<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                      ------------------------------------


                                    FORM 10-Q



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

                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999

                                       OR

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

           FOR THE TRANSITION PERIOD FROM              TO
                                          -------------  -------------

                          COMMISSION FILE NO. 001-11899

                      ------------------------------------


                         THE HOUSTON EXPLORATION COMPANY
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



                DELAWARE                     
    (STATE OR OTHER JURISDICTION OF                      22-2674487
     INCORPORATION OR ORGANIZATION)          (IRS EMPLOYER IDENTIFICATION NO.)

                        1100 LOUISIANA STREET, SUITE 2000
                            HOUSTON, TEXAS 77002-5219
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
                                 (713) 830-6800
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                         -------------------------------


         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
                                               ---   ---

         As of May 12, 1999, 23,895,040 shares of Common Stock, par value $.01
per share, were outstanding.


================================================================================


<PAGE>   2


                         THE HOUSTON EXPLORATION COMPANY

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                     <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...............................................................3

PART I.       FINANCIAL INFORMATION

Item 1.       Consolidated Financial Statements (unaudited)

              Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998..........................4

              Consolidated Statements of Operations -- Three Months Ended March 31, 1999 and 1998..........5

              Consolidated Statements of Cash Flows -- Three Months Ended March 31, 1999 and 1998..........6

              Notes to the Consolidated Financial Statements...............................................7

Item 2.       Management's Discussion and Analysis of Financial Condition and
                  Results of Operations...................................................................12

PART II.      OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K............................................................20

SIGNATURES................................................................................................21
</TABLE>


                                       -2-

<PAGE>   3


                  FACTORS AFFECTING FORWARD LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated, expected or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Exchange Act of 1934, as amended.

         Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiaries on a
consolidated basis.


                                       -3-

<PAGE>   4



PART I.  FINANCIAL INFORMATION

ITEMS 1.  FINANCIAL STATEMENTS

                         THE HOUSTON EXPLORATION COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                          MARCH 31,       DECEMBER 31,
                                                                                           1999               1998
                                                                                         -----------      -----------
<S>                                                                                      <C>              <C>        
                                                                                         (UNAUDITED)
ASSETS:
Cash and cash equivalents ..........................................................     $     1,948      $     4,645
Accounts receivable ................................................................          23,044           23,050
Accounts receivable--Affiliate .....................................................           5,268              137
Inventories ........................................................................             925              915
Prepayments and other ..............................................................             952              754
                                                                                         -----------      -----------
         Total current assets ......................................................          32,137           29,501
Natural gas and oil properties, full cost method
  Unevaluated properties ...........................................................         151,899          145,317
  Properties subject to amortization ...............................................         849,942          828,168
Other property and equipment .......................................................           9,496            9,464
                                                                                         -----------      -----------
                                                                                           1,011,337          982,949
Less: Accumulated depreciation, depletion and amortization .........................        (463,445)        (446,367)
                                                                                         -----------      -----------
                                                                                             547,892          536,582
Other assets .......................................................................           3,731            3,369
                                                                                         -----------      -----------
         TOTAL ASSETS ..............................................................     $   583,760      $   569,452
                                                                                         ===========      ===========

LIABILITIES:
Accounts payable and accrued expenses ..............................................     $    39,027      $    32,743
Subordinated note--Affiliate .......................................................          80,000               --
                                                                                         -----------      -----------
         Total current liabilities .................................................         119,027           32,743

Long-term debt and notes ...........................................................         240,000          233,000
Subordinated note--Affiliate .......................................................              --           80,000
Deferred federal income taxes ......................................................          31,303           31,027
Other deferred liabilities .........................................................             152              152
                                                                                         -----------      -----------
         TOTAL LIABILITIES .........................................................         390,482          376,922

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and 23,895 shares issued
      and outstanding at March 31, 1999 and December 31, 1998, respectively.........             239              239
Additional paid-in capital .........................................................         230,933          230,931
Retained earnings (deficit) ........................................................         (37,894)         (38,640)
                                                                                         -----------      -----------
          TOTAL STOCKHOLDERS' EQUITY ...............................................         193,278          192,530
                                                                                         -----------      -----------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...............................     $   583,760      $   569,452
                                                                                         ===========      ===========
</TABLE>


              The accompanying notes are an integral part of these
                       consolidated financial statements.


                                       -4-

<PAGE>   5


                         THE HOUSTON EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED MARCH 31,
                                                                   1999                 1998
                                                                 --------             ---------
<S>                                                              <C>                  <C>      
                                                                          (UNAUDITED)
REVENUES:
  Natural gas and oil revenues .............................     $ 26,520             $  32,884
  Other ....................................................          345                   200
                                                                 --------             ---------
          Total revenues ...................................       26,865                33,084
OPERATING COSTS AND EXPENSES:
  Lease operating ..........................................        3,962                 3,869
  Severance tax ............................................          999                 1,118
  Depreciation, depletion and amortization .................       17,057                19,314
  General and administrative, net ..........................        1,030                 1,575
                                                                 --------             ---------
          Total operating expenses .........................       23,048                25,876
Income from operations .....................................        3,817                 7,208
Interest expense, net ......................................        3,021                   300
                                                                 --------             ---------
Net income before income taxes .............................          796                 6,908
Provision for federal income taxes .........................           50                 2,185
                                                                 --------             ---------
NET INCOME .................................................     $    746             $   4,723
                                                                 ========             =========

Net income per share .......................................     $   0.03             $    0.20
                                                                 ========             =========
Net income per share--assuming dilution ....................     $   0.03             $    0.20
                                                                 ========             =========

