     Accounts payable and accrued liabilities                                         $ 16,312               $  15,185
     Net working capital deficit of affiliate                                              288                     159
     Due to affiliates                                                                     858                     581
     Current portion of contract settlement                                              2,569
     Current portion of long-term debt                                                  10,961                   5,810
                                                                                      --------               ---------
              Total                                                                     30,988                  21,735
                                                                                      --------                --------

NONCURRENT LIABILITIES
     Long-term debt                                                                     24,310                  29,461
     Contract settlement                                                                                         2,512
     Deferred liability                                                                  1,488                   1,533
                                                                                     ---------               ---------
              Total                                                                     25,798                  33,506
                                                                                     ---------                --------

              Total Liabilities                                                         56,786                  55,241
                                                                                      --------                --------

MINORITY INTEREST IN AFFILIATES                                                          3,451                   3,336
                                                                                     ---------               ---------

PARTNERS' CAPITAL
     Class A Units - 9,977,254 Units issued, 9,077,949
         outstanding in 1997 and 1996                                                   64,619                  61,487
     Class B Subordinated Units - 143,773 Units
         outstanding in 1997 and 1996                                                    1,324                   1,254
     Class C Units - 664,063 Units outstanding in 1997 and 1996                          5,146                   5,146
     General Partner                                                                     3,483                   3,307
     Treasury Units - 899,305 Units in 1997 and 1996                                    (6,979)                (6,979)
                                                                                     ---------              ---------
              Partners' Capital - Net                                                   67,593                  64,215
                                                                                      --------                --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                               $127,830                $122,792
                                                                                       =======                 =======









<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
                                                                                                March 31,
                                                                                        1997                    1996

REVENUES:
<S>                                                                                 <C>                     <C>       
     Oil revenue                                                                    $    4,511              $    5,085
     Gas revenue                                                                         7,473                   7,808
     Pipeline, facilities and other                                                        763                     735
     Interest                                                                              123                      73
                                                                                    ----------             -----------
                                                                                        12,870                  13,701
                                                                                      --------                --------

EXPENSES:
     Production operating                                                                2,789                   3,030
     Facilities operating                                                                  178                     275
     General and administrative                                                          1,224                   1,168
     Depreciation, depletion and amortization                                            2,952                   3,862
     Interest                                                                              851                   1,122
                                                                                    ----------               ---------
                                                                                         7,994                   9,457
                                                                                     ---------               ---------

OTHER INCOME (EXPENSES):
     Equity in earnings of HCRC                                                            980                     376
     Minority interest in net income of affiliates                                        (560)                   (867)
                                                                                    ----------              ----------
                                                                                           420                    (491)
                                                                                    ----------              ----------

NET INCOME                                                                               5,296                   3,753

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

NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
     CLASS A AND CLASS B LIMITED PARTNERS                                           $    5,130              $    3,587
                                                                                     =========               =========

ALLOCATION OF NET INCOME:
     General partner                                                               $       627             $       687
                                                                                    ==========              ==========
     Class A and Class B Limited partners                                           $    4,503              $    2,900
                                                                                     =========               =========
     Per Class A Unit and Class B Unit                                            $        .48            $        .31
                                                                                   ===========             ===========
     Weighted average Class A Units and Class B Units
         and equivalent Units outstanding                                                9,366                   9,271
                                                                                     =========               =========




<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 CASH FLOWS
                                                    (Unaudited)
                                                  (In thousands)


                                                                                         For the Three Months Ended
                                                                                                 March 31,
                                                                                        1997                    1996

OPERATING ACTIVITIES:
<S>                                                                                 <C>                       <C>     
Net income                                                                          $    5,296                $  3,753
     Adjustments to reconcile net income to net cash
          provided by operating activities:
              Depreciation, depletion and amortization                                   2,952                   3,862
              Depreciation charged to affiliates                                            55                      56
              Amortization of deferred loan costs and other assets                          20                      33
              Noncash interest expense                                                      57                      54
              Equity in earnings of HCRC                                                  (980)                   (376)
              Minority interest in net income                                              560                     867
              Undistributed earnings of affiliates                                        (123)                   (456)
              Recoupment of take-or-pay liability                                          (45)                   (176)
                                                                                   -----------                --------

                  Cash from operations before working capital changes                    7,792                   7,617

     Changes in operating  assets and  liabilities  provided  (used) cash net of
          noncash activity:
              Oil and gas revenues receivable                                            2,215                    (790)
              Trade receivables                                                          1,011                    (280)
              Due from affiliates                                                                                 (527)
              Prepaid expenses and other current assets                                    (33)                    167
              Accounts payable and accrued liabilities                                   1,127                     730
              Due to affiliates                                                            331
                                                                                    ----------
                  Net cash provided by operating activities                             12,443                   6,917
                                                                                      --------                 -------

