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

                                    Form 10-Q

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

                For the Quarterly Period Ended September 30, 1999

[ ]           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 Parkway
                    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 November 8, 1999

Common Stock                                                9,999,754
Series A Cumulative Preferred Stock                         2,334,165








                                                    Page 1 of 27


<PAGE>

<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

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



                                                                     September 30,              December 31,
                                                                          1999                      1998

CURRENT ASSETS
<S>                                                                   <C>                          <C>
   Cash and cash equivalents                                          $   7,119                    $  11,874
   Accounts receivable:
     Oil and gas revenues                                                12,473                        5,911
     Trade                                                                6,605                        4,040
   Due from affiliates                                                      622                          119
   Prepaid expenses and other current assets                              1,196                        1,338
   Net working capital of affiliate                                                                      236
                                                                   ------------                   ----------
         Total                                                           28,015                       23,518
                                                                       --------                     --------

PROPERTY,  PLANT  AND  EQUIPMENT,  at cost  Oil and gas  properties  (full  cost
   method):
     Proved mineral interests                                           746,980                      664,799
     Unproved mineral interests                                           4,815                        2,694
   Furniture, fixtures and other                                          3,736                        3,411
                                                                      ---------                    ---------
         Total                                                          755,531                      670,904

   Less accumulated depreciation, depletion,
     amortization and property impairment                              (581,299)                    (565,899)
                                                                        -------                      -------
         Total                                                          174,232                      105,005
                                                                        -------                      -------

OTHER ASSETS
   Deferred expenses and other assets                                     1,402                          408
   Investment in common stock of HCRC                                                                 10,160
                                                                  -------------                     --------
         Total                                                            1,402                       10,568
                                                                      ---------                     --------

TOTAL ASSETS                                                           $203,649                     $139,091
                                                                        =======                      =======













<FN>

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


<PAGE>

<TABLE>
<CAPTION>

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



                                                                             September 30,            December 31,
                                                                                  1999                     1998

CURRENT LIABILITIES
<S>                                                                            <C>                      <C>
   Accounts payable and accrued liabilities                                    $  23,674                $  22,921
   Current portion of long-term debt                                                                        9,319
                                                                            ------------                ---------
         Total                                                                    23,674                   32,240
                                                                                --------                 --------

NONCURRENT LIABILITIES
   Long-term debt                                                                103,428                   40,381
   Deferred liability                                                                939                    1,050
                                                                               ---------                ---------
         Total                                                                   104,367                   41,431
                                                                                 -------                 --------

           Total Liabilities                                                     128,041                   73,671
                                                                                 -------                 --------

MINORITY INTEREST IN AFFILIATES                                                      506                    2,788
                                                                               ---------                ---------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
   Series A Cumulative Preferred Stock;  5,000,000 shares authorized;  2,334,165
     shares issued and outstanding in 1999 and
     1998                                                                         21,386                   21,386
   Common Stock par value $.01 per share; 25,000,000 shares
     authorized; 9,999,754 shares issued and outstanding in 1999 and
     5,599,754 shares issued and outstanding in 1998                                 100                       56
   Additional paid-in capital                                                     68,376                   58,052
   Accumulated deficit                                                           (14,760)                  (16,862)
                                                                                --------                  --------
         Stockholders' equity - net                                               75,102                    62,632
                                                                                --------                  --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $203,649                  $139,091
                                                                                 =======                   =======
















<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
                                                                                                    September
                                                                                      30,
                                                                                  1999                    1998
                                                                                  ----                    ----

REVENUES:
<S>                                                                            <C>                     <C>
   Gas revenue                                                                 $ 10,580                $   7,421
   Oil revenue                                                                    5,063                    2,626
   Pipeline, facilities and other                                                 1,208                    1,067
   Interest                                                                          92                      241
                                                                             ----------                ---------
                                                                                 16,943                   11,355
                                                                                -------                  -------

EXPENSES:
   Production operating                                                           5,238                    2,947
   Facilities operating                                                             148                      136
   General and administrative                                                     1,738                    1,104
   Depreciation, depletion and amortization                                       6,423                    4,617
   Impairment of oil and gas properties                                                                    6,600
   Interest                                                                       2,377                      734
                                                                              ---------                ---------
                                                                                 15,924                   16,138
                                                                                -------                  -------

OTHER EXPENSES:
   Equity in loss of HCRC                                                                                   767
   Minority interest in net income of affiliates                                     56                     203
   Litigation                                                                                               375
                                                                           ------------               ---------
                                                                                     56                   1,345
                                                                              ---------                --------

INCOME (LOSS) BEFORE INCOME TAXES                                                   963                  (6,128)

PROVISION FOR INCOME TAXES:
   Current                                                                          156
   Deferred                                                                         100
                                                                                    256

NET INCOME (LOSS)                                                                   707                  (6,128)

PREFERRED DIVIDENDS                                                                 552                      616
                                                                              ---------                ---------

NET INCOME (LOSS) ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                       $      155               $  (6,744)
                                                                              =========                ========

     NET INCOME (LOSS) PER SHARE - BASIC                                    $       .02              $    (1.20)
                                                                             ==========               =========

     NET INCOME (LOSS) PER SHARE - DILUTED                                  $       .02              $    (1.20)
                                                                             ==========               =========

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

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

     Income (loss) before income taxes                                       $      963               $  (6,128)

     Provision for income taxes


     Net income (loss)                                                       $      963               $  (6,128)
                                                                              =========                ========

     Net income (loss) attributable to common shareholders                   $      411               $  (6,744)
                                                                              =========                ========

     Net income (loss) per share - basic                                    $       .04             $     (1.20)
                                                                             ==========              ==========

     Net income (loss) per share - diluted                                  $       .04             $     (1.20)
                                                                             ==========              ==========
<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 Nine Months Ended
                                                                                          September 30,
                                                                                  1999                    1998

REVENUES:
<S>                                                                            <C>                      <C>
   Gas revenue                                                                 $ 24,616                 $ 21,159
   Oil revenue                                                                   10,261                    8,356
   Pipeline, facilities and other                                                 3,847                    2,743
   Interest                                                                         269                      567
                                                                              ---------                ---------
                                                                                 38,993                   32,825
                                                                                -------                  -------

EXPENSES:
   Production operating                                                          11,728                    9,008
   Facilities operating                                                             475                      381
   General and administrative                                                     4,232                    3,353
   Depreciation, depletion and amortization                                      15,235                   11,234
   Impairment of oil and gas properties                                                                    9,200
   Interest                                                                       4,468                    1,927
                                                                               --------                 --------
                                                                                 36,138                   35,103
                                                                                -------                  -------

