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Securities and Exchange Commission
Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2002

OR

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

Commission File Number: 1–8094

Ocean Energy, Inc.
(Exact name of registrant as specified in its charter)

             Delaware                      74–1764876
(State or other jurisdiction of              (I.R.S. Employer
incorporation or organization)            Identification No.)

1001 Fannin, Suite 1600, Houston, Texas 77002-6794
(Address of principal executive offices)                        (Zip code)

(713) 265-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

                                                          Name of each exchange on
   Title of each class                 which registered
Common Stock, par value $.10 per share      New York Stock Exchange
      Preferred Stock Purchase Rights            New York Stock Exchange

        Securities registered pursuant to Section 12(g) of the Act:
None

     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 [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S–K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10–K or any amendment to this Form 10–K. [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b–2 of the Act). Yes [X] No [ ]

     As of June 28, 2002, approximately 175,818,834 shares of Common Stock, par value $0.10 per share, were outstanding and the aggregate market value of the outstanding shares of Common Stock of the Company held by non–affiliates (based on the closing price of these shares on the New York Stock Exchange) was approximately $3.8 billion. For purposes of determining the above amount, all directors and executive officers are considered affiliates.

     As of February 28, 2003, approximately 177,690,917 shares of Common Stock, par value $0.10 per share, were outstanding and the aggregate market value of the outstanding shares of Common Stock of the Company held by non–affiliates (based on the closing price of these shares on the New York Stock Exchange) was approximately $3.5 billion. For purposes of determining the above amount, all directors and executive officers are considered affiliates.

Documents Incorporated by Reference
The information required by Part III of Form 10–K will be incorporated by reference to the Company’s definitive proxy statement for its annual meeting of stockholders in 2003. To the extent that such proxy statement is not filed within 120 days of the Company’s fiscal year end, the Company will file an amendment to this Form 10–K to include such information.

Ocean Energy, Inc.

Index

(i)

Ocean Energy, Inc.

Part I

Item 1.   Business

     Ocean Energy, Inc. (the “Company,” “OEI” or “Ocean”) is one of the largest independent oil and gas exploration and production companies in the United States. The Company conducts North American operations in the shelf and deepwater areas of the Gulf of Mexico, the Rocky Mountains, Permian Basin, Anadarko, East Texas, North Louisiana and the Gulf Coast regions. Internationally, Ocean holds a leading position among U.S. independents in West Africa with oil and gas activities in Equatorial Guinea, Angola, Nigeria and Côte d’Ivoire. The Company also conducts operations in Egypt, the Russian Republic of Tatarstan, Brazil and Indonesia.

Recent Developments

     On February 23, 2003, Ocean and Devon Energy Corporation (“Devon”) entered into an Agreement and Plan of Merger that provides for the merger of Ocean into a subsidiary of Devon. In connection with the merger, which is anticipated to close mid–year 2003, Ocean stockholders will receive 0.414 share of common stock of Devon for each share of Ocean common stock they own. After the merger, the stockholders of Ocean are expected to own approximately 32% of the outstanding common stock of the combined company. The merger is expected to qualify as a tax–free transaction with no gain or loss recognized for U.S. Federal income tax purposes by the Ocean stockholders upon receipt of Devon common stock in exchange for shares of Ocean common stock. The merger is subject to approval by the stockholders of each Company and certain other customary closing conditions, including regulatory review under the Hart–Scott–Rodino Antitrust Improvements Act of 1976. The agreement between the companies contains reciprocal provisions for the payment of break–up fees under certain termination events.

     We believe the combination of Ocean and Devon will yield operational and financial benefits:

• Devon’s stable, gas–focused North American assets will be complemented by Ocean’s high–potential international and deepwater development and exploration projects.
• The transaction creates an entity with a stronger balance sheet and greater financial flexibility, allowing for acceleration of key exploration opportunities.
• The companies expect general and administrative cost savings of at least $50 million annually.
• Devon and Ocean have significant core area overlap that will provide operational synergies.

     The combination of Ocean and Devon will create the largest U.S.–based independent oil and natural gas producer with production of approximately 650,000 BOE per day, and upon completion of the merger, the combined company will have an estimated enterprise value of approximately $20 billion. After the merger the combined company will, based on information as of December 31, 2002:

• Produce approximately 2.4 billion cubic feet of natural gas and approximately 250,000 barrels of oil and natural gas liquids per day.
• Have approximately 2.2 billion BOE proved reserves, with 84 percent in North America.
• Have 90 percent of its worldwide production from North America, of which 69 percent will be natural gas.
• Have long–term debt of approximately 52 percent of total capitalization.

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Ocean Energy, Inc.

• Hold approximately 29 million net undeveloped acres worldwide.
• Be the largest independent deepwater Gulf leaseholder, with interests in more than 500 deepwater Gulf of Mexico blocks.

General

     Ocean has developed a strong position among U.S. independent oil and gas exploration and production companies in the deep waters off the coasts of the Gulf of Mexico, Brazil and West Africa. The Company has assumed an operator position as controlling partner on selected properties in each of these deepwater areas. During 2002, Ocean increased its deepwater net acreage position in the Gulf of Mexico and expanded its international operations by adding new blocks in Angola, Nigeria and Egypt.

     In 2002, the Company reduced its capital expenditure budget approximately 30% from the prior year in response to the lower commodity price environment that existed at the beginning of the year. With a reduced capital expenditure budget, a greater portion of the budget was used to fund deepwater development projects resulting from three prior years of exploratory success, and exploration and acquisition spending were reduced.

     The reduction in capital spending negatively impacted the Company’s reserve replacement rate and finding and development costs for 2002. The 2002 reserve replacement rate was 111% as compared to 387% for 2001, and 2002 finding and development cost was $12.11 per BOE as compared to $5.52 for 2001. Companies involved in exploration activities can have highly variable results from year to year. Our three–year averages include a reserve replacement rate of 254%, and a three–year average finding and development cost of $6.12 per BOE. During 2003, the Company expects to return to the exploration emphasis it had in 2001.

     Ocean’s total estimated proved reserves declined 1% to 593 MMBOE as of December 31, 2002 from 601 MMBOE at year–end 2001. Reserves were negatively affected by the impact of higher commodity prices on foreign production sharing contracts and the sales of assets. These reductions in reserves were partially offset by the impact of higher commodity prices on reserves not held under foreign production sharing contracts. Proved natural gas reserves, which comprise 50% of total proved reserves, reached 1.8 trillion cubic feet and oil reserves totaled 297 million barrels. Of these total proved reserves, 66% are located in North America and 34% are located internationally.

     Despite shut–ins caused by two hurricanes in the Gulf of Mexico and installation delays on deepwater Gulf of Mexico projects, the Company achieved a 3% year–over–year production increase and a 9% fourth quarter increase over the same period in 2001. Production averaged 153 MBOE per day for 2002 as compared to 149 MBOE per day for 2001. Higher production volumes were primarily attributable to new deepwater production from the Nansen/Boomvang complex and continued exploitation in the Zafiro field in Equatorial Guinea.

     Ocean is focused on financial discipline and a balanced property base. The Company’s assets combine revenue–generating international, domestic onshore and shelf properties as well as high–potential deepwater Gulf of Mexico and international exploratory prospects. The Company remains committed to producing low–cost energy, enhancing stockholder value, maintaining its focus on operating efficiency, and continuing to strengthen its capital structure.

     The Company’s internet address is www.oceanenergy.com. The Company makes available free

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Ocean Energy, Inc.

of charge on or through its internet website its annual reports on Form 10–K, quarterly reports on Form 10–Q, current reports on Form 8–K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission (the “Commission”).

Oil and Gas Operations

     The Company’s activities are focused primarily in three operating areas: (i) the continental shelf and deepwater areas of the Gulf of Mexico, (ii) onshore areas of North America, and (iii) internationally in Equatorial Guinea, Angola, Nigeria, Côte d’Ivoire, Egypt, the Russian Republic of Tatarstan, Brazil and Indonesia.

     The Company’s capital investment program for 2003 is expected to total approximately $1 billion. The spending will be funded from the Company’s discretionary cash flow based on anticipated commodity prices and is subject to change if market conditions shift or new opportunities are identified. Of the budget, $500 million to $550 million will be spent in the Gulf of Mexico region, $300 million to $400 million will be spent internationally, and $100 million to $150 million will be spent in the U.S. onshore region. Approximately one–third of the budget is allocated to exploratory projects.

     Ocean’s principal oil and gas producing areas include the following:

     For additional information relating to the Company’s oil and gas reserves, see Note 20 to the Consolidated Financial Statements. As required, Ocean also files estimates of oil and gas reserve data with various governmental regulatory authorities and agencies. These estimates were not materially different from the reserve estimates reported in the Consolidated Financial Statements.

DOMESTIC

     The Company’s domestic activities reside in two main areas: the Gulf of Mexico and certain onshore areas of North America. The domestic area includes 66% of the Company’s reserves and accounted for 64% of total production for the year ended December 31, 2002.

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Ocean Energy, Inc.

Gulf of Mexico

     The Company’s Gulf of Mexico properties are located in offshore waters along the coasts of Texas and Louisiana. For 2002, the Gulf of Mexico area had average daily production of 51 MBOE. This area currently accounts for 33% of Company–wide production and will be the focus of approximately 50% of the Company’s planned capital expenditures in 2003, with 75% of that amount focused on deepwater activities.

