<PAGE>   1

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



                                 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 SEPTEMBER 30, 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                                   22-2674487
(STATE OR OTHER JURISDICTION OF             (IRS EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)


                        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 November 4, 1999 23,919,040 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>                                                                                          <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS ............................................................    3

PART I.  FINANCIAL INFORMATION

Item 1.       Consolidated Financial Statements (unaudited)

              Consolidated Balance Sheets -- September 30, 1999 and December 31, 1998....................    4

              Consolidated Statements of Operations -- Three Month and Nine Month Periods Ended
                  September 30, 1999 and 1998 ...........................................................    5

              Consolidated Statements of Cash Flows -- Nine Month Periods Ended
                  September 30, 1999 and 1998 ...........................................................    6

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

Item 2.       Management's Discussion and Analysis of Financial Condition and
                  Results of Operations .................................................................   11

PART II. OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K ..........................................................   22

SIGNATURES ..............................................................................................   23

</TABLE>


<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," "expect," "estimate," "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 Houston Exploration'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, expected, estimated 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 for the
year ended December 31, 1998 under the Securities Exchange Act of 1934, as
amended.

         All statements contained in this Form 10-Q, including the
forward-looking statements discussed above, are made as of November 4, 1999,
except for those statements that are expressly made as of another date. The
Company disclaims any responsibility for the correctness of any information
contained in this Form10-Q to the extent such information is affected or
impacted by events, circumstances, or developments occurring after November 4,
1999, or by the passage of time after such date and, except as required by
applicable securities laws, the Company does not intend to update such
information.

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


                                      -3-

<PAGE>   4


PART I.  FINANCIAL INFORMATION

ITEMS 1.  FINANCIAL STATEMENTS


                         THE HOUSTON EXPLORATION COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                    SEPTEMBER 30,    DECEMBER 31,
                                                                                        1999             1998
                                                                                    -----------      -----------
                                                                                     (UNAUDITED)
<S>                                                                                 <C>              <C>
ASSETS:
Cash and cash equivalents ......................................................... $     2,935      $     4,645
Accounts receivable ...............................................................      41,304           23,050
Accounts receivable -- Affiliate...................................................       5,551              137
Inventories .......................................................................         958              915
Prepayments and other .............................................................       1,107              754
                                                                                    -----------      -----------
          Total current assets ....................................................      51,855           29,501
Natural gas and oil properties, full cost method
  Unevaluated properties ..........................................................     159,950          145,317
  Properties subject to amortization ..............................................     906,127          828,168
Other property and equipment ......................................................       9,731            9,464
                                                                                    -----------      -----------
                                                                                      1,075,808          982,949
Less: Accumulated depreciation, depletion and amortization ........................    (500,138)        (446,367)
                                                                                    -----------      -----------
                                                                                        575,670          536,582
Other assets ......................................................................       3,926            3,369
                                                                                    -----------      -----------
          TOTAL ASSETS ............................................................ $   631,451      $   569,452
                                                                                    ===========      ===========

LIABILITIES:
Accounts payable and accrued expenses ............................................. $    45,496      $    32,743
Subordinated note -- Affiliate.....................................................      80,000               --
                                                                                    -----------      -----------
          Total current liabilities ...............................................     125,496           32,743

Long-term debt and notes ..........................................................     260,000          233,000
Subordinated note -- Affiliate ....................................................          --           80,000
Deferred federal income taxes .....................................................      38,402           31,027
Other deferred liabilities ........................................................         155              152
                                                                                    -----------      -----------
          TOTAL LIABILITIES .......................................................     424,053          376,922

COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)

STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000 shares authorized and 23,919 shares issued
 and outstanding at September 30, 1999 and 23,895 shares issued and outstanding
 at December 31, 1998 .............................................................         239              239
Additional paid-in capital ........................................................     231,336          230,931
Retained earnings (deficit) .......................................................     (24,177)         (38,640)
                                                                                    -----------      -----------
          TOTAL STOCKHOLDERS' EQUITY ..............................................     207,398          192,530
                                                                                    -----------      -----------
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $   631,451      $   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,        NINE MONTHS ENDED,
                                                        SEPTEMBER 30,             SEPTEMBER 30,
                                                    ------------------       ---------------------
                                                      1999        1998         1999         1998
                                                   --------     --------     --------     --------
                                                                       (UNAUDITED)
<S>                                                <C>          <C>          <C>          <C>
REVENUES:
  Natural gas and oil revenues ..................  $ 42,081     $ 30,545     $103,622     $ 98,570
  Other .........................................       396          308          857          878
                                                   --------     --------     --------     --------
          Total revenues ........................    42,477       30,853      104,479       99,448
OPERATING COSTS AND EXPENSES:
  Lease operating ...............................     5,091        4,455       13,386       11,887
  Severance tax .................................     1,588        1,249        3,775        3,717
  Depreciation, depletion and amortization ......    18,644       19,759       53,673       59,264
  General and administrative, net ...............       960        1,463        2,909        4,745
                                                   --------     --------     --------     --------
          Total operating expenses ..............    26,283       26,926       73,743       79,613

Income from operations ..........................    16,194        3,927       30,736       19,835