Weighted average shares outstanding ........................       23,895                23,384
Weighted average shares outstanding--assuming dilution .....       23,959                23,560
</TABLE>


                 The accompanying notes are an integral part of
                     these consolidated financial statements


                                       -5-
<PAGE>   6


                         THE HOUSTON EXPLORATION COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                            THREE MONTHS ENDED MARCH 31,
                                                                              1999               1998
                                                                           ---------           ---------
<S>                                                                        <C>                 <C>      
                                                                                    (UNAUDITED)
OPERATING ACTIVITIES:
Net income ...........................................................     $     746           $   4,723
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation, depletion and amortization ...........................        17,057              19,314
  Deferred income tax expense ........................................           276               2,185
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable ......................        (5,125)              5,712
     Increase in inventories .........................................          (198)               (120)
     Increase in prepayments and other ...............................           (10)               (131)
     Increase in other assets and liabilities ........................          (362)             (1,912)
     Increase (decrease) in accounts payable and accrued expenses ....         6,284             (14,843)
                                                                           ---------           ---------

Net cash provided by operating activities ............................        18,668              14,928

INVESTING ACTIVITIES:
Investment in property and equipment .................................       (28,367)            (39,549)
                                                                           ---------           ---------

Net cash used in investing activities ................................       (28,367)            (39,549)

FINANCING ACTIVITIES:
Proceeds from long term borrowings ...................................        12,000             121,000
Repayments of long term borrowings ...................................        (5,000)            (99,000)
Proceeds from issuance of common stock ...............................             2                  14
                                                                           ---------           ---------

Net cash provided by financing activities ............................         7,002              22,014

Decrease in cash and cash equivalents ................................        (2,697)             (2,607)

Cash and cash equivalents, beginning of period .......................         4,645               4,745
                                                                           ---------           ---------

Cash and cash equivalents, end of period .............................     $   1,948           $   2,138
                                                                           =========           =========

Cash paid for interest ...............................................     $   7,351           $   2,034
                                                                           =========           =========

Cash paid for taxes ..................................................     $      --           $      --
                                                                           =========           =========
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       -6-

<PAGE>   7


                         THE HOUSTON EXPLORATION COMPANY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

         Organization

         Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of exploratory drilling in the Gulf of Mexico
and lower risk, exploitation and development drilling onshore. At December 31,
1998, the Company had net proved reserves of 480 Bcfe, 98% of which were natural
gas and 80% of which were classified as proved developed.

         Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering of its common
stock. As of March 31, 1999, THEC Holdings Corp., a wholly owned subsidiary of
Brooklyn Union owned approximately 64% of the outstanding shares of Houston
Exploration's common stock. Brooklyn Union is a wholly-owned subsidiary of
MarketSpan Corporation, doing business as KeySpan Energy ("KeySpan"). KeySpan is
a diversified energy provider that: (i) distributes natural gas, through its
subsidiary Brooklyn Union, in the New York City and Long Island areas; (ii) is
contracted by Long Island Power Authority ("LIPA") to manage LILPA's electricity
service in the Long Island area; and (iii) through its unregulated subsidiaries,
is involved in gas retailing, power plant management and energy management
services.

         Principles of Consolidation

         The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly-owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.

         Interim Financial Statements

         The balance sheet of the Company at March 31, 1999 and the statements
of operations and cash flows for the periods indicated herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The balance sheet at December 31, 1998 is
derived from the December 31, 1998 audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Interim Financial Statements should be read in conjunction with the Combined
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.

         In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.


                                       -7-

<PAGE>   8



         Reclassifications and Use of Estimates

         The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. Because there are numerous
uncertainties inherent in the estimation process, actual results could differ
from the estimates. Certain reclassifications for prior years have been made to
conform with current year presentation.

         Net Income Per Share

         Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. No dilution for any potentially dilutive securities is included. Diluted
EPS assumes the conversion of all potentially dilutive securities and is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding plus all potentially dilutive securities.


<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED MARCH 31,
                                                            1999                    1998
                                                         ----------              -----------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                      <C>                     <C>        
Net income .......................................       $      746              $     4,723
                                                         ==========              ===========

Denominator:
Weighted average shares outstanding ..............           23,895                   23,384
Add:  dilutive securities
          Options ................................               64                      176
                                                         ----------              -----------
Total weighted average shares outstanding and
  dilutive securities ............................           23,959                   23,560
                                                         ==========              ===========

Net income per share .............................       $     0.03              $      0.20
                                                         ==========              ===========
Net income per share--assuming dilution ..........       $     0.03              $      0.20
                                                         ==========              ===========
</TABLE>

         The computation of diluted EPS for the three months ended March 31,
1999 did not assume the conversion of the KeySpan Facility as their inclusion
would have been antidilutive. See Note 2--Long-Term Debt and Notes.

NOTE 2 -- LONG-TERM DEBT AND NOTES


<TABLE>
<CAPTION>
                                                        MARCH 31,1999      DECEMBER 31,1998
                                                        -------------      ----------------
<S>                                                     <C>                <C>             
                                                                 (IN THOUSANDS)
    SENIOR DEBT:
    Bank revolving credit facility, due 2003 .......... $     140,000      $        133,000
    SUBORDINATED DEBT:
    8 5/8% Senior Subordinated Notes, due 2008.........       100,000               100,000
    Subordinated Note--KeySpan, due 2000                           --                80,000
                                                        -------------      ----------------
        Total long-term debt and notes................. $     240,000      $        313,000
                                                        =============      ================
</TABLE>


         The carrying amount of borrowings outstanding under the Credit Facility
and the KeySpan Facility approximates fair value as the interest rates are tied
to current market rates. At March 31, 1999, the quoted market value of the
Company's $100 million of 8 5/8% Senior Subordinated Notes was 99% of the $100
million carrying value or $99 million.


