NEWFIELD EXPLORATION CO /DE/, 10-K405, 1998-02-24

NEWFIELD EXPLORATION CO /DE/
10-K405, 1998-02-24
CRUDE PETROLEUM & NATURAL GAS

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UNITED STATES
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, 1997

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

For the transition period from to

Commission File Number: 1-12534

NEWFIELD EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)

State of incorporation: Delaware I.R.S. Employer
Identification No. 72-1133047

363 N. Sam Houston Parkway E.
Suite 2020
Houston, Texas 77060
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: 281-847-6000

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, New York Stock Exchange
Par Value $0.01 Per Share

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.

[X] Yes [ ] 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 the 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]

The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $412,556,000 as of February 20, 1998 (based
on the last sale price of such stock as quoted on the New York Stock Exchange).

As of February 20, 1998 there were 36,101,977 shares of the
Registrant's Common Stock, par value $0.01 per share, outstanding.

Documents incorporated by reference: 1997 Annual Report to
Stockholders of Newfield Exploration Company, which is incorporated into Part
II of this Form 10-K and Proxy Statement of Newfield Exploration Company for
the Annual Meeting of Stockholders to be held on May 7, 1998, which is
incorporated into Part III of this Form 10-K.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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PART I
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 14

Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 14

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 15

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 16

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

PART III

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . 17

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . 17

Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 17

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . 17
</TABLE>
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PART I

ITEM 1. BUSINESS

OVERVIEW

Newfield Exploration Company ("Newfield" or the "Company") is an
independent oil and gas company engaged in the exploration, development and
acquisition of oil and natural gas properties located primarily in the Gulf of
Mexico. The Company discovered and acquired its first oil and gas reserves in
1990 and has grown rapidly since that time. At December 31, 1997 the Company
had proved reserves of 435.3 Bcfe consisting of 16.3 MMBbls of oil and
condensate and 337.5 billion cubic feet ("Bcf") of natural gas. At such date,
approximately 78% of the Company's proved reserves were natural gas and
approximately 80% were proved developed. Unless otherwise noted, all
information in this Form 10-K relating to oil and gas reserves and the
estimated future net cash flows attributable thereto are based upon estimates
prepared by the Company and are net to the Company's interest. See "Item 2.
Properties - Oil and Gas Reserves." Certain terms relating to the oil and gas
business are defined under the caption "Oil and Gas Terms" at the end of Item
2.

STRATEGY

Newfield's strategy is to continue to expand its reserve base and
increase its cash flow through exploration and the acquisition and exploitation
of proved properties. The Company emphasizes the following elements in
implementing this strategy:

o Reserve growth through exploratory drilling of a balanced portfolio
o Balance between exploration and acquisition and exploitation of
proved properties
o Geographic focus in the Gulf of Mexico
o Control of operations and costs
o Use of 3-D seismic and other advanced technology
o Equity ownership and other incentives to retain and attract
employees

Newfield has utilized a balanced approach of exploration and the
acquisition and exploitation of proved properties to grow its reserves,
production and cash flow. Of the 706 Bcfe of proved reserves Newfield added
through December 31, 1997, 37% were added through exploration, 38% were added
through the acquisition of proved reserves and 25% were added through the
exploitation of opportunities identified and acquired in connection with the
acquisition of proved properties. Newfield's exploration, acquisition and
exploitation activities are complementary. Proved properties acquired by
Newfield usually have exploration or exploitation potential that Newfield has
previously identified. In addition, acquisitions can increase Newfield's
presence in an area, creating the infrastructure to provide Newfield with the
ability to capture other opportunities at a competitive advantage. Information
gathered while evaluating production on acquisition candidates and adjacent
acreage is used, as appropriate, in Newfield's exploration efforts.
Conversely, a successful exploratory prospect may reveal similar untested
reserve potential on an adjacent property, making its purchase attractive.

EXPLORATION ACTIVITIES. The Company maintains an active,
technologically driven, exploration program. During 1997 the Company invested
$66.8 million for exploration costs, including seismic data, leasehold
acquisitions and exploratory drilling. The Company allocates its exploration
spending between a small number of higher risk, higher potential prospects
which, if successful, may result in significant increases in proved reserves,
and a greater number of lower risk, moderate potential prospects. From its
inception through December 31, 1997, the Company participated in 91 exploratory
wells at a cost to drill and evaluate of $150.2 million net to Newfield's
interest. These wells have resulted in the discovery of proved reserves of 6.4
MMBbls of oil and condensate and 223.7 Bcf of natural gas net to Newfield's
interest. All but 17 of these wells were operated by the Company. Fifty-eight
of the wells operated by the Company were drilled under turnkey drilling
contracts, which are fixed rate contracts pursuant to which the drilling
contractor generally bears the risk of loss for unbudgeted contingencies.

Newfield acquires exploration prospects through federal and state
lease sales, in connection with proved property acquisitions and through
farm-ins. Newfield is continuously evaluating new opportunities and currently
has a substantial inventory of prospects, including 15 to 20 that are expected
to be drilled in 1998. The Company also plans to drill a second exploration
well in China in the second half of 1998.
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ACQUISITION ACTIVITIES. The Company actively pursues the acquisition
of proved oil and gas properties in the Gulf of Mexico and southern Louisiana,
particularly properties with unexploited reserve potential in order to enhance
returns. The Company looks for properties that it can operate to control
operations and costs and in which it can increase its interest. Acquisition
properties that meet these criteria and provide a base for further evaluation
and exploitation adjacent to production already established by the Company are
of particular interest to the Company. The Company pursues a multi-discipline
team approach for evaluating acquisition opportunities. Acquisition candidates
undergo extensive technical and financial evaluation by a group of geologists,
geophysicists, geological engineers and petroleum engineers. Land, drilling,
operations and marketing staffs support these evaluation efforts. The
Company's seismic, land and production databases, along with regional
geological interpretations, supplement any information provided by a potential
seller in the acquisition candidate screening process.

DEVELOPMENT ACTIVITIES. Newfield also maintains an active development
program. During 1997, Newfield invested $117.3 million for development costs,
including recompletions and development drilling. From its inception through
December 31, 1997, Newfield participated in 102 development wells at an
aggregate cost, net to Newfield's interest, of $248.3 million. These wells
have resulted in the addition of proved reserves of 167 Bcfe. Newfield has
budgeted $98 million for development activities for 1998.

GEOGRAPHIC FOCUS. The Company believes that its focus in the federal
waters of the Gulf of Mexico, primarily offshore Louisiana in shallow water,
is the foundation for its continued growth. The Gulf of Mexico is a prolific
oil and gas province, accounting for approximately 25% of domestic natural gas
production, and the Company believes that it has significant remaining
undiscovered reserve potential. Newfield's management and technical personnel
have extensive experience in the Gulf of Mexico, and Newfield's geographic
focus assists it in controlling operating and administrative costs. The Gulf
of Mexico has a substantial existing infrastructure, including gathering
systems, platforms and pipelines, and numerous drilling and service companies
maintain a substantial presence there, facilitating cost effective operations
and the timely development of discoveries. In addition, significant amounts of
geologic data are available at reasonable cost.

While Newfield intends to continue to focus on the Gulf of Mexico, it
also intends to pursue selective opportunities to develop "focused
diversification" outside the Gulf of Mexico. Focused diversification efforts
will be directed toward a limited number of areas where Newfield can apply its
core competencies, such as geological and geophysical analyses through the
application of 3-D seismic and other advanced technologies, expertise in marine
operations and control of or significant influence on operations.

As a natural extension of its operations in the Gulf of Mexico,
Newfield has established onshore Gulf Coast operations in southern Louisiana.
The objective of this onshore effort is to acquire and rejuvenate large
producing fields through the use of 3-D seismic and core competencies that
Newfield has used successfully in the adjacent offshore area.

In May 1997, Newfield acquired a 35% working interest in a 415,000
acre production sharing contract in the Bohai Bay, offshore China, for
approximately $6 million. As part of this acquisition, Newfield also acquired
certain rights and data relating to offshore West Africa and an international
database and added a small international technical staff. The first
exploratory prospect in China reached its objective in the fourth quarter of
1997 and was plugged and abandoned after finding non-commercial hydrocarbons.
Exploration efforts are continuing, and Newfield plans to drill a second
exploratory well in the second half of 1998. Successful exploratory drilling
in the Bohai Bay may result in significant future investment in the area.
Newfield is also actively considering investments in selected countries in West
Africa and Latin America.

CONTROL OF OPERATIONS AND COSTS. The Company prefers to operate its
properties in order to manage production performance and to control operating
expenses, the timing and amount of capital expenditures and the application of
technology. Properties operated by the Company accounted for 92% of its total
equivalent production for 1997. Newfield's geographic focus enables it to
manage a large asset base with a relatively small number of employees and to
add successful exploratory and development wells and proved property
acquisitions at relatively low incremental costs. Newfield also uses
independent contractors for much of its field operations activities to control
costs.

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TECHNOLOGY. Newfield uses advanced technology in its exploration
and development activities in order to reduce its risks and lower its costs.
Newfield currently holds licenses or has access to 3-D seismic surveys covering
approximately 1,700 blocks in the Gulf of Mexico and 315 square miles in
southern Louisiana, including coverage of all of the producing fields it
operates. In addition, Newfield holds licenses or has access to more than
380,000 miles of recent vintage conventional seismic data in the Gulf of Mexico
and owns a library containing logs on more than 4,500 wells drilled in
Newfield's focus area.

The availability of 3-D seismic coverage for the Gulf of Mexico at a
reasonable cost makes its use in exploration attractive from a risk management
perspective. The use of 3-D seismic and computer-aided exploration technology
provides Newfield with substantially more accurate and comprehensive geological
data for the evaluation of drilling prospects that use of only 2-D seismic
data.

MANAGEMENT AND EMPLOYEES. Newfield's management and 38 technical
personnel have extensive experience in the Gulf of Mexico. In order to retain
and attract its employees, the Company provides incentives through equity
ownership and other benefit plans. As of December 31, 1997, the Company's
employees owned or had options to acquire an aggregate of approximately 13% of
the Company's outstanding Common Stock, par value $0.01 per share ("Common
Stock"), on a fully diluted basis.

MARKETING

The Company markets substantially all of the oil and gas production
from Company-operated properties for both the account of the Company and the
other working interest owners in these properties. Substantially all of the
Company's natural gas production is sold to a variety of purchasers under
short-term (less than 12 months) contracts or 30-day spot gas purchase
contracts. During 1997, Coast Energy Group, Enron Gas Marketing, Inc. and
Superior Natural Gas Corporation each purchased in excess of 10% of the gas
sold by the Company for its own account. Oil sales contracts are short-term
and are based upon field posted prices plus negotiated bonuses. During 1997,
Gulfmark Energy, Inc., Texaco Trading and Transportation, Inc. and Northridge
Energy Marketing each purchased in excess of 10% of the oil sold by the Company
for its own account. Based upon the current demand for oil and gas, the
Company believes that the loss of any of these purchasers would not have a
material adverse effect on the Company. See Note 1 to the Company's
consolidated financial statements.

VOLATILITY OF OIL AND GAS PRICES AND HEDGING

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

From time to time, the Company has utilized and expects to continue to
utilize hedging transactions with respect to a portion of its oil and gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to price fluctuations. While the use of these hedging arrangements
limits the downside risk of adverse price movements, they may also limit future
revenues from favorable price movements. The use of hedging transactions also
involves the risk that the counterparties will be unable to meet the financial
terms of such transactions. All of the Company's hedging transactions to date
were carried out in the over-the-counter market and the obligations of the
counterparties have been guaranteed by entities with at least an investment
grade rating or secured by letters of credit. The Company accounts for these
transactions as hedging activities and, accordingly, gains or losses are
included in oil and gas revenues when the hedged production is delivered.
Neither the hedging contracts nor the unrealized gains or losses on these
contracts are recognized in the financial statements.

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COMPETITION

Competition in the oil and gas industry is intense, particularly with
respect to the acquisition of producing properties and proved undeveloped
acreage. Major and independent oil and gas companies actively bid for
desirable oil and gas properties, as well as for the equipment and labor
required to operate and develop such properties. The Company believes that its
geographic focus, its exploration, drilling, and production capabilities, and
the experience of its management generally enable it to compete effectively.
Many of the Company's competitors, however, have financial resources and
exploration and development budgets that are substantially greater than those
of the Company, which may adversely affect the Company's ability to compete
with these companies.

REGULATION

FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS.
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938
(the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the
regulations promulgated thereunder by the Federal Energy Regulatory Commission
(the "FERC"). In the past, the federal government has regulated the prices at
which gas could be sold. Deregulation of wellhead natural gas sales began with
the enactment of the NGPA. In 1989, Congress enacted the Natural Gas Wellhead
Decontrol Act (the "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. Congress could, however, reenact price controls in
the future.

The Company's sales of natural gas are affected by the availability,
terms and cost of transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal and state regulation.
Several major regulatory changes have been implemented by Congress and the FERC
from 1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, that remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purpose of many of these regulatory changes is to
promote competition among the various sectors of the natural gas industry and
these initiatives generally reflect more light-handed regulation of the natural
gas industry. The ultimate impact of the complex rules and regulations issued
by the FERC since 1985 cannot be predicted. In addition, many aspects of these
regulatory developments have not become final but are still pending judicial
and FERC final decisions.

The Company cannot predict what further action the FERC will take on
these matters; however, the Company does not believe that it will be affected
by any action taken materially differently than other natural gas producers,
gatherers and marketers with which it competes.

The Outer Continental Shelf Lands Act (the "OCSLA") requires that all
pipelines operating on or across the Outer Continental Shelf (the "OCS")
provide open-access, non-discriminatory service. Although the FERC has opted
not to impose the regulations of Order No. 509, in which the FERC implemented
the OCSLA, on gatherers and other non-jurisdictional entities, the FERC has
retained the authority to exercise jurisdiction over those entities if
necessary to permit non-discriminatory access to service on the OCS.

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.

FEDERAL LEASES. Substantially all of the Company's operations are
located on federal oil and gas leases, which are administered by the United
States Department of the Interior Minerals Management Service (the "MMS").
Such leases are issued through competitive bidding, contain relatively
standardized terms and require compliance with detailed MMS regulations and
orders pursuant to the OCSLA (which are subject to change by the MMS). For
offshore operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the Environmental Protection Agency), lessees
must obtain a permit from the MMS prior

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to the commencement of drilling. The MMS has promulgated regulations requiring
offshore production facilities located on the OCS to meet stringent engineering
and construction specifications. The MMS also has regulations restricting the
flaring or venting of natural gas, and has proposed to amend such regulations
to prohibit the flaring of liquid hydrocarbons and oil without prior
authorization. Similarly, the MMS has promulgated other regulations governing
the plugging and abandonment of wells located offshore and the removal of all
production facilities. To cover the various obligations of lessees on the OCS,
the MMS generally requires that lessees have substantial net worth or post
bonds or other acceptable assurances that such obligations will be met. The
cost of such bonds or other surety can be substantial and there is no assurance
that bonds or other surety can be obtained in all cases. The Company is
currently exempt from the supplemental bonding requirements of the MMS. Under
certain circumstances, the MMS may require any Company operations on federal
leases to be suspended or terminated. Any such suspension or termination could
materially and adversely affect the Company's financial condition, cash flows
and operations.

The MMS has issued a notice of proposed rulemaking in which it
proposes to amend its regulations governing the calculation of royalties and
the valuation of crude oil produced from federal leases. This proposed rule
would modify the valuation procedures for both arm's-length and
non-arm's-length crude oil transactions, establish a new MMS form for
collecting value differential data, and amend the valuation procedure for the
sale of federal royalty oil. The Company cannot predict what action the MMS
will take on this matter. The Company believes that these rules, if adopted as
proposed, will not have a material impact on its financial condition, liquidity
or results of operations. In April 1997, after two years of study, the MMS
withdrew proposed changes to the way it values natural gas for royalty
payments. These proposed changes would have established an alternative
market-based method for calculating royalties on certain natural gas sold to
affiliates or pursuant to non-arm's length sales contracts. Informal
discussions between the MMS and industry officials are continuing, although it
is uncertain whether, and what, changes may be proposed regarding gas royalty
valuation. In addition, the MMS has recently approved its intention to issue a
proposed rule that would require all but the smallest producers to be capable
of reporting production information electronically by the end of 1998.

STATE AND LOCAL REGULATION OF DRILLING AND PRODUCTION. The Company
owns interests in properties located in onshore Louisiana and in the state
waters of the Gulf of Mexico offshore Texas and Louisiana and occasionally may
conduct operations in the state waters offshore Mississippi. These states
regulate drilling and operating activities by requiring, among other things,
drilling permits and bonds and reports concerning operations. The laws of
these states also govern a number of environmental and conservation matters,
including the handling and disposing of waste materials, unitization and
pooling of oil and gas properties and establishment of maximum rates of
production from oil and gas wells. Some states prorate production to the
market demand for oil and gas.

OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil,
condensate and gas liquids by the Company are not currently regulated and are
made at market prices. Effective as of January 1, 1995, the FERC implemented
regulations establishing an indexing system for transportation rates for oil
that could increase the cost of transporting oil to the purchaser. The Company
is not able to predict what effect, if any, this order will have on it, but
other factors being equal, it may tend to increase transportation costs or
reduce wellhead prices for crude oil.