INVESTING ACTIVITIES:
     Additions to property, plant and equipment                                           (469)                   (313)
     Exploration and development costs incurred                                         (1,708)                 (1,785)
     Proceeds from sales of property, plant and equipment                                                        1,293
     Other investing activities                                                            (70)                    (67)
                                                                                   -----------               ---------
                  Net cash used in investing activities                                 (2,247)                   (872)
                                                                                     ---------                --------

FINANCING ACTIVITIES:
     Payments of long-term debt                                                                                    (87)
     Distributions paid                                                                 (1,914)                 (2,216)
     Distributions paid by consolidated affiliates to minority interest                   (445)                   (332)
     Payment of contract settlement                                                                               (305)
     Syndication costs and capital contributions                                            (4)                    (12)
     Other financing activities                                                                                     (9)
                                                                                 -------------              ----------
                  Net cash used in financing activities                                 (2,363)                 (2,961)
                                                                                     ---------                 -------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                7,833                   3,084

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                                      5,540                   4,977
                                                                                     ---------                 -------

END OF PERIOD                                                                        $  13,373                $  8,061
                                                                                      ========                 =======




<FN>

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

                                                              -5-

<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.  HEP's  objective  is to provide  its  partners  with a
balanced  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 replace production; second, to maintain stable cash
distributions  to  Unitholders;  and third,  to increase HEP's reserve base over
time.  HEP  seeks  to  expand  its  reserve  base  by  continually   evaluating,
prioritizing and developing its existing inventory of development,  exploitation
and  exploration  projects.  In addition,  HEP seeks to expand its  inventory of
projects  through  internal  project  development 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).


                                                        -6-

<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 March 31, 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 ("SFAS 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  accompany  financial  statements  with the pro
forma amounts that would have been  determined in accordance with SFAS 128 is as
follows:


                                           For the Quarter Ending March 31,
                                           1997                         1996

Primary (Basic):
     As reported                           $ .48                        $ .31
     Pro forma                               .49                          .31

Fully Diluted (Diluted):
     As reported                             .48                          .31
     Pro forma                               .48                          .31

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 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 March 31, 1997 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  $2,569,000;   therefore,   its  unused  borrowing  base  totaled
$10,160,000 at May 13, 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.

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% (7.4% at March 31, 1997).  Interest is payable monthly, and quarterly
principal  payments of $1,669,000  commence May 31, 1997.  HEP intends to extend
the  maturity  date of its Credit  Agreement  prior to the  commencement  of the
amortization period.


                                                        -7-

<PAGE>



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 $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 three months ended March 31, 1997 and 1996 was
$774,000 and $842,000, respectively.


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  $12,443,000  of cash flow from  operating  activities  during the
first three months of 1997.

Cash was used primarily for:

     o   Additions to property and development costs incurred of $2,177,000 and

     o   Distributions to Unitholders of $1,914,000

When combined with  miscellaneous  other cash  activity  during the period,  the
result was an increase of $7,833,000  in HEP's cash from  $5,540,000 at December
31, 1996 to $13,373,000 at March 31, 1997.

Development Projects and Acquisitions

Through March 31, 1997, HEP incurred  approximately  $2,177,000 for exploration,
development and acquisition costs toward the 1997 capital budget of $12,500,000.
The expenditures were comprised of approximately  $1,708,000 for exploration and
development  expenditures and approximately  $469,000 for property acquisitions.
HEP  intends to be very active in capital  projects  during the second and third
quarters  of 1997 with  projects  in more than 25 areas,  including  drilling 11
wells in the existing  Spraberry Texas area,  drilling/recompleting  15 wells in
the existing  West Texas  Kermit area,  and  participating  in or operating  ten
seismic prospects. HEP is reviewing possibilities in new locations in Louisiana,
Montana,  North Dakota,  Oklahoma,  Wyoming and Texas. HEP is currently  bidding
with a major oil company on an offshore exploration block in Peru.

A description of significant  exploration  and  development  projects to date in
1997 follows.


                                                        -8-

<PAGE>



HEP has been active in 1997 in the Mercy Field within San Jacinto County,  Texas
with the  drilling of an 11,000 foot  development  well and the  deepening of an
existing  well to a different  formation,  both of which were  successful.  Both
projects are currently in the completion phase with total costs estimated to HEP
of approximately $400,000.