OTHER INCOME (EXPENSES):
   Equity in loss of HCRC                                                         (419)                 (3,090)
   Minority interest in net income of affiliates                                  (252)                   (787)
   Litigation                                                                       100                   (930)
                                                                               --------               --------
                                                                                  (571)                 (4,807)
                                                                              --------                --------

INCOME (LOSS) BEFORE INCOME TAXES                                                 2,284                 (7,085)

PROVISION FOR INCOME TAXES:
   Current                                                                          182

NET INCOME (LOSS)                                                                 2,102                 (7,085)

PREFERRED DIVIDENDS                                                               1,752                    1,848
                                                                               --------                 --------

NET INCOME (LOSS) ATTRIBUTABLE TO
   COMMON SHAREHOLDERS                                                       $      350               $  (8,933)
                                                                              =========                ========

     NET INCOME (LOSS) PER SHARE - BASIC                                    $       .05               $   (1.60)
                                                                             ==========                ========

     NET INCOME (LOSS) PER SHARE - DILUTED                                  $       .05               $   (1.60)
                                                                             ==========                ========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                        7,437                    5,600
                                                                               ========                 ========

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

     Income (loss) before income taxes                                        $   2,284               $  (7,085)

     Provision for income taxes


     Net income (loss)                                                        $   2,284               $  (7,085)
                                                                               ========                ========

     Net income (loss) attributable to common shareholders                   $      532               $  (8,933)
                                                                              =========                ========

     Net income (loss) per share - basic                                     $      .07              $    (1.60)
                                                                              =========               =========

     Net income (loss) per share - diluted                                   $      .07              $    (1.60)
                                                                              =========               =========


<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 Nine Months Ended
                                                                                        September 30,
                                                                                  1999                 1998

OPERATING ACTIVITIES:
<S>                                                                             <C>                 <C>
    Net income (loss)                                                           $  2,102            $  (7,085)
    Adjustments to reconcile net income (loss) to net cash provided
       by operating activities:
          Depreciation, depletion and amortization                                15,235                11,234
          Impairment of oil and gas properties                                                           9,200
          Depreciation charged to affiliates                                         165                   188
          Equity in loss of HCRC                                                     419                 3,090
          Minority interest in net income                                            252                   787
          Undistributed earnings of affiliates                                   (1,176)                 (508)
          Gain on asset disposals                                                                        (188)
          Amortization of deferred loan costs and debt discount                      202                    54
          Noncash interest expense                                                                          15
          Recoupment of take-or-pay liability                                      (173)                  (99)

    Changes in  operating  assets and  liabilities  provided  (used) cash net of
       noncash activity:
          Oil and gas revenues receivable                                        (2,673)                 3,344
          Trade receivables                                                      (2,216)                 (323)
          Due from affiliates                                                    (3,863)                 (874)
          Prepaid expenses and other current assets                                  371                 (240)
          Accounts payable and accrued liabilities                               (1,800)                 1,548
                                                                               --------               --------
                Net cash provided by operating activities                          6,845                20,143
                                                                                --------               -------

INVESTING ACTIVITIES:
    Additions to property, plant and equipment                                   (3,498)              (19,772)
    Exploration and development costs incurred                                   (7,037)               (9,561)
    Costs incurred in connection with the Consolidation                          (2,890)
    Proceeds from sales of property, plant and equipment                             143                   189
    Distributions received from affiliate                                          1,635                   639
    Other investing activities                                                                            (21)
                                                                           -------------            ---------
                Net cash used in investing activities                           (11,647)              (28,526)
                                                                               --------              --------

FINANCING ACTIVITIES:
    Proceeds from long-term debt                                                   6,000                24,500
    Proceeds from equity offering net of syndication costs                                              16,517
    Payments of long-term debt                                                   (2,000)              (18,286)
    Dividends paid                                                               (3,477)               (7,072)
    Payment of contract settlement                                                                     (2,767)
    Distributions paid by consolidated affiliates to minority interest             (429)               (1,200)
    Exercise of options                                                                                    199
    Capital contribution                                                                                   171
    Syndication costs                                                               (47)
                                                                             ----------
                Net cash provided by financing activities                             47                12,062
                                                                              ----------               -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (4,755)                 3,679

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD                                                               11,874                 6,622
                                                                                 -------              --------

END OF PERIOD                                                                  $   7,119              $ 10,301
                                                                                ========               =======
<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 of each year presented.
<TABLE>
<CAPTION>

                                                           For the Three Months Ended September 30,
                                                             1999                                              1998
                               ------------------------------------------------------------------------------------
                                     As           Acquired                             As           Acquired
                                  Reported       Interests         Pro Forma        Reported        Interests        Pro Forma
                                                             (In thousands except per Share data)

<S>                               <C>                               <C>             <C>             <C>              <C>
Revenues                          $16,943                           $16,943         $11,355         $  6,956         $ 18,311
Net income (loss)                     707                               707           (6,128)         (4,576)         (10,704)
Net income (loss)
   attributable to
     common
     shareholders                     155                               155            (6,744)        (4,576)         (11,320)
Net income (loss)
   per share - basic            $     .02                          $    .02          $  (1.20)                       $   (1.13)
                                 ========                           =======           =======                         ========
Net income (loss)
   per share - diluted          $     .02                          $    .02          $  (1.20)                       $   (1.13)
                                 ========                           =======           =======                         ========

Production:
   Gas (mcf)                        5,476                             5,476             3,802          2,394            6,196
   Oil (bbl)                          278                               278               201            147              348

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                            For the Nine Months Ended September 30,
                                                             1999                                              1998
                               ------------------------------------------------------------------------------------
                                     As           Acquired                             As           Acquired
                                  Reported       Interests         Pro Forma        Reported        Interests        Pro Forma
                                                             (In thousands except per Share data)

<S>                               <C>              <C>               <C>              <C>           <C>              <C>
Revenues                          $38,993          $11,971           $50,964          $32,825       $ 18,528         $ 51,353
Net income (loss)                   2,102           (1,065)            1,037           (7,085)       (15,655)         (22,740)
Net income (loss)
   attributable to
     common
     shareholders                     350           (1,065)             (715)          (8,933)       (15,655)         (24,588)
Net income (loss)
   per share - basic            $     .05                          $    (.07)        $  (1.60)                      $   (2.46)
                                 ========                           ========          =======                        ========
Net income (loss)
   per share - diluted          $     .05                          $    (.07)        $  (1.60)                      $   (2.46)
                                 ========                           ========          =======                        ========

Production:
   Gas (mcf)                       13,016            4,097            17,113           10,463          5,937           16,400
   Oil (bbl)                          661              252               913              594            449            1,043
</TABLE>

The pro forma  information  shown above  excludes  any  additional  provision or
benefit  for  income  taxes  because  of  the   Company's  net  operating   loss
carryforwards and related valuation allowance.

