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 June 30, 1997

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

                          Commission File Number 1-8921


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




         Delaware                                                     84-0987088
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)
  4582 South Ulster Street Parkway
         Suite 1700
      Denver, Colorado                                                     80237
(Address of principal executive offices)                              (Zip Code)

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

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

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

Number of Units outstanding as of August 14, 1997


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)



                                                                                      June 30,            December 31,
                                                                                       1997                 1996

CURRENT ASSETS
<S>                                                                                  <C>                    <C>       
     Cash and cash equivalents                                                       $   5,562              $    5,540
     Accounts receivable:
         Oil and gas revenues                                                            6,010                   9,405
         Trade                                                                           3,207                   4,507
     Prepaid expenses and other current assets                                           1,191                     928
                                                                                      --------              ----------
              Total                                                                     15,970                  20,380
                                                                                       -------                --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost
  Oil and gas  properties  (full  cost method):
         Proved mineral interests                                                      614,683                 607,875
         Unproved mineral interests - domestic                                           1,750                   1,244
     Furniture, fixtures and other                                                       3,421                   3,366
                                                                                     ---------               ---------
              Total                                                                    619,854                 612,485

     Less accumulated depreciation, depletion,
         amortization and property impairment                                         (529,538)              (523,936)
                                                                                       -------                -------
              Total                                                                     90,316                  88,549
                                                                                       -------                --------

OTHER ASSETS
     Investment in common stock of HCRC                                                 14,946                  13,700
     Deferred expenses and other assets                                                    122                     163
                                                                                    ----------              ----------
              Total                                                                     15,068                  13,863
                                                                                      --------                --------

TOTAL ASSETS                                                                          $121,354                $122,792
                                                                                       =======                 =======












<FN>

                                         (Continued on the following page)
</FN>

                                                        -2-
</TABLE>

<PAGE>

<TABLE>
<CAPTION>


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




                                                                               June 30,              December 31,
                                                                                 1997                    1996

CURRENT LIABILITIES
<S>                                                                                   <C>                    <C>      
     Accounts payable and accrued liabilities                                         $ 15,669               $  15,185
     Net working capital deficit of affiliate                                              198                     159
     Due to affiliates                                                                     685                     581
     Current portion of contract settlement                                              2,628
     Current portion of long-term debt                                                                           5,810
                                                                                 -------------               ---------
              Total                                                                     19,180                  21,735
                                                                                       -------                --------

NONCURRENT LIABILITIES
     Long-term debt                                                                     29,986                  29,461
     Contract settlement                                                                                         2,512
     Deferred liability                                                                  1,237                   1,533
                                                                                     ---------               ---------
              Total                                                                     31,223                  33,506
                                                                                      --------                --------

              Total liabilities                                                         50,403                  55,241
                                                                                      --------                --------

MINORITY INTEREST IN AFFILIATES                                                          3,040                   3,336
                                                                                      --------               ---------

PARTNERS' CAPITAL
     Class A Units - 9,977,254 Units issued, 9,077,949
         outstanding in 1997 and 1996                                                   64,896                  61,487
     Class B Subordinated Units - 143,773 Units issued
         and outstanding in 1997 and 1996                                                1,351                   1,254
     Class C Units - 664,063 Units issued and outstanding
         in 1997 and 1996                                                                5,146                   5,146
     General Partner                                                                     3,497                   3,307
     Treasury Units - 899,305 Units in 1997 and 1996                                    (6,979)                (6,979)
                                                                                     ---------              ---------
              Partners' capital - net                                                   67,911                  64,215
                                                                                      --------                --------

TOTAL LIABILITIES AND PARTNERS' CAPITAL                                               $121,354                $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
                                                                                                 June 30,
                                                                                       1997                    1996

REVENUES:
<S>                                                                                  <C>                     <C>      
     Oil revenue                                                                     $   3,082               $   5,037
     Gas revenue                                                                         4,961                   6,921
     Pipeline, facilities and other                                                        786                     697
     Interest                                                                              136                     133
                                                                                     ---------               ---------
                                                                                         8,965                  12,788
                                                                                      --------                 -------