                                       -8-

<PAGE>   9



         Credit Facility

         The Company has entered into a revolving credit facility ("Credit
Facility") with a syndicate of lenders led by Chase Bank of Texas, National
Association ("Chase"). The Credit Facility was amended March 30, 1999 and
provides a maximum commitment of $250 million, subject to borrowing base
limitations. At March 31, 1999, the conforming portion of the borrowing base or
threshold amount was $175 million. The Company has the option to increase the
threshold amount to a borrowing base of $200 million at an incremental interest
rate. Up to $2.0 million of the borrowing base is available for the issuance of
letters of credit to support performance guarantees. The Credit Facility matures
on March 1, 2003 and is unsecured. At March 31, 1999, $140.0 million was
outstanding under the Credit Facility and $0.4 million was outstanding in letter
of credit obligations. Subsequent to March 31, 1999, the Company borrowed an
additional $5 million, bringing borrowings and extensions of credit to $145.4
million as of May 12, 1999.

         Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.625% to
1.50%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.50%
and 0.375% per annum on the unused portion of the designated borrowing base, and
(ii) 33% of the fee in (i) above on the difference between the lower of the
facility amount or the borrowing base and the designated borrowing base.

         The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest and
(ii) a total debt to capitalization ratio of less than 60%. For purposes of the
total debt to capitalization ratio, the calculation of total capitalization
excludes the effects of non-cash charges related to the $84.5 million, after
tax, writedown of oil and gas properties incurred by the Company in the fourth
quarter of 1998. In addition to maintenance of certain financial ratios, cash
dividends and/or purchase or redemption of the Company's stock is restricted, as
well as the encumbering of the Company's gas and oil assets or the pledging of
the assets as collateral. As of March 31, 1999, the Company was in compliance
with all such covenants.

         Senior Subordinated Notes

         On March 2, 1998, the Company issued $100 million of 85/8% Senior
Subordinated Notes (the "Subordinated Notes") due January 1, 2008. The Notes
bear interest at a rate of 85/8% per annum with interest payable semi-annually
on January 1 and July 1, commencing July 1, 1998. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after January
1, 2003 at a price equal to 100% of the principal amount plus accrued and unpaid
interest, if any, plus a specified premium if the Notes are redeemed prior to
January 1, 2006. Notwithstanding the foregoing, any time prior to January 1,
2001, the Company may redeem up to 35% of the original aggregate principal
amount of the Notes with the net proceeds of any equity offering, provided that
at least 65% of the original aggregate principal amount of the Notes remains
outstanding immediately after the occurrence of such redemption. Upon the
occurrence of a change of control (as defined), the Company will be required to
offer to purchase the Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any. The Notes
are general unsecured obligations of the Company and rank subordinate in right
of payment to all existing and future senior debt, including the Credit
Facility, and will rank senior or pari passu in right of payment to all existing
and future subordinated indebtedness, including the KeySpan Facility.


                                       -9-

<PAGE>   10



         KeySpan Facility

         On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan (the "KeySpan Facility"), which provides a maximum
commitment of $150 million. The KeySpan Facility ranks subordinate to the Credit
Facility and pari passu to the Subordinated Notes. Borrowings are unsecured and
mature January 1, 2000. Any principal amount that remains outstanding under the
KeySpan Facility at January 1, 2000 will be converted into common stock of the
Company, with the number of shares to be determined based upon the average of
the closing prices of the Company's common stock, rounded to three decimal
places, as reported under "NYSE Composite Transaction Reports" in the Wall
Street Journal during the 20 consecutive trading days ending three trading days
prior to January 1, 2000. Because the market value represents an average of the
Company's common stock over twenty consecutive trading days, ending three days
prior to the maturity date of the loan, the market price may be higher or lower
than the price of the common stock on the conversion date. Interest is payable
monthly and borrowings bear interest at LIBOR plus 1.4%. In addition, the
Company pays a commitment fee of 0.0125% on the unused portion of the maximum
commitment and has incurred an upfront fee of $50,000. As of March 31, 1999,
borrowings outstanding under the facility totaled $80 million and were
classified as current liabilities. For the three months ended March 31, 1999,
the Company incurred a total $1.3 million in interest and fees to KeySpan.

NOTE 3 -- COMMITMENTS AND CONTINGENCIES

         The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse affect on the
financial position or results of operations of the Company.

NOTE 4 -- RELATED PARTY TRANSACTIONS

         KeySpan Facility.

         See Note 2 -- Long-Term Debt and Notes.

         Sale of Section 29 Tax Credits

         Effective January 1, 1997, the Company entered into an agreement to
sell to a subsidiary of Brooklyn Union certain interests in onshore producing
wells of the Company that produce from formations that qualify for tax credits
under Section 29 of the Internal Revenue Code ("Section 29"). Section 29
provides for a tax credit from non- conventional fuel sources such as oil
produced from shale and tar sands and natural gas produced from geopressured
brine, Devonian shale, coal seams and tight sands formations. Brooklyn Union
acquired an economic interest in wells that are qualified for the tax credits
and in exchange, the Company (i) retained a volumetric production payment and a
net profits interest of 100% in the properties, (ii) received a cash down
payment of $1.4 million and (iii) receives a quarterly payment of $0.75 for
every dollar of tax credit utilized. The Company manages and administers the
daily operations of the properties in exchange for an annual management fee of
$100,000. The income statement effect for both of the three month periods ended
March 31, 1999 and 1998 was a $0.2 million reduction to income tax expense,
representing benefits received from the Section 29 tax credits.