ENVIRONMENTAL REGULATIONS. The Company's operations are subject to
numerous laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Public interest
in the protection of the environment has increased dramatically in recent
years. Offshore drilling in certain areas has been opposed by environmental
groups and, in certain areas, has been restricted. To the extent laws are
enacted or other governmental action is taken that prohibits or restricts
offshore drilling or imposes environmental protection requirements that result
in increased costs to the oil and gas industry in general and the offshore
drilling industry in particular, the business and prospects of the Company
could be adversely affected.

The Oil Pollution Act of 1990 (the "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 United States waters. A "responsible party" includes the owner or operator
of an offshore facility, vessel or pipeline, or the lessee or permittee of the
area in which an offshore facility is located. The OPA assigns liability to
each responsible party for oil removal costs and a variety of public and
private 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

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<PAGE> 8
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. Failure to
comply with ongoing requirements or inadequate cooperation during a spill event
may subject a responsible party to civil or criminal enforcement actions.
The OPA also imposes other requirements, such as the preparation of an oil
spill response plan. The Company has such a plan in place.

OPA requires responsible parties, to demonstrate proof of financial
responsibility to cover environmental cleanup and restoration costs that could
be incurred in connection with an oil spill. As amended by the Coast Guard
Authorization Act of 1996, OPA requires responsible parties 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 if
a formal risk assessment indicates that an amount higher than $35 million
should be required. On March 25, 1997, the MMS promulgated a proposed rule
implementing these OPA financial responsibility requirements. The Company does
not anticipate that it will experience any difficulty in satisfying the MMS's
requirements for demonstrating financial responsibility for its offshore
facilities under the OPA amendments or the proposed rule.

In addition, the OCSLA authorizes regulations relating to safety and
environmental protection applicable to lessees and permittees operating on the
OCS. Specific design and operational standards may apply to OCS vessels, rigs,
platforms, vehicles and structures. Violations of lease conditions or
regulations issued pursuant to the OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing
operations and the cancellation of leases. Such enforcement liabilities can
result from either governmental or private prosecution.

The Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances
released into the environment.

In addition, legislation has been proposed in Congress from time to
time that would reclassify certain oil and gas exploration and production
wastes as "hazardous wastes," which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could increase the operating costs of the
Company, as well as the oil and gas industry in general. Initiatives to
further regulate the disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact on the
Company.

Management believes that the Company is in substantial compliance with
current applicable environmental laws and regulations and that continued
compliance with existing requirements will not have a material adverse impact
on the Company.

RISKS OF FOREIGN OPERATIONS

While the Company intends to continue to focus on the Gulf of Mexico,
the Company also intends to pursue selective opportunities to develop "focused
diversification" outside the Gulf of Mexico. In May 1997, the Company acquired
a 35% working interest in a 415,000 acre production sharing contract in the
Bohai Bay, offshore China. The Company also acquired certain rights and data
relating to offshore West Africa, an international database and added a small
international technical staff. The recently drilled initial exploratory well
in the Bohai Bay failed to produce oil or gas and Newfield and the other
participants in the well have agreed to plug and abandon the well. In
accordance with full cost accounting rules, the Company incurred a $2.5 million
after tax charge to income in the fourth quarter of 1997. Newfield anticipates
additional exploratory drilling on the property in the second half of 1998.
Successful exploratory drilling in the Bohai Bay may result in significant
future investment in the area. Newfield is also actively considering

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investments in selected countries in West Africa and Latin America. Ownership
of property interests and production operations in China, and in any other
areas outside the United States in which the Company may choose to do business,
are subject to the various risks inherent in foreign operations. These risks
may include, among other things, currency restrictions and exchange rate
fluctuations, loss of revenue, property and equipment as a result of hazards
such as expropriation, nationalization, war, insurrection and other political
risks, risks of increases in taxes and governmental royalties, renegotiation of
contracts with governmental entities and quasi-governmental agencies, change in
laws and policies governing operations of foreign-based companies and other
uncertainties arising out of foreign government sovereignty over the Company's
international operations. The Company's international operations may also be
adversely affected by laws and policies of the United States affecting foreign
trade, taxation and investment. In addition, the event of a dispute arising
from foreign operations, the Company may be subject to the exclusive
jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of the courts of the United States.

OPERATING HAZARDS AND INSURANCE

The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and environmental hazards such as oil
spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. In addition to the foregoing, substantially all of the Company's
operations are currently offshore and subject to the additional hazards of
marine operations, such as capsizing of vessels, collision and adverse weather
and sea conditions.

In accordance with customary industry practice, the Company maintains
insurance against some, but not all, of the risks described above. The
Company's insurance does not fully cover business interruption or protect
against loss of revenues. There can be no assurance that any insurance
obtained by the Company will be adequate to cover any losses or liabilities.
The Company cannot predict the continued availability of insurance or the
availability of insurance at premium levels that justify its purchase. The
occurrence of a significant event not fully insured or indemnified against
could materially and adversely affect the Company's financial condition, cash
flows and operations.

EMPLOYEES

At February 20, 1998 the Company had 86 full time employees, primarily
professionals, including geologists, geophysicists, and engineers. The Company
believes that its relationships with its employees are satisfactory. None of
the Company's employees are covered by a collective bargaining agreement. From
time to time, the Company utilizes the services of independent consultants and
contractors to perform various professional services, particularly in the areas
of construction, design, well site surveillance, permitting and environmental
assessment. Field and on-site production operation services, such as pumping,
maintenance, dispatching, inspection and testing, are generally provided by
independent contractors.

FORWARD-LOOKING STATEMENTS

This document includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this document,
including statements regarding production targets, anticipated production
rates, planned capital expenditures, the availability of capital resources to
fund capital expenditures, estimates of proved reserves, wells planned to be
drilled in the future, the Company's financial position, business strategy and
other plans and objectives for future operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, such statements are based upon
assumptions and anticipated results that are subject to numerous uncertainties.
Actual results may vary significantly from those anticipated due to many
factors, including drilling results, oil and gas prices, industry conditions,
the prices of goods and services, the availability of drilling rigs and other
support services and the availability of capital resources. In addition, the
drilling of oil and gas wells and the production of hydrocarbons are subject to
governmental regulations and operating risks. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by such factors.

-7-
<PAGE> 10
ITEM 2. PROPERTIES

Substantially all of the Company's proved properties are located in
the federal waters of the Gulf of Mexico. The more significant proved
producing properties stretch from the West Delta area offshore Louisiana,
south-southeast of New Orleans, to the High Island area offshore Texas,
south-southeast of Houston. These properties lie in water depths that range
from 45 feet to 480 feet. For 1997, no single field accounted for more that
15% of the Company's net production. As of December 31, 1997, the Company owns
interests in 125 leases and 440 wells and operates 95 platforms, 57 of which
are considered major platforms. Major platforms are those that have six or
more wells or two pieces of production equipment.

The Company's 10 largest properties accounted for approximately 56% of
the Company's equivalent proved reserves at December 31, 1997, but no single
property held more that 9% of the Company's equivalent proved reserves as of
such date, nor did any single property hold more that 11% of the net present
value of the proved reserves as of such date.

The Company owns interests in two proved producing properties onshore
south Louisiana, in Cameron and Acadia parishes. Additionally, the Company
owns unproved acreage in and adjacent to these producing properties and in
other coastal parishes in Louisiana.

OIL AND GAS RESERVES

The following table sets forth estimated net proved oil and gas
reserves of the Company (all within the United States) and the present value of
estimated future pre-tax net cash flows related to such reserves as of December
31, 1997. Unless otherwise noted, all information in this Form 10-K relating
to oil and gas reserves and the estimated future net cash flows attributable
thereto are based upon estimates prepared by the Company and are net to the
Company's interest. The present value of estimated future net cash flows was
prepared using constant prices as of the calculation date, discounted at 10%
per annum on a pre-tax basis.

<TABLE>
<CAPTION>
PROVED RESERVES
----------------------------------------
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- --------
<S> <C> <C> <C>
Oil and condensate (MBbls) . . . . . . . . . . . . . . 15,712 595 16,307
Gas (MMcf) . . . . . . . . . . . . . . . . . . . . . . 252,017 85,464 337,481
Total proved reserves (MMcfe) . . . . . . . . . . . . . 346,289 89,034 435,323
Present value of estimated future pre-tax net
cash flows (in thousands) . . . . . . . . . . . . . $553,927 $100,742 $654,669
</TABLE>

Ryder Scott Company, Petroleum Engineers ("Ryder Scott"), has prepared
estimates of the Company's proved reserves and future net cash flows therefrom
as of December 31, 1993, 1994, 1995, 1996 and 1997. Ryder Scott's estimates of
equivalent proved reserves were 97.8%, 106.0%, 100.5%, 96.3% and 102.4%,
respectively, of the Company's estimates of proved reserves for the same
periods. Ryder Scott's estimates of the present value of future pre-tax net
cash flows attributable to the Company's proved reserves were 102.4%, 107.9%,
102.4%, 93.7% and 96.5%, respectively, of the Company's estimates for the same
periods.

There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves and in projecting future rates of production and
timing of development expenditures, including many factors beyond the control
of the producer. The reserve data set forth herein represents estimates only.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact way, and the
accuracy of any reserve estimate is a function of the quality of available data
and of engineering and geological interpretation and judgment. As a result,
estimates made by different engineers often vary from one another. In
addition, results of drilling, testing, and production subsequent to the date
of an estimate may justify revision of such estimates, and such revisions may
be material. Accordingly, reserve estimates are generally different from the
quantities of oil and gas that are ultimately recovered. Furthermore, the
estimated future net revenues from proved reserves and the present value
thereof are based upon certain assumptions, including future prices, production
levels and costs, that may not prove correct.

-8-
<PAGE> 11
As is generally the case in the Gulf of Mexico, the Company's
producing properties are characterized by a high initial production rate,
followed by a steep decline in production. As a result, the Company must
locate and develop or acquire new oil and gas reserves to replace those being
depleted by production. Without successful exploration or acquisition
activities, the Company's reserves and revenues will decline rapidly.

As an operator of domestic oil and gas properties, the Company has
filed Department of Energy Form EIA-23, "Annual Survey of Oil and Gas
Reserves," as required by Public Law 93-275. There are differences between the
reserves as reported on Form EIA-23 and as reported herein. The differences
are attributable to the fact that Form EIA-23 requires that an operator report
on the total reserves attributable to wells that are operated by it, without
regard to ownership (i.e., reserves are reported on a gross operated basis,
rather than on a net interest basis).

FINDING COSTS

The following table sets forth certain information regarding the costs
associated with finding, acquiring and developing the Company's proved oil and
gas reserves:

<TABLE>
<CAPTION>
CAPITALIZED RESERVES COST TO
COSTS(1) ADDED FIND AND DEVELOP
(IN THOUSANDS) (MMCFE) (PER MCFE)
-------------- -------- ----------------
<S> <C> <C> <C>
1993 . . . . . . . . . . . . . . . . . . . . . . . $ 43,126 72,164 $ 0.60
1994 . . . . . . . . . . . . . . . . . . . . . . . 116,476 97,513 1.19
1995 . . . . . . . . . . . . . . . . . . . . . . . 103,511 102,580 1.01
1996 . . . . . . . . . . . . . . . . . . . . . . . 162,315 119,050 1.36
1997 . . . . . . . . . . . . . . . . . . . . . . . 237,574(2) 190,279 1.25
------- ------- ------
Five-year period ended December 31, 1997 . . . $ 663,002 581,586 $ 1.14
========= ======= =======
</TABLE>

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

(1) Capitalized costs represent all capitalized expenditures of the Company as
shown in the following table under the caption "--Development, Exploration
and Acquisition Capital Expenditures," excluding interest capitalized.

(2) Capitalized costs in 1997 represent capitalized expenditures of the
Company for domestic operations only.

DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES

The following table sets forth certain information regarding the
capitalized costs incurred in the purchase of proved and unproved properties
and in development and exploration activities:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Property acquisition:
Unproved properties - Domestic . . . . . . . . $ 31,541 $ 5,670 $ 10,154 $ 2,020 $ 1,422
Unproved properties - International . . . . . . 7,196 -- -- -- --
Proved properties - Domestic . . . . . . . . . 30,368 28,480 29,393 32,810 17,694
Exploration - Domestic . . . . . . . . . . . . . 59,787 48,525 32,518 17,710 9,197
Exploration - International . . . . . . . . . . . 4,908 -- -- -- --
Development - Domestic . . . . . . . . . . . . . 115,878 79,640 31,446 63,936 14,813
Interest capitalized - Domestic . . . . . . . . . 3,481 1,508 674 217 119
--------- --------- --------- --------- -------
Total capitalized costs . . . . . . . . . . . . $ 253,159 $ 163,823 $ 104,185 $ 116,693 $43,245
========= ========= ========= ========= =======
</TABLE>

-9-
<PAGE> 12
DRILLING ACTIVITY

The following table sets forth the drilling activity of the Company
for each year of the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive -- Domestic . . . . . . . . . . . 9 6.1 8 4.5 10 4.7
Nonproductive -- Domestic . . . . . . . . . 9 6.2 7 3.4 6 3.9
Nonproductive -- International . . . . . . . 1 0.3 -- -- -- --
-- ---- -- --- -- ---
Total . . . . . . . . . . . . . . . . . 19 12.6 15 7.9 16 8.6
== ==== == === == ===

Development wells:
Productive -- Domestic . . . . . . . . . . . 18 9.4 24 10.1 12 4.0
Nonproductive -- Domestic . . . . . . . . . . 1 0.5 1 0.3 3 2.0
-- --- -- ---- -- ---
Total . . . . . . . . . . . . . . . . . 19 9.9 25 10.4 15 6.0
== === == ==== == ===
</TABLE>

PRODUCTIVE WELLS

The following table sets forth the number of productive oil and gas
wells (all within the United States) in which the Company owned an interest as
of December 31, 1997:
<TABLE>
<CAPTION>
COMPANY OUTSIDE TOTAL
OPERATED OPERATED PRODUCTIVE
COMPANY WELLS WELLS WELLS
OPERATED -------------- ------------ -------------
PLATFORMS GROSS NET GROSS NET GROSS NET
--------- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Offshore Louisiana
Federal:
Oil . . . . . . . . . . . . . 28 66 38.6 -- -- 66 38.6
Gas . . . . . . . . . . . . . 58 87 44.6 33 5.8 120 50.4
State:
Oil . . . . . . . . . . . . . 1 1 0.7 -- -- 1 0.7
Gas . . . . . . . . . . . . . 1 1 0.7 -- -- 1 0.7
Onshore Louisiana
Oil . . . . . . . . . . . . . -- 3 1.3 -- -- 3 1.3
Gas . . . . . . . . . . . . . -- 2 1.2 -- -- 2 1.2
Offshore Texas
Federal:
Oil . . . . . . . . . . . . . -- 6 3.0 -- -- 6 3.0
Gas . . . . . . . . . . . . . 7 10 5.4 -- -- 10 5.4
-- --- ---- -- --- --- -----
Total . . . . . . . . . . . 95 176 95.5 33 5.8 209 101.3
== === ==== == === === =====
</TABLE>

ACREAGE DATA

The following table sets forth certain information regarding the
Company's developed and undeveloped lease acreage as of December 31, 1997:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES
------------------- -------------------
GROSS NET GROSS NET
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Offshore Louisiana:
Federal waters . . . . . . . . . . . . . . . . . . . . . 329,160 162,965 83,944 54,364
State waters . . . . . . . . . . . . . . . . . . . . . . 3,153 2,177 2,592 2,592
Onshore Louisiana . . . . . . . . . . . . . . . . . . . . . 3,438 2,212 37,245 18,456
Offshore Texas:
Federal waters . . . . . . . . . . . . . . . . . . . . . 29,340 14,142 56,430 42,441
State waters . . . . . . . . . . . . . . . . . . . . . . -- -- -- --

Offshore People's Republic of China . . . . . . . . . . . . -- -- 415,000 145,250
------- ------- ------- -------

Total . . . . . . . . . . . . . . . . . . . . . . . . 365,091 181,496 595,211 263,103
======= ======= ======= =======
</TABLE>

-10-
<PAGE> 13
Leases covering approximately 9,822 (7,384 net to the Company), 33,072
(20,635 net to the Company), 43,078 (31,945 net to the Company), 19,063 (12,718
net to the Company) and 17,166 (17,166 net to the Company) undeveloped acres
are scheduled to expire in 1998, 1999, 2000, 2001 and 2002, respectively.

TITLE TO PROPERTIES

The Company believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and gas
industry. The Company's properties are subject to customary royalty interests,
liens incident to operating agreements, liens for current taxes and other
burdens which the Company believes do not materially interfere with the use of
or affect the value of such properties. The MMS must approve all transfers of
record title or operating rights on leases on the OCS. The MMS approval
process can in some cases delay the requested transfer for a significant period
of time.

OIL AND GAS TERMS

The definitions set forth below shall apply to the indicated terms as
used in this document. All volumes of natural gas referred to herein are
stated at the legal pressure base of the state or area where the reserves exist
and at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.

Basis risk. The risk associated with the sales point price for oil or
gas production varying from the reference (or settlement) price for a
particular hedging transaction.

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.

Bcf. Billion cubic feet.

Bcfe. Billion cubic feet equivalent, determined using the ratio of
six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.

Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Completion. The installation of permanent equipment for the
production of oil or natural gas, or in the case of a dry hole, the reporting
of abandonment to the appropriate agency.

Developed acreage. The number of acres that are allocated or
assignable to producing wells or wells capable of production.

Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.

Dry hole or well. A well found to be incapable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

Exploratory well. A well drilled to find and produce oil or natural
gas reserves not classified as proved, to find a new reservoir in a field
previously found to be productive of oil or natural gas in another reservoir or
to extend a known reservoir.

Farm-in or farm-out. An agreement whereunder the owner of a working
interest in an oil and gas lease assigns the working interest or a portion
thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."

-11-
<PAGE> 14
Field. An area consisting of a single reservoir or multiple
reservoirs all grouped on or related to the same individual geological
structural feature and/or stratigraphic condition.

Finding costs. Costs associated with acquiring and developing proved
oil and gas reserves which are capitalized by the Company pursuant to generally
accepted accounting principles.

Gross acres or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.

Liquids. Crude oil, condensate and natural gas liquids.

MBbls. One thousand barrels of crude oil or other liquid
hydrocarbons.

MBbls/d. One thousand barrels of crude oil or other liquid
hydrocarbons per day.

Mcf. One thousand cubic feet.

Mcf/d. One thousand cubic feet per day.

Mcfe. One thousand cubic feet equivalent, determined using the ratio
of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.

MMS. Mineral Management Service of the United States Department of the
Interior.

MMBbls. One million barrels of crude oil or other liquid
hydrocarbons.

MMbtu. One million Btus

MMcf. One million cubic feet.

MMcf/d. One million cubic feet per day.

MMcfe. One million cubic feet equivalent, determined using the ratio
of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas
liquids.

Net acres or net wells. The sum of the fractional working interests
owned in gross acres or gross wells, as the case may be.

Present value. When used with respect to oil and natural gas
reserves, the estimated value of future gross revenues (estimated in accordance
with the requirements of the Securities and Exchange Commission) to be
generated from the production of proved reserves, net of estimated production
and future development costs, using prices and costs in effect as of the date
indicated, without giving effect to non-property related expenses such as
general and administrative expenses, debt service and future income tax
expenses or to depreciation, depletion and amortization, discounted using an
annual discount rate of 10%.

Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.

Proved developed producing reserves. Proved developed reserves that
are expected to recovered from completion intervals currently open in existing
wells and capable of production to market.

Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.

Proved developed nonproducing reserves. Proved developed reserves
expected to be recovered from zones behind casing in existing wells.

-12-
<PAGE> 15
Proved reserves. The estimated quantities of crude oil, natural gas
and natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.

Proved undeveloped location. A site on which a development well can
be drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.

Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.

Recompletion. The completion for production of an existing well bore
in another formation from that in which the well has been previously completed.

Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.

Royalty interest. An interest in an oil and natural gas property
entitling the owner to a share of oil or natural gas production free of costs
of production.

Undeveloped acreage. Lease acreage on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether such acreage contains
proved reserves.

Working interest. The operating interest that gives the owner the
right to drill, produce and conduct operating activities on the property and
share of production.

Workover. Operations on a producing well to restore or increase
production.

-13-
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS

The Company has been named as a defendant in certain lawsuits arising
in the ordinary course of business. While the outcome of these lawsuits cannot
be predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, cash flows and results of
operations of the Company.

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

None.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding the names and
ages (as of February 20, 1998) of and positions held by each of the Company's
executive officers. The Company's executive officers serve at the discretion
of the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joe B. Foster . . . . . . . . . . . . 63 Chairman of the Board, President and Chief Executive Officer
Robert W. Waldrup . . . . . . . . . . 53 Vice President - Operations and Director
David A. Trice . . . . . . . . . . . 49 Vice President - Finance and International
Terry W. Rathert . . . . . . . . . . 45 Vice President - Planning and Administration and Secretary
David F. Schaible . . . . . . . . . . 37 Vice President - Acquisitions & Development
William D. Schneider . . . . . . . . 46 Vice President - International Exploration
Elliot Pew . . . . . . . . . . . . . 43 Vice President - Exploration
Ronald P. Lege . . . . . . . . . . . 53 Controller and Assistant Secretary
C. William Austin . . . . . . . . . . 45 Legal Counsel and Assistant Secretary
James P. Ulm, II . . . . . . . . . . 35 Treasurer
</TABLE>

Each of the executive officers has held the position set forth
opposite his name for the past five years except as follows:

David A. Trice has served as Vice President - Finance and
International since July 1997. Prior to joining the Company, he served as
President, Chief Executive Officer and Director of Huffco Group, Inc. since
late 1991.

Terry W. Rathert has served as Vice President - Planning and
Administration and Secretary since July 1997. From 1992 to July 1997, he
served as Vice President, Chief Financial Officer and Secretary of the Company.

David F. Schaible has served as Vice President - Acquisitions &
Development since February 1995. From 1992 to 1995, he served as
Manager-Acquisitions & Development of the Company.

William D. Schneider has served as Vice President - International
Exploration since January 1998. From 1992 to his promotion, he served as
Manager-Exploration of the Company.

Elliot Pew has served as Vice President - Exploration since January
1998. Prior to joining the Company, he served as Senior Vice President of
Louis Dreyfus Natural Gas Company's Gulf Coast Region and prior to Louis
Dreyfus' merger with American Exploration Company in October 1997 , as Senior
Vice President of Exploration for American Exploration from March 1997 to the
date of such merger. From 1992 to March 1997, Mr. Pew was Vice President of
Exploration for American Exploration.

C. William Austin has served as Legal Counsel and Assistant Secretary
since March 1994. From 1989 to March 1994, Mr. Austin was employed as a staff
attorney for Energy Service Company, Inc., an international contract drilling
and marine service company headquartered in Dallas, Texas.

James P. Ulm, II has served as Treasurer of the Company since June
1995. From 1989 to June 1995, Mr. Ulm was employed in managerial positions,
most recently as Treasurer, by American Exploration Company, an independent oil
and gas company headquartered in Houston, Texas.

-14-
<PAGE> 17
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of the Company is listed on the New York Stock
Exchange under the symbol "NFX." The following table sets forth, for the
periods indicated, the high and low sales price per share for the Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter . . . . . . . . . . . . . . . . . . . 15 1/4 12 1/2
Second Quarter . . . . . . . . . . . . . . . . . . 20 15 1/8
Third Quarter . . . . . . . . . . . . . . . . . . . 22 3/4 18 1/16
Fourth Quarter . . . . . . . . . . . . . . . . . . 26 1/2 22 5/16

1997
First Quarter . . . . . . . . . . . . . . . . . . . 28 18 1/2
Second Quarter . . . . . . . . . . . . . . . . . . 23 7/8 16 7/8
Third Quarter . . . . . . . . . . . . . . . . . . . 28 1/8 19 15/16
Fourth Quarter . . . . . . . . . . . . . . . . . . 33 20

1998
First Quarter (through February 20, 1998) . . . . . 24 11/16 19 9/16
</TABLE>

On December 1, 1996 the Company's Board of Directors effected a
two-for-one split of its outstanding Common Stock to stockholders of record on
December 16, 1996. All share amounts above have been restated to retroactively
reflect the stock split.

On February 20, 1998 the last reported sale price on the New York
Stock Exchange Composite Tape was $23 1/8 per share.

As of February 20, 1998 there were approximately 298 holders of record
of the Common Stock of the Company.

The Company has not in the past, and does not intend to pay cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to retain earnings, if any, for the future operation and development of
its business. In addition, the payment of dividends is restricted by the terms
of the Company's credit facility. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8.
Financial Statements and Supplementary Data."

In May 1997, in connection with the acquisition of the assets of
Huffco International, L.L.C. ("Huffco"), the Company sold an aggregate of
272,600 shares of Common Stock to two principals of Huffco for a cash purchase
price of $5,477,569.88. The offer and sale of these shares were not registered
pursuant to Section 5 on the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon Section 4(2) of the Securities Act.

On October 9, 1997, the Company issued $125,000,000 principal amount
of its 7.45% Senior Notes due 2007 to qualified institutional buyers in the
United States and to non-U.S. persons. The underwriters for the note offering
were Goldman, Sachs & Co., Chase Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Jefferies & Company, Inc. The offering price of the
notes was 99.694% of the principal amount, with an underwriting discount of
1.5% of the principal amount. The offering and sale of the notes were not
registered pursuant to Section 5 of the Securities Act in reliance upon Rule
144A and Regulation S under the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

For information concerning this item, see page 14 of the Newfield
Exploration Company Annual Report to Stockholders for the year ended December
31, 1997 (the "Annual Report") as filed with the Securities and Exchange
Commission as Exhibit 13.1 to this Form 10-K, which information is incorporated
herein by reference.

-15-
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

For information concerning this item, see pages 15 through 23 of the
Annual Report, which information is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For information concerning this item, see pages 24 through 47 of the
Annual Report, which information is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

-16-
<PAGE> 19
PART III

For information concerning Item 10 - Directors and Executive Officers
of the Registrant, Item 11 - Executive Compensation, Item 12 - Security
Ownership of Certain Beneficial Owners and Management and Item 13 - Certain
Relationships and Related Transactions, see the definitive Proxy Statement of
Newfield Exploration Company for the Annual Meeting of Stockholders to be held
on May 7, 1998, which will be filed with the Securities and Exchange Commission
and is incorporated herein by reference, and "Part I - Item 4A. Executive
Officers of the Registrant."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS:

The following financial statements of the Company and the report of
management and the Company's independent accountants thereon are included on
pages 24 through 47 of the Annual Report, and are incorporated herein by
reference:

Management Report on Financial Statements

Report of Independent Accountants

Consolidated Balance Sheet as of the fiscal years ended December 31,
1997 and 1996

Consolidated Statement of Income for the three years in the period
ended December 31, 1997

Consolidated Statement of Stockholders' Equity for the three years in
the period ended December 31, 1997

Consolidated Statement of Cash Flows for the three years in the period
ended December 31, 1997

Notes to the Consolidated Financial Statements

2. EXHIBITS

<TABLE>
<S> <C> <C>
3.1 - Second Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

3.2 - Certificate of Amendment to Second Restated Certificate of Incorporation of the Company dated May
15, 1997 (incorporated by reference to Exhibit 3.1.1 to the Company's Registration Statement on Form
S-3 (Registration No. 333-32582)).

3.3 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).

3.4 - Indenture dated as of October 15, 1997 among the Company, as issuer, and First Union National Bank,
as trustee (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form
S-4 (Registration No. 333-39563)).

+10.1 - Newfield Exploration Company 1989 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.2 - Newfield Exploration Company 1990 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).
</TABLE>

-17-
<PAGE> 20
<TABLE>
<S> <C> <C>
+10.3 - Newfield Exploration Company 1991 Stock Option Plan (incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.4 - Newfield Exploration Company 1993 Stock Option Plan (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.5 - Newfield Employee 1993 Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.6 - Restricted Stock Plan and Agreement (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 33-69540)).

10.7 - Amended and Restated Securityholders Agreement among Newfield Exploration Company and certain of its
stockholders dated as of October 18, 1993 (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.8 - Newfield Exploration Company 1995 Omnibus Stock Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (Registration No. 33-92182)).

+10.9 - Newfield Exploration Company 1995 Non-Employee Director Restricted Stock Plan (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-
92182)).

10.10 - Amended and Restated Credit Agreement dated as of October 9, 1997 among Newfield Exploration Company
as the Company, and The Chase Manhattan Bank as Agent, and the Banks signatory hereto (without
Exhibits) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 31, 1997).

+10.11 - Newfield Exploration Company 1995 Non-Employee Director Restricted Stock Plan (Restated)
(incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-3
(Registration No. 333-32587)).

+10.12 - Newfield Exploration Company Deferred Compensation Plan (incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-3 (Registration No. 333-32587)).

+10.13 - Subscription Agreement between the Company and Terry Huffington dated May 15, 1997 (incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on Form S-3 (Registration No.
333-32587)).

+10.14 - Subscription Agreement between the Company and David A. Trice dated May 15, 1997 (incorporated by
reference to Exhibit 10.13 to the Company's Registration Statement on Form S-3 (Registration No.
333-32587)).

+10.15 - Asset Purchase Agreement among Newfield Offshore Inc., Huffco and Huffco Turkey, Inc. dated as of
May 12, 1997 (without exhibits and schedules) (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-3 (Registration No. 333-32587)).

+10.16 - Resolution of Members Establishing the Preferences, Limitations and Relative Rights of Series "A"
Preferred Shares of Huffco China, LDC. dated May 14, 1997 (incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-3 (Registration No. 333-32587)).

-18-
<PAGE> 21
<TABLE>
<S> <C> <C>
10.18 - Promissory Note dated July 15, 1997 by the Company as maker in favor of The Chase Manhattan Bank
(incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-3
(Registration No. 333-32587)).

*11.1 - Computation of Earnings per Share.

*13.1 - Newfield Exploration Company Annual Report to Stockholders for the year ended December 31, 1997.

21.1 - The Registrant has no subsidiaries other than subsidiaries that, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary.

*23.1 - Consent of Coopers & Lybrand L.L.P.

*23.2 - Consent of Ryder Scott Company.

*27.1 - Financial Data Schedule (included only in the electronic filing of this document)
------------
</TABLE>
* Filed herewith.
+ Identifies management contracts and compensatory plans or arrangements.

(b) REPORTS ON FORM 8-K

On October 1, 1997, the Company filed a Current Report on Form 8-K,
dated September 30, 1997, reporting the offering of $125 million of senior
notes due October 2007.

On October 20, 1997, the Company filed a Current Report on Form 8-K
dated October 15, 1997, reporting the placement, through a Rule 144A private
placement, of $125 million in senior notes due October 2007.

-19-
<PAGE> 22
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on the 23rd day of February, 1998.

NEWFIELD EXPLORATION COMPANY

By: /s/ Joe B. Foster
-------------------------
Joe B. Foster
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joe B. Foster Chairman of the Board and February 23, 1998
- -------------------------- Chief Executive Officer
Joe B. Foster (Principal Executive Officer)

/s/ Robert W. Waldrup Vice President - Operations February 23, 1998
- -------------------------- and Director
Robert W. Waldrup

/s/ Terry W. Rathert Vice President - Planning and February 23, 1998
- -------------------------- Administration and Secretary
Terry W. Rathert (Principal Financial Officer)

/s/ Ronald P. Lege Controller and Assistant Secretary February 23, 1998
- -------------------------- (Principal Accounting Officer)
Ronald P. Lege

/s/ Charles W. Duncan, Jr. Director February 23, 1998
- --------------------------
Charles W. Duncan, Jr.

/s/ Jeffrey A. Harris Director February 23, 1998
- --------------------------
Jeffrey A. Harris

/s/ Dennis Hendrix Director February 23, 1998
- --------------------------
Dennis Hendrix

/s/ Terry Huffington Director February 23, 1998
- --------------------------
Terry Huffington

/s/ Howard H. Newman Director February 23, 1998
- --------------------------
Howard H. Newman

/s/ Thomas G. Ricks Director February 23, 1998
- --------------------------
Thomas G. Ricks

/s/ C. E. Shultz Director February 23, 1998
- --------------------------
C.E. Shultz

/s/ Dale E. Zand Director February 23, 1998
- --------------------------
Dale E. Zand
</TABLE>

-20-

<PAGE> 23

INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
3.1 - Second Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

3.3 - Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).

+10.1 - Newfield Exploration Company 1989 Stock Option Plan (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.2 - Newfield Exploration Company 1990 Stock Option Plan (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.3 - Newfield Exploration Company 1991 Stock Option Plan (incorporated by reference to Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.4 - Newfield Exploration Company 1993 Stock Option Plan (incorporated by reference to Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.5 - Newfield Employee 1993 Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.6 - Restricted Stock Plan and Agreement (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 33-69540)).

+10.8 - Newfield Exploration Company 1995 Omnibus Stock Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (Registration No. 33-92182)).

+10.12 - Newfield Exploration Company Deferred Compensation Plan (incorporated by reference to Exhibit 10.11
to the Company's Registration Statement on Form S-3 (Registration No. 333-32587)).

+10.17 - Guaranty Agreement among the Company, Newfield Offshore Inc., Huffco and Huffco Turkey, Inc. dated
as of May 15, 1997 (incorporated by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-3 (Registration No. 333-32587)).
10.18 - Promissory Note dated July 15, 1997 by the Company as maker in favor of The Chase Manhattan Bank
(incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-3
(Registration No. 333-32587)).

*11.1 - Computation of Earnings per Share.

*13.1 - Newfield Exploration Company Annual Report to Stockholders for the year ended December 31, 1997.

21.1 - The Registrant has no subsidiaries other than subsidiaries that, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary.

*23.1 - Consent of Coopers & Lybrand L.L.P.

*23.2 - Consent of Ryder Scott Company.