Interest expense, net ...........................     3,412        1,279        9,625        2,529
                                                   --------     --------     --------     --------
Income before income taxes ......................    12,782        2,648       21,111       17,306
Provision for federal income taxes ..............     4,254          645        6,648        5,274
                                                   --------     --------     --------     --------
NET INCOME ......................................  $  8,528     $  2,003     $ 14,463     $ 12,032
                                                   ========     ========     ========     ========

Net income per share ............................  $   0.36     $   0.08     $   0.61     $   0.50
                                                   ========     ========     ========     ========
Net income per share -- assuming dilution........  $   0.32     $   0.08     $   0.58     $   0.50
                                                   ========     ========     ========     ========

Weighted average shares outstanding .............    23,911       23,896       23,901       23,725
Weighted average shares outstanding -- assuming
    dilution ....................................    28,001       24,173       28,265       24,009

</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>
                                                                          NINE MONTHS ENDED SEPTEMBER 30,
                                                                          -------------------------------
                                                                              1999               1998
                                                                          -----------         -----------
                                                                                    (UNAUDITED)
<S>                                                                        <C>                 <C>
OPERATING ACTIVITIES:
Net income ..............................................................  $  14,463           $  12,032
Adjustments to reconcile net income to net cash provided by operating
  activities:
  Depreciation, depletion and amortization ..............................     53,673              59,264
  Deferred income tax expense ...........................................      7,375               6,049
  Changes in operating assets and liabilities:
     (Increase) decrease in accounts receivable .........................    (23,668)             16,374
     (Increase) decrease in inventories .................................        (43)                 12
     Increase in prepayments ............................................       (353)               (523)
     Increase in other assets and liabilities ...........................       (501)             (1,752)
     Increase (decrease) in accounts payable and accrued expenses .......     12,753              (7,107)
                                                                           ---------           ---------
Net cash provided by operating activities ...............................     63,699              84,349

INVESTING ACTIVITIES:
Investment in property and equipment ....................................    (92,814)           (166,482)
                                                                           ---------           ---------
Net cash used in investing activities ...................................    (92,814)           (166,482)
FINANCING ACTIVITIES:
Proceeds from long term borrowings ......................................     41,000             187,000
Repayments of long term borrowings ......................................    (14,000)           (109,000)
Proceeds from issuance of common stock ..................................        405                 198
                                                                           ---------           ---------
Net cash provided by financing activities ...............................     27,405              78,198
                                                                           ---------           ---------
Decrease in cash and cash equivalents ...................................     (1,710)             (3,935)
Cash and cash equivalents, beginning of period ..........................      4,645               4,745
                                                                           ---------           ---------
Cash and cash equivalents, end of period ................................  $   2,935           $     810
                                                                           =========           =========
Cash paid for interest ..................................................  $  18,308           $   7,661
                                                                           =========           =========
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 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 September 30, 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
KeySpan Corporation ("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 LIPA'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 September 30, 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 Consolidated 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.

         Reclassifications and Use of Estimates

         The preparation of 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


                                      -7-
<PAGE>   8

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,            NINE MONTHS ENDED,
                                                                    SEPTEMBER 30,                 SEPTEMBER 30,
                                                             -------------------------     -------------------------
                                                                1999           1998           1999           1998
                                                             ----------     ----------     ----------     ----------
                                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>            <C>            <C>            <C>
Numerator:
Net income .............................................     $    8,528     $    2,003     $   14,463     $   12,032
    Interest expense convertible debt, net of tax ......            476             --          1,856             --
                                                             ----------     ----------     ----------     ----------
Net income, adjusted ...................................     $    9,004     $    2,003     $   16,319     $   12,032
                                                             ==========     ==========     ==========     ==========

Denominator:
Weighted average shares outstanding ....................         23,911         23,896         23,901         23,725
Add: dilutive securities
          Convertible debt .............................          3,803             --          4,183             --
          Options ......................................            287            277            181            284
                                                             ----------     ----------     ----------     ----------
Total weighted average shares outstanding and dilutive
  securities ...........................................         28,001         24,173         28,265         24,009
                                                             ==========     ==========     ==========     ==========

Net income per share ...................................     $     0.36     $     0.08     $     0.61     $     0.50
                                                             ==========     ==========     ==========     ==========
Net income per share -- assuming dilution ..............     $     0.32     $     0.08     $     0.58     $     0.50
                                                             ==========     ==========     ==========     ==========
</TABLE>


         New Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement broadens the definition of a
derivative instrument and establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair market value. Derivatives that
are not hedges must be adjusted to fair value currently in earnings. If a
derivative is a hedge, depending on the nature of the hedge, special accounting
allows changes in fair value of the derivative to be either offset against the
change in fair value of the hedged asset or liability in the income statement or
recorded in comprehensive income until the hedged item is recognized in
earnings. The Company must formally document, designate and assess the
effectiveness of transactions that are recorded as hedges. The ineffective
portion of a hedged derivative's change in fair value will be immediately
recognized in earnings. In June 1999, the FASB issued SFAS No. 137, which
extends the adoption requirement of SFAS No. 133 from January 1, 2000 to January
1, 2001. The Company plans to adopt SFAS No. 133 effective January 1, 2001.
Currently, the Company cannot estimate the impact of the statement on results of
future operations; however, it believes that the impact will not be material.


