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, 2000

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

                          Commission File Number 0-9579



                           HALLWOOD ENERGY CORPORATION
             (Exact name of registrant as specified in its charter)



              Delaware                                                84-1489099
(State or other jurisdiction of                                 (I.R.S. Employer
incorporation or organization)                            Identification Number)

         4610 South Ulster Street
                     Suite 200
             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  [  ]

Number of shares outstanding as of May 9, 2000

Common Stock                                                9,621,604
Series A Cumulative Preferred Stock                         2,290,349










                                  Page 1 of 22


<PAGE>

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                           HALLWOOD ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                                 (In thousands)



                                                                       March 31,                December 31,
                                                                          2000                      1999
                                                                    ----------------        ------------

CURRENT ASSETS
<S>                                                                   <C>                          <C>
   Cash and cash equivalents                                          $  15,498                    $  10,480
   Accounts receivable:
     Oil and gas revenues                                                13,741                       12,442
     Trade                                                                6,948                        4,918
   Due from affiliates                                                      838                          704
   Prepaid expenses and other current assets                              1,212                        1,209
                                                                      ---------                    ---------
         Total                                                           38,237                       29,753
                                                                       --------                     --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
   method):
     Proved mineral interests                                           754,414                      758,473
     Unproved mineral interests                                           4,209                        6,543
   Furniture, fixtures and other                                          2,309                        1,941
                                                                      ---------                    ---------
         Total                                                          760,932                      766,957

   Less accumulated depreciation, depletion,
     amortization and property impairment                              (591,820)                   (585,336)
                                                                        -------                     -------
         Total                                                          169,112                      181,621
                                                                        -------                      -------

OTHER ASSETS
   Deferred expenses and other assets                                     1,327                        1,400
                                                                      ---------                    ---------

TOTAL ASSETS                                                           $208,676                     $212,774
                                                                        =======                      =======


















<FN>

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


<PAGE>

<TABLE>
<CAPTION>

                           HALLWOOD ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                          (In thousands except shares)



                                                                               March 31,              December 31,
                                                                                  2000                     1999
                                                                             --------------         -----------

CURRENT LIABILITIES
<S>                                                                            <C>                      <C>
   Accounts payable and accrued liabilities                                    $  25,580                $  26,382
                                                                                --------                 --------

NONCURRENT LIABILITIES
   Long-term debt                                                                102,412                  109,357
   Deferred revenue and other                                                      1,059                    1,066
                                                                               ---------                ---------
         Total                                                                   103,471                  110,423
                                                                                 -------                  -------

           Total liabilities                                                     129,051                  136,805
                                                                                 -------                  -------

MINORITY INTEREST IN AFFILIATES                                                      709                      582
                                                                               ---------                ---------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
   Series A Cumulative Preferred Stock;  5,000,000 shares authorized;  2,290,349
     shares issued and outstanding in 2000
     and 2,334,165 shares issued and outstanding in 1999                          21,083                   21,386
   Common Stock par value $.01 per share; 25,000,000 shares
     authorized; 9,999,754 shares issued and outstanding in
     2000 and 1999                                                                   100                      100
   Additional paid-in capital                                                     67,310                   67,883
   Accumulated deficit                                                            (9,577)                  (13,982)
                                                                               ---------                  --------
         Stockholders' equity - net                                               78,916                    75,387
                                                                                --------                  --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $208,676                  $212,774
                                                                                 =======                   =======


















<FN>


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


<PAGE>
<TABLE>
<CAPTION>


                           HALLWOOD ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (In thousands except per share data)


                                                                                   For the Three Months Ended
                                                                                            March 31,
                                                                                  ---------------------------
                                                                                  2000                    1999
                                                                                  ----                    ----

REVENUES:
<S>                                                                            <C>                       <C>
   Gas revenue                                                                 $ 13,845                  $ 6,490
   Oil revenue                                                                    6,145                    2,167
   Pipeline, facilities and other                                                 1,666                    1,209
   Interest                                                                         153                      116
                                                                              ---------                  -------
                                                                                 21,809                    9,982
                                                                                -------                   ------

EXPENSES:
   Production operating                                                           5,250                    3,058
   Facilities operating                                                             232                      175
   General and administrative                                                     1,801                    1,342
   Depreciation, depletion and amortization                                       6,434                    4,293
   Interest                                                                       2,395                      818
                                                                               --------                  -------
                                                                                 16,112                    9,686
                                                                                -------                   ------

OTHER EXPENSES:
   Equity in loss of HCRC                                                                                   482
   Minority interest in net income of affiliates                                    127                     132
   Litigation                                                                       617
                                                                               --------
                                                                                    744                     614
                                                                               --------               ---------

INCOME (LOSS) BEFORE INCOME TAXES                                                 4,953                    (318)

PROVISION FOR INCOME TAXES:
   Current                                                                          548
                                                                               --------

NET INCOME (LOSS)                                                                 4,405                    (318)

PREFERRED DIVIDENDS                                                                 573                      616
                                                                               --------                 --------

NET INCOME (LOSS) ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                       $    3,832               $    (934)
                                                                              =========                ========

     NET INCOME (LOSS) PER SHARE - BASIC                                   $        .38              $     (.17)
                                                                            ===========               =========

     NET INCOME (LOSS) PER SHARE - DILUTED                                 $        .38              $     (.17)
                                                                            ===========               =========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                       10,000                    5,600
                                                                                =======                   ======

PRO FORMA INFORMATION ASSUMING PROVISION
   FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)

     Loss before income taxes                                                                         $    (318)

     Provision for income taxes

     Net loss                                                                                        $     (318)
                                                                                                      =========

     Net loss attributable to common shareholders                                                    $     (934)
                                                                                                      =========

     Net loss per share - basic                                                                      $     (.17)
                                                                                                      =========

     Net loss per share - diluted                                                                    $     (.17)
                                                                                                      =========
<FN>

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


<PAGE>

<TABLE>
<CAPTION>

                           HALLWOOD ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

                                                                                 For the Three Months Ended
                                                                                          March 31,
                                                                                  --------------------------
                                                                                 2000                   1999
                                                                                 ----                   ----