<PAGE> 1
Exhibit 11.1

NEWFIELD EXPLORATION COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands of dollars, except share and per share amounts)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Net income for earnings per share . . . . . . . . . . . . . . . . $ 40,603 $ 38,494 $ 16,264
=========== =========== ==========
Basic earnings per common share . . . . . . . . . . . . . . . . . $ 1.14 $ 1.10 $ 0.48
=========== =========== ==========
Diluted earnings per common share . . . . . . . . . . . . . . . . $ 1.07 $ 1.03 $ 0.45
=========== =========== ==========

Calculation of weighted average
shares outstanding:

Shares outstanding for basic earnings per share . . . . . . . 35,612,488 34,872,113 33,935,310
Dilution effect of stock options outstanding
at end of period . . . . . . . . . . . . . . . . . . . . . 2,404,689 2,536,811 2,518,713
----------- ----------- ----------
Shares outstanding for diluted earnings per share . . . . . . 38,017,177 37,408,924 36,454,023
=========== =========== ==========

</TABLE>

<PAGE> 1
[NEWFIELD LOGO]

[NEWFIELD 1997 ANNUAL REPORT]

[PICTURE OF SHIP SHOAL 354 PLATFORM,
OFFSHORE LOUISIANA, IN THE GULF OF MEXICO]
<PAGE> 2
==============================================================================
FINANCIAL AND OPERATING HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------
(in thousands, except per share amounts)
FINANCIAL SUMMARY
<S> <C> <C> <C>
Revenues ...................................... $199,399 $149,256 $ 94,598
Income before income taxes .................... $ 62,421 $ 59,286 $ 25,006
Income tax provision .......................... $ 21,818 $ 20,792 $ 8,742
Net income .................................... $ 40,603 $ 38,494 $ 16,264
Basic earnings per common share ............... $ 1.14 $ 1.10 $ 0.48
Diluted earnings per common share ............. $ 1.07 $ 1.03 $ 0.45
Weighted average basic shares outstanding ..... 35,612 34,872 33,935
Weighted average diluted shares outstanding ... 38,017 37,409 36,454

CASH FLOW FROM OPERATIONS
Before changes in assets and liabilities ... $161,852 $125,226 $ 75,613
After changes in assets and liabilities .... $160,338 $127,494 $ 67,640

BALANCE SHEET
Working capital ............................ $ 372 $ 11,436 $ 11,235
Long-term debt and capital lease obligations $129,623 $ 60,000 $ 25,152
Stockholders' equity ....................... $292,048 $239,902 $193,571

OPERATING SUMMARY

Estimated Oil and Gas Reserves
Net proved reserves:
Oil(MBbls) ............................... 16,307 13,659 9,633
Natural gas (MMcf) ....................... 337,481 241,385 203,580
Gas equivalents (MMcfe) .................. 435,323 323,339 261,378

OIL AND GAS OPERATIONS

Production:
Oil (MBbls) .............................. 3,424 2,558 2,071
Natural gas (MMcf) ....................... 53,505 41,323 33,719
Gas equivalents (MMcfe) .................. 74,049 56,670 46,145
Average realized prices:
Oil (per Bbl) ............................ $ 19.08 $ 20.89 $ 17.23
Natural gas (per Mcf) .................... $ 2.51 $ 2.32 $ 1.75
</TABLE>
==============================================================================

[THREE GRAPHS, ONE SHOWING GROWTH IN PROVED RESERVES FROM 1995 TO 1997, ONE
SHOWING GROWTH IN PRODUCTION FROM 1995 TO 1997, THE OTHER SHOWING GROWTH IN
REVENUES AND CASH FLOW FROM 1995 TO 1997.]

GROWTH IN PROVED RESERVES
(Bcfe)

CAGR: 28%
<TABLE>
<CAPTION>
1995 1996 1997
- ---- ---- ----
<S> <C> <C>
261 323 435
</TABLE>

GROWTH IN PRODUCTION
(MMcfe/d)
CAGR: 31%
<TABLE>
<CAPTION>
1995 1996 1997
- ---- ---- ----
<S> <C> <C>
126 155 203
</TABLE>

GROWTH IN REVENUES
AND CASH FLOW ($MM)

CAGR: 41%
<TABLE>
<CAPTION>
REVENUES CASH FLOW
-------- ---------
1995 1996 1997 1995 1996 1997
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
95 149 199 76 125 162
</TABLE>
==============================================================================
1
<PAGE> 3

[MAP OF NEWFIELD'S GULF COAST LEASEHOLD INTERESTS SHOWING EXPANSION OF FOCUS
AREA FROM 1989 TO 1997]

Newfield was founded in 1989 based upon the principle of applying major company
technology in the Gulf of Mexico with an independent's low cost structure and
operating mindset. Newfield has achieved steady growth in the Gulf of Mexico in
both reserves and production with a balanced approach between exploratory
drilling and acquisitions, and currently owns interests in 125 blocks.

PROFILE

Newfield Exploration Company (NYSE: NFX) explores, develops and acquires oil
and gas properties, principally in the Gulf of Mexico.
Company highlights include:

o Founded as Gulf of Mexico start-up in 1989 with $9 million of capital
o Initial Public Offering in November 1993 at $8.75 per share
o Recent diversification into onshore South Louisiana and International
o 12th largest operator of production and 9th most active driller in
Gulf of Mexico in 1997
o 78% of proved reserves were natural gas and 80% were proved developed
at year-end 1997
o Equity market capitalization of $891 million at December 31, 1997.

STRATEGY

Newfield plans to continue to expand its reserve base and increase cash flow on
a per share basis. The Company emphasizes:

o Reserve growth through exploratory drilling
o Balanced capital program between exploration and acquisition of
proved properties
o Strong geographic focus
o Control of operations and costs
o Use of 3-D seismic and other technology
o Employee ownership.

ON THE COVER

A drilling program is underway to develop the 1996 exploratory discovery at Ship
Shoal 354 in 463 feet of water, offshore Louisiana, in the Gulf of Mexico. Ship
Shoal 354 will contribute to Newfield's projected production growth in 1998.

TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial and Operating Highlights .................................... 1
Stockholders' Letter................................................... 3
Operations ............................................................ 6
Five-Year Financial and Reserve Data .................................. 14
Management's Discussion and Analysis .................................. 15
Report of Independent Accountants ..................................... 25
Consolidated Financial Statements ..................................... 26
Notes to Consolidated Financial Statements ............................ 30
Corporate Information .................................. inside back cover
</TABLE>

2
<PAGE> 4
CHAIRMAN'S LETTER

Dear Fellow Stockholder:

I want to focus this year's annual letter on Newfield's plans and strategies for
future growth, but first, a brief word about 1997:

Proved remaining oil and gas reserves were 435 billion cubic feet of natural gas
equivalent (Bcfe) at the end of 1997, up 35% from 1996. Production increased to
74 Bcfe during 1997, up 31% from 1996. Cash flow from operations before changes
in working capital was $4.26 per share, up 27% from 1996. Earnings per share
increased to $1.07 in 1997, up slightly from 1996, even after absorbing a $4.25
million pre-tax charge for an unsuccessful well in China.

These results are a continuation of Newfield's record of solid and steady growth
since its founding in 1989. At that time we had only people and ideas - no
leases, no production and only $9 million of equity capital. By 1997 we had
become the 12th largest operator of production and the ninth most active driller
in the Gulf of Mexico with an equity market capitalization that stood at $891
million by year's end.

During the five year period from 1992 to 1997, Newfield has achieved the
following compound annual average growth rates:

<TABLE>
<S> <C>
Year-end reserves 35%
Annual production 30%
Operating cash flow per share 26%
Net income per share 21%
</TABLE>

Having established a track record of growth, the challenge for Newfield is to
continue the pattern. How do we plan to do that? Let's begin by examining our
basic objectives in managing the Company.

Our driving goal is to add economic value on a per share basis. The emphasis on
growing value per share was a very logical one for a start-up company in 1989
with stock options as an important element of compensation for all the founding
employees. Subsequently, we have attracted both private and public investors
with growth in share value as an objective and have continued to use options in
recruiting new employees. We remain strongly committed to growing the value of
Newfield on a per share basis.

As a public company, we have learned that there are many factors that affect
share value that are beyond our control (and that may not be related to the
underlying real or relative economic value at all). We are convinced, however,
that if we consistently grow production, reserves and operating cash flow on a
per share basis through a solid investment program, market value per share will,
with some volatility, follow the underlying growth in economic value. From an
operating standpoint, our basic growth objective is to grow production - volumes
of oil and gas produced - at a 15-20% per year rate and to maintain a low cost
structure. Since we maintain a roughly constant reserves-to-production ratio,
this translates into a need to grow reserves at about the same percentage rate.
This gives us a rather clear idea of the magnitude of opportunities we must
generate and the size of the drilling and acquisition program we must undertake
to add the requisite reserves.

We impose some financial constraints to ensure that the reserve additions do
indeed add "economic" value.

1. We evaluate all prospective investment opportunities on a discounted
cash flow basis, adjusting for risk, to assure that each can be
expected to add value.

2. We do not want debt to book capitalization to exceed 40%. We
understand that we are in a risky business, that dry holes sometime
come in bunches, and that oil and gas prices can be quite volatile.

3. We manage the company to generate earnings, not just cash flow.
Generally accepted accounting principles, while not always reflective
of true performance in the E&P business, are good enough that if
reasonable earnings and returns on equity are not achieved over time,
something is wrong. Although return on equity may understate the real
return for a growing E&P company, it should exceed 10%.

4. We look at results on a per share basis. If we grow the Company at
20% per year, but dilute the growth rate or value of our shares in so
doing, we have not done our job.

To date, Newfield has met or exceeded its growth and financial objectives from
activity almost exclusively from the Gulf of Mexico. The map on the facing page
shows Newfield's extensive property holdings in the Gulf and also shows how
Newfield has, over time, expanded its area of focus in the Gulf. From the
relatively small area of the Pliocene trend where we began prospecting in 1989,
we have systematically added data sets and operations such that we are now
active from onshore in South Louisiana to beyond the 600 foot water depth line
delineating the continental shelf, and from the Brazos and High Island areas,
offshore Texas, to east of the Mississippi River delta in Viosca Knoll. We have
been achieving growth with focus area expansion as well as with intense activity
in and around our existing property base.

During 1997, we took another step outward, adding the capability to work
internationally and participating in our first international venture, the
drilling of a 13,500 foot exploratory test in the Bohai Bay, offshore China. The
well was abandoned after finding non-producible hydrocarbons, but additional
drilling is planned during 1998 on the 415,000 acre (equal in size to about 83
Gulf of Mexico blocks) license in which Newfield has a 35% working interest.

Our objective internationally is to establish exploration and production efforts
in a few (2-5) international areas which 1) are hydrocarbon rich, 2) lend
themselves to application of our core competencies, namely 3-D geophysics and
marine operations, and 3) have reasonable economic terms. We do not expect to be
an "overnight success" internationally; rather, we expect to build position in a
few select areas and, with focus, continuity and solid technology, provide
longer term growth for Newfield.

In addition to continuing exploration activity on the Bohai Bay block, we are
pursuing some opportunities offshore West Africa and the east coast of South
America.

We expect to become more active onshore in South Louisiana in 1998, as
exploratory drilling, based upon our 1997 3-D seismic programs, commences. Our
rationale for being onshore is that it is a natural extension from our Gulf of
Mexico activity. The geology and 3-D geophysical applications are quite similar
to those we deal with in the Gulf. Our core competencies work onshore as well as
offshore. The onshore cost structure permits smaller prospects to be economic
than is the case offshore, especially as offshore rig day rates have escalated.
Our longer range plan is to limit our onshore activity to those areas adjacent
to the Gulf of Mexico.

As we seek to establish longer term production growth from a few international
areas and to capitalize on available opportunities onshore, our "bread and
butter" for the near term will continue to be the Gulf of Mexico. We believe we
can rely on the following factors to assure continued growth from the Gulf:

1. INTENSE EXPLOITATION IN AND AROUND OUR PROPERTY BASE. Note the
clusters of blocks in which Newfield owns an interest on the
accompanying map. Every cluster represents an area of competitive
advantage for Newfield. We have cost advantages, technical insights
and existing plat forms from which to drill and produce that most of
our competitors do not. There are "waves" of development over these

3
<PAGE> 5
fields as information is gleaned, production is observed and
technology is advanced. We have not seen the last wave on many of
these clusters.

2. INVENTORY OF CONTROLLED OPPORTUNITIES. We have numerous prospects
"on the books" remaining to be drilled. Some were deferred because
of high costs or low prices relative to the risk involved. Some are
awaiting installation of a pipeline or platform in the area to improve
economics. Some are pending offset operator activity. Others are
awaiting the acquisition of additional leases.

3. BACKLOG OF IDEAS-IN-WAITING. Having looked at over 1,000 Gulf of
Mexico blocks for farm-in or acquisition since we have been in
business, in addition to our lease sale and regional exploration, we
have cataloged a lot of opportunities on acreage that is controlled
by others. Experience tells us that, sooner or later, at least some
of these opportunities will become available. With our low employee
turnover and strong continuity at Newfield, we have the "institutional
memory" to take advantage of these kinds of opportunities.

4. CONTINUED FOCUS AREA EXPANSION. We will continue to expand outward in
the Gulf, purchasing new regional 3-D seismic data, and more
intensively exploring new areas. Deeper water, offshore Texas and the
eastern Gulf would be new areas for Newfield. Our history shows the
ability to come into areas where we are not represented and build
position.

5. CHANGING EMPHASES OF GULF OPERATORS. Lessees and operators in the
Gulf are continually changing emphases. Some decide to pull out of the
Gulf. Some decide to focus on deep water. Some have poor results and
shrink their drilling budget. Others are required to devote their
manpower or money to other significant projects in the company. As a
result, properties are for sale, farmouts are available and joint
venture partners are desired. Newfield's continuing emphasis on the
Gulf and its technical, financial and operating strength, assure that
it is "in the line of traffic" for the opportunities arising out of
other operators' good fortune, bad fortune or change of heart.

In summary, we believe we can meet our growth objectives at Newfield over the
longer term with the Gulf of Mexico, international and onshore strategies we are
pursuing.

During the past year, we have strengthened the group responsible for managing
this growth. As part of the Huffco acquisition, David Trice rejoined Newfield as
Vice President - Finance and International. David was a founder and first Chief
Financial Officer of Newfield before leaving to become CEO of Huffco. In January
1998, Elliott Pew became Vice President - Exploration of Newfield. He had
previously served as Senior Vice President of American Exploration/Louis
Dreyfus. David and Elliott add breadth and depth to an already strong management
group. In addition, to assure adequate attention to our emerging international
effort, Bill Schneider, previously our Manager - Exploration, was promoted to
Vice President - International Exploration.

Please take the time to review our 1997 results in some detail. We had a very
good year, made possible by some very talented and hardworking people who love
what they are doing and who are very good at it. I feel privileged to work with
them.

Sincerely,

/s/ JOE B. FOSTER
- -----------------
Joe B. Foster
January 19, 1998

[PICTURE OF NEWFIELD MANAGEMENT GROUP]

Newfield's management focuses on growing the value of the Company
on a per share basis. Seated (l. to r.), Robert W. Waldrup, Joe B. Foster
and David A. Trice. Standing (l. to r.), William D. Schneider, Terry W.
Rathert, David F. Schaible and Elliott Pew.

4
<PAGE> 6

[PHOTOGRAPHS OF NEWFIELD'S CAPITAL ACTIVITIES INCLUDING DRILLING, CONSTRUCTION
AND PRODUCTION OPERATIONS. INSET INCLUDES MAP OF NEWFIELD'S GULF COAST
LEASEHOLD INTERESTS INCLUDING HIGHLIGHTED AREAS OF CAPITAL ACTIVITIES IN 1997
AND 1998.]

During 1997, Newfield was the 12th largest operator and ninth most active
driller in the Gulf of Mexico. Newfield is in the "line of traffic" for new
opportunities to add to its prospect inventory and proved property base.

5
<PAGE> 7

1997 RESULTS -- SOLID, STEADY GROWTH

In 1997 Newfield continued its record of year-on-year growth. Newfield
achieved record levels of oil and gas production, reserve additions, earnings
and cash flow while maintaining a low cost structure, consistent margins and a
conservative balance sheet. These solid increases were accomplished despite a
highly competitive environment for properties and services and fairly constant
commodity prices. The results for 1997 are provided in greater detail as
follows:

* RESERVE REPLACEMENT. Newfield's proved reserves at year-end 1997 totaled 435
billion cubic feet of natural gas equivalent (Bcfe), an increase of 35% over
1996's level of 323 Bcfe. A total of 190 Bcfe of new proved reserves were added
during 1997, resulting in the replacement of 257% of 1997 production. A total of
38 exploratory and development wells were drilled in 1997 with an overall
success ratio of 71%. In the Gulf of Mexico and onshore Louisiana, nine of 18
exploratory wells and 18 of 19 development wells were successful. Exploration
operations in 1997 included 17 wells in the Gulf of Mexico, expansion of
Newfield's onshore program in South Louisiana with the acquisition of additional
acreage and 3-D seismic coverage, Newfield's first well in the deeper waters of
the Gulf and Newfield's first international venture in the People's Republic of
China. Exploration and development expenditures of $184 million and property
acquisitions of $69 million completed a record $253 million capital program in
1997. The largest acquisition in Company history was completed in July 1997, as
nine blocks with multiple drilling prospects were acquired in the High Island,
West Cameron and East Cameron areas of the Gulf of Mexico (the "Western Gulf
Acquisition") for $43 million. The results for 1997 show sustained growth from
Newfield's core operating area on the offshore continental shelf of the Gulf of
Mexico and the development of new growth areas, including deeper waters of the
Gulf of Mexico, onshore Louisiana and select international areas.

* PRODUCTION GROWTH. Newfield increased oil and gas production to 74.0 Bcfe
during 1997 from 56.7 Bcfe in 1996, a 31% increase. Daily production at the end
of 1997 was 220 MMcfe (determined using the ratio of six Mcf to one barrel of
oil) and production averaged 203 MMcfe for the year. Significant contributors
to the 31% increase in production include full year's results from Ewing Bank
947 and South Timbalier 148 (1996 development programs) and West Delta 152,
Vermilion 398 and Ship Shoal 69, where successful drilling activities were
completed during 1997. The Western Gulf Acquisition also added to production in
the second half of 1997.