EXPENSES:
     Production operating                                                                2,536                   2,662
     Facilities operating                                                                  192                     157
     General and administrative                                                          1,030                     750
     Depreciation, depletion and amortization                                            2,540                   3,466
     Interest                                                                              748                     997
                                                                                     ---------               ---------
                                                                                         7,046                   8,032
                                                                                      --------                --------

OTHER INCOME (EXPENSES):
     Equity in earnings of HCRC                                                            266                     351
     Minority interest in net income of affiliates                                       (332)                   (604)
     Litigation settlement                                                                 273                   (228)
                                                                                     ---------              ---------
                                                                                           207                   (481)
                                                                                     ---------              ---------

NET INCOME                                                                               2,126                   4,275

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

NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
     CLASS A AND CLASS B LIMITED PARTNERS                                            $   1,960               $   4,109
                                                                                      ========                ========

ALLOCATION OF NET INCOME:
     General partner                                                                $      249              $      646
                                                                                     =========               =========
     Class A and Class B limited partners                                            $   1,711               $   3,463
                                                                                      ========                ========
     Per Class A Unit and Class B Unit                                             $       .18             $       .37
                                                                                    ==========              ==========
     Weighted average Class A Units and Class B Units
         and equivalent Units outstanding                                                9,335                   9,246
                                                                                      ========                ========



<FN>

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

                                                        -4-
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



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



                                                                                        For the Six Months Ended
                                                                                                  June 30,
                                                                                        1997                    1996

REVENUES:
<S>                                                                                  <C>                      <C>     
     Oil revenue                                                                     $   7,593                $ 10,122
     Gas revenue                                                                        12,434                  14,729
     Pipeline, facilities and other                                                      1,549                   1,432
     Interest                                                                              259                     206
                                                                                     ---------               ---------
                                                                                        21,835                  26,489
                                                                                       -------                 -------

EXPENSES:
     Production operating                                                                5,325                   5,692
     Facilities operating                                                                  370                     432
     General and administrative                                                          2,254                   1,918
     Depreciation, depletion and amortization                                            5,492                   7,328
     Interest                                                                            1,599                   2,119
                                                                                      --------                --------
                                                                                        15,040                  17,489
                                                                                       -------                 -------

OTHER INCOME (EXPENSES):
     Equity in earnings of HCRC                                                          1,246                     727
     Minority interest in net income of affiliates                                       (892)                 (1,471)
     Litigation settlement                                                                 273                   (228)
                                                                                     ---------              ---------
                                                                                           627                   (972)
                                                                                     ---------              ---------

NET INCOME                                                                               7,422                   8,028

CLASS C UNIT DISTRIBUTIONS ($.50 PER UNIT)                                                 332                     332
                                                                                     ---------               ---------

NET INCOME ATTRIBUTABLE TO GENERAL PARTNER,
     CLASS A AND CLASS B LIMITED PARTNERS                                            $   7,090               $   7,696
                                                                                      ========                ========

ALLOCATION OF NET INCOME:
     General partner                                                                $      876               $   1,333
                                                                                     =========                ========
     Class A and Class B limited partners                                            $   6,214               $   6,363
                                                                                      ========                ========
     Per Class A Unit and Class B Unit                                             $       .66             $       .69
                                                                                    ==========              ==========
     Weighted average Class A Units and Class B Units
         and equivalent Units outstanding                                                9,354                   9,258
                                                                                      ========                ========





<FN>

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

                                                        -5-
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



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


                                                                                                For the Six Months Ended
                                                                                                         June 30,
                                                                                               1997                    1996

OPERATING ACTIVITIES:
<S>                                                                                         <C>                     <C>      
Net income                                                                                  $   7,422               $   8,028
     Adjustments to reconcile net income to net cash
          provided by operating activities:
              Depreciation, depletion and amortization                                          5,492                   7,328
              Depreciation charged to affiliates                                                  110                     125
              Amortization of deferred loan costs and other assets                                 41                      78
              Noncash interest expense                                                            116                      55
              Equity in earnings of HCRC                                                       (1,246)                   (727)
              Minority interest in net income of affiliates                                       892                   1,471
              Undistributed earnings of affiliates                                                (73)                   (451)
              Recoupment of take-or-pay liability                                                (296)                   (216)
                                                                                            ---------               ---------