                                       -8-

<PAGE>   9


NOTE 2 -- LONG-TERM DEBT AND NOTES

<TABLE>
<CAPTION>
                                                SEPTEMBER 30, 1999     DECEMBER 31, 1998
                                                ------------------     ------------------
                                                              (IN THOUSANDS)
<S>                       <C>                   <C>                    <C>
SENIOR DEBT:
Bank credit facility, due 2003 ..............   $          160,000     $          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 ..........   $          260,000     $          313,000
                                                ==================     ==================
</TABLE>


         As of September 30, 1999, outstanding borrowings of $80 million under
the KeySpan note were classified as current liabilities, as the note matures
April 1, 2000. The carrying amount of borrowings outstanding under the revolving
bank credit facility and the KeySpan note approximate fair value as interest
rates are tied to current market rates. At September 30, 1999, the quoted market
value of the 8 5/8% senior subordinated notes was 97% of the $100 million
carrying value or $97 million. Subsequent to September 30, 1999, the Company
borrowed an additional $21 million under its revolving bank credit facility to
fund the purchase of interests in 21 Bcfe of proved undeveloped reserves at West
Cameron Block 587 (see Note 5 - Subsequent Events), bringing outstanding
borrowings and extensions of credit under letter of credit agreements to $181.4
million as of November 4, 1999.

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 effect on the
financial position or results of operations of the Company.

NOTE 4 -- RELATED PARTY TRANSACTIONS

         KeySpan Joint Venture

         In March 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. Houston Exploration is joint venture manager and
operator. Effective January 1, 1999, KeySpan agreed to commit up to $100 million
per calendar year and Houston Exploration agreed to 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 pays 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 are paid
51.75% by KeySpan and 48.25% by Houston Exploration. In addition, Houston
Exploration receives reimbursement of a portion of its general and
administrative costs during the term of the joint venture. During the three
month and the nine month periods ended September 30, 1999, KeySpan incurred
approximately $6.8 million and $14.9 million, respectively, in drilling costs
and the Company received approximately $1.1 million and $3.3 million,
respectively, in general and administrative reimbursements pursuant to the
KeySpan Joint Venture.

         On October 26, 1999, the Company's Board of Directors approved an
amendment to the KeySpan Joint Venture to provide a change in the right of
either party to terminate the joint venture. Previously, the agreement provided
that giving sixty days prior notice, the joint venture could be terminated at
the option of either party at the end of the then current calendar year. As
amended, either party, by giving thirty days prior notice, may terminate the
joint venture at the end of the then current quarter.


                                      -9-
<PAGE>   10


         KeySpan Facility

         In November 1998, the Company entered into a revolving credit facility
with KeySpan (the "KeySpan Facility"), which provides a maximum loan commitment
of $150 million. On October 26, 1999, the Company's Board of Directors approved
an amendment to the KeySpan Facility to provide an extension of the maturity
from January 1, 2000 to April 1, 2000. The KeySpan Facility ranks, in right of
payment, subordinate to the revolving bank credit facility and equal in right of
payment with the Company's 8 5/8% senior subordinated notes. Pursuant to a
subordination agreement among the Company, KeySpan and Chase Bank of Texas,
National Association, the Company may not repay any outstanding principal under
the KeySpan Facility prior to payment in full of all outstanding principal and
interest under the revolving bank credit facility. Borrowings under the KeySpan
Facility are unsecured and any principal amount outstanding after April 1, 2000
will be converted into common stock of the Company at a conversion price equal
to the average of the closing prices of the Company's common stock for the 20
consecutive trading days ending three trading days prior to maturity. As of
September 30, 1999, outstanding borrowings under the KeySpan Facility totaled
$80 million and were classified as current liabilities. For the three month and
the nine month periods ended September 30, 1999, the Company incurred a total of
$1.4 million and $4.0 million, respectively, in interest and fees to KeySpan
pursuant to the KeySpan Facility.

         Section 29 Tax Credits

         In January 1997, the Company entered into an agreement to sell to a
subsidiary of KeySpan 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. KeySpan 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
representing benefits received from the Section 29 tax credits was a reduction
to income tax expense of $0.2 million for each of the three month periods ended
September 30, 1999 and 1998 and $0.7 million for each of the nine month periods
ended September 30, 1999 and 1998.

NOTE 5 -- SUBSEQUENT EVENTS

         West Cameron 587 Acquisition

         On November 1, 1999, the Company completed the acquisition of a 64%
working interest in the West Cameron 587 Field (the "West Cameron 587
Acquisition") for $21 million in cash. The acquisition was financed by
borrowings under the Credit Facility and represents interests in two undeveloped
wells. Net proved undeveloped reserves for the natural gas and oil interests
acquired are estimated at 21 Bcfe as of October 1, 1999, the effective date of
the acquisition. The Company plans to complete the two existing wells, install
production facilities and drill two additional development wells with a combined
estimated future development cost of approximately $9 million.


                                      -10-
<PAGE>   11


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 and the nine months ended September 30, 1998 and 1999. 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
KeySpan ("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 LIPA'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.