OPERATING ACTIVITIES:
<S>                                                                             <C>                   <C>
    Net income (loss)                                                           $  4,405              $  (318)
    Adjustments to reconcile net income (loss) to net cash provided
       by (used in) operating activities:
          Depreciation, depletion and amortization                                 6,434                 4,293
          Depreciation charged to affiliates                                          50                    55
          Minority interest in net income                                            127                   132
          Amortization of deferred loan costs and debt discount                      110
          Recoupment of take-or-pay liability                                        (52)                 (31)
          Equity in loss of HCRC                                                                           482
          Undistributed earnings of affiliates                                                           (631)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                         (1,299)                  924
          Trade receivables                                                       (2,030)              (3,267)
          Due from affiliates                                                       (134)                (579)
          Prepaid expenses and other current assets                                   15                   (1)
          Deferred expenses and other                                                                      (7)
          Accounts payable and accrued liabilities                                  (757)              (4,035)
          Due to affiliates                                                                                131
                                                                             -----------             ---------
                Net cash provided by (used in) operating activities                6,869               (2,852)
                                                                                 -------              -------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                    (1,182)                (964)
    Exploration and development costs incurred                                    (4,296)              (1,875)
    Proceeds from sales of property, plant and equipment                          11,503                    16
    Distributions received from affiliate                                                                1,019
                                                                             -----------               -------
                Net cash provided by (used in) investing activities                6,025               (1,804)
                                                                                 -------              -------

FINANCING ACTIVITIES:
    Payments of long-term debt                                                    (7,000)
    Proceeds from long-term debt                                                                         1,000
    Dividends paid                                                                  (573)              (2,309)
    Purchase and cancellation of preferred shares                                   (303)
    Distributions paid by consolidated affiliates to minority interest                                   (186)
                                                                             -----------             --------
                Net cash used in financing activities                             (7,876)              (1,495)
                                                                                 -------              -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                   5,018               (6,151)

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                               10,480                11,874
                                                                                 -------               -------

END OF PERIOD                                                                   $ 15,498              $  5,723
                                                                                 =======               =======
<FN>

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


<PAGE>


                           HALLWOOD ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



NOTE 1    -  GENERAL

Hallwood Energy Corporation  ("HEC" or the "Company") is a Delaware  corporation
engaged in the development,  exploration,  acquisition and production of oil and
gas  properties.  HEC began  operations  June 8, 1999,  in  connection  with the
consolidation  ("Consolidation")  of Hallwood Energy Partners,  L.P. ("HEP") and
Hallwood Consolidated  Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated  ("Hallwood  Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy  interests of Hallwood  Group.
Accordingly,  the  assets and  liabilities  of HEP,  including  its 46% share of
assets and  liabilities  of HCRC  owned  prior to the  Consolidation,  have been
recorded at historical  cost, and the remaining  assets and  liabilities of HCRC
and the  direct  energy  interests  of  Hallwood  Group  have been  recorded  at
estimated fair values as of the date of purchase.  All information presented for
periods  prior to June 8, 1999  represents  the  historical  information  of HEP
because HEP is considered to be the acquiring  entity for  accounting  purposes.
The  financial   statements  for  periods  prior  to  June  8,  1999  have  been
retroactively  restated to reflect the corporate structure of HEC, and all share
and per  share  information  assumes  that the  shares  of HEC  issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. The Company's  properties are primarily  located in the Rocky Mountain,
Mid-Continent, Greater Permian and Gulf Coast regions of the United States.

The following pro forma information  presents the financial  information of HEP,
HCRC and the direct property interests of Hallwood Group as if the Consolidation
had taken  place on January 1, 1999.  Any  additional  provision  or benefit for
income  taxes  is  excluded   because  of  the  Company's  net  operating   loss
carryforwards and related valuation allowance.
<TABLE>
<CAPTION>

                                       For the Three Months Ended March 31, 1999
                                         As             Acquired
                                      Reported         Interests        Pro Forma
                                      --------         ---------        ---------
                                          (In thousands except per share data)

<S>                                     <C>                <C>              <C>
Revenues                                $  9,982           $  6,540         $16,522
Net loss                                    (318)             (1,016)        (1,334)
Net loss
   attributable to common
     shareholders                           (934)             (1,016)        (1,950)
Net loss
   per share - basic                  $     (.09)                        $     (.20)
                                       =========                          =========
Net loss
   per share - diluted                $     (.09)                        $     (.20)
                                       =========                          =========
</TABLE>

The interim financial data are unaudited; however, in the opinion of management,
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 HEC's 1999 Annual Report
on Form 10-K.



<PAGE>


Accounting Policies

Consolidation

HEC  fully  consolidates  entities  in which it owns a greater  than 50%  equity
interest  and  reflects  a  minority  interest  in  the  consolidated  financial
statements.  The accompanying  financial  statements  include the majority owned
affiliates,  the May  Limited  Partnerships  1984-1,  1984-2  and 1984-3 for all
periods and the May Limited Partnerships 1983-1, 1983-2 and 1983-3 through March
31, 1999 when they were liquidated.

Pro Forma Information

The pro forma  information  included in the  statements of  operations  has been
presented to reflect the provision for income taxes,  using statutory  rates, as
though the Company had been a taxable  corporation  during 1999.  Because of the
Company's net operating loss  carryforwards  and its recent operating losses, it
is  assumed  that  the  Company  would  have  had a  full  valuation  allowance.
Accordingly, no provision or benefit for income taxes has been recorded in 1999.

Computation of Net Income (Loss) Per Share

Basic  income  (loss)  per share is  computed  by  dividing  net  income  (loss)
attributable to the common shareholders by the weighted average number of common
shares outstanding during the periods.  Diluted income per common share includes
the potential  dilution that could occur upon exercise of options or warrants to
acquire  common stock,  computed  using the treasury  stock method which assumes
that the  increase  in the  number of shares is  reduced by the number of shares
which could have been  repurchased  by the Company  with the  proceeds  from the
exercise of the options or warrants (which were assumed to have been made at the
average  market price of the common  shares during the  reporting  period).  The
warrants  described in Note 2 and the Company's  outstanding  stock options have
been ignored in the  computation  of diluted net income (loss) per share because
their inclusion would be antidilutive.