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 HEP's 1998 Annual Report
on Form 10-K.

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.

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  for all periods  presented.
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 any period.

Computation of Net Income (Loss) Per Share

Basic income  (loss) per share is computed by dividing net income  (loss) 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 stock
options  described in Note 4 have been ignored in the computation of diluted net
income (loss) per share because their inclusion would be antidilutive.


<PAGE>


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 September 30, 1999
<S>                                                                 <C>                  <C>            <C>
   Net income per share - basic                                     $    155             10,000         $    .02
                                                                     -------            -------          =======
  Net income per share - diluted                                    $    155             10,000         $    .02
                                                                     =======            =======          =======

For the Nine Months Ended September 30, 1999
   Net income per share- basic                                      $    350              7,437          $   .05
                                                                     -------           --------           ======
  Net income per share- diluted                                     $    350              7,437          $   .05
                                                                     =======           ========           ======

For the Three Months Ended September 30, 1998
   Net loss per share- basic                                        $ (6,744)             5,600          $(1.20)
                                                                     -------           --------           =====
  Net loss per share - diluted                                      $ (6,744)             5,600          $(1.20)
                                                                     =======           ========           =====

For the Nine Months Ended September 30, 1998
   Net loss per share - basic                                       $ (8,933)             5,600          $(1.60)
                                                                     -------           --------           =====
  Net loss per share - diluted                                      $ (8,933)             5,600          $(1.60)
                                                                     =======           ========           =====
</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-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

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. The terms of the Credit Agreement
were  amended on October 15,  1999,  to,  among other  matters,  increase  HEC's
borrowing  base  to  $90,000,000.   At  September  30,  1999,  HEC  had  amounts
outstanding  of  $80,200,000.  On October 22, 1999,  HEC borrowed an  additional
$7,000,000 to acquire certain oil and gas properties located  principally in the
Yoakum Gorge area of Lavaca County, Texas (see Note 8). Therefore,  HEC's unused
borrowing base totaled $2,800,000 at November 8, 1999.


<PAGE>


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
7.375% at  September  30,  1999.  Interest  is payable  monthly,  and  quarterly
principal  payments,  including  repayments of the borrowing made  subsequent to
September 30, 1999, of $12,457,000 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, aggregate dividends paid 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.
Aggregate  dividends paid 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. 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
$1,828,000  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 September  30,
1999, 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 three months of 1999              $45,000,000                5.65%
     2000                                    45,000,000                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



<PAGE>


NOTE 3    -  STATEMENTS OF CASH FLOWS

In connection with the  Consolidation,  the purchase of the common stock of HCRC
and the direct  energy  interests  of Hallwood  Group was  recorded  through the
issuance  of  approximately  2,600,000  shares of HEC  common  stock to HCRC and
1,800,000  shares of HEC common stock to Hallwood  Group based on the  estimated
fair value of the assets acquired and the liabilities  assumed as of the date of
purchase. This noncash investing activity is summarized as follows:

                                                             Fair Value of
                                                           Acquired Interest
                                                            (In thousands)

Current assets                                                $   4,823
Oil and gas properties - net                                     81,348
Other assets                                                      1,140
Current liabilities                                              (2,587)
Long-term debt                                                  (49,672)
Other noncurrent liabilities                                        (62)

At the  time of the  Consolidation,  HEC  recorded  the  allocated  value of the
warrants, described in Note 2, as $1,828,000 in additional paid-in-capital which
represented  a noncash  financing  transaction  during the first nine  months of
1999.

Cash paid for interest  during the nine months ended September 30, 1999 and 1998
was $4,251,000 and $1,845,000, respectively.


NOTE 4 -  STOCK OPTION GRANT

On June 9, 1999, HEC granted options to purchase  600,000 shares of common stock
at an exercise price of $7.00 per share which was equal to the fair market value
of the common  stock on the date of grant.  The options  expire on June 9, 2006,
unless sooner  terminated  pursuant to the provisions of the plan.  One-third of
the options are vested,  and the  remainder  vest  one-third on June 8, 2000 and
one-third on June 8, 2001.


NOTE 5 - CAPITAL STOCK

HEC's stock  trades on the NASDAQ  under the symbol  "HECO" for Common Stock and
"HECOP" for Series A Cumulative Preferred Stock.

Common Stock

Under its charter,  HEC is authorized  to issue up to  25,000,000  shares of HEC
common  stock with a par value of $.01 per share.  The common  shareholders  are
entitled to one vote per share on all matters  voted on by  shareholders.  After
giving  effect to any  preferential  rights of any  series  of  preferred  stock
outstanding,  the holders of HEC common  stock are  entitled to  participate  in
dividends,  if any,  as may be  declared  from  time to  time  by the  board  of
directors of HEC.  Upon  liquidation,  the common  shareholders  are entitled to
receive  a pro rata  share of all of the  assets of HEC that are  available  for
distribution to such holders. The holders of HEC common stock have no preemptive
rights with respect to future issuances of HEC common stock.

Preferred Stock

HEC is authorized to issue up to 5,000,000  shares of preferred  stock from time
to time,  in one or more  series,  without  shareholder  approval and to fix the
designation,   preferences,   conversion   or  other  rights,   voting   powers,
restrictions,   limitations  as  to  dividends,  qualifications  and  terms  and
conditions of redemption of any series that may be  established by the HEC board
of directors.


<PAGE>


In  connection  with  the  Consolidation,  the  board  of  directors  of HEC has
authorized  the  issuance of 2,334,165  shares of Series A cumulative  preferred
stock.  Each share of preferred  stock is entitled to one vote on all matters on
which  shareholders may vote. The preferred  shareholders vote together with the
common shareholders in the election of directors and vote as a separate class on
all other matters.

Preferred  shareholders are entitled to receive cumulative cash dividends at the
rate of $1.00 per share per year,  if  declared  by the HEC board of  directors.
Dividends  are paid  quarterly  in  arrears  commencing  on June 30,  1999.  The
dividends are fully cumulative and accumulate, whether or not earned or declared
and whether or not HEC has funds legally available to pay them, without interest
on a daily basis.  HEC may not declare or pay  dividends to common  shareholders
unless full cumulative dividends have been paid on the preferred stock.