         The Company has recently completed the assessment, remediation and
testing of its financial and operational systems and believes that these systems
and the related computer software are Y2K compliant; however, there can be


                                      -11-
<PAGE>   12


no assurances. The Company estimates that it will incur a total of $100,000 in
costs during 1999 to become Y2K compliant and does not anticipate that it will
incur any additional costs relating to Year 2000 issues that would have a
material adverse effect on the Company's financial condition, operations or
liquidity. 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 Y2K compliant on a timely
basis. The Company has contacted its key third parties in an effort 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 will continue to
communicate with its key third parties; however, no assurance can be given that
a Y2K problem will not occur for the Company as a result of a Y2K problem of a
third party.

         The Company's remediation efforts are intended to reduce the Company's
level of uncertainty about Y2K compliance and the possibility of interruption of
normal operations. The Company has established a contingency plan in the event
its financial or operational systems experience failure or malfunction due to
Y2K issues. The Company's contingency plan will allow employees to manually
complete otherwise automated tasks or calculations. The Company believes that
the potential impact, if any, of a system failure or malfunction due to Y2K
issues will 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 Y2K 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, 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, could 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.

         Recent Developments. On September 13, 1999, KeySpan, the Company's
majority shareholder and holder of 64% of the Company's common stock, announced
its intention to begin a process to review strategic alternatives for its
investment in Houston Exploration. The process will include an assessment of the
role of Houston Exploration within KeySpan's future strategic plan, and will
consider a full range of strategic transactions which could include the sale of
all or a portion of Houston Exploration. J.P. Morgan Securities Inc. has been
retained by KeySpan as financial advisor to assist in the strategic review on
behalf of KeySpan. The Company's Board of Directors has appointed a special
committee comprised of outside directors to assist in the review process. The
Company and the special committee have retained Goldman, Sachs and Co. as
financial advisor.

         On October 6, 1999, the Company's revolving bank credit facility (the
"Credit Facility") was amended to, among other things provide: (i) an increase
in the borrowing base from $200 million to $240 million; (ii) to add two new
banks to the syndicate of lenders; and (iii) to increase the required available
borrowing capacity under the $150 million KeySpan credit facility



                                      -12-
<PAGE>   13


from $25 million to $65 million. As of November 4, 1999, the Company had
outstanding borrowings of $181.4 million under the bank credit facility and $80
million under the KeySpan credit facility. Pursuant to the amendment, the
borrowing base under the Credit Facility will decrease from $240 million to $175
million on December 21, 1999. As a result, the Company will be required to repay
any borrowings in excess of the $175 million amount on December 21, 1999. Chase
and the Company have agreed to negotiate an amendment to the Credit Facility to
extend the $240 million borrowing base to March 29, 2000. If the Credit Facility
is not amended prior to December 21, 1999, the Company would be required to
repay any outstanding borrowings in excess of the $175 million.

         At the Company's quarterly meeting of its Board of Directors, held on
October 26, 1999, the Company's Board approved a $20 million increase to the
1999 capital expenditure budget, bringing the 1999 capital expenditure budget to
$125 million. The increase will be designated primarily to offshore exploratory
drilling. In addition to the increase in the capital expenditure budget, the
Board of Directors approved an amendment to the KeySpan Credit Facility and the
KeySpan Joint Venture (see Note 3 -Related Party Transactions). The KeySpan
Facility will be amended to extend the maturity from January 1, 2000 to April 1,
2000. The KeySpan Joint Venture will be amended to provide a change in the right
of either party to terminate the joint venture. Previously, the agreement
provided that giving sixty days prior notice, the joint venture could be
terminated at the option of either party at the end of the then current calendar
year. As amended, either party, by giving thirty days prior notice, may
terminate the joint venture at the end of the then current quarter.

         On November 1, 1999, the Company completed the acquisition of a 64%
working interest in the West Cameron 587 Field (the "West Cameron 587
Acquisition") for $21 million in cash. The acquisition was financed by
borrowings under the Credit Facility and represents interests in two undeveloped
wells. Net proved undeveloped reserves for the natural gas and oil interests
acquired are estimated at 21 Bcfe as of October 1, 1999, the effective date of
the acquisition. The Company plans to complete the two existing wells, install
production facilities and drill two additional development wells with a combined
estimated future development cost of approximately $9 million.


                                      -13-
<PAGE>   14


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,                NINE MONTHS ENDED,
                                                             SEPTEMBER 30,                     SEPTEMBER 30,
                                                     -----------------------------     -----------------------------
                                                         1999             1998             1999             1998
                                                     ------------     ------------     ------------     ------------
<S>                                                  <C>              <C>              <C>              <C>
PRODUCTION:
      Natural gas (MMcf) .........................         17,640           15,122           50,450           46,118
      Oil (MBbls) ................................             47               60              187              164
      Total (MMcfe) ..............................         17,922           15,482           51,572           47,102

AVERAGE SALES PRICES:
      Natural gas (per Mcf) realized(1) ..........   $       2.33     $       1.98     $       2.00     $       2.09
      Natural gas (per Mcf) unhedged .............           2.47             1.84             2.05             2.01
      Oil (per Bbl) ..............................          20.28            11.00            14.71            12.65

EXPENSES (PER MCFE):
      Lease operating ............................   $       0.28     $       0.29     $       0.26     $       0.25
      Severance tax ..............................           0.09             0.08             0.07             0.08
      Depreciation, depletion and amortization ...           1.04             1.28             1.04             1.26
      General and administrative, net ............           0.05             0.09             0.06             0.10
</TABLE>

--------------------
(1)   Reflects the effects of hedging.