The following  table  reconciles  the number of shares  outstanding  used in the
calculation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>

                                                                    Income
                                                                    (Loss)             Shares         Per Share
                                                                   --------            ------         ---------
                                                                       (In thousands except per share data)

For the Three Months Ended March 31, 2000
<S>                                                                 <C>                  <C>            <C>
   Net income per share - basic                                     $  3,832             10,000         $    .38
                                                                     -------             ------          =======
  Net income per share - diluted                                    $  3,832             10,000         $    .38
                                                                     =======             ======          =======

For the Three Months Ended March 31, 1999
   Net income per share- basic                                      $   (934)             5,600        $   (.17)
                                                                     -------            -------         =======
  Net income per share- diluted                                     $   (934)             5,600        $   (.17)
                                                                     =======            =======         =======
</TABLE>

Recently Issued Accounting Pronouncements

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 133 "Accounting for Derivative  Instruments
and  Hedging  Activities"  ("SFAS  133").  SFAS 133  establishes  standards  for
derivative  instruments,  including certain derivative  instruments  embedded in
other  contracts  (collectively  referred  to as  derivatives)  and for  hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities  in the statement of financial  position and measure those
instruments  at fair value.  If certain  conditions are met, a derivative may be
specifically  designated  as (a) a hedge of the  exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted  transaction,  or
(c) a hedge of the foreign  currency  exposure of a net  investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-

<PAGE>


denominated forecasted transaction. The accounting for changes in the fair value
of a derivative (gains and losses) depends on the intended use of the derivative
and the  resulting  designation.  The  Company is  required to adopt SFAS 133 on
January 1, 2001.  The Company has not completed  the process of  evaluating  the
impact that will result from adopting SFAS 133.

Reclassifications

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


NOTE 2    -  DEBT

HEC's  long-term  debt at March 31, 2000 and December 31, 1999  consisted of the
following:

                                  March 31, 2000           December 31, 1999
                                  --------------           -----------------
                                               (in thousands)

Credit Agreement                     $  79,200                  $  86,200
Note Agreement                          25,000                     25,000
Debt discount                           (1,788)                    (1,843)
                                      --------                   --------
Total long-term debt                  $102,412                   $109,357
                                       =======                    =======

On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended,  the "Credit  Agreement")  to extend the term date of its
line of credit to May 31, 2002.  The lenders are Morgan  Guaranty Trust Company,
First  Union  National  Bank  and Bank of  America.  At March  31,  2000,  HEC's
borrowing base was $79,999,663 under which $79,200,000 was outstanding.

During the first quarter of 2000,  HEC sold its interests in  approximately  240
non-strategic  oil and gas wells in order to enable  HEC to better  focus on its
core  areas  while at the same  time  reduce  its  level  of  outstanding  debt.
Subsequent to March 31, 2000 and through May 9, 2000, approximately 260 more oil
and gas properties  have been sold and HEC has repaid an additional  $14,000,000
of its borrowings under the Credit  Agreement.  On April 27, and on May 9, 2000,
the Credit  Agreement was further amended to, among other matters,  reduce HEC's
borrowing base to  $75,175,000 to reflect the most recent  property sales and to
revise two of the covenants within the Credit Agreement. Therefore, HEC's unused
borrowing base totaled $9,975,000 at May 9, 2000.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 2.125%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 7.94%
at March 31, 2000. Interest is payable monthly.  Quarterly principal payments of
$9,314,000 are scheduled to commence May 31, 2002.

The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas  properties.  Additionally,  total  expenditures  for
dividends  paid and stock  repurchased by HEC 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 HEC
is 50% or more of the borrowing base. Total  expenditures for dividends paid and
stock  repurchased by HEC are limited to 65% of cash flow from operations before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt is less than 50% of the borrowing base.


<PAGE>


At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to  Prudential to purchase  309,278  shares of HEC's common stock at an
exercise price of $7.00 per share.  The terms of the Note Agreement were further
amended on October  15,  1999 to exclude  certain  hedging  transactions  of the
subsidiaries  of HEC from the  calculation of  indebtedness.  In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendment to the Note Agreement.  The  Subordinated  Notes
bear  interest  at the rate of 10.32% per annum on the unpaid  balance,  payable
quarterly.  Annual  principal  payments of $5,000,000  are due December 23, 2003
through December 23, 2007.

HEC recorded  the  Subordinated  Notes and the warrants  based upon the relative
fair values of the  Subordinated  Notes without the warrants and of the warrants
themselves at the time of Consolidation.  The allocated value of the warrants of
$1,956,000  was  recorded as  additional  paid-in-capital.  The  discount on the
Subordinated  Notes is being amortized over the term of the  Subordinated  Notes
using the interest method of amortization.

As part of its risk management strategy,  HEC enters into financial contracts to
hedge the interest rate payments  under its Credit  Agreement.  HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit  Agreement,  which has a floating interest rate.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.

All contracts  are interest  rate swaps with fixed rates.  As of April 25, 2000,
HEC was a party to eight contracts with three different counterparties.

The following table provides a summary of HEC's financial contracts.

                                                                    Average
                               Amount of Contract
               Period                       Debt Hedged            Floor Rate

     Last nine months of 2000               $33,750,000                5.65%
     2001                                    36,000,000                5.23
     2002                                    37,500,000                5.23
     2003                                    37,500,000                5.23
     2004                                     6,000,000                5.23


NOTE 3    -  STATEMENTS OF CASH FLOWS

Cash paid for interest during the three months ended March 31, 2000 and 1999 was
$2,285,000 and $818,000, respectively.


NOTE 4 -  STOCK OPTION GRANT

On January 28,  2000,  the  Compensation  Committee  of HEC  granted  options to
purchase 238,500 shares of common stock at an exercise price of $4.625 per share
which  was equal to the fair  market  value of the  common  stock on the date of
grant. The options expire on January 28, 2007, unless sooner terminated pursuant
to the provisions of the plan. One-third of the options vested on the grant date
and the  remainder  vest  one-third on January 28, 2001 and one-third on January
28, 2002.




<PAGE>


NOTE 5 - STOCK REPURCHASES

On February 18, 2000,  HEC  repurchased  and retired  43,816  shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased  for $6.925 per share which  represented  the average of the closing
prices of the stock during the five days prior to February 18, 2000.

During March 2000,  the Board of Directors of HEC approved the  repurchase of up
to $5,000,000  worth of common and preferred  stock of HEC through a combination
of an odd-lot  program for certain  common and  preferred  shareholders  and the
repurchase of common shares in the open market.

Under the odd-lot program,  the Company will offer to purchase holdings of 99 or
fewer  common  shares,  or 20 or  fewer  Series  A  Preferred  shares  from  its
shareholders  of record as of April 10,  2000.  The offer is for the period from
April 21, 2000 through May 22, 2000.