Upon  liquidation or  dissolution of HEC, all accrued  dividends must be paid to
the preferred  shareholders  before any assets may be  distributed to the common
shareholders.  Once all accrued  preferred  dividends  are paid,  the  preferred
shareholders are entitled to participate equally with the common shareholders in
the distribution of the remaining assets of HEC in a liquidation or dissolution.

The HEC preferred  stock is  redeemable at the option of HEC after  December 31,
2003.  After that date, HEC may redeem shares of preferred  stock in whole or in
part at any time at a  redemption  price  of  $10.00  per  share,  plus  accrued
dividends  which are unpaid on the redemption  date.  Preferred stock may not be
redeemed in part if full  cumulative  dividends  have not been paid or set aside
for payment with respect to all prior dividend periods.

Rights Plan

During the second  quarter of 1999,  the board of  directors of HEC approved the
adoption of a rights plan  designed  to protect  shareholders  in the event of a
takeover  action  that  would  otherwise  deny  them  the  full  value  of their
investment.

Under the terms of the rights plan,  one right was  distributed  for each common
share of HEC to holders of record at the close of business on June 8, 1999.  The
rights trade with the common stock.  The rights will become  exercisable only in
the event, with certain  exceptions,  that an acquiring party accumulates 15% or
more of HEC's outstanding common stock. The rights will expire on June 7, 2009.

HEC will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day  following  the  acquisition  of a 15%  position in its
common shares.


NOTE 6    -  ARBITRATION

In connection with the Demand for Arbitration  filed by Arcadia  Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Energy Partners,  L.P., Hallwood  Consolidated  Resources  Corporation,
E.M.  Nominee  Partnership  Company and  Hallwood  Consolidated  Partners,  L.P.
(collectively  referred  to as  "Hallwood"),  the  arbitrators  ruled  that  the
original  agreement  entered  into  in  August  1997  to  purchase  oil  and gas
properties  for  $16,400,000  should  proceed,  with a  reduction  to the  total
purchase price of  approximately  $2,500,000 for title defects.  The arbitrators
also ruled that Arcadia was not entitled to enforce its claim that  Hallwood was
required to purchase an additional  $8,000,000  worth of  properties  and denied
Arcadia's claim for attorneys' fees. The arbitrators granted Arcadia prejudgment
interest on the adjusted  purchase price, in the amount of $904,000 of which HEP
paid  $452,000.  That amount was  accrued in the  December  31,  1998  financial
statements of the Company and was paid during the second quarter of 1999.

In October 1998, HEP and its affiliate,  HCRC, closed the acquisition of oil and
gas properties from Arcadia,  including  interests in  approximately  570 wells,
numerous proven and unproven drilling locations,  exploration  acreage,  and 3-D
seismic data. HEP's share of the purchase price was $8,200,000.



<PAGE>


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  payment  of the
settlement  amount and  dismissal  of the cases will occur thirty days after the
court has given final  approval  for the  settlement.  HEC is  obligated  to pay
approximately  $650,000 in connection with these  lawsuits,  and that amount was
accrued as a liability on the Company's  balance  sheet in  connection  with the
Consolidation. It is anticipated that the court will give its final approval for
the settlement prior to the end of 1999.

Concise Oil and Gas Partnership  ("Concise"),  a wholly owned  subsidiary of the
Company,  was a defendant in a lawsuit styled Dr. Allen J. Ellender,  Jr. et al.
vs. Goldking  Production  Company,  et al., filed in the Thirty-Second  Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The portion of the
lawsuit against Concise was settled in  consideration  of the payment by Concise
of $600,000.  This amount was recorded as litigation  settlement  expense in the
second  quarter of 1998.  Concise has been  dismissed  with  prejudice  from the
lawsuit.

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.


NOTE 8    -  SUBSEQUENT EVENT

On October 20, 1999, HEC acquired oil and gas properties located  principally in
the  Yoakum  Gorge  area of Lavaca  County,  Texas  for  $7,300,000  and  future
contingent consideration.


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.  Therefore,  the quarter  ended  September  30, 1999,  was the first full
quarter after the Consolidation  and generally  accepted  accounting  principles
require  reporting  of results on a basis that makes it  difficult to compare to
prior years. Therefore,  this Overview provides certain information on both GAAP
basis and on a pro forma basis as if the  Consolidation  had been  completed  on
January 1, 1998.

In October  1999,  as a result of a sudden  increase  in water  production,  HEC
temporarily suspended production in the A.L. Boudreaux well located in the Scott
Field  of  Lafayette  Parish,  Louisiana  in order to plug  back  several  water
producing intervals and to attempt to open additional producing formation within
the Bol Mex 3 Zone.  Stabilized  production rates are expected in the range of 8
to 10 mmcfd and 160 to 200 bopd, which fall below  pre-workover  rates.  Precise
results from the  recompletion  are not yet available,  however,  HEC expects to
quantify  the extent of revisions by year-end.  The G.S.  Boudreaux  well,  also
located in the Scott Field,  stopped  producing  in early  October  1999,  after
experiencing significant increased water production.




<PAGE>


Pro Forma Results

On a pro  forma  basis,  revenues  decreased  approximately  7%  and  production
decreased  approximately 14% for the third quarter of 1999 compared to the third
quarter  of 1998 and  revenues  decreased  approximately  1% for the first  nine
months of 1999 compared to the first nine months of 1998.

The pro forma  decrease in revenues and  production  during the third quarter of
1999 is primarily  attributable to lower production from the A. L. Boudreaux and
G.S. Boudreaux wells in South Louisiana,  as previously  reported.  Although the
decline in production from these wells occurred earlier than was projected,  the
Company has been planning for the eventual  depletion of these wells for several
years. The recently  announced  acquisition of additional Lower Wilcox interests
from  Seisgen  Exploration,  Inc.  ("Seisgen")  brought HEC into a play that has
wells similar in  productivity  to its A. L. Boudreaux well. The 1998 repurchase
of a volumetric  production  payment in 34 coal bed methane  wells located in La
Plata County,  Colorado,  has resulted in the San Juan Basin becoming HEC's most
significant  producing  area. In the third  quarter of 1999,  the San Juan Basin
comprised 41% of HEC's  production,  in contrast to South  Louisiana,  which, in
total, comprised only 17% of HEC's production. As a result of this activity, the
Company's fourth quarter  production is expected to be substantially  equivalent
to third quarter levels.

GAAP Results

On a GAAP  basis,  as  described  in  greater  detail in the  remainder  of this
discussion,  revenues  and  production  increased  significantly  from the third
quarter  and first nine  months of 1998 to the same  periods in 1999,  primarily
because the  Consolidation is treated as a purchase by HEP of the assets of HCRC
and the energy interests of The Hallwood Group Incorporated.