RECENT FINANCIAL AND OPERATING RESULTS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

         Production. Houston Exploration's production increased 16% from 15,482
MMcfe for the three months ended September 30, 1998 to 17,922 MMcfe for the
three months ended September 30, 1999. The increase in production for the third
quarter of 1999 is due primarily to new offshore production added from the
November 1998 acquisition of the Mustang Island A-31/32 properties combined with
the fact that offshore production during the third quarter of 1998 was
significantly curtailed due to two hurricanes and two tropical storms in the
Gulf of Mexico and a mechanical failure at High Island 38. During the third
quarter of 1999, tropical weather caused minimal downtime for offshore
operations and High Island 38, which resumed production in late March 1999,
produced approximately 11 MMcfe/day, net to the Company.

         Natural Gas and Oil Revenues. Natural gas and oil revenues increased
38% from $30.5 million for the three months ended September 30, 1998 to $42.1
million for the three months ended September 30, 1999 as a result of the 16%
increase in production combined with an 18% increase in average realized natural
gas prices, from $1.98 per Mcf for the three months ended September 30, 1998 to
$2.33 per Mcf for the three months ended September 30, 1999.

         As a result of hedging activities, the Company realized an average gas
price of $2.33 per Mcf for the three months ended September 30, 1999, which was
94% of the unhedged natural gas price of $2.47 per Mcf that otherwise would have
been received, resulting in a $2.5 million decrease in natural gas revenue for
the three months ended September 30, 1999. For the corresponding three month
period of 1998, the average realized gas price was $1.98 per Mcf, which was 108%
of the unhedged average gas price of $1.84 per Mcf, resulting in an increase in
natural gas revenues of $2.1 million for the three months ended September 30,
1998.

         Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 16% from $4.4 million for the three months ended September 30, 1998 to
$5.1 million for the three months ended September 30, 1999. On an Mcfe


                                      -14-

<PAGE>   15

basis, lease operating expenses decreased from $0.29 for the three months ended
September 30, 1998 to $0.28 for the three months ended September 30, 1999. The
increase in lease operating expenses for the three months ended September 30,
1999 as compared to the corresponding period of 1998 is attributable the
Company's two producing property acquisitions made in 1998 which significantly
expanded the Company's scope of operations: offshore, the Mustang Island A-31/32
complex and onshore, the South Louisiana properties. The decrease in lease
operating expenses on a per unit basis for the third quarter of 1999, reflects
the increase in production for the three months ended September 30, 1999 as
compared to the corresponding period of 1998. Severance tax, which is a function
of volume and revenues generated from onshore production, increased from $1.2
million for the three months ended September 30, 1998 to $1.6 million for the
three months ended September 30, 1999. On an Mcfe basis, severance tax increased
from $0.08 per Mcfe, for the three months ended September 30, 1998 to $0.09 per
Mcfe, for the corresponding three months of 1999. The increase in both the
severance tax expense and the rate per Mcfe is due to higher natural gas prices
received during the third quarter of 1999 as compared to prices received during
the third quarter of 1998.

         Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 6% from $19.7 million for the three months ended
September 30, 1998 to $18.6 million for the three months ended September 30,
1999. Depreciation, depletion and amortization expense per Mcfe decreased 19%
from $1.28 for the three months ended September 30, 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 $130 million ($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 reserves
during the current year.

         General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $0.3 million and $1.4 million for the three months ended September
30, 1998 and 1999, respectively, decreased 33% from $1.5 million for the three
months ended September 30, 1998 to $1.0 million for the three months ended
September 30, 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 $1.3 million,
respectively, for the three months ended September 30, 1998 and 1999. The
decrease in capitalized general and administrative expenses is a result of the
KeySpan reimbursements combined with slightly lower aggregate general and
administrative expenses during the third quarter of 1999 as compared to the
corresponding period of 1998. On an Mcfe basis, general and administrative
expenses decreased 44% from $0.09 for the three months ended September 30, 1998
to $0.05 for the three months ended September 30, 1999. The lower rate per Mcfe
during the third quarter of 1999 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. Interest expense, net of capitalized interest,
increased from $1.3 million for the three months ended September 30, 1998 to
$3.4 million for the three months ended September 30, 1999. Capitalized interest
increased from $2.5 million for the three months ended September 30, 1998 to
$3.0 million for the three months ended September 30, 1999. The increase in
aggregate interest expense was attributable to higher average debt levels during
the three months ended September 30, 1999 as compared to the corresponding
period of 1998. With the issuance of the $100 million of 8e% senior 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 increased from an
expense of $0.6 million for the three months ended September 30, 1998 to an
expense of $4.3 million for the three months ended September 30, 1999. The
increase in income tax expense for the three months ended September 30, 1999
corresponds to the increase in pretax income for the three months ended
September 30, 1999 as compared to the corresponding three months of 1998.

         Operating Income and Net Income. Higher natural gas revenues resulting
from a 16% increase in production combined with an 18% increase in natural gas
prices and a slight 2% decrease in operating expenses caused operating income to
increase from $3.9 million for the three months ended September 30, 1998 to
$16.2 million for the three


                                      -15-

<PAGE>   16


months ended September 30, 1999. Net income increased from $2.0 million for the
three months ended September 30, 1998 to $8.5 million for the three months ended
September 30, 1999 and reflects higher levels of interest and taxes.


COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999

         Production. Houston Exploration's production increased 9% from 47,102
MMcfe for the nine months ended September 30, 1998 to 51,572 MMcfe for the nine
months ended September 30, 1999. The increase in production was primarily
attributable to production added from the acquisition of producing properties at
Mustang Island A-31/32 in November 1998 and the South Louisiana properties
acquired in late April 1998 offset in part by a production decline at the
Company's Charco Field. The production decline at Charco reflects the Company's
decision to curtail capital spending in South Texas during in the fourth quarter
of 1998 due to depressed natural gas prices. Developmental drilling resumed at
Charco in the first quarter of 1999 with two rigs running and during the second
quarter the Company added a third drilling rig to expedite developmental
drilling. The third rig was released during the third quarter of 1999 and
drilling resumed with two rigs. As a result, seven new Charco wells were brought
on-line during the third quarter of 1999 causing average daily production to
increase from 74 MMcfe/day during the first half of 1999 to 83 MMcfe/day during
the third quarter of 1999.

         Natural Gas and Oil Revenues. Natural gas and oil revenues increased 5%
from $98.6 million for the nine months ended September 30, 1998 to $103.6
million for the nine months ended September 30, 1999 as a result of the 9%
increase in production offset in part by a 4% decrease in average realized
natural gas prices, from $2.09 per Mcf in the nine months ended September 30,
1998 to $2.00 per Mcf in the nine months ended September 30, 1999.

         As a result of hedging activities, the Company realized an average gas
price of $2.00 per Mcf for the nine months ended September 30, 1999, which was
98% of the unhedged natural gas price of $2.05 per Mcf that otherwise would have
been received, resulting in a $2.6 million decrease in natural gas revenues for
the nine months ended September 30, 1999. For the nine months ended September
30, 1998, the average realized gas price was $2.09 per Mcf, which was 104% of
the unhedged average gas price of $2.01, resulting in an increase to natural gas
revenues of $3.9 million for the nine month period.

         Lease Operating Expenses and Severance Tax. Lease operating expenses
increased 13% from $11.9 million for the nine months ended September 30, 1998 to
$13.4 million for the nine months ended September 30, 1999. On an Mcfe basis,
lease operating expenses increased from $0.25 for the nine first months of 1998
to $0.26 for the first nine months of 1999. The increase in lease operating
expenses and lease operating expenses on a per unit basis for the nine months
ended September 30, 1999 as compared to the corresponding period of 1998 is
attributable to the acquisition of the Mustang Island A-31/32 properties and the
South Louisiana properties both of which have significantly expanded the
Company's operations and, due to the nature of their locations, are more costly
to operate on a per unit basis. Severance tax, which is a function of volume and
revenues generated from onshore production, remained relatively flat at $3.7
million for the nine months ended September 30, 1998 compared to $3.8 million
for the nine months ended September 30, 1999. On an Mcfe basis, severance tax
decreased from $0.08 per Mcfe for the nine month periods ended September 30,
1998 to $0.07 per Mcfe for the corresponding period of 1999. The decrease in the
rate per Mcfe reflects the lower natural gas prices received during the first
nine months of 1999 as compared to the first nine months of 1998.

         Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 9% from $59.3 million for the nine months ended
September 30, 1998 to $53.7 million for the nine months ended September 30,
1999. Depreciation, depletion and amortization expense per Mcfe decreased 17%
from $1.26 for the nine months ended September 30, 1998 to $1.04 for the nine
months ended September 30, 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 $130 million ($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 reserves
for the nine months ended September 30, 1999.

         General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners, of $0.7 million and $3.9 million, for the nine months ended September
30, 1998 and 1999, respectively, decreased 38% from $4.7 million for the nine
months ended September 30, 1998 to $2.9 million for the nine months ended
September 30, 1999. Included in reimbursements received from working interest



                                      -16-

<PAGE>   17





owners during the nine months ended September 30, 1999 were reimbursements
totaling $3.3 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 $5.9 million and $3.8 million, respectively, for
the nine months ended September 30, 1998 and 1999. The decrease in capitalized
general and administrative expenses is a result of the KeySpan reimbursements
combined with slightly lower aggregate general and administrative expenses
during the first nine months of 1999 as compared to the corresponding period of
1998. On an Mcfe basis, general and administrative expenses decreased 40% from
$0.10 for the nine months ended September 30, 1998 to $0.06 for the nine months
ended September 30, 1999. The lower rate per Mcfe during the first nine months
of 1999 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 $2.5 million for the nine months ended September 30, 1998 to $9.6
million for the nine ended September 30, 1999. Capitalized interest increased
from $7.1 million for nine months ended September 30, 1998 to $8.6 million for
the nine months ended September 30, 1999. The increase in aggregate interest
expense was attributable to higher average debt levels during the first nine
months of 1999. With the issuance of $100 million of 8 5/8% senior 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 increased 25% from
an expense of $5.3 million for the first nine months of 1998 to an expense of
$6.6 million for the first nine months of 1999 due to an increase in pretax
income during the first nine months of 1999 caused primarily by an increase in
production and a decrease in operating expenses offset by an increase in
interest expense.