                  Cash from operations before working capital changes                          12,458                  15,691

     Changes in operating  assets and  liabilities  provided  (used) cash net of
          noncash activity:
              Oil and gas revenues receivable                                                   3,395                    (766)
              Trade receivables                                                                 1,300                     530
              Due from affiliates                                                                                       1,405
              Prepaid expenses and other current assets                                          (263)                     29
              Accounts payable and accrued liabilities                                            484                  (2,150)
              Due to affiliates                                                                  (489)                  1,849
                                                                                            ---------                --------
                  Net cash provided by operating activities                                    16,885                  16,588
                                                                                              -------                 -------

INVESTING ACTIVITIES:
     Additions to property, plant and equipment                                                (1,759)                   (616)
     Exploration and development costs incurred                                                (4,920)                 (4,142)
     Proceeds from sales of property, plant and equipment                                          85                   5,263
     Refinance of Spraberry investment                                                                                 (4,715)
     Investment in affiliates                                                                     (70)                   (508)
                                                                                           ----------               ---------
                  Net cash used in investing activities                                        (6,664)                 (4,718)
                                                                                             --------                --------

FINANCING ACTIVITIES:
     Payments of long-term debt                                                                (5,285)                 (4,373)
     Proceeds from long-term debt                                                                                       6,000
     Distributions paid                                                                        (3,612)                 (4,207)
     Distributions paid by consolidated affiliates to minority interest                        (1,188)                 (1,335)
     Payment of contract settlement                                                                                      (305)
     Syndication costs and capital contributions                                                 (114)                    (12)
     Other financing activities                                                                                          (118)
                                                                                         ------------               ---------
                  Net cash used in financing activities                                       (10,199)                 (4,350)
                                                                                              -------                --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                          22                   7,520

CASH AND CASH EQUIVALENTS:

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

END OF PERIOD                                                                               $   5,562                $ 12,497
                                                                                             ========                 =======
<FN>

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

                                                              -6-
</TABLE>

<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).


                                                        -7-

<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 June 30, 1997 and December 31, 1996. These Units are
treated as treasury units in the accompanying financial statements.

During February 1997, the Financial  Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("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:
<TABLE>
<CAPTION>


                                                    For the Quarter Ended June 30,           For the Six Months Ended June 30,
                                                      1997                  1996                 1997                 1996

Primary (Basic):
<S>                                                    <C>                   <C>                  <C>                  <C> 
     As reported                                       $.18                  $.37                 $.66                 $.69
     Pro forma                                         $.19                  $.37                 $.67                 $.69

Fully Diluted (Diluted):
     As reported                                       $.18                  $.37                 $.66                 $.69
     Pro forma                                         $.18                  $.37                 $.66                 $.69
</TABLE>

Reclassifications

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


NOTE 2 -      DEBT

During the second  quarter of 1997,  HEP and its lenders  amended  and  restated
HEP's Second  Amended and Restated  Credit  Agreement  (as amended,  the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase  Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP's
borrowing base is $51,000,000.  HEP has amounts  outstanding at June 30, 1997 of
$25,700,000  under the Credit  Agreement and $4,286,000  under the Note Purchase
Agreement.  HEP's borrowing base is further  reduced by an outstanding  contract
settlement  obligation  of  $2,628,000;  therefore,  its unused  borrowing  base
totaled $18,386,000 at August 14, 1997.

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

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1997. Interest is payable monthly,  and quarterly principal payments
of  $1,874,125,  as adjusted  for the  anticipated  borrowings  to fund the Note
Purchase Agreement payment due in April 1998, commence May 31, 1999.


                                                        -8-

<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,  if the
principal amount of debt of HEP is 50% or more of the borrowing base.  Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations if the
principal amount of debt is less than 50% of the borrowing base.

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


NOTE 3 -      STATEMENTS OF CASH FLOWS

Cash paid for  interest  during the six months  ended June 30, 1997 and 1996 was
$1,443,000 and $1,913,000, 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  $16,885,000  of cash flow from  operating  activities  during the
first six months of 1997.