     The major growth in this area is associated with Ocean’s deepwater prospects. Ocean now ranks among the top six companies in terms of leasehold in the deepwater Gulf of Mexico with interests in approximately 860,000 net acres covering 361 blocks. The deepwater Gulf of Mexico is characterized by increasing production, multiple development projects and an active exploration program. The Company plans to utilize a hub–and–spoke concept in developing the deepwater Gulf to enhance the economics of producing from deepwater areas. Exploratory efforts are focused on specific regions followed by subsequent development of neighboring discoveries with production from a large, centrally located facility.

     Nansen/Boomvang/Navajo Complex – During 2002, production began from Ocean’s first major deepwater fields in the East Breaks area of the Gulf of Mexico where Ocean made two significant discoveries in 1999. The Nansen and Boomvang production sites feature the world’s first truss spars with a combined daily production capacity of up to 80,000 barrels of oil and 400 million cubic feet of gas. Production began from the Nansen field (50% working interest (“WI”)) in January 2002 and from the Navajo (50% WI) and Boomvang (20% WI) fields in June 2002. Additional discoveries made in the West Navajo field in East Breaks Block 689 (50% WI) and the Northwest Navajo field in East Breaks Block 646 (50% WI) during 2002 are being linked to the nearby Nansen spar via subsea tiebacks. Ocean’s combined net production from the Nansen/Boomvang/Navajo complex was approximately 37,000 BOE per day at December 31, 2002. Completion of dry tree and subsea wells will continue through the first half of 2003.

     Zia Development – The Zia project in Mississippi Canyon Block 496 (65% WI) is the first deepwater development project operated by Ocean. The field will utilize a subsea completion that will flow approximately 16 miles to a platform in South Pass 89. First production is scheduled for late summer 2003.

     Magnolia Development – Ocean is participating in the development of the Magnolia Field (25% WI) in nearly 4,700 feet of water. The deepwater development project is located in Garden Banks blocks 783 and 784. Development drilling is underway, with 2 of 8 platform development wells already drilled, and construction of a tension leg platform has begun. Production is anticipated to begin by year–end 2004.

     Redhawk Development – Two development wells (50% WI) have already been drilled and are waiting on subsea completion. Fabrication of a cell spar has begun and first production is anticipated in 2004.

     Atwater Valley Area – Two discoveries were made in the Atwater Valley area, Merganser in block 36 (50% WI) and Vortex in block 261 (33% WI). Ocean is continuing to evaluate its additional exploration opportunities in the area.

     Trident Prospect – The Trident partnership is currently evaluating Trident in Alaminos Canyon block 943 (13% WI) and offset discoveries in the area to determine overall commerciality.

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Ocean Energy, Inc.

     Deepwater Exploratory Activities – In 2003, Ocean anticipates drilling another six deepwater exploratory prospects. Four of the prospects, Yorktown in Mississippi Canyon Block 841 (50% WI), Shiner in Garden Banks Block 656 (25% WI), Tuscany in Desoto Canyon Block 179 (37.5% WI) and Aztec in Keathley Canyon Block 196 (50% WI) will be Ocean–operated.

     Gulf of Mexico Shelf – Activities in 2002 included a workover and recompletion program designed to maximize production from the area and successful development drilling programs at the Main Pass 69 field (100% WI) and the Eugene Island 126 field (100% WI). The recompletion and workover program will continue during 2003 and the Company plans to engage in exploitation and exploration drilling. The programs are concentrated in the core areas in the Delta and Central Gulf.

North America Onshore

     Ocean’s portfolio of onshore properties in North America is focused primarily in the Rocky Mountains, Permian Basin, Anadarko, East Texas, North Louisiana and the Gulf Coast regions. These properties are located mostly in mature areas where the Company can take advantage of low–cost exploitation to maintain and replace reserves. During 2002, the Company’s share of production from the North America Onshore area averaged 47 MBOE per day.

     Rocky Mountains – The Rocky Mountain area contains the Bear Paw field where Ocean has a large inventory of drilling locations. During 2002, the Company completed a 75–well development drilling program in the Bear Paw Field (96% WI). In 2003, Ocean will continue production and reserve development by expanding its drilling program to 100 wells. The Company plans to implement 3–D seismic for the first time within the Bear Paw producing areas to help identify optimum drilling locations within new fault blocks. The Company obtained a 75% working interest in approximately 60,000 acres in northwest Colorado during 2002 and plans to conduct exploratory activities on this acreage during 2003.

     Permian Basin – The Company’s 2002 activities in the Permian Basin included a successful horizontal drilling and development program in Ward County. The program included the drilling of two 17,000 foot horizontal gas wells, the Harding Fee #2H and the Harding Fee #3H (65% WI), which targeted the Montoya formation. During 2003, the Company will continue horizontal drilling and development activities and plans to drill the first exploratory horizontal well in Midland County. During 2003, the Company also plans to build upon its successful 2002 exploratory efforts in West Texas and New Mexico.

     Anadarko – The Company continues to exploit its extensive acreage position in the Anadarko area. During 2002, the primary focus was in the Strong City and Watonga–Chickasha areas in the Anadarko Basin and the Wilburton area in the Arkoma Basin. For 2003, the Company plans additional development of the Anadarko area, particularly in the Texas Panhandle. Activities will include application to the Company’s undeveloped acreage of new stimulation techniques, which have revitalized sparsely–developed, existing marginal fields.

     East Texas and North Louisiana – Focus areas are the Bossier, Carthage and Stockman Fields in East Texas and the Vernon Ansley and Ruston Field areas in North Louisiana. Development drilling and recompletion activities are ongoing.

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Ocean Energy, Inc.

     Gulf Coast – The primary focus for 2002 was a recompletion/workover program complemented by a continued exploration effort primarily in the Wilcox trend in South Texas. Exploitation activities will continue in 2003 with increased development drilling and a continued active recompletion/workover program. Exploration activities will continue and will include the use of 3–D seismic to identify more exploration leads.

INTERNATIONAL

     The Company produces oil and gas in five countries outside of the United States – Equatorial Guinea, Egypt, Russia, Côte d’Ivoire and Indonesia. In addition, the Company has interests in other countries, including Angola, Brazil and Nigeria. The Company discontinued exploratory activities in the Arabian Sea offshore Pakistan during 2002.

     In Equatorial Guinea, Egypt, Côte d’Ivoire, Angola, and Nigeria, the Company’s acreage is generally held pursuant to production sharing contracts (“PSCs”) with the host governments. Typically, under a PSC the working interest partners pay all of the capital and operating costs and production is split between the government and the working interest partners. Working interest partners recover costs from a percentage of production. The remaining production, after cost recovery, is divided between the government and the working interest partners. Included in the government’s share of remaining petroleum are, in certain situations, the applicable income taxes for the working interest partners.

Equatorial Guinea

     In Equatorial Guinea, the Company has three PSCs covering 1.9 million gross acres. Equatorial Guinea currently includes 20% of the Company’s reserves and accounted for 22% of Company–wide production for 2002. During 2002, the Company’s share of production averaged 33 MBOE per day. Nearly half of the Company’s international budget for 2003 will be spent in Equatorial Guinea on continued development of the Zafiro field.

     Block B – Block B (23.75% WI) covers approximately 547,000 gross acres and contains the Zafiro field, where production currently occurs from two facilities, the Zafiro Producer and the Jade Platform. During 2002, the Company continued development of this area by successfully drilling eight development wells. One of these wells, the JP–6, is the longest extended reach well from the Jade Platform to date, with approximately 13,000 feet of horizontal displacement. A debottlenecking shut down was successfully completed for the Zafiro Producer and the field was returned to full production during third quarter 2002.

     The Company has also been conducting development activities in the Southern Expansion Area (“SEA”) of the Zafiro field. To date, seven development wells have been drilled and suspended pending arrival of the Serpentina, a floating production, storage and offloading vessel (“FPSO”) which will add the capacity needed to begin producing from this area. The SEA Project remains on schedule for startup of the FPSO Serpentina which is anticipated to occur in the second half of 2003.

     Block C – During 2002, the Company conducted exploratory activities on Block C (37.6% WI). An exploratory well failed to discover commercial quantities of reserves and the Company is evaluating the remaining potential for oil in Block C. This block covers approximately 649,000 gross acres.

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Ocean Energy, Inc.

     Block N – In early 2002, the Company entered into a PSC with the government of Equatorial Guinea covering Corisco Bay Block N (25.5% WI), a 678,000 gross acre concession in the Rio Muni Basin offshore the mainland of Equatorial Guinea. Interpretation of final processed 3–D seismic data for Block N is underway and the Company expects to drill an exploratory well in the second half of 2003.

     Block D – During 2002, the Company withdrew from Block D concession after exploratory efforts indicated insufficient quantities of reserves to justify commercial recoverability.

Egypt

     Egypt currently includes 4% of the Company’s reserves and accounted for 6% of Company–wide production for 2002. During 2002, the Company’s share of production averaged 9 MBOE per day.

     The Company’s Egyptian operations consist of working interests in seven concessions covering 3.8 million gross acres. Four of these concessions are producing concessions – East Zeit, Qarun, East Beni Suef and West Abu Gharadig. Ocean also holds an interest in an exploratory block, Southwest Gebel el Zeit in the Gulf of Suez. During 2002, Ocean acquired interests in two additional exploratory blocks, Ras Abu Darag in the Northern Gulf of Suez and North Zeit Bay in the Gulf of Suez.