The Company is currently  attempting  to purchase  shares of its common stock on
the open market.  Subsequent to March 31, 2000 and through May 9, 2000,  HEC has
purchased  18,150  shares of common stock at prices  ranging from $4.10 to $4.81
per share.

On May 5, 2000, the Company  repurchased 360,000 shares of common stock at $5.00
per share.


NOTE 6 - PROPERTY SALES

During the first quarter of 2000,  HEC sold its interests in  approximately  240
non-strategic  oil and gas wells located in the  Keystone,  Merkle and Weesatche
areas of Texas, as well as various wells in Oklahoma,  North Dakota and Montana.
The proceeds from all of the Company's  property  sales during the first quarter
of 2000 were  $11,503,000 of which  $7,000,000  was used to pay down  borrowings
under the Credit Agreement.

Subsequent to March 31, 2000 and through May 9, 2000,  HEC sold its interests in
approximately 260 additional oil and gas wells located in Kansas and Montana for
approximately $11,181,000 and repaid an additional $14,000,000 of its borrowings
under the Credit Agreement.


NOTE 7    -  LEGAL SETTLEMENTS

In connection with the Consolidation, HEC assumed the liability for two lawsuits
filed against  Hallwood Group and certain  individuals and related to the direct
energy  interests  acquired from Hallwood Group.  These lawsuits,  both filed in
federal  court in Denver,  Colorado,  have been  settled and  dismissed.  During
February  2000,  HEC  paid  approximately  $673,000  in  connection  with  these
lawsuits.

In connection with the 1995 closing of the Jakarta,  Indonesia office of HEP and
HCRC, three former  employees filed a lawsuit against those entities,  primarily
based on allegations that their employment contracts had been breached. The case
was tried in 1997, and after appeals, a final judgment of $487,820 plus interest
was awarded to the  plaintiffs.  The amount due was accrued as of March 31, 2000
and will be paid to the plaintiffs in the second quarter of 2000.

In addition to the litigation  noted above, the Company and its subsidiaries are
from time to time subject to routine  litigation and claims  incidental to their
business, which the Company believes will be resolved without material effect on
the Company's financial condition, cash flows or operations.



<PAGE>


ITEM 2    -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

Overview

HEC began  operations on June 8, 1999, in connection with the  Consolidation  of
HEP and HCRC and the  acquisition of the direct  property  interests of Hallwood
Group. For accounting purposes, the Consolidation has been treated as a purchase
by HEP of the common stock of HCRC and the direct  energy  interests of Hallwood
Group. Generally accepted accounting principles require the reporting of results
on a basis that makes it difficult to compare to prior periods.  Therefore, this
Overview  provides  certain  information  on a pro forma basis to facilitate the
comparison with prior periods.

Pro Forma Results

The following pro forma information is prepared as if the Consolidation had been
completed on January 1, 1999.

                         For the Quarter Ended March 31,
                                           2000               1999
                                           ----               ----
                                         (in thousands except prices)

Prices
  Gas (per mcf)                            $2.19               $1.79
  Oil (per bbl)                           $24.19              $11.39

Production
  Gas (mcf)                                6,323               5,921
  Oil (bbl)                                  254                 342

Gas revenue                              $13,845             $10,623
Oil revenue                                6,145               3,896
Production operating expense               5,250               5,523

Liquidity and Capital Resources

Cash Flow

HEC had  $6,869,000  of cash flow from  operating  activities  and proceeds from
property sales of $11,503,000 during the first three months of 2000.

Cash was used primarily for:

o        Additions to property and development costs incurred of $5,478,000;

o        Payments of long-term debt of $7,000,000; and

o        Dividends to preferred shareholders of $573,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was an increase of $5,018,000 in HEC's cash from  $10,480,000 at December
31, 1999 to $15,498,000 at March 31, 2000.

Exploration and Development Projects and Acquisitions

Through March 31, 2000, HEC incurred  $5,478,000 in direct  property  additions,
development,  exploitation,  and exploration  costs. The costs were comprised of
$1,182,000 for property  acquisitions and approximately  $4,296,000 for domestic
exploration  and  development.  HEC's 2000 capital budget is set at $24,000,000.
The significant capital expenditures through March 31, 2000 are as follows:



<PAGE>


Gulf Coast Region

During the first quarter of 2000, HEC expended  approximately  $3,910,000 of its
capital  budget in the Gulf Coast Region in Louisiana  and South and East Texas.
The following are major projects within the region.

Yoakum Gorge  Project.  During the first three months of 2000, HEC continued its
activity  in the  area  and has  incurred  approximately  $1,425,000  for  costs
associated with six non-operated  projects located in Lavaca County,  Texas. One
exploration  project  currently  drilling will test a  16,500-foot  Upper Wilcox
well.  HEC has a 20% interest in the well and costs  incurred  through March 31,
2000 were  approximately  $716,000.  An exploitation well is currently  drilling
which tests an extension zone to one of HEC's  successful  wells which currently
produces  approximately  26,000 mcf per day. HEC has a 15.9% working interest in
the  well  currently  drilling  and  has  incurred   approximately  $362,000  in
associated drilling costs during the first quarter of 2000. One development well
was  successfully  recompleted  from  the  Zoeller  sand  to the  Dagg  sand  at
approximately  10,800 feet. Current gross production is approximately 14,000 mcf
per day. HEC owns a 28.81% working  interest in the well and HEC's  recompletion
costs through March 31, 2000 were approximately  $65,000.  Three other wells are
currently  underway that will test various  sands in the area.  One of the wells
was logged in April 2000 and looks very  encouraging.  During the  remainder  of
2000,  the Company  plans to drill twelve  additional  wells in the area.  HEC's
interests  in the wells range from 7.5% to 12.5% and costs  incurred  during the
first  quarter  of  2000,  were  approximately  $285,000.  With  the  additional
opportunities provided from the 1999 Seisgen Exploration,  Inc. acquisition, HEC
anticipates continued activity in the area.