Liquidity and Capital Resources

The following 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.

Cash Flow

HEC had $6,845,000 of cash flow from operating  activities during the first nine
months of 1999.

The other primary cash inflows were:

          o   Proceeds from long-term debt of $6,000,000; and

          o   Distributions received from affiliate of $1,635,000;

Cash was used primarily for:

o        Additions to property and development costs incurred of $10,535,000;

         oCosts incurred in connection with the Consolidation of $2,890,000;

o        Dividends to shareholders of $3,477,000.

o        Payments of long-term debt of $2,000,000.

When combined with  miscellaneous  other cash  activity  during the period,  the
result was a decrease of $4,755,000 in HEC's cash from  $11,874,000  at December
31, 1998 to $7,119,000 at September 30, 1999.



<PAGE>


Exploration and Development Projects and Acquisitions

Since HEP is considered to be the acquiring entity for accounting purposes,  the
expenditures  discussed  below represent the costs incurred by HEP prior to June
8, 1999 plus the costs  incurred on a consolidated  basis  subsequent to June 8,
1999.

Through  September  30,  1999,  HEC  incurred  $10,535,000  in  direct  property
additions,  development,  exploitation,  and exploration  costs.  The costs were
comprised of $3,498,000 for property  acquisitions and approximately  $7,037,000
for  domestic  exploration  and  development.  HEC's  1999  capital  budget  was
initially  set at  $13,540,000  but was  subsequently  increased to  $20,540,000
($24,000,000  including HCRC's capital  expenditures prior to the Consolidation)
to  allow  for the  purchase  of  certain  of  Seisgen's  oil and gas  interests
discussed  below.  The acquisition in October 1999 and the  significant  capital
expenditures through September 30, 1999 are as follows:

Rocky Mountain Region

During the first nine months of 1999, HEC expended  approximately  $3,553,000 of
its capital  budget in the Rocky Mountain  Region located in Colorado,  Montana,
North Dakota,  Northwest New Mexico and Wyoming.  Of this amount,  approximately
$676,500 was spent for the purchase of overriding  royalty interests and working
interests in 18 coal bed methane  properties already operated by HEC, located in
San Juan County,  New Mexico.  Most of the interests  purchased  qualify for tax
credits  under  Section 29 of the Internal  Revenue  Code.  In order to monetize
these credits, the majority of the acquired interests were sold to 44 Canyon LLC
("44 Canyon"),  a special  purpose entity owned by a large East Coast  financial
institution,  by HEC in exchange for cash, a production payment,  and promissory
notes. HEC's activity in the area began in 1990. The production payment from the
sale to 44 Canyon  increased HEC's net current  average daily  production by 950
mcf per day.

In the third quarter of 1999,  HEC expended  approximately  $1,372,000  drilling
three infill  Dakota/Morrison  gas wells, which are operated by HEC, in Garfield
County, Colorado. HEC anticipates all three wells will begin sales production in
November of 1999 at a combined rate of 2,300 mcf per day. HEC's current  working
interest in the three wells is 100%.

In the  second  quarter  of 1999,  HEC  installed  an  additional  gas-gathering
pipeline in LaPlata County,  Colorado.  HEC anticipates that the additional line
will help lower system  pressures and will increase  production by 1,000 mcf per
day. HEC's costs incurred in 1999 for the additional  pipeline are approximately
$266,000.  Also,  additional water disposal capacity is scheduled for completion
in the fourth quarter of 1999.

Gulf Coast Region

During  1999,  HEC made a  property  acquisition  for  $7,300,000  and  expended
approximately  $4,848,000  of its  capital  budget in the Gulf  Coast  Region in
Louisiana and South and East Texas.  The following are major projects within the
region.

In October 1999, HEC acquired from Seisgen, interests in 34 wells having current
net production of 4,500 mcf per day and 3.5 bcf of proven  reserves.  The proved
reserves  have  a  present  value,   discounted  at  10%,  of  $6,200,000  using
non-escalated  prices of $2.50 mcf of gas and $18.50 per barrel of oil. HEC also
acquired  significant   non-producing  reserves  including  drilling  locations,
exploration  acreage,  and  3-D  seismic  data  having  an  estimated  value  of
$2,200,000.  The  assets are  located  principally  in the Yoakum  Gorge area of
Lavaca  County,  Texas.  These assets were  acquired for  $7,300,000  and future
contingent  considerations.  HEC believes that the  acquisition  has significant
potential  upside value and will expand  opportunities  in an area where HEC has
been active since 1998.
Discussed below are HEC's current projects relating to Yoakum Gorge.

Yoakum  Gorge  Project.  During  the first  nine  months of 1999,  HEC  incurred
approximately $1,805,000 for costs associated with five non-operated directional
exploration  wells testing the Wilcox Steven sands in Lavaca County,  Texas. One
well  drilled in 1998 and two  additional  wells  drilled in 1999 are  currently
producing,  one well is  currently  drilling,  and  another  well is  waiting on
completion.  The average rate of the producers to date is  approximately  25,000
mcf per  day.  HEC has a  working  interest  of  26.7%  in the  well.  With  the
additional   opportunities   provided  by  the  acquisition  from  Seisgen,  HEC
anticipates continued activity in the area.


<PAGE>


Bell Prospect. In 1998, HEC drilled one successful well within the Bell prospect
located in Houston County, Texas. HEC is currently  sidetracking another well to
develop  reserves in the Buda  formation.  In addition,  HEC will be testing the
Georgetown formation in the same wellbore.  Also, in the fourth quarter of 1999,
HEC plans to drill a proved  undeveloped  well in the area. HEC's costs incurred
in 1999 are approximately $413,000 for all costs associated with this prospect.

Mirasoles  Project.  In 1998,  HEC began  drilling a 17,000-foot  Frio Formation
exploration well located in Kenedy County,  Texas.  Eight  prospective  horizons
were  identified  while drilling this large  structural  prospect  defined by 63
miles of proprietary 3-D seismic data. Testing the deepest and highest potential
zone was not possible due to  mechanical  problems.  HEC tested three  shallower
zones,  but found only  subcommercial  oil. In 1999, HEC incurred  approximately
$1,400,000  related to this  project  and HEC  operates  the well and owns a 35%
working  interest  in the well.  The well is  temporarily  abandoned  and HEC is
currently  investigating  the  possibility  of another  attempt to complete  the
deepest zone.  Evaluation  is underway to determine  the  likelihood of the deep
zone being a gas-bearing zone.