     East Zeit – The Company is operator of the East Zeit concession (100% WI) which covers 6,672 acres and is located offshore in the Gulf of Suez. During 2002, the Company conducted a workover program and installed jet pump surface equipment to boost production. A second platform is under construction and the Company plans to drill the C-1 well during 2003 to develop the reserves discovered by the A-21 well.

     Qarun – The Qarun concession (25% WI) covers approximately 66,000 gross acres located 45 miles southwest of Cairo, Egypt. During 2002, the Company successfully drilled two development wells.

     East Beni Suef – The East Beni Suef concession (50% WI) covers approximately 3.4 million gross acres lying adjacent and to the south of the Qarun concession. During 2002, the Company drilled the EBS–10 development well and completed it as a producer. The Company is also conducting exploratory drilling on the concession.

     West Abu Gharadig – The West Abu Gharadig concession (30% WI) covers 32,222 gross acres in lower Egypt.

     Southwest Gebel el Zeit – The Southwest Gebel el Zeit concession (43.75% WI) covers 7,413 gross acres located offshore in the Gulf of Suez. The Company assumed operatorship of the block during 2002 and is conducting exploratory activities.

     Ras Abu Darag and North Zeit Bay – The Ras Abu Darag concession (100% WI) covers 229,312 gross acres and the North Zeit Bay concession (100% WI) covers 44,973 gross acres. The Company is in the process of 3–D seismic acquisition for these exploratory blocks.

Côte d’Ivoire

     In Côte d’Ivoire, the Company is the operator on three blocks, Block CI–01 (80% WI), Block CI–02 (65% WI) and Block CI–11 (48% WI) which in total cover approximately 313,000 gross acres. The Company also owns and operates the Lion Gas Plant. During 2002, the Company’s share of production averaged 7 MBOE per day.

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Ocean Energy, Inc.

     During 2002, an attempted coup d’etat occurred in the country. A peace accord between the government of Côte d’Ivoire, the rebels and various political parties has been signed in Paris. The political situation remains uncertain. To date, Ocean has not experienced any disruption in its operations in Côte d’Ivoire but can provide no assurance that future political or economic events affecting Côte d’Ivoire will not adversely affect its operations.

Russia

      The Company has a net 45% interest in a joint venture in Tatarstan, a republic in the Russian Federation. During 2002, the joint venture successfully drilled 29 development wells and 2 exploratory wells in the Onbysk and Demkino fields and plans additional development activity in the Onbysk and Demkino fields during 2003.

     During 2002, the Company’s share of production averaged 5 MBOE per day.

Angola

     Ocean is the only U.S. independent chosen to act as an operator in Angola and currently holds interests in 2.7 million gross acres.

     Block 10 – Ocean acquired an operated interest in Block 10 (35% WI) offshore Angola in early 2002. The Company holds an interest in 1.2 million gross acres in Block 10 and is in the process of conducting 3–D seismic acquisition. The Company plans to drill the first exploratory well on Block 10 during 2003.

     Block 24 – Block 24 (40% WI) is in the Kwanza Basin adjacent to Block 10. Ocean will become operator of this Block following the drilling of the Varina North well which spud in February 2003. The Company anticipates drilling a second exploratory well on Block 24 in late 2003. The Company holds an interest in 1.2 million gross acres in Block 24.

     Block 19 – During 2002, the Company discontinued exploratory activities on Block 19 (20% WI) in the Lower Congo Basin after exploratory efforts indicated insufficient quantities of reserves to justify commercial recoverability.

Brazil

     Ocean holds an interest in two deepwater exploration blocks offshore Brazil. The Company has a 65% working interest in Block BM–C–15, which it operates, and a 20% working interest in Block BM–S–22. The two blocks cover a total of 1.2 million gross acres. The Company is in the process of interpreting 3–D seismic data on Block BM–C–15 in the Campos Basin and plans to drill on this block in late 2003 or early 2004. Drilling activities on Block BM–S–22 are not anticipated to begin until 2004.

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Ocean Energy, Inc.

Nigeria

     In early 2003, the Company finalized a production sharing contract to become operator of OPL Block 256 (95% WI). The 631,000 gross acre block spans approximately 87 miles and is located in water depths of 6,000–9,500 feet. The working program calls for seismic studies and the drilling of three obligatory exploration wells, the first of which is expected to spud in 2004. The Company plans to farm out a portion of its interest in this block.

Indonesia

      Ocean owns a 1.7% interest in a joint venture in East Kalimantan, Indonesia. The majority of the joint venture’s revenues results from the sale of liquefied natural gas.

Production

     The following table summarizes the Company’s production, average sales prices and production–related operating costs for the periods indicated:

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Ocean Energy, Inc.

10

Ocean Energy, Inc.

Oil and Gas Drilling Activities

     Ocean’s oil and gas exploratory and developmental drilling activities are as follows for the periods indicated. A well is considered productive for purposes of the following table if it justifies the installation of permanent equipment for the production of oil or gas. The term “gross wells” means the total number of wells in which Ocean owns an interest, while the term “net wells” means the sum of the fractional working interests Ocean owns in gross wells. The information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled, quantities of reserves found or economic value.

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Ocean Energy, Inc.

     The Company had 36 gross (16 net) exploratory wells and 72 gross (37 net) development wells in progress at December 31, 2002. Wells classified as “in progress” at year–end represent wells where drilling activity is ongoing, wells awaiting installation of permanent equipment and wells awaiting the drilling of additional delineation wells.

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Ocean Energy, Inc.

     The following table sets forth information regarding the number of productive wells in which the Company held a working interest at December 31, 2002. Productive wells are either producing wells or wells capable of commercial production although currently shut–in. One or more completions in the same borehole are counted as one well.

Developed and Undeveloped Oil and Gas Acreage

     As of December 31, 2002, the Company owned working interests in the following developed and undeveloped oil and gas acreage (amounts in thousands):

     Additionally, as of December 31, 2002, the Company owned mineral and/or royalty interests in 185,445 gross (1,750 net) developed acres and 3.4 million gross (39,832 net) undeveloped acres in other international locations.

     For additional information relating to oil and gas producing activities, see Notes 19 and 20 to the Consolidated Financial Statements.

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Ocean Energy, Inc.

U.S. Regulation

     The availability of a ready market for oil and natural gas production depends upon numerous regulatory factors beyond the Company’s control. These factors include regulation of oil and natural gas production, federal and state regulations governing environmental quality and pollution control and state limits on allowable rates of production by a well or proration unit. State and federal regulations generally are intended to prevent waste of oil and natural gas, protect rights to produce oil and natural gas between owners in a common reservoir, control the amount of oil and natural gas produced by assigning allowable rates of production and control contamination of the environment.

     Regulation of Oil and Natural Gas Exploration and Production. Exploration and production operations of the Company are subject to various types of regulation at the federal, state and local levels. Such regulation includes requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled and the plugging and abandonment of wells. The Company’s operations are also subject to various conservation laws and regulations. These include the regulation of the size of drilling and spacing units or proration units and the density of wells which may be drilled and unitization or pooling of oil and gas properties. In this regard, some states allow the forced pooling or integration of tracts to facilitate exploration while other states rely on voluntary pooling of lands and leases. In addition, state conservation laws establish maximum rates of production requirements regarding the ratability of production.

     Federal Regulation of Sales and Transportation of Natural Gas. Historically, the transportation and sale of natural gas in U.S. interstate commerce has been regulated pursuant to several laws enacted by Congress and the regulations promulgated under these laws by the Federal Energy Regulatory Commission ("FERC"). The FERC regulates the transportation and sale for resale of natural gas in interstate commerce pursuant to the Natural Gas Act of 1938, or NGA, and the Natural Gas Policy Act of 1978, or NGPA. Deregulation of wellhead sales in the natural gas industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act. The Decontrol Act removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993.

     Our sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation are subject to extensive federal and state regulation. From 1985 to the present, several major regulatory changes have been implemented by Congress and the FERC that affect the economics of natural gas production, transportation and sales.

     Commencing in April 1992, the FERC issued Order Nos. 636 and subsequent orders in the same proceeding (collectively "Order No. 636"), which require interstate pipelines to provide transportation services separate, or "unbundled," from the pipelines’ sales of gas. Also, Order No. 636 requires pipelines to provide open access transportation on a nondiscriminatory basis that is equal for all natural gas shippers. The courts have largely affirmed the significant features of Order No. 636 and numerous related orders pertaining to the individual pipelines, although the FERC continues to review and modify their open access regulations. These initiatives may affect the intrastate transportation of gas under certain circumstances.

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Ocean Energy, Inc.

     In particular, the FERC is conducting a broad review of their transportation regulations, including how they operate in conjunction with state proposals for retail gas market restructuring, whether to eliminate cost–of–service rates for short–term transportation, whether to allocate all short–term capacity on the basis of competitive auctions, and whether changes to long–term transportation policies may also be appropriate to avoid a market bias toward short–term contracts. In February 2000, the FERC issued Order No. 637 amending certain regulations governing interstate natural gas pipeline companies in response to the development of more competitive markets for natural gas and natural gas transportation. The goal of Order No. 637 is to "fine tune" the open access regulations implemented by Order No. 636 to accommodate subsequent changes in the market. Among other things, Order No. 637 revised FERC pricing policy by waiving price ceilings for short–term released capacity for a two–year period, and effected changes in FERC regulations relating to scheduling procedures, capacity segmentation, pipeline penalties, rights of first refusal and information reporting. The U.S. Court of Appeals for the District of Columbia Circuit recently issued a decision that either upheld or declared premature for review most major aspects of Order No. 637. Order No. 637 required interstate natural gas pipelines to implement the policies mandated by the order through individual compliance filings. The FERC has now ruled on a number of the individual compliance filings, although its decisions in such proceedings remain subject to the outcome of pending rehearing requests and possible court appeals. We cannot predict whether and to what extent FERC’s market reforms will survive judicial review and, if so, whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. We do not believe that we will be affected by any action taken materially differently than other natural gas producers, gatherers and marketers with which we compete.