Bell Prospect. In the first quarter of 2000, HEC incurred approximately $370,000
for completion  costs associated with two wells drilled in 1999 which are in the
Bell prospect  located in Houston County,  Texas. One well tested the Georgetown
formation and was  completed in the Buda  formation and the other well is a dual
lateral Buda formation  development well. The first well is currently  producing
approximately 150 barrels of oil per day and 75 mcf per day with the expectation
of increasing  rates,  but has been  constrained  by salt water disposal and gas
gathering  facilities.  Previous  disposal  and  gathering  problems  have  been
remedied and withdrawals are being increased. The second well is currently being
completed. HEC owns 36% working interests in the two wells. The Company plans to
drill one additional well in this area during the current year.

Louisiana.  HEC incurred approximately  $1,106,000 for drilling costs associated
with an alternate unit well replacing the G.S. Boudreaux well, which was lost in
1999.  HEC believes that this  13,600-foot  Bol Mex 3 well will be  successfully
completed  during the second  quarter  of 2000 and will  produce  from a zone to
which reserves have not previously been booked.  Initial test rates were as high
as 15,000 mcf per day and 450 barrels of oil per day at flowing tubing pressures
of 6,829 pounds per square inch. The Company anticipates  stabilized  production
rates will be higher than the initial test rates. The originally-targeted  upper
zone will remain as behind pipe proved nonproducing  reserves.  HEC owns a 37.4%
working interest in the well. In February 2000, HEC plugged and abandoned a well
that  attempted to recover  remaining  reserves in a fault block adjacent to the
A.L.  Boudreaux  well.  HEC's costs  through  March 31, 2000 were  approximately
$570,000.  In 2000,  HEC's plans include an exploration test of the deeper Klump
sands productive in nearby fields.

Rocky Mountain Region

During the first  quarter of 2000,  HEC expended  approximately  $465,000 of its
capital budget in the Rocky Mountain Region located in Colorado,  Montana, North
Dakota,  Northwest  New  Mexico,  and  Wyoming.  Of this  amount,  HEC  incurred
approximately  $140,000 to frac two wells located on the Colorado Western Slope.
HEC believes  these  workovers  will improve  production  and will  additionally
increase the wells' ultimate recovery. In addition,  during the first quarter of
2000, HEC  participated in a Hudson Ranch  exploration  play that tested the Red
River and Nisku formations of North Dakota.  The well found  insufficient pay to
justify  completion.  HEC's  costs  incurred  during  first  quarter  2000  were
approximately $255,000.



<PAGE>


San Juan Basin  Project - Colorado  and New Mexico.  HEC,  along with many other
industry  partners,  has made application to the Colorado Oil and Gas Commission
for fieldwide  infill drilling of the Fruitland Coal formation.  The application
is to reduce  the  present  320-acre  spacing  units to 160 acres,  because  the
existing spacing units cannot be adequately  drained by a single well.  Approval
is expected in 2000, and could result in as many as 18 possible locations on the
acreage in which the  Company has an  interest  through its special  purpose tax
credit vehicle.  It is not yet known what the economic effect will be of any new
regulations   related  to  drilling  near   residential   developments  and  any
contractual  requirements related to drilling on the tax credit vehicle acreage.
Assuming  economic  viability,  HEC anticipates that infill drilling in Colorado
could begin as soon as 2001. In addition to the Colorado locations,  HEC has the
potential for 14 similar locations in New Mexico if infill drilling is permitted
there.  HEC has not added any volumes to its reserve  projections  in connection
with the Colorado or New Mexico infill drilling opportunities.

Other

The remaining  $1,103,000 of HEC's  capital  expenditures  incurred in the first
quarter of 2000 relate to all other areas. One successful  non-operated well was
drilled in Gaines County,  Texas.  The well was completed in the Leonard sand at
approximately 8,000 feet. HEC owns a 17.50% working interest in the well and has
incurred costs of  approximately  $112,000 during the first quarter of 2000. The
remaining  costs  are  associated   principally   with  technical   general  and
administrative  expenditures  and numerous other projects which are completed or
underway and which are individually less significant.

Property Divestments

During the first quarter of 2000,  HEC sold its interests in  approximately  240
non-strategic oil and gas wells located in the Keystone,  Merkle,  and Weesatche
areas of Texas,  as well as various oil and gas wells in Oklahoma,  North Dakota
and Montana.  Subsequent to March 31, 2000 and through May 9, 2000, HEC sold its
interests in  approximately  260  additional oil and gas wells located in Kansas
and Toole County,  Montana.  Total proceeds received during the first quarter of
2000 were approximately $11,503,000.  The wells sold represent approximately 35%
of HEC's  total  well  count,  approximately  16% of HEC's  reserve  value,  and
approximately  11% of its operating cash flow based on five year average reserve
pricing. The completion of HEC's 2000 sales effort has enabled HEC to reduce its
level of debt and will allow the Company to reduce its administrative  overhead,
and to  focus on its core  areas of  Colorado,  Utah,  New  Mexico,  Texas,  and
Louisiana.

Dividends

On March 15,  2000,  HEC  declared  a  quarterly  dividend  of $.25 per Series A
Cumulative Preferred share, payable on May 15, 2000 to shareholders of record on
March 31, 2000. This amount was accrued as of March 31, 2000.

The Series A Cumulative  Preferred Stock has a dividend  preference of $1.00 per
share per year.  HEC may not  declare or pay  dividends  to common  shareholders
unless full cumulative dividends have been paid on the preferred stock.

Stock Repurchases

On February 18, 2000,  HEC  repurchased  and retired  43,816  shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased  for $6.925 per share which  represented  the average of the closing
prices of the stock during the five days prior to February 18, 2000.

During March 2000,  the Board of Directors of HEC approved the  repurchase of up
to $5,000,000  worth of common and preferred  stock of HEC through a combination
of an odd-lot  program for certain  common and  preferred  shareholders  and the
repurchase of common shares in the open market or in block purchases.

Under the odd-lot program,  the Company will offer to purchase holdings of 99 or
fewer  common  shares,  or 20 or  fewer  Series  A  Preferred  shares  from  its
shareholders  of record as of April 10,  2000.  The offer is for the period from
April 21, 2000 through May 22, 2000.


<PAGE>


The Company is currently  attempting  to purchase  shares of its common stock on
the open market.  Subsequent to March 31, 2000 and through May 9, 2000,  HEC has
purchased  18,150  shares of common stock at prices  ranging from $4.10 to $4.81
per share.

On May 5, 2000, the Company  repurchased 360,000 shares of common stock at $5.00
per share.