         Operating Income and Net Income. The combined effect of an increase in
natural gas revenues and a decrease in operating expenses caused operating
income for the nine months ended September 30, 1999 to increase by 55% from
$19.8 million for the nine months ended September 30, 1998 to $30.7 million for
the nine months ended September 30, 1999. Net income increased 21% from $12.0
million for the nine months ended September 30, 1998 to $14.5 million for the
nine months ended September 30, 1999 and reflects higher interest expense and
taxes during the first nine months of 1999.


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 its 1996 initial public offering of
common stock, capital contributions from KeySpan. On March 2, 1998, the Company
issued $100 million of 8e% senior subordinated indebtedness. Net proceeds of
approximately $97 million were used to repay a portion of the outstanding
borrowings 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 September 30, 1999, the Company had a working capital deficit of
$73.6 million, which includes current maturities of $80 million outstanding
under the KeySpan Facility which are due April 1, 2000. As of September 30,
1999, the Company had $14.6 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 nine months
ended September 30, 1999 was $63.7 million compared to $84.13 million for the
nine months ended September 30, 1998. The decrease in working capital during the
first nine months of 1999 is primarily related to the timing of cash receipts
and payments. Receivables are higher due to the increase in natural gas revenues
caused by an increase in both natural gas price and production volume, and,
payables are higher due to an increase in drilling activity. The Company's cash
position was increased during the first nine months of 1999 by a net increase in
borrowings under the Credit Facility of $27 million. Funds used in investing
activities consisted of $92.8 million for investments in property and equipment.
As a result of these activities, cash and cash equivalents decreased $1.7
million from $4.6 million at December 31, 1998 to $2.9 million at September 30,
1999.


                                      -17-

<PAGE>   18

         Future Capital Requirements. The Company's initial capital expenditure
budget for 1999 of $90 million was increased by $15 million in July 1999 and by
another $20 million in October 1999 to a total of $125 million for the year. The
Company does not include property acquisition costs in its capital expenditure
budget as the size and timing of capital requirements for acquisitions is
inherently unpredictable. As of September 30, 1999, the Company had spent a
total of $92.6 million on natural gas and oil properties which includes $2.6
million for exploration, $70.6 for development, workovers and recompletions, and
$19.4 for leasehold acquisition costs, which includes capitalized interest and
capitalized general and administrative expenses. As of September 30, 1999 the
Company had not made a significant acquisition of proved reserves; however, on
November 1, 1999, the Company acquired a 64% working interest in the West
Cameron 587 Field for $21 million in cash. Net proved reserves for the
natural gas and oil interests acquired are estimated at 21 Bcfe as of October 1,
1999, the effective date of the acquisition. The acquisition was financed by
borrowings under the Credit Facility and represents interests in two undeveloped
wells. The Company plans to complete the existing two wells, install production
facilities and drill two additional development wells with a combined estimated
future development cost of approximately $9 million. The capital expenditure
budget includes 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 remainder of 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 intends to continue to selectively seek
acquisition opportunities for proved reserves with substantial exploration and
development potential both offshore and onshore; although, there can be no
assurance that the Company will be able to identify and make acquisitions of
proved reserves on terms it considers favorable.

         On May 20, 1999, the Company filed a "shelf" registration with the
Securities and Exchange Commission to offer and sell in one or more offerings up
to a total offering amount of $250 million in securities which could include
shares of the Company's common stock, shares of preferred stock or unsecured
debt securities or, a combination thereof. The Company intends to use the net
proceeds received from the sale of any securities for the repayment of debt and
general corporate purposes, including acquisitions. There can be no assurance
that the Company will be able to consummate such offering on acceptable terms.

         In March 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. Houston Exploration is joint venture manager and
operator. Effective January 1, 1999, KeySpan agreed to commit up to $100 million
per calendar year and Houston Exploration agreed to 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 pays 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 are paid
51.75% by KeySpan and 48.25% by Houston Exploration. In addition, Houston
Exploration receives reimbursement of a portion of its general and
administrative costs during the term of the 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 November 4, 1999 and pursuant to
the Joint Venture, the Company participated in the drilling and completion of
one successful well at East Cameron 84, has drilled one unsuccessful exploratory
well at Mustang Island 859; is in the process of drilling one exploratory well
at Galveston Island 190 and one well at Mustang Island A-113; and is
participating in the drilling of one exploratory well at North Padre Island
883 East.

         On October 26, 1999, the Company's Board of Directors approved an
amendment to the KeySpan Joint Venture to provide a change in the right of
either party to terminate the joint venture. Previously, the agreement provided
that giving sixty days prior notice, the joint venture could be terminated at
the option of either party at the end of the then current calendar year. As
amended, either party, by giving thirty days prior notice, may terminate the
joint venture at the end of the then current quarter.

         Capital Structure. The Company has entered into a revolving bank credit
facility with a syndicate of lenders led by Chase Bank of Texas, National
Association ("Chase"). The Credit Facility was amended on March 30, May 4


                                      -18-

<PAGE>   19

and October 6, 1999 and provides a maximum commitment of $250 million, subject
to borrowing base limitations. At September 30, 1999, the conforming portion of
the borrowing base or threshold amount was $175 million. The Company has the
option to borrow in excess of the threshold amount up to a borrowing base of
$240 million by paying 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 September 30, 1999, $160 million was outstanding under the Credit
Facility and $0.4 million was outstanding in letter of credit obligations.