     The Outer Continental Shelf Lands Act (“OCSLA”) requires that all pipelines operating on or across the Outer Continental Shelf (“OCS”) provide open–access, non–discriminatory transportation service on their systems. Commencing in April 2000, FERC issued Order Nos. 639 and 639–A (collectively, "Order No. 639"), which required “gas service providers” operating on the OCS to make public their rates, terms and conditions of service. The purpose of Order No. 639 was to provide regulators and other interested parties with sufficient information to detect and to remedy discriminatory conduct by such service providers. In a recent decision, the U.S. District Court for the District of Columbia permanently enjoined the FERC from enforcing Order No. 639, on the basis that the FERC did not possess the requisite rule–making authority under the OCSLA for issuing Order No. 639. FERC’s appeal of the court’s decision is pending in the U.S. Court of Appeals for the District of Columbia Circuit. We cannot predict the outcome of this appeal, nor can we predict what further action FERC will take with respect to this matter.

     On September 27, 2001, FERC issued a Notice of Proposed Rulemaking in Docket No. RM01–10. The proposed rules would expand FERC’s current standards of conduct to include a regulated transmission provider and all of its energy affiliates. It is not known whether FERC will issue a final rule in this docket and, if it does, whether the final rule would impact our operations.

     Additional proposals and proceedings that might affect the natural gas industry are pending before Congress, the FERC and the courts. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue.

     Offshore Leasing. U.S. offshore operations the Company conducts are on federal oil and gas leases. Ocean must comply with regulatory restrictions from numerous agencies, including the U.S. Minerals Management Service (“MMS”), U.S. Bureau of Land Management, U.S. Coast Guard and U.S. Environmental Protection Agency. For offshore operations, the Company must obtain regulatory

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Ocean Energy, Inc.

approval for exploration, development and production plans prior to the commencement of such operations. These agencies have stringent engineering and construction specifications, safety–related regulations concerning the design and operating procedures for offshore production platforms and pipelines, regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization, regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities and other rules and regulations governing many phases of offshore operations. To cover the various obligations of lessees, governmental agencies generally require substantial bonds or other acceptable assurances that such obligations will be met.

     The restructuring of oil and gas markets has resulted in a shifting of markets downstream from the wells. Deregulation has altered the marketplace such that lessors, including the MMS, are challenging the methods of valuation of production for royalty purposes. In addition, the MMS is conducting an inquiry into certain contract settlement agreements from which producers on MMS leases have received settlement proceeds that are royalty bearing and the extent to which producers have paid the appropriate royalties on those proceeds.

     The MMS issued a final rule that amended its regulations governing the valuation of crude oil produced from federal leases. This rule, which became effective June 1, 2000, provides that the MMS will collect royalties based on the market value of oil produced from federal leases. The lawfulness of the new rule has been challenged in federal court. We cannot predict whether this new rule will be upheld in federal court, nor can we predict whether the MMS will take further action on this matter. However, we do not believe that this new rule will affect us any differently than other producers and marketers of crude oil.

Competition and Significant Customers

     The Company’s competitors in oil and gas exploration, development and production include major oil companies, as well as numerous independent oil and gas companies, individuals and drilling partnerships. Some of these competitors have financial and personnel resources substantially in excess of those available to the Company and, therefore, the Company may be placed at a competitive disadvantage. The Company’s success in discovering reserves will depend on its ability to select suitable prospects for future exploration in today’s competitive environment. For further discussion of the Company’s customers and markets see Note 2 to the Consolidated Financial Statements.

     Duke Energy Trading & Marketing and affiliates (“DETM”), a wholly–owned subsidiary of Duke Energy Corp., and ExxonMobil Sales and Supply (“EMSS”), a wholly–owned subsidiary of ExxonMobil Corporation, accounted for significant portions of the Company’s total oil and gas production revenues during 2002, 2001 and 2000 as follows:

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Ocean Energy, Inc.

Because a ready market exists for the Company’s oil and gas production, the Company does not believe the loss of any individual customer would have a material adverse effect on its financial position or results of operations.

Environmental Matters

     Ocean’s operations are subject to federal, foreign, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Numerous governmental departments issue rules and regulations to implement and enforce such laws which are often difficult and costly to comply with and which carry substantial penalties for failure to comply. These laws and regulations may require the acquisition of a permit before drilling or production commences, restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit construction or drilling activities on certain lands lying within wilderness, wetlands and other protected areas, restrict the rate of oil and gas production, require remedial actions to prevent pollution from former operations and impose substantial liabilities for pollution resulting from the Company’s operations. In addition, these laws and regulations may impose substantial liabilities and penalties for the Company’s failure to comply with them or for any contamination resulting from the Company’s operations.

     The Company has established policies and procedures for continuing compliance with environmental laws and regulations. However, the Company does not believe costs relating to these laws and regulations have had a material adverse effect on the Company’s operations or financial condition in the past. As these laws and regulations are becoming more stringent and complex, there is no assurance that changes in or additions to laws or regulations regarding the protection of the environment will not have such an impact in the future. The requirements imposed by these laws and regulations are frequently changed and subject to new interpretations. It is likely that the costs of compliance with environmental laws and regulations could increase the cost of operating drilling equipment or significantly limit drilling and operation or production activities.

     The Oil Pollution Act of 1990 (“OPA”) and regulations thereunder impose a variety of regulations on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A “responsible party” includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. The OPA imposes strict, joint and several liability on responsible parties for oil removal costs and a variety of public and private damages, including natural resource damages. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill was caused by gross negligence or willful misconduct or resulted from violation of a federal safety, construction or operating regulation. If the party fails to report a spill or to cooperate fully in the cleanup, liability limits likewise do not apply. Even if applicable, the liability limits for offshore facilities require the responsible party to pay all removal costs, plus up to $75 million in other damages. Few defenses exist to the liability imposed by the OPA. In addition OPA regulations require parties responsible for offshore facilities to provide financial assurance in the amount of $35 million to cover potential OPA liabilities. This amount can be increased up to $150 million in certain limited circumstances. OPA regulations also require the development and implementation of oil spill response plans. The Company believes it is in substantial compliance with OPA requirements.

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Ocean Energy, Inc.

Risk Factors

     In addition to the other information in this document, investors in our common stock should consider carefully the following risks.

     Ocean’s Pending Merger with Devon. Ocean’s pending merger with Devon, described above under “Business—Recent Developments”, is subject to a number of closing conditions and may not be consummated. The merger agreement requires, among other things, adoption of the merger agreement by Ocean’s stockholders and approval by Devon’s stockholders of the issuance of shares of Devon common stock to Ocean’s stockholders pursuant to the merger agreement. The merger agreement also requires termination or expiration of the waiting period under the Hart–Scott–Rodino Antitrust Improvements Act of 1976.

     Even if the merger is consummated, Ocean stockholders may not realize the anticipated benefits expected to result from the combination. To be successful following the merger, management of the combined company will need to combine and integrate the operations of Ocean and Devon into one company. Because of the size, complexity and diverse asset base of each company, integration will be a difficult process that will require substantial management attention that could detract attention from the day–to–day business of the combined company. If Ocean and Devon cannot be integrated successfully, some of the expected benefits of the merger, including expected cost savings, may not be realized. Moreover, any difficulties associated with the transition and integration process could have an adverse effect on the revenue, level of expenses and operating results of the combined company. In addition, the combined company may not realize the accretion to various financial measurements that Ocean expects to result from the merger. Finally, the combined company’s debt level is expected to be significant and will be higher than Ocean’s debt level on a stand–alone basis.

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Ocean Energy, Inc.

     Dependence on Oil and Gas Prices. Ocean’s success will depend on the market prices of oil and gas. These market prices tend to fluctuate significantly in response to factors beyond the Company’s control. The prices the Company receives for its crude oil production are based on global market conditions. The continued threat of war in the Middle East, the continuing economic crisis in Venezuela (a major oil exporter), and actions of OPEC and its maintenance of production constraints, as well as other economic, political, and environmental factors will continue to affect world supply. Natural gas prices fluctuate significantly in response to numerous factors including the U.S. economic environment, North American weather patterns, other factors affecting demand such as substitute fuels, the impact of drilling levels on natural gas supply, and the environmental and access issues that limit future drilling activities for the industry.

     The year 2002 began with lower commodity prices as a result of the global economic downturn and decreases in demand. During 2002, crude oil prices increased due to a combination of factors including fears of war in Iraq (and the resulting impact on the Middle East), Venezuelan strikes that reduced oil exports, and continued OPEC production discipline. Natural gas prices also increased throughout 2002 as U.S. productive capacity declined and as demand increased in the fourth quarter with below–normal temperatures. Commodity prices ended the year at their highest levels and have remained strong in 2003. The Company expects that commodity prices will continue to fluctuate significantly in the future.