Financing

On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended,  the "Credit  Agreement")  to extend the term date of its
line of credit to May 31, 2002.  The lenders are Morgan  Guaranty Trust Company,
First  Union  National  Bank  and Bank of  America.  At March  31,  2000,  HEC's
borrowing base was $79,999,663 under which $79,200,000 was outstanding.

During the first quarter of 2000,  HEC sold its interests in  approximately  240
non-strategic  oil and gas wells in order to enable  HEC to better  focus on its
core  areas  while at the same  time  reduce  its  level  of  outstanding  debt.
Subsequent to March 31, 2000 and through May 9, 2000, approximately 260 more oil
and gas properties  have been sold and HEC has repaid an additional  $14,000,000
of its borrowings under the Credit  Agreement.  On April 27, and on May 9, 2000,
the Credit  Agreement was further amended to, among other matters,  reduce HEC's
borrowing base to  $75,175,000 to reflect the most recent  property sales and to
revise two of the covenants within the Credit Agreement. Therefore, HEC's unused
borrowing base totaled $9,975,000 at May 9, 2000.

Borrowings  against  the  Credit  Agreement  bear  interest  at the lower of the
Certificate  of Deposit rate plus from 1.375% to 2.125%,  prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 7.94%
at March 31, 2000. Interest is payable monthly.  Quarterly principal payments of
$9,314,000 are scheduled to commence May 31, 2002.

The  borrowing  base  for  the  Credit   Agreement  is  typically   redetermined
semiannually,  although the lenders have the right to make a redetermination  at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas  properties.  Additionally,  total  expenditures  for
dividends  paid and stock  repurchased by HEC 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 HEC
is 50% or more of the borrowing base. Total  expenditures for dividends paid and
stock  repurchased by HEC are limited to 65% of cash flow from operations before
working  capital  changes and  distributions  received from  affiliates,  if the
principal amount of debt is less than 50% of the borrowing base.

At the  time  of the  Consolidation,  HCRC  had  $25,000,000  of  10.32%  Senior
Subordinated Notes ("Subordinated  Notes") due December 23, 2007 and warrants to
purchase  common stock which were held by The  Prudential  Insurance  Company of
America  ("Prudential").  On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase  Agreement (the "Note Agreement") was amended to issue
warrants to  Prudential to purchase  309,278  shares of HEC's Common Stock at an
exercise price of $7.00 per share.  The terms of the Note Agreement were further
amended on October  15,  1999 to exclude  certain  hedging  transactions  of the
subsidiaries  of HEC from the  calculation of  indebtedness.  In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendment to the Note Agreement.  The  Subordinated  Notes
bear  interest  at the rate of 10.32% per annum on the unpaid  balance,  payable
quarterly.  Annual  principal  payments of $5,000,000  are due December 23, 2003
through December 23, 2007.

HEC recorded  the  Subordinated  Notes and the warrants  based upon the relative
fair values of the  Subordinated  Notes without the warrants and of the warrants
themselves at the time of Consolidation.  The allocated value of the warrants of
$1,956,000  was  recorded as  additional  paid-in-capital.  The  discount on the
Subordinated  Notes is being amortized over the term of the  Subordinated  Notes
using the interest method of amortization.

As part of its risk management strategy,  HEC enters into financial contracts to
hedge the interest rate payments  under its Credit  Agreement.  HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit  Agreement,  which has a floating interest rate.
The  amounts  received  or  paid  upon  settlement  of  these  transactions  are
recognized as interest expense at the time the interest payments are due.


<PAGE>


All contracts  are interest  rate swaps with fixed rates.  As of April 25, 2000,
HEC was a party to eight contracts with three different counterparties.

The following table provides a summary of HEC's financial contracts.

                                                                    Average
                               Amount of Contract
               Period                       Debt Hedged            Floor Rate

     Last nine months of 2000               $33,750,000               5.65%
     2001                                    36,000,000               5.23
     2002                                    37,500,000               5.23
     2003                                    37,500,000               5.23
     2004                                     6,000,000               5.23

Cautionary Statement Regarding Forward-Looking Statements

In the interest of providing the shareholders with certain information regarding
the Company'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  meanings  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 Company are, to the
knowledge  and in the  judgment of the  officers  and  directors of the Company,
expected to prove true and 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 Company's actual performance
and  financial   results  in  future  periods  to  differ  materially  from  any
projection,  estimate  or  forecasted  result.  Please  refer  to the  Company's
Registration  Statement  dated May 4, 1999,  SEC file  #333-77409 for additional
statements  concerning  important  factors  that could cause  actual  results to
differ materially from the Company's expectations. These risks and uncertainties
include,  among other  things,  volatility  of oil and gas prices,  competition,
risks  inherent in the  Company's  oil and gas  operations,  risk of  mechanical
failure,  the inexact nature of  interpretation  of seismic and other geological
and geophysical  data,  imprecision of reserve  estimates,  the  availability of
capital,  the Company's ability to replace and expand oil and gas reserves,  and
such other risks and uncertainties  described from time to time in the Company's
periodic  reports and  filings  with the  Securities  and  Exchange  Commission.
Accordingly,  shareholders  and potential  investors are cautioned  that certain
events or  circumstances  could cause actual results to differ  materially  from
those projected, estimated or predicted.

Inflation and Changing Prices

Prices

Prices obtained for oil and gas production depend upon numerous factors that are
beyond  the  control  of HEC,  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 during 1999 and through the
first quarter of 2000. The following table presents the weighted  average prices
received  each  quarter  by HEC  and the  effects  of the  hedging  transactions
discussed below.



<PAGE>





<TABLE>
<CAPTION>

                                      Oil                   Oil                    Gas                    Gas
                                (excluding the         (including the        (excluding the         (including the
                                  effects of             effects of            effects of             effects of
                                    hedging               hedging                hedging                hedging
                                 transactions)         transactions)          transactions)          transactions)
                                 -------------         -------------          -------------          -------------
                                   (per bbl)             (per bbl)              (per mcf)              (per mcf)

<S>             <C>                  <C>                   <C>                    <C>                    <C>
First quarter - 1999                 $11.33                $11.41                 $1.65                  $1.81
Second quarter - 1999                 15.99                 15.70                  1.93                   1.91
Third quarter - 1999                  20.22                 18.21                  2.25                   1.95
Fourth quarter - 1999                 22.50                 19.01                  2.26                   1.93
First quarter - 2000                  27.26                 24.19                  2.29                   2.19
</TABLE>



<PAGE>


As part of its risk management strategy,  HEC enters into 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 amounts
received or paid upon settlement of hedge contracts are recognized as oil or gas
revenue at the time the hedged volumes are sold.