         KeySpan Joint Venture

         On March 15, 1999, the Company signed a joint exploration agreement 
(the "KeySpan Joint Venture") with a subsidiary of KeySpan, KeySpan Exploration
& Production, LLC, to explore for natural gas and oil over a term of three years
expiring December 31, 2001. The joint venture may be terminated at the option of
either party at the end of the then current calendar year. Houston Exploration
is joint venture manager and operator. Effective January 1, 1999, KeySpan will
commit up to $100 million per calendar year and Houston Exploration will commit
its proportionate share of the funds per calendar year necessary to fund a joint
exploration and development drilling program. Houston Exploration contributed
all of its undeveloped offshore leases as of January 1, 1999 to the joint
venture. KeySpan will

                                      -10-

<PAGE>   11



receive 45% of Houston Exploration's working interest in all prospects to be
drilled under the program. Revenues will be shared 55% Houston Exploration and
45% KeySpan. During the term of the KeySpan Joint Venture, KeySpan will pay 100%
of actual intangible drilling costs up to a maximum of $20.7 million per year.
All additional intangible drilling costs incurred during such year will be paid
51.75% by KeySpan and 48.25% by Houston Exploration. In addition, Houston
Exploration will receive reimbursement of a portion of its general and
administrative costs during the term of the KeySpan Joint Venture. During the
first three months of 1999, KeySpan incurred approximately $4.2 million in
drilling costs and the Company received approximately $1.1 million in general
and administrative reimbursements pursuant to KeySpan Joint Venture.


                                      -11-

<PAGE>   12



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

         The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for the
three months ended March 31, 1999 and 1998. The Company's consolidated financial
statements and notes thereto included elsewhere in this report contain detailed
information that should be referred to in conjunction with the following
discussion.

GENERAL

         Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of exploratory drilling in the Gulf of Mexico
and lower risk, exploitation and development drilling onshore. At December 31,
1998, the Company had net proved reserves of 480 Bcfe, 98% of which were natural
gas and 80% of which were classified as proved developed.

         Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering its of common
stock. As of March 31, 1999, THEC Holdings Corp., a wholly owned subsidiary of
Brooklyn Union owned approximately 64% of the outstanding shares of Houston
Exploration's common stock. Brooklyn Union is a wholly-owned subsidiary of
MarketSpan Corporation, doing business as KeySpan Energy ("KeySpan"). KeySpan is
a diversified energy provider that: (i) distributes natural gas, through its
subsidiary Brooklyn Union, in the New York City and Long Island areas; (ii) is
contracted by Long Island Power Authority ("LIPA") to manage LILPA's electricity
service in the Long Island area; and (iii) through its unregulated subsidiaries,
is involved in gas retailing, power plant management and energy management
services.

         As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas, oil and condensate, which are dependent upon
numerous factors beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been very volatile, as evidenced by the recent
volatility of natural gas and oil prices, and there can be no assurance that
commodity prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, cash flows, quantities of natural gas and oil reserves that may be
economically produced and access to capital.

         The Company uses the full cost method of accounting for its investment
in natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a write down is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities. Once incurred, a write down of oil and
gas properties is not reversible at a later date even if oil and gas prices
increase.

         Year 2000. Year 2000 issues result from the inability of computer
programs or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. Typically, the year 2000 could be
misinterpreted as the year 1900. This date misinterpretation could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business.

                                      -12-

<PAGE>   13



         To ensure Year 2000 compliance, the Company has implemented a plan to
review all financial and operational systems and equipment involving a four
phase process: assessment, remediation and replacement, testing and
implementation. To date, the assessment phase has been fully completed, and the
Company is currently in the remediation phase which is approximately 95%
complete. The Company plans to begin testing systems and equipment during the
second quarter of 1999. Once testing is complete, systems will be ready for
immediate use. The Company expects testing and implementation to be
substantially complete by June 30, 1999. During 1998, the Company incurred
approximately $20,000 in expenses related to its Year 2000 compliance efforts
and during the first quarter of 1999, the Company has incurred approximately
$10,000. Year 2000 costs are currently being expensed as they are incurred.
However, in certain instances the Company may determine that replacing existing
equipment would be more efficient and the costs of these replacements would then
be capitalized. The Company currently expects that it will incur an additional
$100,000 in costs or expenses during 1999 to become Year 2000 compliant. The
Company believes that total costs or expenses to become Year 2000 compliant will
not exceed $500,000 and that such costs or expenses will not have a material
adverse effect on the Company's financial condition, operations or liquidity.

         The foregoing timetable and assessment of costs to become Year 2000
compliant reflect management's current best estimates. These estimates are based
on many assumptions, including assumptions about the cost, availability and
ability of resources to locate, remediate and modify affected systems and
equipment. Based upon its activities to date, the Company does not believe that
these factors will cause results to differ significantly from those estimated.
However, the Company cannot reasonably estimate the potential impact on its
financial condition and operations if key third parties including, among others,
suppliers, contractors, joint venture partners, financial institutions,
customers, traders, and governments do not become Year 2000 compliant on a
timely basis. The Company is in the process of contacting many of these third
parties to determine the extent to which the Company is vulnerable to those
third parties' potential failure to remediate their own Year 2000 issues. The
Company expects its survey of key third parties to be fully complete by June 30,
1999.