Cash was used primarily for:

     o   Additions to property and development costs incurred of $6,679,000,

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

     o   Distributions to Unitholders of $3,612,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was an increase of $22,000 in HEP's cash from  $5,540,000 at December 31,
1996 to $5,562,000 at June 30, 1997.

Development Projects and Acquisitions

Through June 30, 1997, HEP incurred  approximately  $6,679,000 for  exploration,
development and acquisition costs toward the 1997 capital budget of $15,500,000.
The expenditures were comprised of approximately  $4,920,000 for exploration and
development and approximately $1,759,000 for property acquisitions.

HEP's  1997  capital  budget is  allocated  to the  following:  Permian/Delaware
Basins,  Gulf Coast Region,  Rocky Mountain Region, and Mid-Continent  Region. A
description of HEP's  significant  exploration,  exploitation,  and  development
projects to date in 1997 follows.

                                                        -9-

<PAGE>



Permian/Delaware Basins

HEP has allocated 36%  (approximately  $5,500,000) of its 1997 capital budget to
the  Permian/Delaware  Basins located in Texas and Southeastern New Mexico. Thus
far in 1997, HEP spent  approximately  $1,900,000  drilling 22 exploitation  and
development  wells  plus  five  exploration  wells,  and on the  acquisition  of
undeveloped  acreage and geological and geophysical data. Of the wells that were
drilled,  22 (82%) are a success.  During the  remainder  of 1997,  HEP plans to
drill 36 additional  exploitation  and  development  wells and nine  exploration
wells.  In July, HEP acquired  additional  interests in 34 of its existing wells
with potential net volumes of approximately 127,500 equivalent barrels of oil. A
discussion of several of the larger projects within the Basins follows.

In 1996, HEP became active in the Garden City/Mills project in Glasscock County,
Texas.  This project  included the acquisition and processing of 66 square miles
of  nonproprietary   3-D  seismic  data  and  the  drilling  of  one  successful
exploratory  well  prior  to the end of  1996.  In 1997,  HEP  drilled  a second
successful 10,000 foot delineation well which is currently  producing at a gross
rate of 230 equivalent  barrels of oil per day.  HEP's working  interest in this
well is 25%.  A third  well in this  area  recently  failed.  HEP's  1997  costs
incurred in this area to date are  approximately  $220,000.  HEP will attempt to
drill one additional exploitation well during the remainder of 1997.

The  nonoperated  Merkel Project  consists of 10 square miles of proprietary 3-D
seismic  data in  Jones,  Taylor  and  Nolan  Counties,  Texas.  HEP  began  its
involvement in this area in 1995 with the successful  completion of one well. In
1996, HEP participated in the drilling of eight additional wells, seven of which
were successful.  In 1997, HEP continued its participation  with the drilling of
two more successful  wells,  and four additional  wells are currently  underway.
HEP's 1997 costs for these wells to date total approximately  $115,000. HEP owns
an average 10% working interest in this area.

Based on the success in the nonoperated  Merkel area, HEP acquired 74 additional
miles of proprietary 3-D seismic data adjacent to the nonoperated area. HEP owns
an average 25% working interest in these wells, and HPI is the operator. HEP has
drilled  three  successful  wells and two  unsuccessful  wells in the area.  Ten
additional wells are scheduled to be drilled during the remainder of 1997. HEP's
1997  costs to date  for  drilling  and  acreage  in the area are  approximately
$300,000.

HEP  purchased  an interest in a 3-D seismic  shoot  covering 85 square miles of
acreage for the Griffin  Project in Gaines County,  Texas for $455,000.  HEP has
developed a number of prospects  incorporating different geologic ideas which it
plans to pursue in 1997 and future  years.  The first  prospect,  a 12,800  foot
Devonian/Silurian  well  was  drilled  and  subsequently  plugged  at a cost  of
approximately $165,000. HEP plans to drill 3 additional exploratory wells in the
area in 1997.

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

HEP drilled three successful development and exploitation wells in the Spraberry
area of Texas and plans to drill an  additional  10 wells during 1997.  In 1997,
HEP has spent approximately $225,000 in this area.