HEC's  philosophy is to use derivatives to provide a measure of stability in the
volatile  price  environment  of oil and  gas,  and to  furnish  an  element  of
predictability in the cash flow of the Company. In general,  the Company expects
to hedge  up to 50%,  on a total  equivalent  volume  basis,  of its oil and gas
production for the next two forward  years,  and 30% for each of the three years
thereafter. The Company does not ordinarily intend to hedge more than 65% of any
one commodity.  In addition,  HEC will, in most cases,  enter into  transactions
with minimum  fixed prices for the  production  subject to the  contracts.  This
philosophy may be modified as circumstances require.

The  financial  contracts  used by HEC to hedge the price of its oil and natural
gas production are swaps and collars.  Under the swap  contracts,  HEC sells its
oil and gas  production  at spot market  prices and  receives or makes  payments
based on the differential  between the contract price and a floating price which
is based on spot market  indices.  As of April 25,  2000,  HEC was a party to 26
financial contracts with four different counterparties.

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

                                               Oil
                                                                   Contract
                                  Percent of Production           Delivered
            Period                          Hedged               Floor Price

                                                                  (per bbl)

Last nine months of 2000                     66%                    $18.55
2001                                         12                      19.16




<PAGE>






                                                Gas                Contract
                                       Percent of Production      Delivered
            Period                           Hedged              Floor Price

                                                                  (per mcf)

Last nine months of 2000                     54%                   $ 2.14
2001                                         57                      2.11
2002                                         34                      1.95

Between  8% and 12% of the gas  volumes  hedged  in each year are  subject  to a
collar  agreement  under which HEC 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 $2.54 per mcf to
$2.65 per mcf.

During the second quarter through April 25, 2000, the weighted average oil price
(for  barrels not  hedged) was  approximately  $23.50 per barrel.  The  weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.70 per mcf.

Inflation

Inflation did not have a material  impact on HEC in 1999 and is not  anticipated
to have a material impact in 2000.



<PAGE>


Results of Operations

For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy  interests of Hallwood  Group.
Accordingly,  all  information  presented  for  periods  prior  to June 8,  1999
represents the historical information of HEP because HEP is considered to be the
acquiring entity for accounting purposes.

First Quarter of 2000 Compared to the First Quarter of 1999

The  following  table is  presented  to  contrast  HEC's  oil and gas  price and
production for discussion  purposes.  Significant  fluctuations are discussed in
the accompanying narrative.

                                            2000              1999
                                            ----              ----
                                          (In thousands except price)
Gas
  Production (mcf)                          6,323             3,580
  Price (per mcf)                         $  2.19           $  1.81

Oil
  Production (bbl)                            254               190
  Price (per bbl)                          $24.19            $11.41

Gas Revenue

Gas revenue increased  $7,355,000 during the first quarter of 2000 compared with
the  first  quarter  of 1999.  The  increase  is the  result of an  increase  in
production  from 3,580,000 mcf in 1999 to 6,323,000 mcf in 2000. The average gas
price  increased  from  $1.81  per mcf in 1999 to  $2.19  per mcf in  2000.  The
increase in  production is primarily  due to the  Consolidation  which caused an
increase  in  gas  production  of  2,464,000  mcf.  The  remaining  increase  in
production is primarily due to the  acquisition  of interests in 18 gas wells in
San  Juan  County,  New  Mexico  during  the  second  quarter  of  1999  and the
acquisition  of  interest  in 34 gas wells in Lavaca  County,  Texas  during the
fourth quarter of 1999. The increased  production  from these  acquisitions  was
partially offset by a production  decline on two significant  wells in Louisiana
caused by increased  rates of water  production on the wells and property  sales
during the first quarter of 2000.

The effect of HEC's  hedging  transactions  as described  under  "Inflation  and
Changing  Prices,"  during the first  quarter  of 2000,  was to  decrease  HEC's
average gas price from $2.29 per mcf to $2.19 per mcf,  representing  a $632,000
decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue increased  $3,978,000 during the first quarter of 2000 compared with
the first  quarter of 1999.  The  increase  is the result of an  increase in the
average  oil price from  $11.41 per barrel in 1999 to $24.19 per barrel in 2000,
and an increase in production from 190,000 barrels in 1999 to 254,000 barrels in
2000. The production increase is primarily due to the Consolidation which caused
an increase in oil  production of 113,000  barrels.  This increase was partially
offset by a decrease in production  primarily due to a production decline on two
wells in Louisiana  caused by increased  rates of water  production and property
sales during the first quarter of 2000.

The effect of HEC's hedging transactions during the first quarter of 2000 was to
decrease  HEC's  average  oil price from $27.26 per barrel to $24.19 per barrel,
resulting in a $780,000 decrease in revenue from hedging transactions.



<PAGE>


Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County, New Mexico and LaPlata County, Colorado. Pipeline,  facilities and other
revenue  increased  $457,000  during the first quarter of 2000 compared with the
first  quarter of 1999.  The net increase is primarily  comprised of  additional
revenue from the Consolidation.

Interest Income

Interest income increased $37,000 during the first quarter of 2000 compared with
the first quarter of 1999 due primarily to a higher  average cash balance during
2000.

Production Operating

Production  operating expense  increased  $2,192,000 during the first quarter of
2000 compared  with the first  quarter of 1999.  The majority of the increase is
the result of the Consolidation,  partially offset by decreased  operating costs
due to property sales during the first quarter of 2000.

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 HEC.
These expenses  increased $459,000 during the first quarter of 2000 primarily as
a result of the Consolidation.

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $2,141,000 during the
first quarter of 2000  compared with the first quarter of 1999.  The increase is
primarily the result of higher  capitalized costs and a higher depletion rate in
2000 due to the increase in production primarily caused by the Consolidation.

Interest

Interest expense increased  $1,577,000 during the first quarter of 2000 compared
with the first quarter of 1999 due to a higher average  outstanding debt balance
during 2000 resulting from the Consolidation.

Equity in Loss of HCRC

Equity in loss of HCRC represents  HEC's share of its equity  investment in HCRC
prior to the Consolidation. This loss decreased to zero during the first quarter
of  2000,  compared  with  the  first  quarter  of  1999,  as a  result  of  the
Consolidation.