In 1996, HEP acquired 106 square miles of three  dimensional  (3-D) seismic data
on the Cowden Ranch in Crane County,  Texas. Two exploratory  wells were drilled
in 1996,  both of which were dry. In early 1997,  a third  exploratory  well was
drilled  at a total  cost to HEP of  $175,000.  This well was dry in its  target
location and considered noncommercial in an identified shallow formation.

HEP also became active in Glasscock  County,  Texas in 1996 with the acquisition
and  processing  of 66 square  miles of 3-D seismic data and the drilling of one
successful  exploratory  well  prior to the end of the  year.  In 1997,  HEP has
incurred  approximately  $190,000 for the drilling of a second successful 10,000
foot  delineation  well.  This  well  is  currently  producing  at a rate of 230
equivalent  barrels of oil per day, and HEP's  working  interest in this well is
30%. HEP currently plans to drill at least one development  well in this area in
1997 and has identified additional exploration locations.

In the San Juan Basin of New Mexico, HEP is currently  recompleting two wells at
an  estimated  cost of $85,000.  HEP plans to  recomplete  at least one more New
Mexico well and up to seven of their San Juan Basin, Colorado wells in 1997.

The  completion  of  projects  begun in the fourth  quarter of 1996 has cost HEP
approximately  $700,000 in the first quarter of 1997. These additional costs are
comprised  primarily of $230,000  for two  exploratory  wells in  Louisiana  and
miscellaneous costs in the West Texas Kermit, Merkel and Cowden Ranch areas.

The Merkel Project area initially  comprised 10 square miles of 3-D seismic data
in Jones,  Taylor and Nolan  Counties,  Texas.  In 1996 HEP  participated in the
drilling of eight  wells,  seven of which were  successful.  These wells are all
outside  operated and HEP owns an average 12.5%  working  interest in this area.
HEP plans to drill three  additional wells in 1997. Based on the success of this
area in 1996,  HEP acquired 74 additional  miles of 3-D seismic data adjacent to
the  nonoperated  area and plans to drill a minimum of five  wells in 1997,  the
first of which  was dry.  HEP will own a 30%  working  interest  and will be the
operator in the new area.

Distributions

HEP declared  distributions  of $.13 per Class A Unit and $.25 per Class C Unit,
payable on May 15, 1997 to Unitholders of record on March 31, 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 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 March 31, 1997 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  $2,569,000;   therefore,   its  unused  borrowing  base  totaled
$10,160,000 at May 13, 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.

                                                        -9-

<PAGE>



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% (7.4% at March 31, 1997).  Interest is payable monthly, and quarterly
principal  payments of $1,669,000  commence May 31, 1997.  HEP intends to extend
the  maturity  date of its Credit  Agreement  prior to the  commencement  of the
amortization period.

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 $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.

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  set  forth  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 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 Partnership'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 1996 and 1997.
The following  table presents the weighted  average prices received each quarter
by HEP and the effects of the hedging transactions discussed below.


                                                       -10-

<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>  
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
</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 nine months of 1997                                      46%                       $17.78
1998                                                          21%                       $16.41
1999                                                           3%                       $15.88
</TABLE>

Between  12% 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  32% 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 $17.50 to $19.35.
<TABLE>
<CAPTION>


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

<S>                                                           <C>                       <C>  
Last nine months of 1997                                      54%                       $1.97
1998                                                          48%                       $2.02
1999                                                          24%                       $1.86
2000                                                          18%                       $2.01
</TABLE>

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 $2.78 to $2.93.


                                                       -11-

<PAGE>



During the second quarter through April 23, 1997 the weighted  average oil price
(for  barrels not  hedged) was  approximately  $18.75 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $1.80 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%.


                                                       -12-

<PAGE>

<TABLE>
<CAPTION>


                                                      

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



                                              For the Quarter Ended March 31, 1997     For the Quarter Ended March 31, 1996
                                             ------------------------------------      ------------------------------------
                                                Direct                                    Direct  
                                                Owned        Mays       Total              Owned        Mays          Total

<S>                                           <C>           <C>       <C>                <C>           <C>          <C>
Oil production (bbl)                              192           22        214                251           32           283
Gas production (mcf)                            2,609          359      2,968              2,884          510         3,394

Average oil price (per bbl)                    $20.90       $22.68     $21.08             $17.82       $19.16        $17.97
Average gas price (per mcf)                   $  2.41      $  3.28    $  2.52            $  2.08      $  3.54       $  2.30