Boca Chica Project. In 1999, HEC incurred approximately $410,000 for seismic and
all costs associated with its  participation  in an exploration  well, which was
directionally  drilled from the shore to a bottom hole location under the waters
of the  Gulf  of  Mexico.  This  10,000-foot  exploration  well  in the  Big Hum
formation tested wet, yet the exploration results were sufficiently  encouraging
that working interest owners shot 3-D seismic over the area in the third quarter
of 1999. Subject to favorable 3-D seismic  interpretation,  HEC anticipates that
in the first quarter of 2000, it will make a second  drilling  attempt by either
reentering the existing wellbore or using a shallow-water drilling rig. HEC owns
a 25% working interest in the well.

Louisiana.  HEC  is  planning  to  re-enter  the  G.S.  Boudreaux  wellbore  and
directionally  drill the well to an updip  position to explore for Marg Tex Sand
production  in an  adjacent  fault  block.  HEC also  anticipates  drilling  the
alternate unit development well in the G.S. Boudreaux Unit  approximately  1,000
feet  updip to develop  the Bol Mex 3 attic gas.  This  action  should  have the
effect of increasing  recoverable reserves from the unit as well as accelerating
the associated cash flow.

Other

The remaining $2,134,000 of HEC's capital  expenditures  incurred in 1999 relate
principally to technical  general and  administrative  expenditures and numerous
other projects which are completed or underway and which are  individually  less
significant.

Future Plans

HEC is planning to sell its interests in approximately 500 non-strategic oil and
gas wells over the next several months.  These sales are being made in an effort
to better  focus the Company on its core areas of  Colorado,  Utah,  New Mexico,
Texas and Louisiana and at the same time,  reduce its level of debt. These wells
represent  approximately 34% of HEC's total well count, and approximately 11% of
HEC's reserve value. Proceeds from the sales will be used to reduce debt.

Although HEC does not anticipate depletion replacement for 1999, HEC anticipates
a capital budget for 2000 in the range of $24,000,000.

Dividends

On September  20, 1999,  HEC declared a quarterly  dividend of $.25 per Series A
Cumulative  Preferred  share,  payable on November 15, 1999 to  shareholders  of
record on September 30, 1999.

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.


<PAGE>



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. The terms of the Credit Agreement
were  amended on October 15,  1999,  to,  among other  matters,  increase  HEC's
borrowing  base  to  $90,000,000.   At  September  30,  1999,  HEC  had  amounts
outstanding  of  $80,200,000.  On October 22, 1999,  HEC borrowed an  additional
$7,000,000 to acquire  certain oil and gas properties  from Seisgen as described
above. Therefore,  HEC's unused borrowing base totaled $2,800,000 at November 8,
1999.

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
7.375% at  September  30,  1999.  Interest  is payable  monthly,  and  quarterly
principal  payments,  including  repayments of the borrowing made  subsequent to
September 30, 1999, of $12,457,000 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, aggregate dividends paid 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.
Aggregate  dividends paid 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. 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
$1,828,000  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.

For 1999, the Company had  established an initial  capital budget of $13,540,000
but as a result of the acquisition  from Seisgen and other capital  expenditures
added  throughout the year, it is estimated that the total capital  expenditures
for 1999 will be $20,540,000  ($24,000,000 including HCRC's capital expenditures
prior to the  Consolidation).  HEC's  preliminary  estimates  indicate  that its
capital budget for 2000 will be in the range of  $24,000,000.  These budgets are
subject to further revision to reflect future developments. They may be impacted
by oil and gas price levels, future redeterminations of the borrowing base under
the Credit Agreement, proceeds from asset sales and other factors.

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 September  30,
1999, HEC was a party to eight contracts with three different counterparties.



<PAGE>


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

                                                                    Average
                                             Amount of              Contract
               Period                       Debt Hedged            Floor Rate

     Last three months of 1999              $45,000,000                5.65%
     2000                                    45,000,000               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

Issues Related to the Year 2000

General.  The following  Year 2000  statements  constitute a Year 2000 Readiness
Disclosure  within  the  meaning  of the Year  2000  Information  and  Readiness
Disclosure  Act of 1998.  The Year 2000 problem has arisen because many existing
computer  programs  use only the last two digits to refer to a year.  Therefore,
these  computer  programs do not properly  recognize and process  date-sensitive
information  beyond  1999.  In  general,  there  are two areas  where  Year 2000
problems may exist for the Company:  information  technology  such as computers,
programs and related systems ("IT") and non-information  technology systems such
as embedded technology on a silicon chip ("Non IT").

The  Plan.  The  Company's  Year 2000 Plan (the  "Plan")  has four  phases:  (i)
assessment,  (ii) inventory,  (iii) remediation,  testing and implementation and
(iv) contingency plans.  Approximately  twenty-one months ago, the Company began
its phase one assessment of its particular exposure to problems that might arise
as a result of the new millennium. The assessment and inventory phases have been
substantially  completed and have  identified the Company's IT systems that must
be updated or replaced in order to be Year 2000 compliant.  Remediation, testing
and  implementation  was substantially  completed on September 30, 1999, and the
contingency plans phase of the Plan is scheduled to be completed by November 30,
1999.

However,  the  effects of the Year 2000  problem on IT systems  are  exacerbated
because of the  interdependence  of computer  systems in the United States.  The
Company's  assessment  of the  readiness of third parties whose IT systems might
have an impact on the Company's business has thus far not indicated any material
problems;  responses  have been received to  approximately  70% of the inquiries
made.

With regard to the Company's Non IT systems,  the Company  believes that most of
these systems can be brought into compliance on schedule. Because Non IT systems
are embedded  chips,  it is difficult to determine with complete  accuracy where
all such systems are located. However, to the best knowledge of management,  the
Company's assessment of third party readiness is complete.

Estimated  Costs.  Although  it is  difficult  to  estimate  the total  costs of
implementing  the Plan  through  January  1,  2000  and  beyond,  the  Company's
preliminary  estimate  is that such costs  will not be  material.  To date,  the
Company has determined  that its IT systems are either  compliant or can be made
compliant for less than $40,000.  However, although management believes that its
estimates are reasonable,  there can be no assurance,  for the reasons stated in
the next  paragraph,  that the  actual  cost of  implementing  the Plan will not
differ materially from the estimated costs.