         Subsequent to September 30, 1999, the Company borrowed an additional
$21 million under the Credit Facility to fund the West Cameron 587 Acquisition.
Total outstanding borrowings and extensions of credit were $181.4 million as of
November 4, 1999 which exceeded the $175 million threshold amount by $6.1
million. Pursuant to the October 6, 1999 amendment, the borrowing base will
decrease from $240 million to equal the $175 million threshold on December 21,
1999. As a result, the Company will be required to repay any borrowings in
excess of the $175 million threshold amount on December 21, 1999. Chase and the
Company have agreed to negotiate an amendment to the Credit Facility to extend
the $240 million borrowing base to March 29, 2000. If the Credit Facility is not
amended prior to December 21, 1999, the Company would be required to repay any
outstanding borrowings in excess of the $175 million threshold, or approximately
$6.1 million as of November 4, 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 0.375%
and 0.500% 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, the covenants restrict cash dividends and/or
purchase or redemption of the Company's stock, as well as the encumbering of the
Company's gas and oil assets or the pledging of the assets as collateral. As of
September 30, 1999, the Company was in compliance with all such covenants.

         On March 2, 1998, the Company issued $100 million of 8 5/8% Senior
Subordinated Notes (the "Notes") due January 1, 2008. The Notes bear interest at
a rate of 8 5/8% per annum with interest payable semi-annually on January 1 and
July 1. 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.

         The KeySpan Facility established by the Company in November 1998
provides a maximum loan commitment of $150 million. The KeySpan Facility ranks
subordinate to the Credit Facility and equal in right of payment with the Notes.
Pursuant to a subordination agreement among the Company, KeySpan and Chase, the
Company may not repay any outstanding principal under the KeySpan Facility prior
to payment in full of all outstanding principal and interest under the Credit
Facility. Borrowings under the KeySpan Facility are unsecured. On October 26,
1999, the Company's Board of Directors approved an amendment to extend the
maturity of the KeySpan Facility from January 1, 2000 to


                                      -19-

<PAGE>   20

April 1, 2000. Any principal amount that remains outstanding under the KeySpan
Facility after April 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 April
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 accrued under the
KeySpan Facility is payable monthly and borrowings bear interest at LIBOR plus
1.4%. In addition, the Company incurs a quarterly commitment fee of 0.0125% on
the unused portion of the maximum commitment and has incurred a one time upfront
fee of $50,000. As of September 30, 1999, outstanding borrowings under the
facility were $80 million, all of which were classified as current liabilities.
For the three and nine month periods ended September 30, 1999, the Company
incurred a total $1.4 million and $4.0 million, respectively in interest and
fees to KeySpan. Borrowings were used to finance a portion of the November 1998
Chevron Acquisition.

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 September 30, 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 September 1999 was 6,103 MMcf (6,266 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>
         October 1999          --          --        4,030       $ 2.138        $ 2.485
         November 1999         --          --        3,750       $ 2.440        $ 2.797
         December 1999         --          --        3,875       $ 2.580        $ 2.975
         January 2000          --          --        1,860       $ 2.550        $ 3.648
         February 2000         --          --        1,740       $ 2.450        $ 3.433
         March 2000            --          --        1,860       $ 2.350        $ 3.113
         April 2000            --          --          900       $ 2.200        $ 2.697
         May 2000              --          --          930       $ 2.200        $ 2.697
         June 2000             --          --          900       $ 2.200        $ 2.697
         July 2000             --          --          930       $ 2.200        $ 2.697
         August 2000           --          --          930       $ 2.200        $ 2.697
         September 2000        --          --          900       $ 2.200        $ 2.697
</TABLE>

         As of November 4, 1999, the Company had no commodity hedging contracts
extending beyond September 2000 and had not entered into any basis swaps during
the remainder of 1999 or extending into 2000.

         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


                                      -20-

<PAGE>   21

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.


                                      -21-

<PAGE>   22



PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits:

    EXHIBIT NO.                              DESCRIPTION
    -----------                              -----------
    *    10.32  --         Second Amendment to Amended and Restated Credit
                           Agreement between The Houston Exploration Company and
                           Chase Bank of Texas, National Association dated
                           October 6, 1999.

    *    27.1   --         Financial Data Schedule.

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

*        Filed herewith.


      (b) Reports on Form 8-K:

         None


                                      -22-

<PAGE>   23


                                   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, thereunto duly authorized.


                               THE HOUSTON EXPLORATION COMPANY

                                 By:        /s/ James G. Floyd
                                    ------------------------------------------
                                               James G. Floyd
Date:  November 4, 1999               President and Chief Executive Officer



                                 By:        /s/ James F. Westmoreland
                                    ------------------------------------------
                                               James F. Westmoreland
Date:  November 4, 1999               Vice President, Chief Accounting Officer,
                                      Comptroller and Secretary


                                      -23-

<PAGE>   24

                               INDEX TO EXHIBITS



    EXHIBIT NO.                              DESCRIPTION
    -----------                              -----------
    *    10.32  --         Second Amendment to Amended and Restated Credit
                           Agreement between The Houston Exploration Company and
                           Chase Bank of Texas, National Association dated
                           October 6, 1999.

    *    27.1   --         Financial Data Schedule.





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

*        Filed herewith.