     Changes in commodity prices significantly affect the Company’s capital resources, liquidity and expected operating results. Price changes directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in non–cash charges to earnings due to a ceiling test writedown under the full cost method of accounting which the Company uses to account for its exploration and development activities. The Company uses derivative financial instruments to hedge its exposure to price risk from changing commodity prices and the Company has hedged a substantial portion of its anticipated production for 2003.

     Significant Capital Requirements. Ocean must make a substantial amount of capital expenditures for the acquisition, exploration and development of oil and gas reserves. Historically, we have paid for these expenditures with cash from operating activities, proceeds from debt and equity financings and asset sales. Ocean’s revenues or cash flows could be reduced because of lower oil and gas prices or for other reasons. If Ocean’s revenues or cash flows decrease, we may not have the funds available to replace our reserves or to maintain production at current levels. If this occurs, our production will decline over time. Other sources of financing may not be available if Ocean’s cash flows from operations are not sufficient to fund its capital expenditure requirements. Where Ocean is not the majority owner or operator of an oil and gas project, it may have no control over the timing or amount of capital expenditures associated with the particular project. If Ocean cannot fund its capital expenditures, its interests in some projects may be reduced or forfeited.

     Our Oil and Gas Reserve Information Is Estimated. The proved oil and gas reserve information included in this document represents estimates. These estimates are based primarily on reports prepared by internal reserve engineers and were calculated using oil and gas prices as of December 31, 2002. These prices could change. An independent petroleum engineering firm annually reviews at least 80% of the Company’s estimates of proved reserves. Petroleum engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact manner. Estimates of economically recoverable oil and gas reserves and of future net cash flows necessarily depend upon a number of variable factors and assumptions, including:

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Ocean Energy, Inc.

• historical production from the area compared with production from other similar producing areas;
• the assumed effects of regulations by governmental agencies;
• assumptions concerning future oil and gas prices; and
• assumptions concerning future operating costs, severance and excise taxes, development costs and workover and remedial costs.

     Because all reserve estimates are to some degree subjective, each of the following items may differ materially from those assumed in estimating reserves:

• the quantities of oil and gas that are ultimately recovered;
• the production and operating costs incurred;
• the amount and timing of future development expenditures; and
• future oil and gas sales prices.

     Furthermore, different reserve engineers may make different estimates of reserves and cash flows based on the same available data. Ocean’s actual production, revenues and expenditures with respect to reserves will likely be different from estimates and the differences may be material. The discounted future net cash flows included in this document should not be considered as the current market value of the estimated oil and gas reserves attributable to Ocean’s properties. As required by the SEC, the estimated discounted future net cash flows from proved reserves are generally based on prices and costs as of the date of the estimate, while actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by factors such as:

• the amount and timing of actual production;
• supply and demand for oil and gas;
• increases or decreases in consumption; and
• changes in governmental regulations or taxation.

     In addition, the 10% discount factor, which is required by the SEC to be used to calculate discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and gas industry in general.

     Ocean Operates in Foreign Countries and Will Be Subject to Political, Economic and Other Uncertainties. Ocean conducts significant operations in foreign countries including Equatorial Guinea, Côte d’Ivoire and Egypt. As of December 31, 2002, 34% of the Company’s reserves were located in foreign countries. Ocean may also expand its foreign operations in the future. Operations in foreign countries are subject to political, economic and other uncertainties, including:

• the risk of war, acts of terrorism, revolution, border disputes, expropriation, renegotiation or modification of existing contracts, import, export and transportation regulations and tariffs;

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Ocean Energy, Inc.

• taxation policies, including royalty and tax increases and retroactive tax claims;
• exchange controls, currency fluctuations and other uncertainties arising out of foreign government sovereignty over Ocean's international operations;
• laws and policies of the U.S. affecting foreign trade, taxation and investment; and
• the possibility of having to be subject to the exclusive jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States.

     Foreign countries have occasionally asserted rights to land, including oil and gas properties, through border disputes. If a country claims superior rights to oil and gas leases or concessions granted to Ocean by another country, Ocean’s interests could be lost or decreased in value. Various regions of the world have a history of political and economic instability. This instability could result in new governments or the adoption of new policies that might assume a substantially more hostile attitude toward foreign investment. In an extreme case, such a change could result in termination of contract rights and expropriation of foreign–owned assets. This could adversely affect Ocean’s interests. The Company seeks to manage these risks by, among other things, concentrating its international exploration efforts in areas where the Company believes that the existing government is favorably disposed towards United States exploration and production companies. The Company maintains insurance against certain political uncertainties. However, the occurrence of an event that is not fully covered by insurance could have a material adverse effect on the financial position and results of operations of Ocean.

     Oil and Gas Operations Involve Substantial Costs and Are Subject to Various Economic Risks. The oil and gas operations of Ocean are subject to the economic risks typically associated with exploration, development and production activities, including the necessity of significant expenditures to locate and acquire properties and to drill exploratory wells. In conducting exploration and development activities, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause Ocean’s exploration, development and production activities to be unsuccessful. This could result in a total loss of Ocean’s investment in a particular property. If exploration efforts in a country are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs would be charged against earnings as impairments. In addition, the cost and timing of drilling, completing and operating wells is often uncertain.

     Drilling Oil and Gas Wells Could Involve Blowouts, Environmental Hazards and Other Risks. The nature of the oil and gas business involves certain operating hazards such as well blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, formations with abnormal pressures, pollution, releases of toxic gas and other environmental hazards and risks. Any of these operating hazards could result in substantial losses to Ocean. In addition, Ocean may be liable for environmental damages associated with Ocean’s historical activities at sites no longer owned or operated by Ocean, and third-party activities at sites currently owned or operated by Ocean. As a result, substantial liabilities to third parties or governmental entities may be incurred. The payment of these amounts could reduce or eliminate the funds available for exploration, development or acquisitions. These reductions in funds could result in a loss of Ocean’s properties. Additionally, some of Ocean’s oil and gas operations are located in areas that are subject to tropical weather disturbances. Some of these disturbances can be severe enough to cause substantial damage to facilities and possibly interrupt production. In accordance with customary industry practices, Ocean maintains insurance against some, but not all, of such risks and losses. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on the financial position and results of operations of Ocean.

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Ocean Energy, Inc.

     Competition Within the Oil and Gas Industry is Intense. The exploration and production business is highly competitive. Many of Ocean’s competitors have substantially larger financial resources, staffs and facilities than Ocean. These competitors include other independent oil and gas producers such as Anadarko Petroleum Corporation, Apache Corporation, Burlington Resources Inc., Devon Energy Corporation, EOG Resources, Inc., Kerr–McGee Corporation, Noble Energy, Inc., Pioneer Natural Resources Company, and Unocal Corporation as well as major oil and gas companies such as ExxonMobil Corporation, ChevronTexaco Corporation, Shell Oil Company and BP Corporation.

     Government Agencies Can Increase Costs and Can Terminate or Suspend Operations. Ocean’s business is subject to foreign, federal, state and local laws and regulations relating to the exploration for, and the development, production and transportation of, oil and gas, as well as environmental and safety matters. Many of these laws and regulations have become stricter in recent years. These laws and regulations often impose greater liability on a larger number of potentially responsible parties. Under some circumstances, the U.S. Minerals Management Service may require the operations of Ocean on federal leases to be suspended or terminated. These circumstances include Ocean’s failure to pay royalties, Ocean’s failure to comply with safety and environmental regulations and the MMS’ reaction to political pressure to limit offshore drilling in environmentally sensitive areas. This could have a material adverse effect on Ocean’s financial condition and operations. The requirements imposed by these laws and regulations are frequently changed and subject to new interpretations. It is likely that the costs of compliance could increase the cost of operating offshore drilling equipment or significantly limit drilling activity.

     Terrorist Attacks or Similar Hostilities May Adversely Impact Our Results of Operations. The impact that future terrorist attacks or regional hostilities (particularly in the Middle East) may have on the energy industry in general, and on us in particular, is not known at the time. Uncertainty surrounding military strikes or a sustained military campaign may affect our operations in unpredictable ways, including disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, processing plants and refineries, could be direct targets of, or indirect casualties of, an act of terror or war. Moreover, we have incurred additional costs since the terrorist attacks of September 11, 2001 to safeguard certain of our assets and we may be required to incur significant additional costs in the future.

     The terrorist attacks on September 11, 2001 and the changes in the insurance markets attributable to such attacks have made certain types of insurance more difficult for us to obtain. There can be no assurance that insurance will be available to us without significant additional costs. A lower level of economic activity could also result in a decline in energy consumption which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of terrorism or war could also affect our ability to raise capital.

Employees

     As of February 28, 2003, the Company had approximately 948 employees. In addition to the services of its full time employees, the Company contracts, as needed, the services of consulting geologists, engineers, regulatory consultants, contract pumpers and certain other temporary employees. Except for local national employees in Côte d’Ivoire, none of the Company’s employees are represented by a labor union. The Company considers its relations with its employees to be satisfactory.

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Ocean Energy, Inc.

Executive Officers of the Company

     The executive officers of the Company, each of who has been elected to serve until his successor is elected and qualified, are as follows:

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Ocean Energy, Inc.

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Ocean Energy, Inc.

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Ocean Energy, Inc.