         The Company currently has no contingency plans in place in the event it
does not complete all phases of its Year 2000 program. The Company plans to
evaluate the status of completion of the Year 2000 compliance process by the end
of the second quarter of 1999 and determine whether such a contingency plan is
necessary.

         In the event the Company is unable to complete the remediation or
replacement of critical computer software and equipment, establish alternative
procedures in a timely manner, or if those with whom the Company conducts
business are unsuccessful in implementing timely solutions, Year 2000 issues
could result in an interruption in, or a failure of certain normal business
activities that could result in a material adverse effect on the Company's
results of operations, liquidity and financial position. The Company's
remediation efforts are expected to reduce the Company's level of uncertainty
about Year 2000 compliance and the possibility of interruption of normal
operations. The Company believes that the potential impact, if any, of its
systems not being year 2000 compliant should not affect the Company's ability to
continue oil and gas exploration, drilling, production and sales activities.
However, there can be no guarantee that the Company, its business partners,
vendors or customers will successfully be able to identify and remedy all
potential Year 2000 problems and that a resulting system failure would not have
a material adverse effect on the Company.

         In a recent Securities and Exchange Commission release regarding Year
2000 disclosures, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Analysis of the most reasonably likely worst case Year 2000 scenario
that Houston Exploration may face leads to contemplation of the following
possibilities which, though unlikely in some or many cases, must be included in
any consideration of worst cases: widespread failure of electrical, gas, and
similar supplies by utilities serving the Company; widespread disruption of the
services of communications common carriers; similar disruption to means and
modes of transportation for Houston Exploration and its employees, contractors,
suppliers, and customers; significant disruption to Houston Exploration's
ability to gain access to, and remain working in, office buildings and other
facilities; the failure of substantial numbers of the Company's computer
hardware and software systems, including both internal business systems and
systems (such as those with embedded chips) controlling operational facilities
such as onshore and offshore oil and gas production facilities, gas meters and
pipelines, the effects of which would have a cumulative material adverse impact
on the Company. Among other things, the Company could face substantial claims by
customers or loss of revenues due to service interruptions, inability to fulfill
contractual obligations, inability to account for certain revenues or
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation,


                                      -13-

<PAGE>   14



stabilization of operations following systems failures, and the execution of
contingency plans. Houston Exploration could also experience an inability by
customers, traders, and others to pay, on a timely basis or at all, obligations
owed to the Company. Under these circumstances, the adverse effect on the
Company, and the reduction of the Company's revenues, would be material,
although not quantifiable at this time. Further in this scenario, the cumulative
effect of these failures could have a substantial adverse effect on the economy,
domestically and internationally. The adverse effect on Houston Exploration, and
the reduction of the Company's revenues, from a domestic or global recession or
depression is also likely to be material, although not quantifiable at this
time.



                                      -14-

<PAGE>   15



RESULTS OF OPERATIONS

         The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:


<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED MARCH 31,
                                                ----------------------------
                                                   1999              1998
                                                ----------        ----------
<S>                                             <C>               <C>   
PRODUCTION:
    Natural gas (MMcf).........................     16,135            15,135
    Oil (MBbls)................................         55                47
    Total (MMcfe)..............................     16,465            15,417

AVERAGE SALES PRICES:
    Natural gas (per Mcf) realized(1).......... $     1.61        $     2.13
    Natural Gas (per Mcf) unhedged.............       1.61              2.06
    Oil (per Bbl)..............................      10.51             14.17

EXPENSES (PER MCFE):
    Lease operating............................ $     0.24        $     0.25
    Severance tax..............................       0.06              0.07
    Depreciation, depletion and amortization          1.04              1.25
    General and administrative, net............       0.06              0.10
</TABLE>

---------------------------


(1)      Reflects the effects of hedging.


RECENT FINANCIAL AND OPERATING RESULTS

COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1999

         Production. Houston Exploration's production increased 7% from 15,417
MMcfe for the three months ended March 31, 1998 to 16,465 MMcfe for the three
months ended March 31, 1999. The increase in production was primarily
attributable new production added from the South Louisiana properties acquired
in late April 1998.

         Natural Gas and Oil Revenues. Natural gas and oil revenues decreased
19% from $32.9 million for the three months ended March 31, 1998 to $26.5
million for the three months ended March 31, 1999 as a result of the 24%
decrease in average realized natural gas prices, from $2.13 per Mcf for the
three months ended March 31, 1998 to $1.61 per Mcf for the three months ended
March 31, 1999, offset in part by the 7% increase in production.

         As a result of hedging activities, the Company realized an average gas
price of $1.61 per Mcf for the three months ended March 31, 1999, which was
equal to the average unhedged natural gas price and as a result, natural gas and
oil revenues were reduced slightly by $0.1 million for the three months ended
March 31, 1999. For the corresponding three month period of 1998, the average
realized gas price was $2.13 per Mcf, which was 103% of the unhedged average gas
price of $2.06 per Mcf, resulting in an increase in natural gas revenues of $1.1
million for the three months ended March 31, 1998.

         Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 2% from $3.9 million for the three months ended March 31, 1998 to $4.0
million for the three months ended March 31, 1999. On an Mcfe basis, lease
operating expenses decreased from $0.25 for the first three months of 1998 to
$0.24 for the first three months of 1999. Lease operating expenses during the
first three months of 1999 have remained relatively flat despite the addition of
a new core area of operations in South Louisiana since the first quarter of
1998. The Company continues to control costs where possible and has seen
operating costs begin to stabilize as the oil and gas industry is experiencing a


                                      -15-

<PAGE>   16



downturn in activity. The decrease in the lease operating expenses per Mcfe is a
result of the increase in production combined with the minimal increase in costs
during the first three months of 1999 as compared to the corresponding period of
1998. Severance tax, which is a function of volume and revenues generated from
onshore production, decreased 10% from $1.1 million for the three months ended
March 31, 1998 to $1.0 million for the three months ended March 31, 1999. On an
Mcfe basis, severance tax decreased from $0.07 per Mcfe, for the first three
months of 1998 to $0.06 per Mcfe, for the first three months of 1998. The
decrease in severance tax per Mcfe is due to lower natural gas prices received
during the first three months of 1999 as compared to prices received during the
first three months of 1998.

         Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 11% from $19.3 million for the three months ended
March 31, 1998 to $17.1 million for the three months ended March 31, 1999.
Depreciation, depletion and amortization expense per Mcfe decreased 17% from
$1.25 for the three months ended March 31, 1998 to $1.04 for the corresponding
three months in 1999. The decrease in depreciation, depletion and amortization
expense was a result of a lower depletion rate. The lower depletion rate is
primarily a result of the $84.5 million (net of tax) writedown in natural gas
and oil properties that was taken in the fourth quarter of 1998 due to weak
natural gas prices; combined with, an increase in production and a lower level
of capital spending during the first three months of 1999 as compared to the
corresponding period of 1998.

         General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $0.2 million and $1.2 million, for the three months ended March 31,
1998 and 1999, respectively, decreased 38% from $1.6 million for the three
months ended March 31, 1998 to $1.0 for the three months ended March 31, 1999.
Included in reimbursements received from working interest owners were
reimbursements totaling $1.1 million received from KeySpan pursuant to the
KeySpan Joint Venture (see Note --4 Related Party Transactions). The Company
capitalized general and administrative expenses directly related to oil and gas
exploration and development activities of $2.0 million and $1.2 million,
respectively, for the three months ended March 31, 1998 and 1999. The decrease
in capitalized general and administrative expenses is a result of lower
aggregate general and administrative expenses during the first three months of
1999 as compared to the corresponding period of 1998. Aggregate general and
administrative expenses are lower during the first three months of 1999
primarily as a result of the Company's efforts to control and reduce expenses
where possible. On an Mcfe basis, general and administrative expenses decreased
40% from $0.10 for the three months ended March 31, 1998 to $0.06 for the three
months ended March 31, 1999. The lower rate per Mcfe during the first three
months of 1998 reflects a combination of an increase in production, a reduction
in aggregate general and administrative expenses and the effect of the KeySpan
Joint Venture reimbursements.

         Interest Expense, Net. Interest expense, net of capitalized interest,
increased from $0.3 million for the three months ended March 31, 1998 to $3.0
million for the three months ended March 31, 1999. Capitalized interest
increased from $2.0 million for the first three months of 1998 to $2.8 million
for the first three months of 1999. The increase in aggregate interest expense
was attributable to higher average debt levels during the first three months of
1999 as compared to the corresponding period of 1998. With the issuance of the
Subordinated Notes in March 1998 and the implementation of the KeySpan Facility
in November 1998, the Company expects its 1999 average debt levels to exceed
those in 1998 and accordingly, expects an increase in net interest expense.

         Income Tax Provision. The provision for income taxes decreased from an
expense of $2.2 for the first three months of 1998 to an expense of $0.05
million for the first three months of 1999. The decrease in income tax expense
for the three months ended March 31, 1999 as compared to the corresponding
period of 1998 is due to the 88% decrease in pretax income for the three months
ended March 31, 1999 as compared to the corresponding period of 1998.

         Operating Income and Net Income. The 7% increase in production and the
11% decrease in operating expenses was not large enough to offset the 24%
decrease in natural gas prices for the three months ended March 31, 1999. As a
result, operating income decreased by 47% from $7.2 million for the first three
months of 1998 to $3.8 million for the first three months of 1999. Net income
decreased 83% from $4.7 million for the three months ended March 31, 1998 to
$0.8 million for the three months ended March 31, 1999 due to lower natural gas
prices and higher interest expense.

                                      -16-

<PAGE>   17


LIQUIDITY AND CAPITAL RESOURCES

         The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, bank borrowings and, prior to the IPO, capital contributions from
Brooklyn Union. On March 2, 1998, the Company issued $100 million of senior
subordinated indebtedness. Net proceeds of approximately $97 million were used
to repay a portion of the outstanding indebtedness under the Company's revolving
bank credit facility (the "Credit Facility"). In November of 1998, the Company
established a $150 million subordinated revolving credit facility with KeySpan
(the "KeySpan Facility") and borrowed $80 million under this facility to fund a
portion of the November 1998 acquisition of producing natural gas and oil
properties in the Gulf of Mexico from Chevron U.S.A. Inc.(the "Chevron
Acquisition").

         As of March 31, 1999, the Company had a working capital deficit of
$86.9 million, which includes current maturities of $80 million outstanding
under the KeySpan Facility, and $59.6 million of borrowing capacity available
under the Credit Facility and $70.0 million of borrowing capacity available
under the KeySpan Facility. Net cash provided by operating activities for the
three months ended March 31, 1999 was $18.7 million compared to $14.9 million
for the three months ended March 31, 1998. The Company's cash position was
increased during the first three months of 1999 by a net increase in borrowings
under the Credit Facility of $7 million. Funds used in investing activities
consisted of $28.4 million for investments in property and equipment. As a
result of these activities, cash and cash equivalents decreased $2.7 million
from $4.6 million at December 31, 1998 to $1.9 million at March 31, 1999.