Potential  Risks.  The  failure to correct a material  Year 2000  problem  could
result  in  an  interruption  in,  or a  failure  of,  certain  normal  business
activities or  operations.  This risk exists both as to the Company's IT and Non
IT systems,  as well as to the systems of third  parties.  Such  failures  could
materially and adversely affect the Company's  results of operations,  cash flow
and financial  condition.  Due to the general  uncertainty  inherent in the Year
2000  problem,  resulting  in large part from the  uncertainty  of the Year 2000
readiness of third party  suppliers,  vendors and  transporters,  the Company is
unable to determine at this time whether the  consequences of Year 2000 failures
will have a material impact on the Company's results of operations, cash flow or
financial condition. Primarily because of its reliance on third party suppliers,
the Company is not  currently  able to determine the  consequences  of Year 2000
failures, however, its current assessment is that its area of greatest potential
risk in its third party relationships is in connection with the transporting and
marketing of the oil and gas produced by the Company.  The Company has contacted
the various  purchasers  and pipelines  with which it regularly does business to
determine  their state of readiness  for the Year 2000.  Although in general the
purchasers  and pipelines  contacted will not guaranty their state of readiness,
to date, none have indicated that they expect to encounter any serious problems.
The  Company  believes  that  in a  worst  case  scenario,  the  failure  of its
purchasers and transporters to conduct business in a normal fashion could have a
material adverse effect on cash flow for a period of six to nine months.

Cautionary  Statement  Regarding  Forward-Looking   Statements.  The  dates  for
completion of the phases of the Year 2000 Plan are based on the  Company's  best
estimates,  which were derived using numerous  assumptions of future events. Due
to the general uncertainty inherent in the Year 2000 problem,  resulting in part
from the  uncertainty  of the  Year  2000  readiness  of  third-parties  and the
interconnection  of computer  systems,  the Company cannot ensure its ability to
timely and cost-effectively resolve problems associated with the Year 2000 issue
that may affect its  operations  and  business.  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.

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,  with a distinct downward
trend in both oil and gas prices occurring in the calendar year 1998 and through
the first quarter of 1999.  Prices began to rebound in April 1999. 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 - 1998                 $14.80                $15.30                 $2.11                  $2.07
Second quarter - 1998                 13.03                 13.82                  2.08                   2.06
Third quarter - 1998                  12.19                 13.06                  1.85                   1.95
Fourth quarter - 1998                 11.12                 12.29                  1.96                   2.02
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
</TABLE>

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.

The  financial  contracts  used by HEC to hedge the price of its oil and natural
gas  production  are swaps,  collars and  participating  hedges.  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 October 26,
1999,   HEC  was  a  party  to  38  financial   contracts  with  four  different
counterparties.

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

                                               Oil                 Contract

                                  Percent of Production           Delivered
            Period                          Hedged               Floor Price

                                                                  (per bbl)

Last three months of 1999                   48%                     $15.30
2000                                      26                         17.00

Approximately 7% of the oil volumes hedged for the remainder of 1999 are subject
to a participating  hedge under which HEC will receive the contract price if the
posted  futures  price is lower than the  contract  price,  and will receive the
contract  price plus 25% of the  difference  between the contract  price and the
posted  futures  price if the posted  futures price is greater than the contract
price.  Additionally,  7% of the volumes  hedged for the  remainder  of 1999 are
subject to a collar agreement whereby 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 delivered cap price.  The cap prices range from $16.50 to
$18.35.


<PAGE>









                                                Gas                Contract

                                  Percent of Production           Delivered
            Period                           Hedged              Floor Price

                                                                  (per mcf)

Last three months of 1999                    66%                    $2.00
2000                                         45                      2.04
2001                                         43                      2.06
2002                                         33                      2.04

Between  7% and 13% 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 $2.63 per mcf to
$2.80 per mcf.

During the fourth quarter  through  October 26, 1999,  the weighted  average oil
price (for barrels not hedged) was approximately $21.00 per barrel. The weighted
average  price of  natural  gas (for mcf not  hedged)  during  that  period  was
approximately $2.65 per mcf.

Inflation

Inflation did not have a material  impact on HEC in 1998 and is not  anticipated
to have a material impact in 1999.

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.

Third Quarter of 1999 Compared to Third Quarter of 1998

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.

                                           1999              1998
                                           ----              ----

Gas
  Production (mcf)                      5,476,000         3,802,000
  Price (per mcf)                         $  1.95           $  1.95

Oil
  Production (bbl)                        278,000           201,000
  Price (per bbl)                          $18.21            $13.06

Gas Revenue

Gas revenue increased  $3,159,000 during the third quarter of 1999 compared with
the  third  quarter  of 1998.  The  increase  is the  result of an  increase  in
production  from 3,802,000 mcf in 1998 to 5,476,000 mcf in 1999. The average gas
price  remained  constant at $1.95 per mcf in 1998 and in 1999.  The increase in
production is primarily due to the Consolidation which caused an increase in gas
production of 2,245,000 mcf. 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 normal production declines.


<PAGE>


The effect of HEC's  hedging  transactions  as described  under  "Inflation  and
Changing  Prices,"  during the third  quarter  of 1999,  was to  decrease  HEC's
average gas price from $2.25 per mcf to $1.95 per mcf, representing a $1,642,800
decrease in revenue from hedging transactions.

Oil Revenue

Oil revenue increased  $2,437,000 during the third quarter of 1999 compared with
the third  quarter of 1998.  The  increase  is the result of an  increase in the
average  oil price  from  $13.06  per  barrel in 1998 to $18.21 in 1999,  and an
increase in production  from 201,000 barrels in 1998 to 278,000 barrels in 1999.
The increase in oil  production  is  primarily  due to the  Consolidation  which
caused an increase in oil  production  of 123,000  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 normal production declines.

The effect of HEC's hedging transactions during the third quarter of 1999 was to
decrease  HEC's  average  oil price from $20.22 per barrel to $18.21 per barrel,
resulting in a $558,800 decrease in revenue from hedging transactions.

Pipeline, Facilities and Other

Pipeline,  facilities and other revenue consists  primarily of facilities income
from two gathering  systems  located in New Mexico,  revenues  derived from salt
water  disposal  and  incentive  payments  related to certain  wells in San Juan
County, New Mexico and LaPlata County, Colorado. Pipeline,  facilities and other
revenue  increased  $141,000  during the third quarter of 1999 compared with the
third  quarter of 1998.  The net increase is primarily  comprised of  additional
revenue  from the  Consolidation  partially  offset by a decrease  in  incentive
payment income due to a one-time adjustment relating to gas measurements made in
prior periods.

Interest Income

Interest  income  decreased  $149,000  during the third quarter of 1999 compared
with the third quarter of 1998 due to a lower average cash balance during 1999.

Production Operating

Production  operating expense  increased  $2,291,000 during the third quarter of
1999 compared  with the third  quarter of 1998.  The majority of the increase is
the result of the Consolidation.

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 $634,000 during the third quarter of 1999 primarily as
a result of the Consolidation.