Litigation

Litigation  expense  during the first  quarter of 2000 is comprised of the costs
related to the  settlement of the employment  litigation  described in Note 7 of
the accompanying financial statements.

Provision for Income Taxes

On June 8, 1999, in connection with the Consolidation, HEC began operations as a
taxable entity.  Prior to the  Consolidation,  HEP was a partnership and was not
subject to federal  income tax. The  provision for income taxes during the first
quarter of 2000 is comprised of a provision for current  federal taxes resulting
from alternative minimum taxes, and current state taxes.


<PAGE>


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HEC's primary market risks relate to changes in interest rates and in the prices
received  from sales of oil and  natural  gas.  HEC's  primary  risk  management
strategy is to partially  mitigate the risk of adverse changes in its cash flows
caused by increases in interest rates on its variable rate debt and decreases in
oil and natural gas prices, by entering into derivative  financial and commodity
instruments,  including  swaps and  collars.  By  hedging  only a portion of its
market risk exposures,  HEC is able to participate in the increased earnings and
cash flows  associated with decreases in interest rates and increases in oil and
natural gas prices;  however,  it is exposed to risk on the unhedged  portion of
its variable rate debt and oil and natural gas production.

Historically,  HEC has  attempted to hedge the exposure  related to its variable
rate debt and its  forecasted oil and natural gas production in amounts which it
believes  are  prudent  based on the  prices of  available  derivatives  and the
Company's estimated debt levels and deliverable  volumes. HEC attempts to manage
the  exposure  to  adverse  changes  in the fair  value of its  fixed  rate debt
agreements by issuing fixed rate debt only when business  conditions  and market
conditions are favorable.

HEC does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEC's derivative instruments
are designated and effective as hedges against its identified  risks, and do not
of themselves  expose HEC to market risk because any adverse  change in the cash
flows associated with the derivative  instrument is accompanied by an offsetting
change in the cash flows of the hedged transaction.

All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision.  The personnel involved in derivative  activity must
follow prescribed  trading limits and parameters that are regularly  reviewed by
the Board of  Directors  and by  senior  management.  HEC uses only  well-known,
conventional  derivative  instruments  and attempts to manage its credit risk by
entering into financial contracts with reputable financial institutions.

Following are disclosures  regarding HEC's market risk sensitive  instruments by
major  category.  Investors and other readers are cautioned to avoid  simplistic
use of these  disclosures.  Readers  should  realize  that the actual  impact of
future  interest rate and commodity  price movements will likely differ from the
amounts  disclosed  below due to  ongoing  changes in risk  exposure  levels and
concurrent  adjustments to hedging  positions.  It is not possible to accurately
predict future movements in interest rates and oil and natural gas prices.

Commodity  Price  Risk  (non-trading)  - HEC  hedges a portion of the price risk
associated  with the sale of its oil and natural gas production  through the use
of derivative commodity  instruments,  which consist of swaps and collars. These
instruments  reduce HEC's exposure to decreases in oil and natural gas prices on
the hedged  portion of its  production by enabling it to  effectively  receive a
fixed price on its oil and gas sales or a price that only  fluctuates  between a
predetermined  floor and  ceiling.  As of April 25,  2000,  HEC has entered into
derivative  commodity hedges covering an aggregate of 358,000 barrels of oil and
23,318,000 mcf of gas that extend through 2002. Under these contracts, HEC sells
its oil and natural gas  production  at spot market prices and receives or makes
payments  based on the  differential  between the contract  price and a floating
price which is based on spot market  indices.  The amount  received or paid upon
settlement  of these  contracts is  recognized as oil or natural gas revenues at
the time the hedged volumes are sold. A hypothetical decrease in oil and natural
gas prices of 10% from the prices in effect as of March 31,  2000 would  cause a
loss in income and cash flows of $4,890,000  during the remaining nine months of
2000, assuming that oil and gas production remain at projected levels. This loss
in income and cash flows would be offset by a $2,836,000  increase in income and
cash flows associated with the oil and natural gas derivative contracts that are
in effect for the remaining nine months of 2000.



<PAGE>


Interest Rate Risks  (non-trading)  - HEC uses both fixed and variable rate debt
to partially finance operations and capital expenditures.  As of March 31, 2000,
HEC's debt  consisted of $79,200,000  in borrowings  under its Credit  Agreement
which bears interest at a variable rate, and $25,000,000 in borrowings under its
10.32% Senior Subordinated Notes which bear interest at a fixed rate. HEC hedges
a portion of the risk associated with this variable rate debt through derivative
instruments,  which consist of interest  rate swaps and collars.  Under the swap
contracts,  HEC makes interest payments on its Credit Agreement as scheduled and
receives or makes payments based on the  differential  between the fixed rate of
the swap and a  floating  rate plus a defined  differential.  These  instruments
reduce HEC's  exposure to increases in interest  rates on the hedged  portion of
its debt by  enabling it to  effectively  pay a fixed rate of interest or a rate
which only fluctuates  within a predetermined  ceiling and floor. A hypothetical
increase in interest rates of two percentage points would cause a loss in income
and cash flows of $1,188,000 during the remaining nine months of 2000,  assuming
that outstanding  borrowings under the Credit Agreement remain at March 31, 2000
levels.  This  loss in income  and cash  flows  would be  offset  by a  $506,000
increase in income and cash flows  associated  with the  interest  rate swap and
collar agreements that are in effect for the remaining nine months of 2000.





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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, 1999 and Note 7 of this Form 10-Q.


ITEM 2     -  CHANGES IN SECURITIES

              None.


ITEM 3     -  DEFAULTS UPON SENIOR SECURITIES

              None.


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

              None.


ITEM 5     -  OTHER INFORMATION

              None.


ITEM 6     -  EXHIBITS AND REPORTS ON FORM 8-K

               a) Exhibits

                  10.15    Amendment No. 3 to Credit Agreement, dated as of
                            April 27, 2000
                  10.16    Amendment No. 4 to Credit Agreement, dated as of
                            May 9, 2000
                  27       Financial Data Schedule

              b)   Reports on Form 8-K

                   None.


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SIGNATURE

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

                                                   HALLWOOD ENERGY CORPORATION



Date:  May 9, 2000

                                       By:
                                          William J. Baumgartner, Vice President
                                                (Chief Financial Officer)