         Future Capital Requirements. The Company's capital expenditure budget
for 1999 of $90 million includes $42 million and $33 million, respectively, for
exploration and development, with the balance reserved for leasehold acquisition
costs. These amounts include development costs associated with recently acquired
properties and amounts that are contingent upon drilling success. The Company
will continue to evaluate its capital spending plans through the year. No
significant abandonment or dismantlement costs are anticipated through 1999.
Actual levels of capital expenditures may vary significantly due to a variety of
factors, including drilling results, natural gas prices, industry conditions and
outlook and future acquisitions of properties. The Company believes cash flows
from operations and borrowings under its Credit Facility will be sufficient to
fund these expenditures. The Company will continue to selectively seek
acquisition opportunities for proved reserves with substantial exploration and
development potential both offshore and onshore. The size and timing of capital
requirements for acquisitions is inherently unpredictable. The Company expects
to fund exploration and development through a combination of cash flow from
operations, borrowings under its Credit Facility, or the issuance of equity or
debt securities.

         On March 15, 1999, the Company signed a joint exploration agreement (
the "KeySpan Joint Venture") with a subsidiary of KeySpan, KeySpan Exploration &
Production, LLC, to explore for natural gas and oil over a term of three years
expiring December 31, 2001. The joint venture may be terminated at the option of
either party at the end of the then current calendar year. Houston Exploration
is joint venture manager and operator. Effective January 1, 1999, KeySpan will
commit up to $100 million per calendar year and Houston Exploration will commit
its proportionate share of the funds per calendar year necessary to fund a joint
exploration and development drilling program. Houston Exploration contributed
all of its undeveloped offshore leases as of January 1, 1999 to the joint
venture. KeySpan will receive 45% of Houston Exploration's working interest in
all prospects to be drilled under the program. Revenues will be shared 55%
Houston Exploration and 45% KeySpan. During the term of the KeySpan Joint
Venture, KeySpan will pay 100% of actual intangible drilling costs up to a
maximum of $20.7 million per year. All additional intangible drilling costs
incurred during such year will be paid 51.75% by KeySpan and 48.25% by Houston
Exploration. In addition, Houston Exploration will receive reimbursement of a
portion of its general and administrative costs during the term of the KeySpan
Joint Venture. The Company plans to drill approximately eight to ten offshore
exploratory wells under the terms of the KeySpan Joint Venture during 1999. As
of March 31, 1999, the Company has drilled one unsuccessful exploratory well
(Mustang Island 859 #1) under the KeySpan Joint Venture.

         Capital Structure. The Company has entered into a revolving credit
facility ("Credit Facility") with a syndicate of lenders led by Chase Bank of
Texas, National Association ("Chase"). The Credit Facility was amended March 30,
1999 and provides a maximum commitment of $250 million, subject to borrowing
base limitations. At March 31, 1999, the conforming portion of the borrowing
base or threshold amount was $175 million. The Company has the option to
increase the threshold amount to a borrowing base of $200 million at an
incremental interest rate. Up to $2.0 million of the borrowing base is available
for the issuance of letters of credit to support performance guarantees. The
Credit Facility matures on March 1, 2003 and is unsecured. At March 31, 1999,
$140.0 million was outstanding under the


                                      -17-

<PAGE>   18



Credit Facility and $0.4 million was outstanding in letter of credit
obligations. Subsequent to March 31, 1999, the Company borrowed an additional $5
million, bringing borrowings and extensions of credit to $145.4 million as of
May 12, 1999.

         Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.625% to
1.50%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.50%
and 0.375% per annum on the unused portion of the designated borrowing base, and
(ii) 33% of the fee in (i) above on the difference between the lower of the
facility amount or the borrowing base and the designated borrowing base.

         The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest and
(ii) a total debt to capitalization ratio of less than 60%. For purposes of the
total debt to capitalization ratio, the calculation of total capitalization
excludes the effects of non-cash charges related to the $84.5 million, after
tax, writedown of oil and gas properties incurred by the Company in the fourth
quarter of 1998. In addition to maintenance of certain financial ratios, cash
dividends and/or purchase or redemption of the Company's stock is restricted, as
well as the encumbering of the Company's gas and oil assets or the pledging of
the assets as collateral. As of March 31, 1999, the Company was in compliance
with all such covenants.

         On March 2, 1998, the Company issued $100 million of 85/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008. The Notes bear interest at
a rate of 85/8% per annum with interest payable semi-annually on January 1 and
July 1, commencing July 1, 1998. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after January 1, 2003 at a price
equal to 100% of the principal amount plus accrued and unpaid interest, if any,
plus a specified premium if the Notes are redeemed prior to January 1, 2006.
Notwithstanding the foregoing, at any time prior to January 1, 2001, the Company
may redeem up to 35% of the original aggregate principal amount of the Notes
with the net proceeds of any equity offering, provided that at least 65% of the
original aggregate principal amount of the Notes remains outstanding immediately
after the occurrence of such redemption. Upon the occurrence of a change of
control (as defined), the Company will be required to offer to purchase the
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and will
rank senior or pari passu in right of payment to all existing and future
subordinated indebtedness including the KeySpan Facility.