Rocky Mountain Region

At  the  current  date,  HEP  has  allocated  approximately  11%  (approximately
$1,700,000) of its 1997 capital  budget to the Rocky Mountain  Region located in
Colorado,  Montana, North Dakota, Northwest New Mexico and Wyoming. To date, HEP
spent approximately  $870,000 on drilling and recompletion of 12 development and
exploitation   wells,  one  exploration  well,  and  acquiring   geological  and
geophysical data. Seven of these wells are a success,  and HEP plans to drill an
additional  16 wells in this  region in 1997.  A  discussion  of major  projects
within the region follows.


                                                       -10-

<PAGE>




In the  Lone  Tree  area of  Montana,  HEP  drilled  one  exploitation  well and
performed two  recompletions;  one well was a success.  Work on a fourth well in
the area increased production on a gross basis by 50 barrels per day. Total 1997
costs for these Montana projects were approximately $320,000.

HEP  also  purchased  a  12.5%  interest  in  the  Hudson  Ranch  project.  This
multi-objective  exploration project focuses on several  formations.  HEP's 1997
costs to date for the project are approximately  $315,000. The first well in the
project is scheduled to be drilled in 1998.

Gulf Coast Region

HEP's 1997 capital budget  allocation for the Gulf Coast Region in Louisiana and
South and East Texas is approximately 18% (approximately  $2,800,000).  In 1997,
HEP spent  approximately  $1,050,000 to drill and recomplete  four  exploitation
wells and two exploration wells. Four of the wells were successful. HEP plans to
drill four additional wells within the region during the remainder of 1997.

In 1997,  HEP  spent  approximately  $490,000  for  tubing  repairs,  additional
perforations  and  miscellaneous  maintenance  costs.  In  addition,  HEP  spent
approximately  $170,000 in 1997 for a 14,500 foot  exploration well in the South
Scott Field of Louisiana, which was unsuccessful.

HEP  participated in the drilling of two Jeffress Field wells in Hidalgo County,
Texas. Both wells are a success and have cost HEP approximately $475,000. One of
the wells  reported  a first 24 hour  test of 15,338  mcf of gas per day and 480
barrels of condensate per day on a gross basis. These wells are nonoperated, and
HEP owns a 10% interest.

HEP has been  active in the Mercy Field in San  Jacinto  County,  Texas where it
drilled an 11,000 foot  development  well and  deepened  an  existing  well to a
different formation.  Both wells were successful,  and the estimated total costs
to HEP is approximately $380,000.

Other

HEP's 1997 capital budget  allocation for all other areas is  approximately  35%
(approximately  $5,500,000).  To date, HEP successfully  recompleted four wells.
HEP plans to drill 15 wells in the remainder of 1997.

HEP is currently  participating  in the Stealth  Exploration  Prospect in Garter
County,  Oklahoma.  This  structural  test of two reservoirs will be 19,000 feet
deep and will take  nearly  nine  months  to  drill.  HEP has the right of first
refusal on five additional prospects developed by the same operator in the area.
In 1997, HEP's cost is approximately $80,000 for its 5% interest in the well.

Projects  begun in the  fourth  quarter  of 1996  have  cost  HEP  approximately
$780,000  through  the  second  quarter  of 1997.  These  additional  costs  are
comprised primarily of approximately  $200,000 for two unsuccessful  exploratory
wells in the Gulf Coast Region and in the Permian/Delaware Basins.

Distributions

HEP declared  distributions  of $.13 per Class A Unit and $.25 per Class C Unit,
payable on August 15, 1997 to Unitholders of record on June 30, 1997.

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


                                                       -11-

<PAGE>



Financing

During the second  quarter of 1997,  HEP and its lenders  amended  and  restated
HEP's Second  Amended and Restated  Credit  Agreement  (as amended,  the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement and an Amended and Restated Note Purchase  Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities") HEP's
borrowing base is $51,000,000.  HEP has amounts  outstanding at June 30, 1997 of
$25,700,000  under the Credit  Agreement and $4,286,000  under the Note Purchase
Agreement.  HEP's borrowing base is further  reduced by an outstanding  contract
settlement  obligation  of  $2,628,000;  therefore,  its unused  borrowing  base
totaled $18,386,000 at August 14, 1997.