* COMMODITY PRICES AND HEDGING ACTIVITIES. Newfield's commodity prices rose
2% in 1997 to $2.69 per Mcfe from $2.63 per Mcfe in the prior year. Gas price
realizations increased to $2.51 per Mcf from $2.32 per Mcf in 1996 while oil
prices declined from $20.89 per barrel in 1996 to $19.08 per barrel. Newfield
continues to hedge natural gas prices with the objective of reducing volatility
and maintaining stable cash flow to fund capital expenditures. Newfield entered
1998 with approximately two-thirds of first quarter natural gas production
hedged, including 4.5 Bcf sold forward at an average price of $2.78 per MMbtu
and price floors (net of costs) of $2.51 per MMbtu for an additional 4.5 Bcf.
Newfield has hedged an additional 11.25 Bcf of natural gas production in the
aggregate in the second and third quarters using both forward sales and price
floors.

* LOW OPERATING COSTS, HIGH OPERATING MARGINS. Newfield continues to be among
the industry leaders in maintaining low general and administrative expenses and
lease operating expenses. Based on comparative 1996 data prepared by Goldman,
Sachs & Co. Newfield had the highest cash operating margin and second lowest
cash operating cost among a group of 23 companies. Despite substantial increases
in oil service costs, Newfield's cash operating margin in 1997 was $2.21 per
Mcfe, or 82.2% of revenue, compared to $2.20 per Mcfe, or 83.7% of revenue in
1996.

* ACHIEVEMENT OF RECORD EARNINGS AND CASH FLOW. Newfield achieved record
operating results in 1997. Net income increased to $43.1 million, or $1.13 per
share (all per share amounts used herein are on a diluted basis), before
including a $2.5 million after-tax charge in the fourth quarter of 1997 for the
unsuccessful well drilled in the Bohai Bay, China, versus $38.5 million, or
$1.03 per share, in the previous year. Earnings for 1997, inclusive of the
write-down, were $1.07 per share. Retained earnings at the end of 1997 increased
to $135.6 million, up 43% from 1996. Operating cash flow before changes in
working capital increased 27% during 1997 to $161.9 million, or $4.26 per share,
from the prior year's level of $125.2 million, or $3.35 per share.

6
<PAGE> 8

* FINANCING. In response to favorable market conditions in the public debt
market, Newfield issued $125 million of 7.45% Senior Unsecured Notes due 2007 in
October 1997. The rating agencies rated the issue BB (S&P) / Ba2, Positive
Outlook (Moody's) during the offering process. The proceeds of the note
offering were used to repay all outstanding bank debt. Coincident with the debt
transaction, Newfield entered into an amended bank credit agreement with reduced
fees and greater financial flexibility. At December 31, 1997, Newfield had $120
million of available capacity under its existing credit agreements.

1997 CAPITAL PROGRAM

Capital expenditures for Newfield's core Gulf of Mexico operating area
accounted for 89%, or $225 million, of Newfield's 1997 capital outlays.
Substantially all of Newfield's 190 Bcfe of reserve additions in 1997 came from
this core area. Development of Newfield's position in onshore South Louisiana
continued in 1997 and onshore drilling and acreage acquisition expenditures
equaled $16 million. In May 1997 Newfield initiated its first international
project with the purchase of the assets of Huffco International, L.L.C. Total
international expenditures in 1997 were $12 million, including the Huffco
purchase and the first exploration well in China.

Newfield's balanced growth through exploration and acquisitions continued in
1997 with approximately 43% of reserve additions coming from the acquisition of
proved reserves and 57% being added through the drill bit. Acquisitions
continued to be an important source of opportunities to add reserves through
exploration and exploitation operations on the acquired properties. The Western
Gulf Acquisition was the source of a significant exploration discovery in 1997
and will be the source of substantial development activity in 1998.

GULF OF MEXICO - NEWFIELD'S CORE AREA

* ACQUISITIONS. In July 1997 Newfield closed the $43 million Western Gulf
Acquisition consisting of nine blocks, including five producing fields. The
acquisition substantially increased Newfield's presence in the western portion
of the Gulf, offshore Louisiana and Texas. Net daily production from the
producing fields was 18 MMcfe, resulting in a 10% increase in Newfield's
production at the time of the purchase. In addition to the purchase of proved
reserves in this transaction, Newfield identified several opportunities to add
incremental reserves through the exploitation of probable and possible reserves
and exploration prospects.

One exploration prospect was located on East Cameron 286 in which Newfield
acquired a 50% working interest in the purchase transaction. Prior to drilling
this prospect, Newfield purchased the remaining 50% working interest in East
Cameron 286 and farmed into East Cameron 287 which contained a portion of the
prospect. As a result of these transactions, Newfield controlled 100% of the
prospect. The initial exploration well was drilled on East Cameron 287 and found
125 feet of net gas pay in two sands. Delineation wells drilled in December 1997
and January 1998 have confirmed a significant discovery that will be fully
developed in 1998 with the drilling of two additional wells and the installation
of a platform and production facilities. First production is anticipated in late
1998 or early 1999.

In 1998, exploration drilling is planned for another of the acquired blocks
and development operations are scheduled on High Island A-471, West Cameron 533
and 618 and the "B" platform on East Cameron 286, all of which were part of the
Western Gulf Acquisition.

* LEASE SALES. In the March 1997 federal lease sale for the central Gulf of
Mexico, Newfield was successful bidder on three blocks, South Marsh Island
Blocks 118 and 119, and Eugene Island 278. Prospects were identified on these
blocks prior to the sale and Newfield plans to drill two exploration wells on
these blocks in 1998. In the August 1997 federal lease sale, Newfield acquired
High Island A-487, which is adjacent to a property purchased in the Western Gulf
Acquisition. The prospect on this block was identified in connection with the
evaluation of the Western Gulf properties and any future development on this
block will benefit from the infrastructure acquired with those properties. In a
State of Louisiana sale in July 1997 Newfield purchased Ship Shoal 65 which
adjoins Newfield's Ship Shoal 69 complex, where a successful development program
was completed in 1997.

* EXPLORATION. Nine of the 17 exploration wells drilled by Newfield in the
Gulf of Mexico in 1997 resulted in discoveries. Four discoveries (Ship Shoal
170, East Cameron 89, Eugene Island 324 and Main Pass 259) were drilled from or
near existing infrastructure and were developed and brought on line in 1997.
Other discoveries include Newfield's first well in deeper waters of the Gulf
(East Breaks 164 #1 in 880 feet of water), a discovery at Brazos A-7, which is
currently under development, the significant discovery at East Cameron 286/287
discussed above, and the following two additional significant discoveries that
are under development:

EAST CAMERON 373 - During the first quarter of 1997, Newfield participated
in an exploratory discovery, the East Cameron 373 #3, with Kerr-McGee. The East
Cameron 373 #3 was drilled to a total depth of 6,410 feet and logged 192 feet

7
<PAGE> 9

[PHOTOGRAPH OF DRILLING RIG ON LOCATION AT EAST CAMERON 286/287, A 1997
EXPLORATORY DISCOVERY. INSET MAP FOCUSES ON INTERESTS ADDED DURING 1997 IN THE
WESTERN GULF OF MEXICO.]

As part of a balanced capital program, Newfield actively pursues proved
acquisitions with drilling upside. The map below highlights the Western Gulf of
Mexico, an area of increased focus as a result of a $43 million acquisition in
July 1997. The initial exploratory well drilled on these properties resulted in
a discovery at East Cameron 286/287 shown drilling here.

8
<PAGE> 10
[PICTURE OF DRILLING RIG AT BROUSSARD AREA, AN ONSHORE SOUTH LOUISIANA
EXPLORATORY DISCOVERY. INSET INCLUDES PHOTOGRAPH OF ONSHORE SOUTH LOUISIANA TEAM
MEMBERS REVIEWING SEISMIC DATA.]

Newfield utilizes a multi-disciplinary team approach to generate drilling
prospects. Here, members of the onshore South Louisiana team review 3-D seismic
data with respect to the 1998 Broussard discovery shown drilling at left:

<PAGE> 11

of gas pay in two sands. Fabrication for the platform and facilities, to be set
in 425 feet of water, has been completed with the installation expected during
the second quarter of 1998. The discovery well will be completed and an
additional development well will be drilled. Initial daily gross production is
expected to be in the 50-60 MMcf range beginning in the third quarter of 1998.
Newfield's net revenue interest is 33%. In order to further enhance the project
economics, an agreement was reached with a pipeline company which has agreed to
pay the upfront costs of platform construction and installation and assume the
associated plugging and abandonment liabilities in exchange for an interest-free
repayment and the ability to process deepwater production on the platform.

MAIN PASS 256 - In October 1997 Newfield entered into a farming agreement
for Main Pass 256, which is near producing gas fields on Main Pass 255 and 259
in which Newfield owns interests. Newfield identified a seismic event on Block
256 that was very similar to a seismic event indicating gas pay on Block 255. In
the fourth quarter Newfield drilled a well to test this seismic event and found
48 feet of net gas pay. A delineation well drilled 2,000 feet from the discovery
well also found 48 feet of net gas pay thereby confirming a commercial
discovery. Platform installation and well completion are scheduled to occur in
the fourth quarter of 1998 with first production in early 1999 at an anticipated
gross daily rate of 30 MMcf. Newfield's net revenue interest is 55%.

* DEVELOPMENT. Several significant development programs were concluded in 1997
and were successful in adding new reserves and contributing to production
growth. The results are summarized as follows:

<TABLE>
<CAPTION>
Gross Daily
Field Production Activity
- ---------------- ------------ ------------------------
<S> <C> <C>
S. Timbalier 148 > 70 MMcfe 10 well program
West Delta 152 > 30 MMcfe 9 of 10 successful wells
Ship Shoal 69 > 20 MMcfe 3 new wells on-line
Vermilion 398 > 18 MMcfe 4 well program
</TABLE>

In addition, development work was completed on a horizontal well at Viosca Knoll
209 and a three well program at West Cameron 560/561. These developments were
both on stream by mid-January 1998 and were contributing approximately 20 MMcfe
to Newfield's gross daily production. As 1997 ended, development work continued
on the subsea development at Mississippi Canyon 357 and a successful development
well was drilled at Ship Shoal 159. Production from these latter two projects is
expected to commence in the first and second quarters of 1998, respectively.

* MAJOR DEVELOPMENTS TO SUPPORT GROWTH IN 1998 AND 1999. At the beginning of
1998 several major development projects were underway that will provide the
basis for production growth in 1998 and 1999. In addition to development on
exploratory discoveries at East Cameron 286/287, East Cameron 373 and Main Pass
256, Newfield will be active at Ship Shoal 354 where a four pile platform was
installed during the third quarter of 1997, in 463 feet of water, at the site of
a 1996 exploratory discovery and delineation well. Two additional development
wells are planned. The final phase of the development at Ship Shoal 354 will
include the completion of the four wells with initial production expected early
in the second quarter of 1998 at gross daily rates of 30-35 MMcfe. Newfield is
the operator and owns a 40% net revenue interest.

ONSHORE SOUTH LOUISIANA

In 1997 Newfield continued expanding its data base and leasehold position in
South Louisiana. Newfield's onshore strategy is to acquire interests in and near
mature onshore fields and then to acquire 3-D seismic to generate new drilling
ideas. Newfield acquired the rights to a 50% interest in 21,000 acres at Second
Bayou and a 1,700 acre position in the Broussard area. In addition, Newfield
acquired 63 square miles of 3-D seismic over the Rayne Field, which was acquired
in 1996, 49 square miles of 3-D seismic over the Second Bayou lease and
reprocessed an older vintage 3-D survey over the Broussard area. Interpretation
of the RAYNE and SECOND BAYOU 3-D surveys to date has generated several
exploratory prospects which are planned to be drilled in 1998.

During 1997 Newfield drilled two onshore wells, one dry exploratory well and
a successful oil development well in the Second Bayou Field. As the year ended,
Newfield was drilling its first exploratory test on the Broussard prospect. In
February 1998 this exploratory well, the Gladys Garber No. 1, reached its
objective and encountered 70 feet of net gas pay. The Broussard discovery will
be placed on production after the installation of a pipeline. Additional
drilling is planned in the Broussard area. Newfield's net revenue interest in
the discovery well is approximately 35%.

10
<PAGE> 12

INTERNATIONAL

In May 1997 Newfield acquired the assets of Huffco International, which
consisted of a 35% interest in Block 05/36 in the Bohai Bay, offshore China, a
data base for portions of West Africa and an experienced international
exploration team. This acquisition represented Newfield's initial international
project. An exploratory well to test the BZ 8-4 prospect on Block 05/36 reached
its objective in the fourth quarter of 1997 and was plugged and abandoned after
finding non-commercial hydrocarbons. Exploration efforts are continuing on this
415,000 acre block, and Newfield plans to drill a second exploration well in
China in the second half of 1998. The international team will continue to
evaluate opportunities in a few select basins where Newfield can apply its core
competencies, such as 3-D geophysics and marine operations.

[MAP OF CHINA SHOWING LOCATION OF BOHAI BAY.]

SIGNIFICANT OPERATOR IN GULF OF MEXICO

Newfield currently owns interests in 125 blocks in the Gulf of Mexico,
representing 505,000 gross acres. In addition, Newfield operates 97 platforms
and 118 pipelines and gathering lines and serves as operator for over 90% of its
daily production. Newfield has an extensive seismic data base with licenses to
more than 380,000 miles of speculative 2-D data and 3-D surveys covering
approximately 1,700 blocks (out to 1,500 feet of water) in the Gulf of Mexico,
which includes all of its producing fields. This substantial infrastructure,
large acreage position, technology data base and emphasis on operations, when
combined with an experienced and motivated group of employees, provides Newfield
with the competitive advantages necessary to achieve its growth objectives.

During 1997 Newfield operated more than two times its net daily production
and based upon the latest available public information on gross operated daily
production, Newfield was the 12th largest operator in the Gulf of Mexico. A
survey prepared by the James K. Dodson Company ranked Newfield as the ninth most
active driller in the Gulf of Mexico in 1997. The Company had, on average, 5.7
drilling and completion rigs under contract each day. In recognition of
Newfield's operating capability, in April 1997, the Company was the recipient of
the 1996 Minerals Management Service of the United States Department of the
Interior SAFE Award for the Lafayette Production District.

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

FORWARD-LOOKING STATEMENTS. Certain of the statements set forth in this
annual report regarding production targets, anticipated production rates,
estimates of proved reserves and cash flows therefrom and planned capital
expenditures and activities, are forward looking and are based upon assumptions
and anticipated results that are subject to numerous uncertainties. Actual
results may vary significantly from those anticipated due to many factors.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which follows, for a further discussion of certain of
these factors.

SECURITIES AND EXCHANGE COMMISSION FORM 10-K INFORMATION. The following pages
include information required to be filed with the Securities and Exchange
Commission on Form 10-K and are incorporated by reference in the Company's
filing of its Form 10-K.

11
<PAGE> 13

FINANCIAL SECTION CONTENTS
<TABLE>

<S> <C>
Five-Year Financial and Reserve Data...........................................................14

Management's Discussion and Analysis...........................................................15

Report of Independent Accountants..............................................................25

Consolidated Balance Sheet.....................................................................26

Consolidated Statement of Income...............................................................27

Consolidated Statement of Stockholders' Equity.................................................28

Consolidated Statement of Cash Flows...........................................................29

Notes to Consolidated Financial Statements.....................................................30
</TABLE>

12
<PAGE> 14

Intentionally Left Blank

<PAGE> 15
SELECTED FIVE-YEAR FINANCIAL AND RESERVE DATA

The following table sets forth selected consolidated financial and reserve
data regarding the Company as of and for each of the periods indicated. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
consolidated financial statements and notes thereto and supplementary financial
information, which follow.
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ---------
(dollars in thousands)

<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas revenues....................... $199,399 $149,256 $ 94,598 $ 69,728 $ 60,178
-------- -------- -------- -------- ---------
Operating expenses:
Lease operating ......................... 24,308 16,946 14,227 9,555 7,096
Depreciation, depletion and
amortization........................... 94,000 64,026 49,904 34,118 25,116
China ceiling test write-down............ 4,254 --- --- --- ---
General and administrative, net.......... 11,093 7,552 5,549 3,802 3,709
Stock compensation (1)................... 1,177 1,943 692 1,084 3,235
-------- -------- -------- -------- ---------
Total operating expenses............... $134,832 $ 90,467 $ 70,372 $ 48,559 $ 39,156
-------- -------- -------- -------- ---------

Income from operations..................... $ 64,567 $ 58,789 $ 24,226 $ 21,169 $ 21,022

Interest income (expense), net............. (2,146) 497 780 1,379 759
-------- -------- -------- -------- ---------

Income before income taxes................. $ 62,421 $ 59,286 $ 25,006 $ 22,548 $ 21,781
Income tax provision....................... 21,818 20,792 8,742 8,108 7,753
-------- -------- -------- -------- ---------

Net income ................................ $ 40,603 $ 38,494 $ 16,264 $ 14,440 $ 14,028
======== ======== ======== ======== =========

Basic earnings per common share............ $ 1.14 $ 1.10 $ 0.48 $ 0.43 $ 0.53
======== ======== ======== ======== =========

Diluted earnings per common share ......... $ 1.07 $ 1.03 $ 0.45 $ 0.40 $ 0.50
======== ======== ======== ======== =========

Weighted average number of shares
outstanding for basic earnings per
share.................................... 35,612 34,872 33,935 33,197 26,651

Weighted average number of shares
outstanding for diluted earnings
per share................................ 38,017 37,409 36,454 35,974 28,041

CASH FLOW DATA:
Net cash provided by operating
activities before changes in operating
assets and liabilities .................. $161,852 $125,226 $ 75,613 $ 57,535 $ 48,024
Net cash provided by operating activities.. 160,338 127,494 67,640 68,121 38,569
Net cash used in investing activities ..... (242,962) (159,537) (99,329) (123,619) (41,382)
Net cash provided by financing activities.. 77,551 32,800 33,810 865 57,482

BALANCE SHEET DATA (AT END OF PERIOD):
Working capital............................ $ 372 $ 11,436 $ 11,235 $ 10,987 $ 70,268
Oil and gas properties, net ............... 483,954 328,615 228,509 173,924 91,136
Total assets............................... 553,621 395,938 277,406 215,557 183,683
Long-term debt and capital lease
obligations, less current maturities .... 129,623 60,000 25,152 555 446
Stockholders' equity ...................... 292,048 239,902 193,571 169,491 152,845

RESERVE DATA (AT END OF PERIOD):
Proved Reserves:
Oil and condensate (MBbls)............... 16,307 13,659 9,633 8,610 6,414
Gas (MMcf)............................... 337,481 241,385 203,580 153,967 102,261
Total proved reserves (MMcfe) ........... 435,323 323,339 261,378 205,627 140,745
Present value of estimated future pre-tax
net cash flows........................... $654,669 $859,817(2) $364,879 $230,594 $ 159,155
</TABLE>

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

(1) Stock compensation represents noncash stock compensation charges. See Note
6 to the Company's consolidated financial statements.
(2) The December 31, 1996 present value of estimated future pre-tax net cash
flows would be $502,959 if calculated using oil and gas prices at December
31, 1997.