         On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan, which provides a maximum commitment of $150 million. The
KeySpan Facility ranks subordinate to the Credit Facility and pari passu to the
Senior Subordinated Notes. Borrowings are unsecured. Any principal amount that
remains outstanding under the KeySpan Facility at January 1, 2000 will be
converted into common stock of the Company, with the number of shares to be
determined based upon the average of the closing prices of the Company's common
stock, rounded to three decimal places, as reported under "NYSE Composite
Transaction Reports" in the Wall Street Journal during the 20 consecutive
trading days ending three trading days prior to January 1, 2000. Because the
market value represents an average of the Company's common stock over twenty
consecutive trading days, ending three days prior to the maturity date of the
loan, the market price may be higher or lower than the price of the common stock
on the conversion date. Interest is payable monthly and borrowings bear interest
at LIBOR plus 1.4%. In addition, the Company pays a commitment fee of 0.0125% on
the unused portion of the maximum commitment and has incurred an upfront fee of
$50,000. As of December 31, 1998, outstanding borrowings under the facility were
$80 million. For the year ended December 31, 1998, the Company paid a total $0.5
million in interest and fees to KeySpan. Borrowings were used to finance a
portion of the November 1998 Chevron Acquisition.

                                                       -18-

<PAGE>   19




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Natural Gas Hedging. The Company utilizes derivative commodity
instruments to hedge future sales prices on a portion of its natural gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. While the use of these
hedging arrangements limits the downside risk of adverse price movements, they
may limit future revenues from favorable price movements. The use of hedging
transactions also involves the risk that the counterparties will be unable to
meet the financial terms of such transactions. Hedging instruments used are
swaps, collars and options, and are generally placed with major financial
institutions that the Company believes are minimal credit risks. The Company
accounts for these transactions as hedging activities and, accordingly, gains or
losses are included in natural gas and oil revenues in the period the hedged
production occurs. Unrealized gains and losses on these contracts, if any, are
deferred and offset against the related settlement amounts.

         As of March 31, 1999, the Company had entered into commodity price
hedging contracts with respect to its gas production as listed below. Natural
gas production during the month of April 1999 was 5,394 MMcf (5,541 MMMbtu).


<TABLE>
<CAPTION>
                                   FIXED PRICE SWAPS                         COLLARS
                               -------------------------      ---------------------------------------
                                                NYMEX                                  NYMEX
                                VOLUME         CONTRACT        VOLUME             CONTRACT PRICE
              PERIOD           (MMMBTU)          PRICE        (MMMBTU)         FLOOR         CEILING
         ----------------      --------       ----------      --------       ---------      ---------
<S>                            <C>            <C>             <C>            <C>            <C>      
         May 1999                 775         $    2.014        1,085        $   2.026      $   2.406
         June 1999                 --               --          3,000        $   2.074      $   2.406
         July 1999                 --               --          3,100        $   2.074      $   2.406
         August 1999               --               --          3,100        $   2.074      $   2.406
         September 1999            --               --          3,000        $   2.074      $   2.406
         October 1999              --               --          3,100        $   2.074      $   2.406
         November 1999             --               --          1,500        $   2.400      $   2.663
         December 1999             --               --          1,550        $   2.500      $   2.876
</TABLE>

         As of May 12, 1999, the Company had no commodity hedging contracts
extending beyond December 31,1999 and had not entered into any basis swaps
during 1999.

         These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
the last three trading days of a particular contract month (the "settlement
price"). With respect to any particular swap transaction, the counterparty is
required to make a payment to the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is required to make payment to the counterparty in the event that
the settlement price for any settlement period is greater than the swap price
for such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. For any
particular floor transaction, the counterparty is required to make a payment to
the Company if the settlement price for any settlement period is below the floor
price for such transaction. The Company is not required to make any payment in
connection with a floor transaction. For option contracts, the Company has the
option, but not the obligation, to buy contracts at the strike price up to the
day before the last trading day for that NYMEX contract.

         The Company periodically enters into basis swaps (either as part of a
particular hedging transaction or separately) tied to a particular NYMEX-based
transaction to eliminate basis risk. Because substantially all of the Company's
natural gas production is sold under spot contracts that have historically
correlated with the NYMEX price, the Company believes that it has no material
basis risk.


                                      -19-

<PAGE>   20




PART II.
OTHER INFORMATION

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K:


<TABLE>
<CAPTION>
EXHIBITS                         DESCRIPTION
--------                         -----------
<S>        <C>   <C>
* 10.1     --    Exploration Agreement between The Houston
                 Exploration Company and KeySpan Exploration and Production,
                 L.L.C., dated March 15,1999.

* 10.2     --    Amended Credit Agreement among The Houston Exploration Company
                 and Chase Bank of Texas, National Association, dated March 30,
                 1999.

* 27.1     --    Financial Data Schedule.
</TABLE>

---------------------------

*        Filed herewith.

         (b)      Reports on Form 8-K:

                  None



                                      -20-

<PAGE>   21



                                   SIGNATURES

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

                                  THE HOUSTON EXPLORATION COMPANY

                                   By:         /s/ James G. Floyd
                                        --------------------------------------
                                                 James G. Floyd
Date: May 12, 1999                      President and Chief Executive Officer



                                   By:         /s/ James F. Westmoreland
                                        --------------------------------------
                                                  James F. Westmoreland
Date: May 12, 1999                     Vice President, Chief Accounting Officer,
                                               Comptroller and Secretary


                                      -21-

<PAGE>   22

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBITS                   
NUMBER                       DESCRIPTION
--------                     -----------
<S>        <C>   
* 10.1     --    Exploration Agreement between The Houston
                 Exploration Company and KeySpan Exploration and Production,
                 L.L.C., dated March 15,1999.

* 10.2     --    Amended Credit Agreement among The Houston Exploration Company
                 and Chase Bank of Texas, National Association, dated March 30,
                 1999.

* 27.1     --    Financial Data Schedule.
</TABLE>

------------
*    Filed herewith.