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

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 1.875%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1997. Interest is payable monthly,  and quarterly principal payments
of  $1,874,125,  as adjusted  for the  anticipated  borrowings  to fund the Note
Purchase Agreement payment due in April 1998, commence May 31, 1999.

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

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

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.

                                                       -12-

<PAGE>



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 through
the second  quarter of 1997. The following  table presents the weighted  average
prices received each quarter by HEP and the effects of the hedging  transactions
discussed below.
<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
Second quarter - 1997                 17.71                   17.71                     2.02                    1.98
</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:


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

Last six months of 1997                     47%                       $17.78
1998                                        21%                       $16.41
1999                                         3%                       $15.88


                                                       -13-

<PAGE>



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.


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

Last six months of 1997                     54%                        $1.97
1998                                        48%                        $2.02
1999                                         24%                       $1.86
2000                                        18%                        $2.01

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.

During the third  quarter  through July 24, 1997 the weighted  average oil price
(for  barrels not  hedged) was  approximately  $18.50 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.10 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%.


                                                       -14-

<PAGE>

<TABLE>
<CAPTION>


                                                       

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



                                                     For the Quarter Ended June 30, 1997      For the Quarter Ended June 30, 1996
                                                     -----------------------------------      -----------------------------------
                                                      Direct                                  Direct                
                                                       Owned        Mays         Total         Owned        Mays           Total

<S>                                                    <C>           <C>         <C>           <C>           <C>           <C>
Oil production (bbl)                                     158           16          174           224           26            250
Gas production (mcf)                                   2,220          286        2,506         2,810          459          3,269

Average oil price (per bbl)                           $17.52       $19.63       $17.71     $   20.05     $  20.96       $  20.15
Average gas price (per mcf)                          $  1.93      $  2.36      $  1.98    $     2.02    $    2.69      $    2.12

Oil revenue                                          $ 2,768      $   314      $ 3,082      $  4,492    $     545       $  5,037
Gas revenue                                            4,285          676        4,961         5,687        1,234          6,921
Pipeline, facilities and other                           786                       786           697                         697
Interest                                                 113           23          136           115           18            133
                                                     -------     --------      -------      --------    ---------       --------

   Total revenue                                       7,952        1,013        8,965        10,991        1,797         12,788
                                                      ------       ------       ------        ------      -------         ------

Production operating                                   2,410          126        2,536         2,496          166          2,662
Facilities operating                                     192                       192           157                         157
General and administrative                               941           89        1,030           631          119            750
Depreciation, depletion, and amortization              2,267          273        2,540         3,019          447          3,466
Interest                                                 748                       748           997                         997
Litigation settlement (income) expense                 (243)         (30)        (273)           222            6            228
Equity in earnings of HCRC                             (266)                     (266)         (351)                       (351)
Minority interest in net income of affiliates                         332          332                        604            604
                                                  ----------      -------      -------   -----------     --------       --------

   Total expense                                       6,049          790        6,839         7,171        1,342          8,513
                                                      ------      -------       ------       -------      -------        -------

      Net income                                     $ 1,903     $    223      $ 2,126      $  3,820    $     455       $  4,275
                                                      ======      =======       ======       =======     ========        =======

</TABLE>


                                                                -15-

<PAGE>

<TABLE>
<CAPTION>


                                                               

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



                                          For the Six Months Ended June 30, 1997         For the Six Months Ended June 30, 1996
                                          --------------------------------------          --------------------------------------
                                                Direct                                  Direct
                                                Owned        Mays         Total         Owned              Mays               Total

<S>                                               <C>          <C>         <C>          <C>                 <C>               <C>
Oil production (bbl)                                350          38          388          475                 58                533
Gas production (mcf)                              4,829         645        5,474        5,694                969              6,663

Average oil price (per bbl)                      $19.37      $21.39       $19.57    $   18.87           $  19.97           $  18.99
Average gas price (per mcf)                     $  2.19     $  2.87      $  2.27   $     2.05          $    3.14          $    2.21