Oil revenue                                  $  4,012    $     499   $  4,511           $  4,472    $     613      $  5,085
Gas revenue                                     6,295        1,178      7,473              6,002        1,806         7,808
Pipeline, facilities and other revenue            763                     763                735                        735
Interest income                                   106           17        123                 59           14            73
                                             --------    ---------   --------          ---------    ---------     ---------

   Total revenue                               11,176        1,694     12,870             11,268        2,433        13,701
                                               ------      -------     ------             ------      -------        ------

Production operating expense                    2,633          156      2,789              2,848          182         3,030
Facilities operating expense                      178                     178                275                        275
General and administrative expense              1,115          109      1,224              1,055          113         1,168
Depreciation, depletion, and amortization       2,611          341      2,952              3,330          532         3,862
Interest expense                                  851                     851              1,122                      1,122
Equity in income of HCRC                        (980)                   (980)              (376)                      (376)
Minority interest                                              560        560                             867           867
                                          -----------     --------   --------        -----------     --------      --------

   Total expense                                6,408        1,166      7,574              8,254        1,694         9,948
                                              -------      -------    -------            -------      -------       -------

      Net income                             $  4,768    $     528    $ 5,296           $  3,014    $     739      $  3,753
                                              =======     ========     ======            =======     ========       =======

</TABLE>


                                                                -13-

<PAGE>



First Quarter of 1997 Compared to First Quarter of 1996

Oil Revenue

Oil revenue decreased $574,000 during the first quarter of 1997 as compared with
the  first  quarter  of 1996.  The  decrease  is the  result  of a  decrease  in
production from 283,000  barrels in 1996 to 214,000  barrels in 1997,  partially
offset by an increase in the average oil price from $17.97 per barrel in 1996 to
$21.08 per barrel in 1997.  The decrease in oil production is due to a temporary
production  decline on the A.L.  Boudreaux well in the Louisiana area as well as
steep production declines on wells located in the West Texas area.

The effect of HEP's hedging  transactions,  as described  under  "Inflation  and
Changing  Prices,"  during the first  quarter  of 1997,  was to  decrease  HEP's
average oil price from $22.10 per barrel to $21.08 per  barrel,  representing  a
reduction in revenue from hedging transactions of $218,000.

Gas Revenue

Gas revenue decreased $335,000 during the first quarter of 1997 as compared with
the  first  quarter  of 1996.  The  decrease  is the  result  of a  decrease  in
production from 3,394,000 mcf in 1996 to 2,968,000 mcf in 1997 partially  offset
by an increase in price from $2.30 per mcf in 1996 to $2.52 per mcf in 1997. The
decrease  in  production  is due to a temporary  production  decline on the A.L.
Boudreaux  well in the Louisiana  area as well as steep  production  declines on
wells located in the West Texas area.

The effect of HEP's hedging  transactions  during the first quarter of 1997, was
to  decrease  HEP's  average  gas  price  from  $2.89  per mcf to $2.52 per mcf,
representing a $1,098,000 reduction in revenue from hedging transactions.

Interest Income

The increase in interest  income of $50,000  during the first quarter of 1997 as
compared  with the first  quarter of 1996  resulted  from a higher  average cash
balance during the first quarter of 1997 as compared with the same period during
1996.

Production Operating Expense

Production operating expense decreased $241,000 during the first quarter of 1997
as  compared  with  the  first  quarter  of  1996,  primarily  due to  decreased
production taxes resulting from the 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 $97,000 during the
first quarter of 1997 as compared  with the first quarter of 1996  primarily due
to the sale of a facility in Louisiana during the second quarter of 1996.

Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense decreased $910,000 during the
first quarter of 1997 as compared  with the first quarter of 1996.  The decrease
is  primarily  the result of lower  capitalized  costs in 1997 as compared  with
1996, as well as a lower depletion rate in 1997 due to the decline in production
previously discussed.

Interest Expense

Interest expense decreased $271,000 during the first quarter of 1997 as compared
with the first quarter of 1996,  primarily as a result of lower outstanding debt
during 1997.


                                                       -14-

<PAGE>



Equity in Income of HCRC

Equity in income of HCRC increased  $604,000 during the first quarter of 1997 as
compared with the first quarter of 1996. The increase is primarily due to HCRC's
higher gas revenue and lower depreciation, depletion and amortization expense.

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 $307,000 is
due to a decrease in the net income of the May Partnerships  resulting primarily
from decreased production on their properties.


                                                       -15-

<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

              10.14 - Financial Consulting Agreement



                                                       -16-

<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:    May 13, 1997                         By: /s/Robert S. Pfeiffer
     ----------------------------------          ----------------------
                                              Robert S. Pfeiffer, Vice President
                                                  (Chief Financial Officer)