Depreciation, Depletion and Amortization Expense

Depreciation, depletion and amortization expense increased $1,806,000 during the
third quarter of 1999  compared with the third quarter of 1998.  The increase is
primarily the result of higher  capitalized costs and a higher depletion rate in
1999 due to the increase in production primarily caused by the Consolidation.

Impairment of Oil and Gas Properties

Impairment of oil and gas properties during the third quarter of 1998 represents
the impairment recorded because capitalized costs at September 30, 1998 exceeded
the present  value  (discounted  at 10%) of estimated  future net revenues  from
proved  oil and gas  reserves,  based on prices of $12.80  per barrel of oil and
$1.90 per mcf of gas.



<PAGE>


Interest

Interest expense increased  $1,643,000 during the third quarter of 1999 compared
with the third quarter of 1998 due to a higher average  outstanding debt balance
during 1999.

Equity in Loss of HCRC

Equity in loss of HCRC  decreased  to zero  during  the third  quarter  of 1999,
compared with the third quarter of 1998, as a result of the Consolidation.

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 $147,000
during the third  quarter  of 1999  compared  with the third  quarter of 1998 is
primarily due to the  liquidation of three of the six May  Partnerships on March
31, 1999.

Litigation

Litigation  expense  during the third  quarter of 1998 is comprised of the costs
related  to the  Arcadia  arbitration  described  in Note 6 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 third
quarter of 1999 is comprised of a provision for current and deferred taxes.  The
current  provision is primarily  comprised of state income  taxes.  The deferred
provision  is the result of  providing a full  valuation  allowance  against the
Company's deferred tax asset.

First Nine Months 1999 Compared to the First Nine Months 1998

The  comparisons  for the first nine  months 1999 and the first nine months 1998
are  consistent  with those  discussed in the third quarter 1999 compared to the
third  quarter  of 1998  except  as  discussed  below.  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.

                                           1999              1998
                                           ----              ----

Gas
  Production (mcf)                     13,016,000        10,463,000
  Price (per mcf)                           $1.89             $2.02

Oil
  Production (bbl)                        661,000           594,000
  Price (per bbl)                          $15.52            $14.07

Gas Revenue

Gas  revenue  increased  $3,457,000  during  the  first  nine  months of 1999 as
compared  to the first nine  months of 1998.  The  increase  is the result of an
increase in production  from  10,463,000  mcf in 1998 to 13,016,000  mcf in 1999
partially  offset by a decrease in price from $2.02 per mcf in 1998 to $1.89 per
mcf in 1999. The Consolidation  increased production by approximately  2,807,000
mcf which was partially  offset by a decrease in  production  primarily due to a
production  decline on two wells in  Louisiana,  as  discussed  above and normal
production declines.

The effect of HEC's  hedging  transactions  during the first nine months of 1999
was  to  decrease  HEC's  average  gas  price  from  $1.98  to  $1.89  per  mcf,
representing a $1,171,000 decrease in revenue from hedging transactions.


<PAGE>


Oil Revenue

Oil  revenue  increased  $1,905,000  during  the  first  nine  months of 1999 as
compared  with the first nine months of 1998.  The  increase is the result of an
increase  in the  average oil price from $14.07 per barrel in 1998 to $15.52 per
barrel in 1999 and an increase in  production  from  594,000  barrels in 1998 to
661,000  barrels in 1999. The increase in oil production is primarily due to the
Consolidation,  which caused an increase of 155,000  barrels that was  partially
offset by decreased production on two wells in Louisiana, as discussed above and
normal production declines.

The effect of HEC's  hedging  transactions  during the first nine months of 1999
was to  decrease  HEC's  average  oil price from $16.43 per barrel to $15.52 per
barrel,  representing  a  decrease  in  revenue  from  hedging  transactions  of
$602,000.

Impairment of Oil and Gas Properties

Impairment  of oil and gas  properties  during  the  first  nine  months of 1998
includes an impairment at June 30, 1998 based on prices of $13.00 per bbl of oil
and  $2.00  per mcf of gas,  as well as the third  quarter  property  impairment
previously discussed.

Litigation

Litigation  income  during the first nine  months of 1999  represents  insurance
proceeds which  reimbursed  costs  previously paid in connection with a property
related claim.  Litigation expense during the first nine months of 1998 includes
the settlement of the Ellender  lawsuit  described in Note 7 of the accompanying
financial  statements  in  addition  to the  costs  of the  Arcadia  arbitration
described above.




<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,  collars and  participating  commodity hedges. 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,  collars  and
participating  hedges.  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.  HEC's participating
hedges also  enable HEC to receive 25% of any  increase in prices over the fixed
prices specified in the contracts.  As of October 26, 1999, HEC has entered into
derivative  commodity hedges covering an aggregate of 421,000 barrels of oil and
24,774,000 mcf of gas that extend through 2002. Under the 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 September 30, 1999
would cause a loss in income and cash flows of  $1,995,000  during the remaining
three months of 1999, assuming that oil and gas production, including production
from properties  acquired in Consolidation,  remain at current levels during the
last three months of 1999. This loss in income and cash flows would be offset by
a  $1,099,000  increase  in income  and cash flows  associated  with the oil and
natural gas  derivative  contracts  that are in effect for the  remaining  three
months of 1999.



<PAGE>


Interest Rate Risks  (non-trading)  - HEC uses both fixed and variable rate debt
to partially finance  operations and capital  expenditures.  As of September 30,
1999 and currently,  the majority of HEC's debt consists of borrowings under its
Credit Agreement which bear interest at a variable 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 $436,000  during the  remaining  three  months of 1999,  assuming  that
outstanding borrowings under the Credit Agreement remain at current levels. This
loss in income and cash flows  would be offset by a $225,000  increase in income
and cash flows associated with the interest rate swap and collar agreements that
are in effect for the remaining three months of 1999.





<PAGE>


PART II  -OTHER INFORMATION


ITEM 1     -  LEGAL PROCEEDINGS

              Reference  is made to Item 8 - Notes  12 and 13 of Form  10-K  for
              Hallwood  Energy  Partners,  L.P. for the year ended  December 31,
              1998 and Notes 6 and 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

10.12    Amendment No. 1 to Credit Agreement, dated as of October 15, 1999.
10.13    Letter Amendment No. 1 to Note Agreement, dated as of October 15, 1999.
27       Financial Data Schedule

              b)   Reports on Form 8-K

                   HEC filed a report on Form 8-K on August 10, 1999,  reporting
                   the adoption of the Rights Plan.


<PAGE>


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:  November 8, 1999                  By: /s/Thomas J.Jung
                                              Thomas J. Jung, Vice President
                                              (Chief Financial Officer)