14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in an understanding of
the Company's consolidated financial position and results of operations for each
year of the three-year period ended December 31, 1997. The Company's
consolidated financial statements and the notes thereto that follow contain
detailed information that should be referred to in conjunction with the
following discussion.

GENERAL

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

The Company uses the full cost method of accounting for its oil and gas
properties. Under this method, all acquisition, exploration and development
costs, including certain related employee costs (less any joint interest
reimbursements for such costs) incurred for the purpose of acquiring and finding
oil and gas reserves are capitalized in a "full cost pool" as incurred. These
costs are grouped into cost centers on a country-by-country basis. The Company
records depletion of its full cost pool using the unit of production method and
uses its internal estimates of proved quantities of oil and gas reserves for
financial accounting matters. For each cost center, to the extent that
capitalized costs in a full cost pool (net of depreciation, depletion and
amortization and related deferred taxes) exceed the present value (using a 10%
discount rate) of estimated future net after-tax cash flows from proved oil and
gas reserves, such excess costs are charged to operations. Once incurred, a
write-down of oil and gas properties is not reversible at a later date even if
oil or gas prices increase.

In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement No. 128"). The statement specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") and is designed to
improve the EPS information provided in the financial statements by simplifying
the existing computation. In February 1997, the FASB also issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information about Capital
Structure" ("Statement No. 129"). The statement consolidates the existing
requirements to disclose certain information about an entity's capital
structure, for both public and nonpublic entities. The Company adopted the
provisions of these statements in its 1997 annual consolidated financial
statements.

15
<PAGE> 17

In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). The
statement establishes standards for reporting and display of comprehensive
income and its components. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("Statement No. 131"). The statement specifies revised
guidelines for determining an entity's operating and geographic segments and the
type and level of financial information about those segments to be disclosed.
The Company will adopt the provisions of Statements No. 130 and 131 in its 1998
consolidated financial statements. The Company does not believe that such
adoption will have a material effect on its results of operations or the
calculation of net income.

RESULTS OF OPERATIONS

The following table sets forth certain operating information with
respect to the oil and gas operations of the Company.
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------
1997 1996 1995
--------- --------- ---------

<S> <C> <C> <C>
Production:
Oil and condensate (MBbls)............................................... 3,424 2,558 2,071
Gas (MMcf)............................................................... 53,505 41,323 33,719
Total production (MMcfe)................................................. 74,049 56,670 46,145

Average Realized Price:
Oil and condensate (per Bbl)............................................. $ 19.08 $ 20.89 $ 17.23
Gas (per Mcf)............................................................ 2.51 2.32 1.75

Average Costs (per Mcfe):
Lease operating.......................................................... $ 0.33 $ 0.30 $ 0.31
Depreciation, depletion and amortization................................. 1.27 1.13 1.08
General and administrative, net.......................................... 0.15 0.13 0.12
</TABLE>

1997 COMPARED TO 1996

PRODUCTION. Net production increased 31%, from 56.7 Bcfe for 1996, to
74.0 Bcfe for 1997. Oil and condensate production for 1997 increased 866 MBbls,
or 34%, compared to 1996. Increased oil production for 1997 was due primarily to
production increases from development drilling activities during 1996 at South
Timbalier 148 and Ewing Bank 947, the acquisition of Ship Shoal 69 in the third
quarter of 1996 and a well drilled and placed on production late in the fourth
quarter 1996 at Vermilion 398. Gas production increased by 12.2 Bcf, or 29%,
from 41.3 Bcf for 1996 to 53.5 Bcf for 1997. Increased gas production was due to
production increases from development drilling activities during 1996 at South
Timbalier 148 and Ewing Bank 947, the acquisition of interests in nine offshore
blocks in the East Cameron, West Cameron and High Island areas of the Gulf of
Mexico in July 1997, and wells drilled and placed on production during the
fourth quarter of 1996 at Vermilion 308 and Vermilion 398. These increases were
partially offset by natural production decline on other properties of the
Company.

OIL AND GAS REVENUES. Oil and gas revenues for 1997 increased by $50.1
million, or 34%, compared to 1996, primarily as a result of increased oil and
gas production and higher realized gas prices. The average realized price of
natural gas increased by 8%.

<PAGE> 18

For 1997, the average realized gas price was $2.51 per Mcf, which, as a
result of hedging activities, was 96% of the $2.61 per Mcf average gas sales
price that would have otherwise been received. As a result of hedging activities
for gas production for 1996, the Company realized an average gas price of $2.32
per Mcf, or 86% of the $2.70 per Mcf average gas sales price that would have
otherwise been received. For 1997, the average realized oil and condensate price
was $19.08, which, as a result of hedging activities, was 101% of the $19.05 per
barrel average oil and condensate sales price that would have otherwise been
received. For 1996, the average realized oil and condensate price was $20.89,
which as a result of hedging activities, was 99% of the $21.15 per barrel
average oil and condensate sales price that would have otherwise been received.
During 1997, approximately 64% of the Company's equivalent production was
subject to hedge positions as compared to 54% in 1996.

LEASE OPERATING EXPENSE. Lease operating expense for 1997 increased to
$24.3 million from $16.9 million for 1996. Lease operating expense per Mcfe
increased from $0.30 for 1996 to $0.33 for 1997. These increases are primarily
attributable to a general increase in costs in the oilfield service industry,
increased workover activities and lease operating costs associated with
properties acquired during 1997 and 1996.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE. During 1997,
depreciation, depletion and amortization expense increased to $94.0 million from
$64.0 million for 1996. The increase was the result of an increased depletion
rate per Mcfe and production increases from acquisitions and exploratory and
development drilling activities during 1996 and 1997. The depletion rate per
unit for 1997 increased to $1.27 per Mcfe, from $1.13 per Mcfe for 1996. The
increase in the depletion rate per unit is primarily attributable to increased
costs of drilling goods and services, platforms and facilities construction and
transportation services in the industry.

CHINA CEILING TEST WRITE-DOWN. During 1997, the Company completed the
drilling of its initial exploratory well in the Bohai Bay, offshore China at a
cost of $4.3 million. The well did not encounter commercial quantities of oil or
gas and the participants in the well agreed to plug and abandon it. As a result,
in accordance with full cost accounting rules the Company recorded a write-down
of its investment by the amount of the cost of the well. Newfield plans to drill
a second exploration well in China in 1998. To the extent that the well fails to
find commercial quantities of oil and gas, the Company's investment in that well
would be subject to write-down.

GENERAL AND ADMINISTRATIVE EXPENSE, NET. General and administrative
expense, which is net of overhead reimbursements received by the Company from
other working interest owners, increased to $11.1 million, or $0.15 per Mcfe for
1997, as compared to $7.6 million, or $0.13 per Mcfe, for 1996. Performance
based compensation, as a component of general and administrative expense,
increased from $4.9 million, or $0.09 per Mcfe for 1996 to $5.3 million, or
$0.07 per Mcfe for 1997. Direct costs associated with staff increases during
1996 were partially offset by joint interest reimbursements. To the extent that
the Company continues to grow the Company expects general and administrative
expenses, in the aggregate, to continue to increase.

INTEREST EXPENSE, NET. Interest expense, net of capitalized interest,
for 1997 increased to $3.3 million from $0.4 million for 1996. The increase was
attributable to higher average debt levels during 1997 and a lower percentage of
total interest cost being capitalized. The Company expects its 1998 average debt
levels to exceed those in 1997 and expects an increase in interest expense net
of capitalized interest.

NET INCOME. As a result of the foregoing, the Company had net income of
$40.6 million, or $1.07 per diluted share, for 1997, as compared to $38.5
million, or $1.03 per diluted share, for 1996.

17
<PAGE> 19

1996 COMPARED TO 1995

PRODUCTION. Net production increased 23%, from 46.1 Bcfe for 1995, to
56.7 Bcfe for 1996. Oil and condensate production for 1996 increased 487 MBbls,
or 24%, compared to 1995. Increased oil production for 1996 was due primarily to
production increases at Eugene Island 182, Ship Shoal 157 and the acquisition of
Ship Shoal 69 in the third quarter of 1996. Gas production increased by 7.6 Bcf,
or 23%, from 33.7 Bcf for 1995 to 41.3 Bcf for 1996. Increased gas production
was due to production increases at Eugene Island 251/262 and production from
wells drilled and placed on production at Vermilion 355 and Vermilion 297 during
the fourth quarter of 1995 and the first quarter of 1996, respectively. These
increases were partially offset by natural production decline on other
properties of the Company.

OIL AND GAS REVENUES. Oil and gas revenues for 1996 increased by $54.7
million, or 58%, compared to 1995, primarily as a result of increased oil and
gas production and increased oil and gas prices. The average realized price of
oil and condensate increased by 21% and the average realized price of natural
gas increased by 33%.

For the year ended December 31, 1996, the average realized gas price
was $2.32 per Mcf, which, as a result of hedging activities, was 86% of the
$2.70 per Mcf average gas sales price that would have otherwise been received.
For the year ended December 31, 1995, the average realized gas price was $1.75
per Mcf, which as a result of hedging activities, was 105% of the $1.67 per Mcf
average gas sales price that would have otherwise been received. For 1996, the
average realized oil and condensate price was $20.89, which, as a result of
hedging activities, was 99% of the $21.15 per barrel average oil and condensate
sales price that would have otherwise been received. Oil hedging activities for
1995 had a negligible impact on oil and condensate revenues. During 1996,
approximately 54% of the Company's equivalent production was subject to hedge
positions as compared to 42% in 1995.

LEASE OPERATING EXPENSE. Lease operating expense for 1996 increased to
$16.9 million from $14.2 million for 1995. Despite a general increase in costs
in the oil service industry, lease operating expense per Mcfe decreased from
$0.31 for 1995, to $0.30 for 1996. The decrease in lease operating expense per
unit is primarily attributable to higher production volumes.

DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE. During 1996,
depreciation, depletion and amortization expense increased to $64.0 million from
$49.9 million for 1995. The increase was the result of an increased depletion
rate per Mcfe and production increases from acquisitions and exploratory and
development drilling activities during 1996. The depletion rate per unit for
1996 increased to $1.13 per Mcfe from $1.08 per Mcfe for 1995. The increase in
the depletion rate per unit is primarily attributable to higher cost reserve
additions associated with proved properties the Company acquired in 1996.

GENERAL AND ADMINISTRATIVE EXPENSE, NET. General and administrative
expense, which is net of overhead reimbursements received by the Company from
other working interest owners, increased to $7.6 million, or $0.13 per Mcfe, for
1996 as compared to $5.5 million, or $0.12 per Mcfe, for 1995. Performance based
compensation, as a component of general and administrative expense, increased
from $2.4 million, or $0.05 per Mcfe, for 1995, to $4.9 million, or $0.09 per
Mcfe, for 1996. Direct costs associated with staff increases during 1996 were
offset to a significant extent by joint interest reimbursements.

STOCK COMPENSATION EXPENSE. Stock compensation expense increased by
$1.3 million during 1996 due to the amortization of additional noncash
compensation expense associated with 246,000 shares of restricted stock that
were granted in 1996 to employees and 10,000 shares of restricted stock that
were granted to non-employee Directors.

18
<PAGE> 20

NET INCOME. As a result of the foregoing, the Company had net income of
$38.5 million or $1.03 per diluted share for 1996, as compared to $16.3 million
or $0.45 per diluted share for 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company had $0.4 million of working capital at December 31, 1997
compared to $11.4 million at December 31, 1996. The $11.0 million decrease in
working capital is primarily due to increased drilling activity during 1997
offset by the impact of increased revenues and borrowings during the year.
Long-term debt increased from $60.0 million at December 31, 1996 to $129.6
million at December 31, 1997. Working capital balances may fluctuate from year
to year to the extent the Company increases or decreases borrowings under its
revolving credit facility (the "Credit Facility"). Historically, the Company has
funded its oil and gas activities through cash flow from operations, equity
capital from private and public sources and bank borrowings. On October 15,
1997, the Company placed through a Rule 144A private placement offering, $125
million in senior unsecured notes due October 2007. Net proceeds from the sale
of the notes were used to repay outstanding indebtedness under the Credit
Facility. The notes were issued at 99.684% of par with a 7.45% coupon, with
interest payable on April 15 and October 15, commencing April 15, 1998.

The Company maintains its reserve-based revolving Credit Facility with
The Chase Manhattan Bank, as agent. As of December 31, 1997, $5 million was
outstanding under the Credit Facility. The Credit Facility was amended and
restated as of October 9, 1997 in connection with the Company's private
placement of $125 million of senior unsecured notes. The net proceeds of the
private placement were used primarily to repay all amounts then outstanding
under the Credit Facility. As so amended and restated, the Credit Facility
provides a $125 million revolving credit maturing on October 31, 2002, improved
interest rate pricing grids and additional flexibility under certain covenants.
The amount available under the Credit Facility is subject to a calculated
borrowing base, which is reduced by the principal amount of the senior notes
outstanding at the time of calculation. The Company has an option, subject to
the borrowing base, to increase the facility to $200 million. The Company
currently has $120 million of available capacity under the Credit Facility.

The Company's net cash flow from operations for 1997 was $160.3 million
compared to $127.5 million for 1996. The increase is primarily due to increases
in oil and gas production and average realized gas prices and changes in
operating assets and liabilities. Net cash flow from operations before changes
in operating assets and liabilities for 1997 was $161.9 million compared to
$125.2 million for 1996. The year-to-year increase in net cash flow from
operations before changes in operating assets and liabilities is primarily
attributable to increases in oil and gas production and higher average realized
natural gas prices, partially offset by higher operating expenses and lower oil
prices.

From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow, as well as to reduce its exposure to price fluctuations. While the
use of these hedging arrangements limits the downside risk of adverse price
movements, they may also limit future revenues from favorable price movements.
The use of hedging transactions also involves the risk that the counterparties
will be unable to meet the financial terms of such transactions. All of the
Company's hedging transactions to date were carried out in the over-the-counter
market and the obligations of the counterparties have been guaranteed by
entities with at least an investment grade rating or secured by letters of
credit. The Company accounts for these transactions as hedging activities and,
accordingly, gains or losses are included in oil and gas revenues when the
hedged production is delivered. Neither the hedging contracts nor the unrealized
gains or losses on these contracts are recognized in the financial statements.

19
<PAGE> 21

As of December 31, 1997, the Company had entered into commodity price
hedging contracts with respect to its 1998 production as follows:

Swaps Collars Floor Contracts
------------------------- ------------------------------------ -------------------------
Weighted NYMEX
Average Contract Price
NYMEX per MMBtu NYMEX
Volume in Contract Price Volume in ------------------------ Volume in Contract Price
Period MMMBtu per MMBtu MMMBtu Floor Ceiling MMMBtu per MMBtu
----------- ----------- -------------- --------- ------- --------- --------- --------------

<S> <C> <C> <C> <C> <C> <C> <C>
January 1998............. 1,500 (1) $3.09 1,500 $2.86-$3.36 $3.91-$4.30 --- ---
February 1998 ........... 1,500 (1) $2.77 1,500 $2.59-$2.98 $3.53-$4.03 --- ---
March 1998 .............. 1,500 (1) $2.48 750 $2.48-$2.66 $3.21-$3.38 750 $2.33
April 1998............... 1,000 (2) $2.27 500 $2.28-$2.34 $2.83-$2.89 250 $2.33
May 1998................. 750 (3) $2.27 250 $2.19 $2.65 250 $2.22
June 1998................ 750 (3) $2.26 --- --- --- 250 $2.20
July 1998................ 750 (3) $2.26 --- --- --- --- ---
August 1998.............. 750 (3) $2.26 --- --- --- --- ---
September 1998........... 750 (3) $2.26 --- --- --- --- ---
</TABLE>

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

(1) The Company has entered into a basis swap with respect to 50% of the
indicated volume.
(2) The Company has entered into a basis swap with respect to 75% of the
indicated volume.
(3) The Company has entered into a basis swap with respect to 33% of the
indicated volume.