Defined Terms

     Oil, condensate and natural gas liquids (“NGL”) are stated in barrels (“Bbl”) or thousand barrels (“MBbl”). Natural gas is stated herein in billion cubic feet (“Bcf”), million cubic feet (“MMcf”) or thousand cubic feet (“Mcf”). Oil, condensate and NGL are converted to gas at a ratio of one barrel of liquids per six Mcf of gas. MMBOE, MBOE and BOE represent one million barrels, one thousand barrels and one barrel of oil equivalent, respectively, with six Mcf of gas converted to one barrel of liquid. “MMBtu” represents one million British Thermal Units. Bcfe represents one billion cubic feet of gas equivalent. “Net” acres, production or wells refers to the total acres, production or wells in which the Company has a working interest, multiplied by the percentage working interest owned by the Company.

Item 2.   Properties

     Incorporated herein by reference to Item 1 of this Annual Report on Form 10–K.

Item 3.   Legal Proceedings

     The Company is a named defendant in lawsuits and is a party in governmental proceedings from time to time arising in the ordinary course of business. While the outcome of such lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position or results of operations of the Company.

     A lawsuit captioned Breakwater Partners, LP v. James T. Hackett, et. al. (Case No. 2003–10161) was filed on February 27, 2003 in the District Court of Harris County, Texas, naming as defendants Ocean and all of the members of Ocean’s board of directors. The complaint generally alleges that:

• the 0.414 exchange ratio is inadequate and unfair to Ocean common stockholders; and
• the defendants breached their fiduciary duties to Ocean stockholders, including the duty of care and the duty of loyalty, or aided and abetted in the breach of those fiduciary duties, by, among other things, (1) failing to conduct a “full and fair auction process or active market check;” (2) agreeing to the terms of the merger agreement, including a non-solicitation provision and the termination fee that is payable by Ocean to Devon under certain circumstances; (3) failing to make an informed decision; (4) failing to ensure that conflicts of interest are resolved in the best interests of Ocean’s public stockholders; (5) personally benefiting from the merger; and (6) not appointing “any truly independent person or entity” to negotiate on behalf of Ocean stockholders.

The complaint seeks class action status. It also seeks (1) injunctive relief against completing the merger or, if the merger is completed, rescission of the merger; (2) monetary damages in an unspecified amount; and (3) recovery of the plaintiff’s costs and attorneys’ fees. Ocean believes that the lawsuit is without merit and intends to defend against it vigorously. We can provide no assurance that additional claims may not be made or filed the substance of which is similar to the allegations described above or that otherwise might arise from, or in connection with, the merger agreement and related transactions. See Note 18 to the Company’s Consolidated Financial Statements.

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Ocean Energy, Inc.

Item 4.   Submission of Matters to a Vote of Security Holders

     None during the fourth quarter of 2002.

Part II

Item 5.   Market for Registrant’s Common Stock and Related Stockholder Matters

     D.      Equity Compensation Plans

            The table below provides information relating to the Company’s equity compensation plans as of December 31, 2002:

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Ocean Energy, Inc.

Item 6.   Selected Financial Data

Selected Financial Data⁽¹⁾
(Amounts in Thousands Except Per Share Data)

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Ocean Energy, Inc.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Ocean Energy, Inc. (the “Company,” “OEI” or “Ocean”) is an independent energy company engaged in the exploration, development, production and acquisition of crude oil and natural gas. North American operations are focused in the shelf and deepwater areas of the Gulf of Mexico, the Rocky Mountains, Permian Basin, Anadarko, East Texas, North Louisiana and the Gulf Coast regions. Internationally, Ocean holds a leading position among U.S. independents in West Africa with oil and gas activities in Equatorial Guinea, Angola, Nigeria and Côte d’Ivoire. The Company also conducts operations in Egypt, the Russian Republic of Tatarstan, Brazil and Indonesia.

     On February 23, 2003, Ocean entered into an Agreement and Plan of Merger under the terms of which Ocean would merge into a subsidiary of Devon Energy Corporation ("Devon"). Under the terms of the agreement, Ocean stockholders will receive 0.414 share of Devon common stock for each Ocean common share. The proposed merger is subject to approval by the stockholders of each company as well as other customary closing conditions and is expected to be completed mid–year 2003. The discussions included in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Item 7.a Quantitative and Qualitative Disclosures About Market Risks do not reflect the effect the proposed merger would have on Ocean.

     The Company’s accompanying Consolidated Financial Statements contain detailed information that should be referred to in conjunction with the following discussion.

Corporate Governance

     Ocean supports the recent initiatives by the United States Congress, the Securities and Exchange Commission and the New York Stock Exchange to restore investor confidence and to ensure the credibility and transparency of financial reporting. Ocean has been built on a culture where integrity is the first and most important value, and this value has long been a part of the Company’s corporate values. Ocean has endeavored to maintain best practices in the area of corporate governance including having an independent majority of the Board of Directors, with only independent members serving on the Audit, Governance and Nominating and Organization and Compensation committees; board governance guidelines and charters for all committees; a business conduct policy; independent auditors; and an internal audit function.

     Recently the Company has enhanced its corporate governance by adopting a new Code of Business Conduct and Ethics that includes adopting a new Code of Ethics for Senior Financial Officers; adopting new Corporate Governance Guidelines; amending and restating its committee charters for the Audit, the Governance and Nominating and the Compensation and Benefits Committees of the Board of Directors, forming a Disclosure Committee of senior management to assist the Company’s certifying officers in fulfilling their responsibility for oversight of the accuracy and timeliness of the disclosures made by the Company. The Company has also taken steps to ensure that the Company’s independent auditors do not perform prohibited non–audit services and, therefore, are able to maintain their independence.

     The Board of Directors has also adopted a standard of independence and evaluated each director in light of this standard. The Board has concluded that it has three non–independent directors and ten independent directors. The Company will continue to have solely independent directors on each of its Audit Committee, Governance and Nominating Committee and Organization and Compensation

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Ocean Energy, Inc.

Committees. The Board’s non–management directors will regularly meet in executive session. The Company will continue to enhance its governance practices as new ideas and best practices emerge.

Results of Operations

     In 2002, the Company reduced its capital expenditure budget as a result of the lower commodity price environment that existed at the beginning of the year. Company plans were to fund development commitments generated by earlier exploration successes while maintaining balance sheet strength. The Company was successful in this regard. At the same time, reduced capital spending, lower commodity prices, adverse weather and installation delays in the Gulf of Mexico led to some mixed operating results. Production growth was lower than expected at the start of 2002. Reserve replacement and the current year finding and development cost were below the Company’s targets. With rising commodity prices and new production, the Company ended 2002 with a strong fourth quarter.

     The Company reached a milestone in its deepwater strategy with the installation and start up of its first Gulf of Mexico deepwater development in the Nansen and Boomvang fields. There was further exploitation success in the Zafiro field in Equatorial Guinea and the Company continued to expand its exploration activities in the deepwater Gulf of Mexico region, West Africa and other international locations.

     Results for 2002 can be summarized as follows:

• 3% year–over–year and 9% fourth quarter over prior–year quarter production increase
• refinanced fixed–rate debt to achieve lower cost of capital
• maintenance of 48% debt to total capitalization ratio
• 34% reduction in capital expenditures to accommodate lower commodity prices
• 111% reserve replacement rate
• $12.11 per BOE finding and development cost.

     The Company reported net income of $135 million, or $0.74 per diluted share for 2002 compared to net income of $274 million, or $1.53 per diluted share for 2001. For fourth quarter 2002, the Company reported net income of $67 million, or $0.37 per diluted share, as compared to $21 million, or $0.12 per diluted share, for fourth quarter 2001.

     Two special items affected this year’s results. First, the Company announced that it would discontinue exploratory activities in the Arabian Sea offshore Pakistan and on Block 19 in the Lower Congo Basin offshore Angola. As a result, the Company recognized an impairment in the amount of $76 million ($50 million, after tax). Second, the Company repurchased $202 million of fixed–rate debt, resulting in a loss on the early extinguishment of debt of $12 million ($8 million, after tax).

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Ocean Energy, Inc.

Oil and Gas Operations
(Amounts in Thousands)

     Revenues – Ocean operates in highly competitive markets where energy prices fluctuate significantly. As oil and gas prices fluctuate, so do the Company’s revenues, results of operations and cash flows. The year began with lower commodity prices as a result of the global economic downturn and decreases in demand. These conditions were only partially offset by OPEC’s supply constraints. During 2002, crude oil prices increased due to a combination of factors including fears of war in Iraq, Venezuelan strikes that reduced oil exports and continued OPEC production discipline. Natural gas prices rose throughout 2002 as U.S. productive capacity declined. Demand for natural gas increased in the fourth quarter with below–normal temperatures. Commodity prices ended the year at their highest levels and have remained strong in 2003. High oil prices also support natural gas prices by not competing as effectively as a substitute fuel source.

     Oil Revenues – For 2002, revenues from sales of crude oil totaled $662 million, an increase of $106 million, or 19%, compared to revenues of $556 million for 2001. The change in revenues included:

• An increase in revenues of $26 million due to a 4% increase in the average realized price for crude oil, excluding the impact of financial derivatives, to $22.32 per Bbl for 2002 from $21.48 per Bbl for 2001.
• An increase in revenues of $55 million due to a 9% increase in production. Average daily oil production was 82 MBbl per day for 2002 as compared to 75 MBbl per day for 2001. Higher production volumes were primarily attributable to new deepwater production in the Gulf of Mexico and continued success with Zafiro field exploitation initiatives in Equatorial Guinea.
• A positive year–over–year net change of $25 million relating to the Company’s use of crude oil derivative financial instruments. The effect of derivative financial instruments on oil revenues was a decrease of $9 million for 2002 as compared to a decrease of $34 million for 2001.