Oil revenue                                     $ 6,780    $    813      $ 7,593     $  8,964           $  1,158            $10,122
Gas revenue                                      10,580       1,854       12,434       11,689              3,040             14,729
Pipeline, facilities and other                    1,549                    1,549        1,432                                 1,432
Interest                                            219          40          259          174                 32                206
                                                -------    --------      -------     --------          ---------           --------

   Total revenue                                 19,128       2,707       21,835       22,259              4,230             26,489
                                                 ------      ------       ------       ------            -------             ------

Production operating                              5,042         283        5,325        5,344                348              5,692
Facilities operating                                370                      370          432                                   432
General and administrative                        2,056         198        2,254        1,686                232              1,918
Depreciation, depletion, and amortization         4,878         614        5,492        6,349                979              7,328
Interest                                          1,599                    1,599        2,119                                 2,119
Litigation settlement (income) expense            (243)        (30)        (273)          222                  6                228
Equity in earnings of HCRC                      (1,246)                  (1,246)        (727)                                 (727)
Minority interest in net income of affiliates                   892          892                           1,471              1,471
                                             ----------     -------      -------  -----------            -------            -------

   Total expense                                 12,456       1,957       14,413       15,425              3,036             18,461
                                                 ------      ------       ------       ------            -------             ------

      Net income                                $ 6,672    $    750      $ 7,422     $  6,834           $  1,194           $  8,028
                                                 ======     =======       ======      =======            =======            =======


</TABLE>

                                                                -16-

<PAGE>



Second Quarter of 1997 Compared to Second Quarter of 1996

Oil Revenue

Oil revenue  decreased  $1,955,000 during the second quarter of 1997 as compared
with the second  quarter of 1996.  The  decrease  is the result of a decrease in
production  from 250,000  barrels in 1996 to 174,000  barrels in 1997,  combined
with a  decrease  in the  average  oil price  from  $20.15 per barrel in 1996 to
$17.71 per barrel in 1997.  Approximately  13% of the decrease in oil production
is due to the  temporary  shut-in  of two  wells  in the  Louisiana  area  while
workover  procedures  are  performed,  and  the  remainder  of the  decrease  in
production  is due to steep  production  declines  on wells  located in the West
Texas area.

HEP's hedging transactions,  as described under "Inflation and Changing Prices,"
during the second quarter of 1997, had an immaterial effect on HEP's average oil
price.

Gas Revenue

Gas revenue  decreased  $1,960,000 during the second quarter of 1997 as compared
with the second  quarter of 1996.  The  decrease  is the result of a decrease in
production  from  3,269,000 mcf in 1996 to 2,506,000 mcf in 1997 combined with a
decrease  in  price  from  $2.12  per  mcf in  1996 to  $1.98  per mcf in  1997.
Approximately  64% of the decrease in production is due to the temporary shut-in
of two wells in the Louisiana area while workover procedures are performed,  and
the remainder of the decrease in production is due to steep production  declines
on wells located in the West Texas area.

The effect of HEP's hedging  transactions during the second quarter of 1997, was
to  decrease  HEP's  average  gas  price  from  $2.02  per mcf to $1.98 per mcf,
representing a $100,000 reduction in revenue from hedging transactions.

Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County.  Pipeline,  facilities  and other revenue  increased  $89,000 during the
second  quarter of 1997 as compared  with the second  quarter of 1996 due to the
write-off of miscellaneous amounts no longer considered liabilities of HEP.

Production Operating Expense

Production  operating  expense  decreased  $126,000 during the second quarter of
1997 as compared  with the second  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 increased $35,000 during the
second quarter of 1997 as compared with the second quarter of 1996 primarily due
to increased maintenance activity during 1997.

General and Administrative

General  and   administrative   expense   includes  costs  incurred  for  direct
administrative  services  such as legal,  audit and  reserve  reports as well as
allocated  internal overhead incurred by the operating company on behalf of HEP.
These expenses  increased $280,000 during the second quarter of 1997 as compared
with the second  quarter of 1996  primarily  due to the timing of the payment of
consulting fees.