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

The Company enters into basis swaps (either as part of a particular
hedging transaction or separately) tied to a particular NYMEX-based transaction
to mitigate basis risk. Because substantially all of the Company's natural gas
production is sold under spot contracts that have historically correlated with
the swap price, the Company believes that it has no material basis risk with
respect to gas swaps that are not coupled with basis swaps.

The Company has entered into a crude oil swap agreement for 15,000
barrels of oil production per month for the period January 1998 through June
1998, which effectively fixes the price of such production against the NYMEX
West Texas Intermediate contract price ranging from $20.77 to $21.52 per barrel.
Because substantially all of the Company's oil production is sold under spot
contracts which correlate to the West Texas Intermediate price, the Company
believes that it has no material basis risk with respect to these transactions.

20
<PAGE> 22

Subsequent to December 31, 1997, the Company entered into additional
commodity price hedging contracts with respect to its 1998 production as
follows:

Swaps Collars Floor Contracts
-------------------------- ---------------------------------- -------------------------
NYMEX
Weighted Contract Price
Average per MMBtu
NYMEX ---------------------- NYMEX
Volume in Contract Price Volume in Volume in Contract Price
Period MMMBtu per MMBtu MMMBtu Floor Ceiling MMMBtu per MMBtu
----------- ----------- -------------- --------- ------- --------- --------- --------------

<S> <C> <C> <C> <C> <C> <C> <C>
May 1998................. --- --- --- --- --- 500 $2.20
June 1998................ --- --- --- --- --- 750 $2.21
July 1998................ --- --- --- --- --- 1,250 $2.20-$2.21
August 1998.............. --- --- --- --- --- 1,250 $2.20-$2.21
September 1998........... --- --- --- --- --- 1,250 $2.20-$2.21
</TABLE>

Capital expenditures for 1997 were $253.2 million, consisting of $66.8
million for exploration, $117.3 million for development and $69.1 million for
acquisitions of properties. The Company's exploration capital expenditure budget
for 1998 is approximately $59 million. Primarily as a result of the Company's
successful exploratory wells drilled in 1997, 20% of the Company's proved
reserves at December 31, 1997 were proved undeveloped. The Company has budgeted
approximately $98 million in 1998 for development drilling and construction
expenditures for platforms, facilities and pipelines including $4 million for
the abandonment or dismantlement of existing wells and facilities. The Company
continues to pursue attractive acquisition opportunities. The timing and size of
any acquisition and the associated capital commitments are unpredictable.

Actual levels of capital expenditures may vary significantly due to
many factors, including drilling results, oil and gas prices, industry
conditions, the prices and availability of goods and services and the extent to
which proved properties are acquired. The Company anticipates that capital
expenditures will be funded principally from cash flow from operations, working
capital and bank borrowings. During 1997, the Company borrowed $357.3 million
and repaid $412.3 million under the Credit Facility. The Company anticipates
additional borrowings under the Credit Facility during 1998.

To cover the various obligations of lessees on the Outer Continental
Shelf (the "OCS"), the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The cost
of such bonds or other surety can be substantial and there is no assurance that
bonds or other surety can be obtained in all cases. Additionally, the MMS may
require operators in the OCS to post supplemental bonds in excess of lease and
area wide bonds to assure that abandonment obligations on specific properties
will be met. The Company is currently exempt from the supplemental bonding
requirements of the MMS. Under certain circumstances, the MMS may require any
Company operations on federal leases to be suspended or terminated. Any such
suspension or termination could materially and adversely affect the Company's
financial condition and operations.

The Company's operations are subject to various federal, state and
local laws and regulations relating to the protection of the environment. The
Company believes its current operations are in material compliance with current
environmental laws and regulations. There can be no assurance, however, that
current regulatory requirements will not change, currently unforeseen
environmental incidents will not occur or past non-compliance with environmental
laws will not be discovered.

The Company has been named as a defendant in certain lawsuits arising
in the ordinary course of business. While the outcome of these lawsuits cannot
be predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position, liquidity or results of
operations or cash flows of the Company.

21
<PAGE> 23

YEAR 2000 ISSUES

Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.

Because the Company was recently formed, it was aware of, and
considered Year 2000 issues at the time of purchase or development of its
software systems. In addition, the Company has recently completed a further
assessment of its core financial and operational software systems to ensure
compliance. Further assessment of other less critical software systems and
various types of equipment is continuing and should be completed by June 1998.
The Company believes that the potential impact, if any, of these systems not
being Year 2000 compliant will at most require employees to manually complete
otherwise automated tasks or calculations and it should not impact the Company's
ability to continue exploration, drilling, production or sales activities.

The Company has initiated formal communication with its significant
suppliers, business partners and customers to determine the extent to which the
Company is vulnerable to those third parties' failure to correct their own Year
2000 issues. There can be no guarantee, however, that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems would not have a material adverse effect on the
Company. The Company has determined it has no exposure to contingencies related
to the Year 2000 issue with respect to products sold to third parties.

The Company has and will utilize both internal and external resources
to complete tasks and perform testing necessary to address the Year 2000 issue.
The Company plans to complete the Year 2000 project no later than December 31,
1998. The Company does not anticipate that it will incur any significant costs
relating to the assessment and remediation of Year 2000 issues.

FORWARD-LOOKING STATEMENTS

This document includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical facts included in this document,
including statements regarding production targets, anticipated production rates,
planned capital expenditures, the availability of capital resources to fund
capital expenditures, estimates of proved reserves, wells planned to be drilled
in the future, the Company's financial position, business strategy and other
plans and objectives for future operations, are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, such statements are based upon
assumptions and anticipated results that are subject to numerous uncertainties.
Actual results may vary significantly from those anticipated due to many
factors, including drilling results, oil and gas prices, industry conditions,
the prices of goods and services, the availability of drilling rigs and other
support services and the availability of capital resources. In addition, the
drilling of oil and gas wells and the production of hydrocarbons are subject to
governmental regulations and operating risks.

22
<PAGE> 24

FORWARD-LOOKING STATEMENTS (CONT)

There are also numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves and in projecting future rates
of production and timing of development expenditures, including many factors
beyond the control of the Company. Reserve engineering is a subjective process
of estimating underground accumulations of oil and natural gas that cannot be
measured in an exact way, and the accuracy of any reserve estimate is a function
of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates made by different engineers
often vary from one another. In addition, results of drilling, testing and
production subsequent to the date of an estimate may justify revisions of such
estimate and such revisions, if significant, would change the schedule of any
further production and development drilling. Accordingly, reserve estimates are
generally different from the quantities of oil and natural gas that are
ultimately recovered. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.

23
<PAGE> 25

MANAGEMENT REPORT ON FINANCIAL STATEMENTS

The Management of Newfield Exploration Company is responsible for
the preparation and integrity of all information contained in this Annual
Report. The financial statements and other financial information are prepared in
accordance with generally accepted accounting principles and, accordingly,
include certain informed judgments and estimates of management. The Company's
independent public accountants have audited the financial statements as
described in their report which follows.

Management maintains a system of internal accounting and
managerial controls which are designed to provide reasonable assurance that
assets are safeguarded, transactions are executed in accordance with
management's authorization and accounting records are reliable for financial
statement preparation.

An Audit Committee of the Board of Directors, consisting of
directors who are not employees of the Company, meets periodically with
management and the independent public accountants to obtain assurances as to the
integrity of the Company's accounting and financial reporting and to affirm the
adequacy of the system of accounting and managerial controls in place. The
independent accountants have full, free and separate access to the Audit
Committee to discuss all appropriate matters.

We believe that the Company's policies and system of accounting and
managerial controls reasonably assure the integrity of the information in the
financial statements and in the other sections of this Annual Report.

/s/ JOE B. FOSTER /s/ TERRY W. RATHERT
- -------------------------------- ---------------------------
Joe B. Foster Terry W. Rathert
Chairman of the Board, President Vice President - Planning
and Chief Executive Officer and Administration and
Secretary

24
<PAGE> 26

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Newfield Exploration Company:

We have audited the accompanying balance sheets of Newfield Exploration
Company as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Newfield Exploration
Company as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P.

Houston, Texas
February 6, 1998

25
<PAGE> 27

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEET
(In thousands of dollars, except share data)

December 31,
------------------------------
1997 1996
---------- -----------
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 8,217 $ 13,290
Accounts receivable - oil and gas.............................................. 54,123 46,814
Other.......................................................................... 2,426 1,179
---------- -----------
Total current assets......................................................... 64,766 61,283
---------- -----------
Oil and gas properties (full cost method, of which $79,264
at December 31, 1997 and $55,305 at December 31, 1996
were excluded from amortization)............................................... 775,585 526,680
Furniture, fixtures and equipment................................................. 3,100 2,496
Less - accumulated depreciation, depletion and amortization....................... (293,111) (199,161)
---------- -----------
485,574 330,015
---------- -----------
Other assets...................................................................... 3,281 4,640
---------- -----------
Total assets.................................................................. $ 553,621 $ 395,938
========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities........................................ $ 63,834 $ 46,072
Advances from joint owners...................................................... 560 3,612
Current maturities of capital lease obligations................................. --- 163
---------- -----------
Total current liabilities.................................................... 64,394 49,847
---------- -----------
Other liabilities.................................................................. 3,846 2,048
Long-term debt..................................................................... 129,623 60,000
Deferred taxes..................................................................... 63,710 44,141
---------- -----------
Total long-term liabilities.................................................... 197,179 106,189
---------- -----------
Commitments and contingencies (Note 5)............................................. --- ---

Stockholders' equity:
Preferred stock ($0.01 par value, 5,000,000 shares authorized;
no shares issued)............................................................. --- ---
Common stock ($0.01 par value, 100,000,000 and 50,000,000 shares
authorized; 35,975,777 and 35,243,040 shares issued and outstanding
at December 31, 1997 and December 31, 1996, respectively)..................... 360 352
Additional paid-in capital...................................................... 160,672 147,291
Unearned compensation........................................................... (4,592) (2,746)
Retained earnings............................................................... 135,608 95,005
Total stockholders' equity.................................................... ---------- -----------
292,048 239,902
---------- -----------
Total liabilities and stockholders' equity.................................... $ 553,621 $ 395,938
========== ===========
</TABLE>

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

26
<PAGE> 28

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------

<S> <C> <C> <C>
Oil and gas revenues................................................... $ 199,399 $ 149,256 $ 94,598
--------- --------- ---------
Operating expenses:
Lease operating .................................................. 24,308 16,946 14,227
Depreciation, depletion and amortization.......................... 94,000 64,026 49,904
China ceiling test write-down..................................... 4,254 --- ---
General and administrative, net................................... 11,093 7,552 5,549
Stock compensation................................................ 1,177 1,943 692
--------- --------- ---------
Total operating expenses...................................... 134,832 90,467 70,372
--------- --------- ---------

Income from operations ................................................ 64,567 58,789 24,226

Other income (expenses):
Interest income................................................... 1,122 917 988
Interest expense, net............................................. (3,268) (420) (208)
--------- --------- ---------
(2,146) 497 780
--------- --------- ---------

Income before income taxes............................................. 62,421 59,286 25,006

Income tax provision:
Current........................................................... --- 29 21
Deferred.......................................................... 21,818 20,763 8,721
--------- --------- --------
21,818 20,792 8,742
--------- --------- --------
Net income ............................................................ $ 40,603 $ 38,494 $ 16,264
========= ========= ========

Basic earnings per common share........................................ $ 1.14 $ 1.10 $ 0.48
========= ========= ========
Diluted earnings per common share...................................... $ 1.07 $ 1.03 $ 0.45
========= ========= ========
Weighted average number of shares outstanding
for basic earnings per share...................................... 35,612,488 34,872,113 33,935,310

Weighted average number of shares outstanding
for diluted earnings per share.................................... 38,017,177 37,408,924 36,454,023
</TABLE>

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

27
<PAGE> 29

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In thousands, except share data)

Unrealized Gain (Loss)
Common Stock Additional on Investment Total
------------------- Paid-In Unearned Retained Securities Stockholders'
Shares Amount Capital Compensation Earnings Available for Sale Equity
--------- ------- ---------- ------------ -------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 33,332,360 $ 333 $ 130,718 $ (1,788) $ 40,247 $(19) $169,491
Issuance of common stock
for cash, net of offering costs.... 1,016,484 10 4,333 4,343
Issuance of restricted stock, less
amortization of $33................ 6,000 80 (47) 33
Cancellation of stock options........ (63) 17 (46)
Amortization of stock
compensation....................... 705 705
Adjustment to unrealized loss
on investment securities
available for sale ................ 19 19
Tax benefit from exercise
of stock options (Note 6).......... 2,762 2,762
Net income........................... 16,264 16,264
---------- ------ --------- ----------- --------- ---- --------
Balance, December 31, 1995........... 34,354,844 343 137,830 (1,113) 56,511 --- 193,571
Issuance of common stock
for cash........................... 632,196 6 3,204 3,210
Issuance of restricted stock, less
amortization of $1,441............. 256,000 3 3,601 (2,163) 1,441
Cancellation of stock options........ (28) 3 (25)
Amortization of stock
compensation....................... 527 527
Tax benefit from exercise
of stock options (Note 6).......... 2,684 2,684
Net income........................... 38,494 38,494
---------- ------ --------- ----------- --------- ---- --------
Balance, December 31, 1996........... 35,243,040 352 147,291 (2,746) 95,005 --- 239,902
Issuance of common stock
for cash........................... 686,915 7 8,088 8,095
Issuance of restricted stock, less
amortization of $226............... 45,822 1 3,022 (2,797) 226
Amortization of stock
compensation....................... 951 951
Tax benefit from exercise
of stock options (Note 6).......... 2,271 2,271
Net income........................... 40,603 40,603
---------- ------ --------- ----------- --------- ---- --------
Balance, December 31, 1997........... 35,975,777 $ 360 $ 160,672 $ (4,592) $ 135,608 $--- $292,048
========== ====== ========= =========== ========= ==== ========
</TABLE>

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

28
<PAGE> 30

NEWFIELD EXPLORATION COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)

Year Ended December 31,
-------------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income....................................................... $ 40,603 $ 38,494 $ 16,264

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization...................... 94,000 64,026 49,904
China ceiling test write-down................................. 4,254 --- ---
Deferred taxes................................................ 21,818 20,763 8,721
Stock compensation............................................ 1,177 1,943 692
Realized loss on sale of investment securities................ --- --- 32
---------- ---------- ----------
161,852 125,226 75,613
Changes in assets and liabilities:
Increase in accounts receivable, oil and gas.................. (7,309) (21,418) (8,859)
(Increase) decrease in other current assets................... (1,226) 3,793 (307)
(Increase) decrease in other assets........................... 1,359 443 (24)
Increase in accounts payable
and accrued liabilities.................................... 6,912 16,523 4,275
Increase (decrease) in advances from joint owners............ (3,052) 1,939 (3,194)
Increase in other liabilities................................. 1,802 988 136
---------- ---------- ----------

Net cash provided by operating activities............... 160,338 127,494 67,640
---------- ---------- ----------
Cash flows from investing activities:
Additions to oil and gas properties.............................. (242,309) (158,834) (106,957)
Additions to furniture, fixtures and equipment................... (653) (703) (599)
Sales of investment securities................................... --- --- 8,227
---------- ---------- ----------

Net cash used in investing activities................... (242,962) (159,537) (99,329)
---------- ---------- ----------

Cash flows from financing activities:
Proceeds from borrowings......................................... 357,250 281,000 96,000
Repayments of borrowings......................................... (412,250) (251,000) (66,000)
Proceeds from issuance of senior notes........................... 124,619 --- ---
Proceeds from issuances of common stock, net..................... 8,095 3,210 4,343
Payments on capital lease obligations............................ (163) (410) (533)
---------- ---------- ----------

Net cash provided by financing activities............... 77,551 32,800 33,810
---------- ---------- ----------

Increase (decrease) in cash and cash equivalents.................... (5,073) 757 2,121
Cash and cash equivalents, beginning of period...................... 13,290 12,533 10,412
---------- --------- ----------
Cash and cash equivalents, end of period........................... $ 8,217 $ 13,290 $ 12,533
========== ========= ==========
</TABLE>

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

29
<PAGE> 31

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

These financial statements include the accounts of Newfield Exploration
Company (the "Company"), a Delaware corporation, which was formed on December 5,
1988 to conduct offshore oil and gas exploration and drilling and development
operations in the Gulf of Mexico. The Company has diversified its operations
into onshore South Louisiana and select international areas. The Company
conducts foreign operations through its subsidiaries. As an independent oil and
gas producer, the Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate, which are dependent upon numerous factors beyond the Company's
control, such as economic, political and regulatory developments and competition
from other sources of energy. The energy markets have historically been very
volatile, as evidenced by the recent volatility of oil and gas prices, and there
can be no assurance that oil and gas prices will not be subject to wide
fluctuations in the future. A substantial or extended decline in oil and gas
prices could have a material adverse effect on the Company's financial position,
results of operations, cash flows, quantities of oil and gas reserves that may
be economically produced and access to capital.