     For 2001, revenues from sales of crude oil totaled $556 million, an increase of $9 million, or 2%, compared to revenues of $547 million for 2000. The change in revenues included:

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Ocean Energy, Inc.

• A decrease in revenues of $111 million due to a 16% decline in the average realized price for crude oil, excluding the impact of financial derivatives, to $21.48 per Bbl for 2001 from $25.51 per Bbl for 2000.
• An increase in revenues of $70 million due to a 10% increase in production. Average daily oil production was 75 MBbl for 2001 as compared to 68 MBbl for 2000. Higher production volumes were primarily attributable to increased exploration and exploitation success from the Gulf of Mexico shelf properties and the Zafiro field in Equatorial Guinea.
• A positive year–over–year net change of $50 million relating to the Company’s use of crude oil derivative financial instruments. The effect of derivative financial instruments on oil revenues was a decrease of $34 million for 2001 as compared to a decrease of $84 million for 2000.

     Oil prices were on a steady upward trend through 2002. The Company expects that future crude oil prices will fluctuate significantly. The continued threat of war in the Middle East, the continuing economic crisis in Venezuela (a major oil exporter), and actions of OPEC and its maintenance of production constraints, as well as other economic, political and environmental factors will continue to affect world supply.

     Gas Revenues – For 2002, revenues from sales of natural gas totaled $500 million, a decrease of $199 million, or 28%, compared to revenues of $699 million for 2001. The change in revenues included:

• A decrease in revenues of $155 million due to a 24% decline in the average realized price for natural gas, excluding the impact of financial derivatives, to $3.19 per Mcf for 2002 from $4.18 per Mcf for 2001.
• A decrease in revenues of $26 million due to a 4% decline in production. Average daily gas production was 426 MMcf for 2002 as compared to 443 MMcf for 2001.
• A negative year–over–year net change of $18 million related to the Company’s use of natural gas derivative financial instruments. The effect of derivative financial instruments on gas revenues was an increase of $5 million for 2002 as compared to an increase of $23 million for 2001.

     For 2001, revenues from sales of natural gas totaled $699 million, an increase of $173 million, or 33%, compared to revenues of $526 million for 2000. The change in revenues included:

• An increase in revenues of $53 million due to a 9% increase in the average realized price for natural gas, excluding the impact of financial derivatives, to $4.18 per Mcf for 2001 compared to $3.85 per Mcf for 2000.
• An increase in revenues of $51 million due to a 9% increase in production. Average daily gas production was 443 MMcf for 2001 as compared to 407 MMcf for 2000. Higher production volumes were primarily attributable to successful results from U.S. drilling activities and acquisitions of producing properties in Texas and Louisiana during 2001.
• A positive year–over–year net change of $69 million relating to the Company’s use of natural gas derivative financial instruments. The effect of derivative financial instruments on gas revenues was an increase of $23 million for 2001 as compared to a decrease of $46 million for 2000.

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Ocean Energy, Inc.

     Natural gas prices fluctuate significantly in response to numerous factors. Since most of Ocean’s gas reserves and production are in the United States, future natural gas prices will be dependent primarily on the U.S. economic environment, North American weather patterns, other factors affecting demand such as substitute fuels, the impact of drilling levels on natural gas supply and the environmental and access issues that limit future drilling activities for the industry.

Operating Data (*)

(*) All price information excludes the impact of financial derivatives, unless otherwise stated.

     Total production for 2002 was 56 MMBOE, a 3% increase over 2001. Average daily production for the full year was 426 MMcf of gas and 82 MBbl of oil, or 153 MBOE per day. For fourth quarter 2002, average daily production was 158 MBOE per day, an increase of 9% over fourth quarter 2001 average daily production of 145 MBOE per day. The Company expects its production to increase during 2003 as a result of increased production from the deepwater Gulf of Mexico and Equatorial Guinea and from Egypt, net of anticipated declines in onshore and Gulf of Mexico shelf areas related to their constrained capital spending in 2002 and asset sales which occurred in late 2002.

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Ocean Energy, Inc.

     Total production for 2001 was 54 MMBOE as compared to 50 MMBOE for 2000. Average daily production for the full year was 443 MMcf of gas and 75 MBbl of oil, or 149 MBOE per day.

     Reclassification of Expenses – The Company expenses employee costs associated with operating and general corporate activities. In prior years, a portion of costs related to certain administrative functions which support the Company’s ongoing operating activities were included in operating expense. During 2002, the Company reclassified costs of certain administrative functions as general and administrative expense. As a result, previous years have been reclassified to conform to current year presentation. While this reclassification had no effect on net income, it did decrease operating expense, and increase general and administrative expense, by $24 million, $20 million and $18 million for the years ended December 31, 2002, 2001 and 2000, respectively.

     Operating Expenses – Total operating expenses increased $25 million, or 9%, to $312 million for 2002 from $287 million for 2001 due to higher transportation expense related to new deepwater Gulf of Mexico production, increased workover and repair expense and higher lease operating expense due to increased production, offset by lower production and ad valorem taxes due to lower natural gas prices.

     Total operating expense per BOE increased 6% to $5.58 per BOE for the year ended December 31, 2002, compared to $5.27 for 2001.

     Total operating expenses increased $48 million, or 20%, to $287 million for the year ended December 31, 2001 from $239 million for 2000 due to increased workover expense; increases in production and ad valorem taxes due to increased production, higher commodity prices and an increase in the production tax rate for the State of Louisiana; and higher lease operating expense due to the 10% increase in production.

     Operating expenses per BOE increased 9% to $5.27 per BOE for the year ended December 31, 2001, compared to $4.83 for 2000.

     Depreciation, Depletion and Amortization Expense – Total depreciation, depletion and amortization (“DD&A”) expense for oil and gas operations increased $14 million, or 4%, to $358 million for 2002 from $344 million for 2001 due to increased production and increased rates from higher estimated future development costs. DD&A expense per BOE related to oil and gas operations increased 1% to $6.39 per BOE for 2002 as compared to $6.33 per BOE for 2001 primarily due to higher estimated future development costs and 2002 finding and development cost of $12.11 per BOE.

     Total DD&A expense for oil and gas operations increased $39 million to $344 million for the year ended December 31, 2001, from $305 million for 2000 primarily due to increased production. DD&A expense per BOE related to oil and gas operations rose 3% to $6.33 per BOE for the year ended December 31, 2001, from $6.15 per BOE for 2000 primarily due to the effects of property acquisitions, higher estimated future development costs and the geographic mix of production.

     Impairment of Oil and Gas Properties – During 2002, the Company announced that it would discontinue current exploratory activities in Pakistan and on Block 19 offshore Angola. As a result, the Company recognized an impairment in the amount of $76 million. During 2000, the Company recognized an impairment in the amount of $20 million related to the discontinuance of exploration activities in the Republic of Yemen. The Company recognized no impairments during 2001 and had no ceiling test limitations in 2002, 2001 or 2000.

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Ocean Energy, Inc.

Corporate

     Corporate expenditures are comprised of general and administrative expenses and the DD&A expense for non–oil and gas assets.

     General and Administrative Expenses – General and administrative expenses increased $13 million, or 25%, to $64 million for the year ended December 31, 2002, compared to $51 million for 2001. This increase was due primarily to increases in insurance cost, occupancy cost, transportation and certain employee-related costs. On a per BOE basis, general and administrative expenses rose to $1.14 per BOE for 2002 from $0.94 per BOE for 2001.

     General and administrative expenses increased $5 million, or 11%, to $51 million for the year ended December 31, 2001, compared to $46 million for 2000. This increase was due primarily to increases in employee–related costs. On a per BOE basis, general and administrative expenses rose to $0.94 per BOE for 2001 from $0.93 per BOE for 2000.

     The Company capitalizes certain employee–related costs that are directly attributable to oil and gas operations. The Company capitalized costs of $61 million, $58 million and $45 million in 2002, 2001 and 2000, respectively. The increases are related to the Company’s expanding activities in deepwater Gulf of Mexico and to new cost centers in Angola and Brazil.

     DD&A – DD&A expense for non–oil and gas assets was approximately $12 million, $6 million and $6 million for the years 2002, 2001 and 2000, respectively. The increase in 2002 was due to an increase in corporate assets.

Other

     Interest Expense – Interest expense decreased $2 million, or 3%, to $61 million for the year ended December 31, 2002, from $63 million in 2001. Interest expense for 2002 was reduced as a result of lower average borrowing rates achieved on the Company’s outstanding debt. Borrowing rates were reduced due to refinancings of fixed–rate debt during 2002 and 2001 and a lower average rate applicable to the Company’s credit facility. In addition, the effect of interest rate swaps relating to the Company’s 7 5/8% and 7 7/8% senior notes was a reduction in interest expense of $7 million in 2002 compared to $3 million in 2001. The interest savings was offset by a $1 million reduction in the amount of interest capitalized ($44 million during 2002 compared to $45 million during 2001) and by an increase in the total debt balance.