                                                       -17-

<PAGE>



Depreciation, Depletion and Amortization Expense

Depreciation,  depletion and amortization  expense decreased $926,000 during the
second quarter of 1997 as compared with the second quarter of 1996. The decrease
is primarily the result of a lower  depletion rate in 1997 due to the decline in
production previously discussed.

Interest Expense

Interest  expense  decreased  $249,000  during  the  second  quarter  of 1997 as
compared  with the  second  quarter  of  1996,  primarily  as a result  of lower
outstanding debt during 1997.

Equity in Earnings of HCRC

Equity in earnings of HCRC  decreased  $85,000 during the second quarter of 1997
as compared  with the second  quarter of 1996.  The decrease is primarily due to
HCRC's lower gas revenue  resulting  from  decreased  production  combined  with
decreased oil and gas prices during the second quarter of 1997.

Minority Interest in Net Income of Affiliates

Minority interest in net income of affiliates represents  unaffiliated partners'
interest in the net income of the May Partnerships.  The decrease of $272,000 is
due to a decrease in the net income of the May Partnerships  resulting primarily
from decreased production on their properties.

Litigation Settlement

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

First Six Months of 1997 Compared to First Six Months of 1996

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

Oil Revenue

Oil revenue decreased $2,529,000 during the first six months of 1997 as compared
with the first six months of 1996.  The  decrease is the result of a decrease in
production from 533,000  barrels in 1996 to 388,000  barrels in 1997,  partially
offset by an increase in the average oil price from $18.99 per barrel in 1996 to
$19.57 per barrel in 1997.  Approximately  11% of the decrease in oil production
is due to the  temporary  shut-in  of two  wells  in the  Louisiana  area  while
workover procedures are performed,  and the remainder is due to steep production
declines on wells located in the West Texas area.

The effect of HEP's hedging transactions during the first six months of 1997 was
to decrease HEP's average oil price from $20.13 per barrel to $19.57 per barrel,
representing a reduction in revenue from hedging transactions of $217,000.

Gas Revenue

Gas revenue decreased $2,295,000 during the first six months of 1997 as compared
with the first six months of 1996.  The  decrease is the result of a decrease in
production from 6,663,000 mcf in 1996 to 5,474,000 mcf in 1997 partially  offset
by an  increase  in price  from  $2.21 per mcf in 1996 to $2.27 per mcf in 1997.
Approximately  57% of the decrease in production is due to the temporary shut-in
of two wells in the Louisiana area while workover procedures are performed,  and
the remainder is due to steep  production  declines on wells located in the West
Texas area.


                                                       -18-

<PAGE>



The effect of HEP's hedging transactions during the first quarter of 1997 was to
decrease  HEP's  average  gas  price  from  $2.49  per  mcf to  $2.27  per  mcf,
representing a $1,204,000 reduction in revenue from hedging transactions.

Facilities Operating Expense

Facilities  operating  expense  decreased $62,000 during the first six months of
1997 as compared with the first six months of 1996  primarily due to the sale of
a facility in Louisiana during the second quarter of 1996.

Equity in Earnings of HCRC

Equity in earnings  of HCRC  increased  $519,000  during the first six months of
1997 as compared  with the first six months of 1996.  The  increase is primarily
due to lower operating  expenses  combined with lower  depletion  expense during
1997.

                                                       -19-

<PAGE>



PART II  -    OTHER INFORMATION


ITEM 1  -     LEGAL PROCEEDINGS

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


ITEM 2  -     CHANGES IN SECURITIES

              None.


ITEM 3  -     DEFAULTS UPON SENIOR SECURITIES

              None.


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

              None.


ITEM 5  -     OTHER INFORMATION

              None.


ITEM 6  -     EXHIBITS AND REPORTS ON FORM 8-K

              Exhibit

              10.15 Third Amended and Restated Credit  Agreement dated as of 
                    May 31, 1997.



                                                       -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:      HEPGP LTD.
                                      General Partner
                                      BY:      HALLWOOD G.P., INC.
                                               General Partner



Date:  August 14 , 1997                      By:         /s/Robert S. Pfeiffer
     ------------------------                     ------------------------------
                                             Robert S. Pfeiffer, Vice President
                                                   (Chief Financial Officer)


                                                       -21-

<PAGE>