     Interest expense decreased $12 million, or 16%, to $63 million for the year ended December 31, 2001, from $75 million in 2000. This decrease was primarily the result of lower average borrowing rates achieved on the Company’s outstanding debt due to a refinancing of fixed–rate debt and to a lower average rate applicable to the Company’s credit facility during 2001. In addition, the interest rate swaps described above reduced interest expense by approximately $3 million in 2001.

35

Ocean Energy, Inc.

     The Company capitalized interest expense of $44 million, $45 million and $44 million in 2002, 2001 and 2000, respectively. The amount of interest expense capitalized is generally a function of the Company’s average interest cost and level of capital expenditures.

     Early Extinguishment of Debt – During 2002, the Company repurchased $175 million of its 8 7/8% senior subordinated notes due July 2007 and $27 million of its 8 3/8% senior subordinated notes due July 2008. In connection with these repurchases, the Company recorded other expense of $12 million and a related tax benefit of $4 million.

     During 2001, the Company retired existing higher interest–rate debt by exercising call provisions for $100 million of its 8 5/8% senior subordinated notes due 2005 and $2 million of its 9 3/4% senior subordinated notes due 2006. The Company also repurchased $22 million of its 8 3/8% senior subordinated notes due July 2008 and $25 million of its 8 7/8% senior subordinated notes due July 2007. The repurchase of these notes was funded with available cash balances and borrowings under the Company’s existing credit facility. In connection with these repurchases, the Company recorded other expense of $6 million and a related tax benefit of $2 million.

     The Company reported losses on early extinguishment of debt as extraordinary items until fourth quarter 2002. During fourth quarter 2002, the Company early adopted certain provisions of Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS No. 145"). With the adoption of SFAS No. 145, the classification of losses associated with extinguishments of debt, that were previously recorded as extraordinary items, were reclassified into other expense with the related tax benefit reclassified into income tax expense.

     Merger and Integration Costs – Merger and integration costs of $3 million associated with the merger of Ocean and Seagull Energy Corporation were recorded in the first quarter of 2000 and related primarily to severance costs.

     Income Tax Expense – Income tax expense of $130 million relating to continuing operations was recognized for the year ended December 31, 2002, compared to expense of $224 million for the year ended December 31, 2001. The effective income tax rate was 49% for 2002 and 45% for 2001. The increase in effective income tax rate for 2002 was primarily due to the effect of the international impairments as the tax benefit resulting from the impairments was calculated at a lower incremental tax rate.

     Income tax expense of $224 million was recognized for the year ended December 31, 2001, compared to expense of $165 million for the year ended December 31, 2000. Total income tax expense increased primarily due to higher revenues and operating profit recognized in 2001. The effective income tax rate was 45% for 2001 and 44% for 2000.

     Dividends – Quarterly stock dividends, which were first declared in December 2000, continued for each quarter of 2002 and 2001. The Company paid cash dividends on common stock totaling approximately $28 million and $27 million during 2002 and 2001, respectively. The amount of future dividends for OEI common stock will be determined on a quarterly basis and will depend on earnings, financial condition, capital requirements and other factors.

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Ocean Energy, Inc.

     Preferred Dividends – The Company pays quarterly dividends on its preferred stock. The preferred stock has a 6.5% cumulative dividend.

Liquidity and Capital Resources

     Liquidity – The Company’s primary sources of liquidity are its cash on hand, cash flows from operations and available borrowing capacity under its credit facility. The Company made significant progress during 2002 in improving liquidity, primarily by expanding its borrowing capacity and reducing costs of capital. Ocean continued to take advantage of the positive interest–rate environment and improve its credit position by repurchasing higher fixed–rate debt and replacing it with lower–cost debt. In addition, a new credit facility, with an extended term, will provide increased flexibility to the Company.

     The Company successfully maintained its balance sheet leverage during 2002. The debt to total capitalization ratio was 48% at December 31, 2002 compared to 47% at December 31, 2001. Although the balance sheet reflects a $160 million increase in debt at year–end 2002 compared to year–end 2001, this increase is partially offset by a $66 million increase in the year–end cash balance.

     New Revolving Credit Facility – During 2002, the Company was able to extend by two years and double the amount of its credit facility. The new credit facility provides for $1 billion in borrowing capacity and has a maturity date of May 2006. The credit facility replaced the Company’s previous $500 million facility which was scheduled to mature in March 2004. As of December 31, 2002, the Company’s outstanding borrowings under the credit facility were zero, and letters of credit totaled $28 million, leaving $972 million of available borrowing capacity under the Company’s credit facility. The Company’s obligations under the credit facility are unsecured and guaranteed by Ocean Energy, Inc., a Louisiana corporation. The credit facility bears interest, at the Company’s option, at LIBOR or prime rates plus applicable margins ranging from zero to 1.7% or at a competitive bid. The average interest rate on the facilities was 3% during 2002.

     Debt Issuances and Repurchases – The Company took advantage of current low interest rates to refinance a significant portion of its debt during 2002 by issuing $400 million of 4 3/8% senior notes due October 2007. The proceeds were used to repay amounts outstanding under the credit facility which included balances used to retire debt earlier in the year when the Company exercised call provisions for $175 million of its 8 7/8% senior subordinated notes due July 2007. In addition, the Company purchased $27 million of its 8 3/8% senior subordinated notes due July 2008. The 4 3/8% notes are redeemable at any time at the Company’s option and, upon certain changes in control, the notes would be subject to a mandatory repurchase offer.

     During 2001, the Company issued $350 million of 7 1/4% senior notes due October 2011. A portion of the proceeds was used to repay amounts outstanding under the Company’s credit facility, and the remainder of the proceeds was used to retire existing higher interest rate debt by exercising call provisions for $100 million of 8 5/8% senior subordinated notes due 2005 and $2 million of 9 3/4% senior subordinated notes due 2006. Also during 2001, the Company repurchased on the open market $22 million of its 8 3/8% senior subordinated notes due July 2008 and $25 million of its 8 7/8% senior subordinated notes due July 2007. The repurchase of these notes was funded with available cash balances and borrowings under the Company’s existing credit facility. The 7 1/4% notes are redeemable at any time at the Company’s option and, upon certain changes in control, the notes would be subject to a mandatory repurchase option.

37

Ocean Energy, Inc.

     The Company’s 7 7/8% senior notes, in the amount of $100 million, are due in August 2003. The Company has established the necessary credit capacity, through its credit facility, to refinance the 7 7/8% senior notes and it is the Company’s current intention to refinance these obligations on a long–term basis. The Company’s 8 3/8% senior subordinated notes due July 2008 are redeemable at a premium beginning in July 2003. The Company may choose to call these notes if market conditions warrant.

     Asset Sales – During 2002, the Company closed the sale of selected royalty, overriding royalty and mineral interests in various locations throughout the United States and two packages of non–core working interests. Total net proceeds from the sales provided additional cash flow of $74 million to the Company. The Company received $64 million in proceeds from the sales of certain non-core properties during 2001.

     Operating Leases – During 2002, the Company leased two spars that are being used in the development of the Nansen and Boomvang fields in the Gulf of Mexico. The operating leases extend for 20 years and contain various options whereby the Company may purchase the lessors’ interests in the spars. Future cash payments under the operating leases total $9 million, $11 million, $15 million, $15 million and $15 million for the years 2003, 2004, 2005, 2006 and 2007, respectively, and $258 million total for all years thereafter. The Company has guaranteed that the spars will have residual values to the lessors at the end of the operating leases equal to at least 10% of the fair market value of the spars at the inception of the leases. The total guaranteed value is $20 million in 2022 for the spars and the amount may be reduced under the terms of the lease agreements.

     Prepaid Commodity Transactions – In 1999 and 2000, the Company entered into two standard prepaid commodity transactions, one for crude oil in 1999 and one for natural gas in 2000. The prepaid crude oil sales contract provides that the Company deliver approximately 5.6 MBbl per day of crude oil for the period February 2000 through May 2003. In exchange for the crude oil to be provided, the Company received an advance payment of approximately $100 million. The prepaid natural gas sales contract is a market–sensitive contract which, as amended, provides that the Company deliver 53,500 MMBtu per day of natural gas for 2003 and 55,600 MMBtu per day for 2004. In exchange for the natural gas to be provided, the Company received an advance payment of approximately $75 million.

     The obligations associated with the future delivery of the crude oil and natural gas have been recorded as deferred revenue in the Company’s accompanying Consolidated Balance Sheets, and the remaining unamortized balance was approximately $87 million as of December 31, 2002. The prepaid proceeds were shown as a component of cash flows from financing activities in the Company’s Consolidated Statements of Cash Flows in the years in which they were received. The prepaid proceeds are being amortized into revenue as scheduled deliveries of crude oil and natural gas are made. This amortization is deducted from net income when computing Net Cash Provided by Operating Activities in the Company’s Consolidated Statements of Cash Flows as scheduled delivery occurs.

38

Ocean Energy, Inc.

     Financing Transaction – During 2000, the Company conveyed certain Internal Revenue Code Section 29 tax credit–bearing properties to a trust for approximately $70 million, which was recorded in other noncurrent liabilities. The trust receives the operating cash flow from the properties until the investor recoups its investment plus a required after–tax rate of return. At December 31, 2002, payout is estimated to occur during second quarter 2009. The transaction is determined to have an embedded derivative financial instrument as described in Note 12 to the Company’s Consolidated Financial Statements.

Capital Expenditures
(Amounts in Thousands)