Principles of Consolidation

The consolidated financial statements include the accounts of Newfield
Exploration Company and its subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated.

Reclassifications and Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the
reporting period(s). The Company's most significant financial estimates are
based on remaining proved oil and gas reserves (see Supplementary Oil and Gas
Disclosures included in Supplementary Financial Information). Actual results
could differ from these estimates. Certain reclassifications for prior years
have been made to conform with the current year presentation.

Earnings Per Share

Effective December 31, 1997, the Company retroactively adopted the
provisions of Statement of Financial Accounting Standards No. 128 for all
periods presented. Basic earnings per common share ("EPS") is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities were exercised or converted to common stock. All share amounts
reflect the retroactive application of a two-for-one common stock split in
December 1996.

30
<PAGE> 32

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following is a calculation of basic and diluted weighted average
shares outstanding for each of the three years in the period ended December 31,
1997:

1997 1996 1995
---------- ---------- ----------

<S> <C> <C> <C>
Shares outstanding for basic EPS............................ 35,612,488 34,872,113 33,935,310

Dilution effect of stock options
outstanding at end of period............................ 2,404,689 2,536,811 2,518,713
---------- ---------- ----------
Shares outstanding for diluted EPS.......................... 38,017,177 37,408,924 36,454,023
========== ========== ==========
</TABLE>

Financial Instruments

Cash equivalents include highly liquid investments with a maturity of
approximately three months or less when acquired. The Company invests cash in
excess of operating requirements in United States Treasury notes, Eurodollar
bonds and investment grade commercial paper. Cash equivalents are stated at
cost, which approximates fair market value.

The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different from
the book value. The book value of those financial instruments that are
classified as current assets or liabilities approximate fair value because of
the short maturity of those instruments.

The Company enters into various commodity price hedging contracts with
respect to its oil and gas production. While the use of these hedging
arrangements limits the downside risk of adverse price movements, they may also
limit future revenues from favorable price movements. The use of hedging
transactions also involves the risk that the counterparties will be unable to
meet the financial terms of such transactions. Such contracts are accounted for
as hedges, in accordance with Statement of Financial Accounting Standards No.
80. Gains and losses on these contracts are recognized in revenue in the period
in which the underlying production is delivered. These instruments are measured
for correlation at both the inception of the contract and on an ongoing basis.
If these instruments cease to meet the criteria for deferral accounting, any
subsequent gains or losses are recognized in revenue. If these instruments are
terminated prior to maturity, resulting gains and losses continue to be deferred
until the hedged item is recognized in revenue. Neither the hedging contracts
nor the unrealized gains or losses on these contracts are recognized in the
financial statements.

Oil and Gas Properties

The Company uses the full cost method of accounting for exploration and
development costs. Under this method of accounting, all costs incurred in the
acquisition, exploration and development of oil and gas properties are
capitalized into cost centers that are established on a country-by-country
basis. Such capitalized costs and estimated future development and dismantlement
costs are amortized on a unit-of-production method based on proved reserves. For
each cost center, the net capitalized costs of oil and gas properties are
limited to the lower of unamortized cost or the cost center ceiling, defined as
the sum of the present value (10% discount rate) of estimated future net
revenues from proved reserves, based on year-end oil and gas prices; plus the
cost of properties not being amortized, if any; plus the lower of cost or
estimated fair value of unproved properties included in the costs being
amortized, if any; less related income tax effects. In accordance with full cost
accounting rules the Company recorded a write-down of $4.3 million in 1997
related to an unsuccessful well in China.

31
<PAGE> 33

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Proceeds from the sale of oil and gas properties are applied to reduce
the costs in the cost center unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss is
recognized.

Unevaluated properties and associated costs not currently being
amortized and included in oil and gas properties were $71.4 million and $55.3
million at December 31, 1997 and 1996, respectively. Additionally, at December
31, 1997, there was $7.9 million of unproved property costs associated with the
Company's investment in international activities. The properties represented by
these costs were at such dates undergoing exploration or development activities,
or are properties on which the Company intends to commence such activities in
the future. The Company believes that the unevaluated properties at December 31,
1997 will be substantially evaluated and therefore subject to amortization in 12
to 24 months.

Other property and equipment are recorded at cost and are depreciated
over their estimated useful lives of five to seven years using the straight-line
method.

Abandonment and Dismantlement Costs

Future abandonment and dismantlement costs include costs to dismantle,
relocate and dispose of the Company's offshore production platforms, gathering
systems, wells and related structures. The Company develops estimates of its
future abandonment and dismantlement costs for each of its properties based upon
the type of production structure, depth of water, currently available
abandonment procedures and consultations with construction and engineering
consultants. The Company does not currently anticipate additional abandonment
and dismantlement costs will be incurred beyond such estimates. Such estimates
are re-evaluated by the Company's engineers at least annually.

Total estimated future abandonment and dismantlement costs associated
with the Company's developed and acquired properties were $53.9 million, $41.5
million, and $35.9 million as of December 31, 1997, 1996 and 1995, respectively.

Estimated future abandonment and dismantlement costs are accrued on a
unit-of-production method based on proved reserves. The portion of future
abandonment and dismantlement costs that has been accrued is included in
accumulated depreciation, depletion and amortization and was $23.6 million,
$18.0 million and $13.7 million as of December 31, 1997, 1996 and 1995,
respectively.

Income Taxes

The Company follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("FAS 109"). This statement requires deferred
tax assets and liabilities to be determined by applying tax regulations existing
at the end of a reporting period to the cumulative temporary differences between
the tax bases of assets and liabilities and their reported amounts in the
financial statements.

Concentration of Credit Risk

The Company maintains cash balances with several banks, which
frequently exceed federally insured limits and invests its cash in investment
grade commercial and U.S. Government backed securities. The Company's joint
interest partners consist primarily of independent oil and gas producers. The
Company's

32
<PAGE> 34

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

oil and gas production purchasers consist primarily of independent marketers and
major gas pipeline companies. The Company performs credit evaluations of its
customers' financial condition and obtains letter of credit agreements and
parental guarantees from selected oil and gas purchase customers. The Company
has not experienced any significant losses from uncollectible accounts. All of
the Company's hedging transactions to date were carried out in the
over-the-counter market and the obligations of the counterparties have been
guaranteed by entities with at least an investment grade rating or secured by
letters of credit.

Major Customers

The Company sold oil and gas production representing more than 10% of
its oil and gas revenues for the year ended December 31, 1997, to Coast Energy
Group (12%) and Gulfmark Energy, Inc. (11%); for the year ended December 31,
1996, to Gulfmark Energy, Inc. (17%), Coast Energy Group (16%), and Superior
Natural Gas Corporation (12%); for the year ended December 31, 1995, to Gulfmark
Energy, Inc. (22%), Coast Energy Group (15%), and Northridge Energy (10%). Based
upon the current demand for oil and gas, the Company believes that the loss of
any of these purchasers would not have a material adverse effect on the Company.

2. HEDGING TRANSACTIONS:

During 1997, approximately 64% of the Company's equivalent production
was subject to hedge positions as compared to 54% in 1996. The Company has
entered into hedging transactions with respect to a portion of its estimated
production for 1998.

As of December 31, 1997, the Company had entered into commodity price
hedging contracts with respect to its gas production for 1998 as follows:

NYMEX Contract
Price per MMBtu
--------------------------------------------------
Collar
Volume in ------------------------- Floor Fair Market
Period MMMBtu Swap Floor Ceiling Contract Value(3)
-------------- --------- ------ ----------- ----------- ----------- --------------

<S> <C> <C> <C> <C> <C> <C>
January 1998 - March 1998
Price Swap Contracts....... 4,500(1) $2.78 --- --- --- $2.7 million
Collar Contracts........... 3,750 --- $2.48-$3.36 $3.21-$4.30 --- $2.4 million
Floor Contracts............ 750 --- --- --- $2.33 $0.1 million
April 1998 - June 1998
Price Swap Contracts....... 2,500(1) $2.27 --- --- --- $0.2 million
Collar Contracts........... 750 --- $2.19-$2.34 $2.65-$2.89 --- $0.1 million
Floor Contracts............ 750 --- --- --- $2.20-$2.33 $0.1 million
July 1998 - September 1998
Price Swap Contracts....... 2,250(2) $2.26 --- --- --- $0.2 million
</TABLE>

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

(1) The Company has entered into a basis swap with respect to 50% of
the indicated volume.
(2) The Company has entered into a basis swap with respect to 33% of
the indicated volume.
(3) The fair market value is calculated using prices derived from NYMEX
futures contract prices existing at December 31, 1997.

33
<PAGE> 35

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of December 31, 1996, the Company had entered into commodity price
hedging contracts with respect to its gas production for 1997 as follows:

NYMEX Contract
Price per MMBtu
----------------------------------
Collar
Volume in ------------------------- Fair Market
Period MMMBtu Swap Floor Ceiling Value(2)
-------------- --------- ------ ----------- ----------- --------------

<S> <C> <C> <C> <C> <C>
January 1997 - March 1997
Price Swap Contracts........... 3,900(1) $ 2.22 --- --- ($3.3 million)
Cashless Collar Contracts...... 7,650(1) --- $1.97-$2.60 $2.39-$3.05 ($3.3 million)
April 1997 - June 1997
Price Swap Contracts........... 2,400(1) $ 1.97 --- --- ($0.2 million)
</TABLE>

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

(1) The Company has entered into a basis swap with respect to 100% of
the indicated volume.
(2) The fair market value is calculated using prices derived from NYMEX
futures contract prices existing at December 31, 1996.

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

34
<PAGE> 36

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

3. DEBT:

Long-term debt consisted of the following (in thousands):

December 31, December 31,
1997 1996
------------ ------------
Senior Unsecured Debt

<S> <C> <C>
Bank revolving credit facility:
Prime rate based loans.................................. $ 5,000 $ 25,000
LIBOR based loans....................................... --- 35,000
------------ ------------
Total bank revolving credit facility............. 5,000 60,000
------------ ------------
7.45% Senior Notes, due 2007............................... 124,623 ---
------------ ------------
Long-term debt.......................................... $ 129,623 $ 60,000
============ ============
</TABLE>

At December 31, 1997 and 1996 the interest rates under the bank
revolving credit facility for prime rate loans were 8.50% and 8.25%,
respectively, and for LIBOR based loans were 6.19% and 6.38%, respectively.

The Company has an unsecured revolving credit agreement (the "Credit
Facility") with a current commitment of $125 million that matures on October 31,
2002. As of December 31, 1997, there was $5 million outstanding under the Credit
Facility. The Company's calculated borrowing base was $225 million ("Borrowing
Base") which is reduced by the aggregate principal then outstanding on the
Senior Notes, currently resulting in an available Borrowing Base of $100
million. The Borrowing Base is determined by the majority banks party to the
agreement. The Company has the option, subject to notification and conditioned
upon the then effective Borrowing Base, to increase the size of the Credit
Facility to $200 million.

Borrowings under the Credit Facility bear interest, at the Company's
option, at (i) the higher of (a) the federal fund rate plus 50 basis points and
(b) the bank's prime rate or (ii) LIBOR plus a variable margin, which is based
upon the loan amount outstanding relative to the Borrowing Base and the
Company's corporate credit ratings. The Credit Facility also provides for the
payment of a commitment fee and a standby fee. The Company paid fees of
$148,000, $205,000, and approximately $179,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

The Credit Facility contains positive and negative covenants which,
among other things, require the Company to maintain a working capital ratio, as
defined, a fixed charge coverage ratio, as defined, and a minimum net worth. The
Credit Facility also limits the incurrence of additional debt, additional liens
on properties, sale of certain assets and the declaration or payment of
dividends.

On October 15, 1997, the Company issued $125 million of 7.45% Senior
Notes due 2007 ("the Notes"). The Notes were issued at 99.684% of par with a
7.45% coupon, with interest payable on April 15 and October 15, commencing April
15, 1998. The Notes may be redeemed at any time, at the option of the Company,
in whole or in part, at a price equal to 100% of the principal amount plus
accrued and unpaid interest (if any) to the date of redemption plus a premium
(if any) relating to the then prevailing yield on United States Treasury notes
with a term equal to the remaining life of the Notes. The Notes are senior
unsecured obligations of the Company and rank pari passu in right of payment
with any existing and future senior unsecured indebtedness of the Company,
including indebtedness under its Credit Facility.

35
<PAGE> 37

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. FEDERAL INCOME TAXES:

The components of deferred tax assets and liabilities are as follows (in
thousands):

December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liability:
Oil and gas properties..................................................... $ 83,012 $ 55,993
------------ ------------
Deferred tax asset:
Alternative minimum tax.................................................... 1,848 1,848
Net operating losses....................................................... 15,073 8,329
Other, net................................................................. 2,381 1,675
------------ ------------
19,302 11,852
Valuation allowance............................................................. --- ---
------------ ------------
Net deferred tax liability................................................. $ 63,710 $ 44,141
============ ============
</TABLE>

The Company does not believe a deferred tax asset valuation is required
because all tax carryovers are expected to be fully utilized.

As of December 31, 1997, the Company had a net operating loss ("NOL")
carryforward for federal income tax purposes of approximately $38.0 million and
$5.0 million for foreign income tax purposes that may be used in future years to
offset taxable income. Utilization of the Company's NOL carryforward is subject
to annual limitations due to certain stock ownership changes that have occurred
or may occur. To the extent not utilized, the NOL carryforward will begin to
expire in 2005.

5. COMMITMENTS AND CONTINGENCIES:

The Company has entered into a noncancelable operating lease agreement
for office space in Houston, Texas. The lease term expires in November 2002,
with two options to renew the lease for five years each.

Future minimum lease payments required as of December 31, 1997 related
to this operating lease are as follows (in thousands):

Year ended December 31,
<S> <C>
1998................................................................ $ 572
1999................................................................ 592
2000................................................................ 613
2001................................................................ 633
2002 ............................................................... 541
Total minimum lease payments.................................... ------
$2,951
======
</TABLE>

Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$590,000, $537,000 and $490,000, respectively.

36
<PAGE> 38

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6. STOCK-BASED COMPENSATION:

The Company has several stock-based compensation plans, which are
described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans.

Stock Option Plans

The Company has granted options pursuant to its 1989, 1990, 1991, 1993
and 1995 stock option plans (collectively, the "Stock Option Plans"). Options
that have been granted and are outstanding generally expire 10 years from the
date of grant and become exercisable at the rate of 20% per year. The following
is a summary of all stock option activity for 1995, 1996 and 1997:

Number Weighted
of Shares Average
Underlying Exercise
Options Prices
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1994...................... 4,438,440 $ 4.39
Granted............................................... 241,600 13.18
Exercised............................................. (981,550) 4.06
Forfeited............................................. (34,750) 9.63
Expired............................................... (96,000) 14.14
---------- ---------
Outstanding at December 31, 1995...................... 3,567,740 4.76
Granted............................................... 539,350 15.35
Exercised............................................. (598,590) 4.64
Forfeited............................................. (25,800) 9.09
---------- ---------
Outstanding at December 31, 1996...................... 3,482,700 6.39
Granted............................................... 285,000 22.16
Exercised............................................. (375,070) 5.25
Forfeited............................................. (640) 13.94
---------- ---------
Outstanding at December 31, 1997...................... 3,391,990 $ 7.84
========== =========
Exercisable at December 31, 1995 2,292,790 $ 4.04
========== =========
Exercisable at December 31, 1996 2,168,770 $ 4.18
========== =========
Exercisable at December 31, 1997 2,291,480 $ 4.73
========== =========
</TABLE>

At December 31, 1997, the Company had an additional 702,840 options
available for grant. If granted, these additional options will be exercisable at
a price not less than the fair market value per share of the Company's Common
Stock on the date of grant. The weighted average fair value of options granted
during 1997, 1996 and 1995 was $9.42, $6.39 and $5.69, respectively.

37
<PAGE> 39
NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The fair value of each stock option granted is estimated as of the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997, 1996 and 1995: no dividend
yield for all years; expected volatility of 31.56%, 28.52% and 28.52%,
respectively; risk-free interest rates of 6.47%, 6.25% and 6.25%, respectively;
and an expected option life of 6.50 years for all years.

The following table summarizes information about stock options
outstanding and exercisable at December 31, 1997:

Options Outstanding Options Exercisable
---------------------------------------------------------------------- ----------------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------ ----------- ---------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 3.50 to $ 5.62 2,369,280 4 years $ 4.00 2,125,530 $ 3.97
10.94 to 14.78 646,710 8 years 13.58 147,750 13.54
15.04 to 20.81 103,000 9 years 19.57 8,000 18.77
21.31 to 29.94 273,000 9 years 23.18 10,200 14.72
------------------ ----------- ---------------- ------------- ------------- -----------------
$ 3.50 to $29.94 3,391,990 5 years $ 7.84 2,291,480 $ 4.73
</TABLE>

Common Stock issued through the exercise of stock options results in a
tax deduction for the Company equivalent to the taxable gain recognized by the
optionee. For financial reporting purposes, the tax effect of this deduction is
accounted for as a credit to additional paid-in capital rather than as a
reduction of income tax expense. The exercise of stock options during 1997, 1996
and 1995 resulted in a tax benefit to the Company of approximately $2.3 million,
$2.7 million and $2.8 million, respectively, which was recorded as an increase
in stockholders' equity.

Employee Stock Purchase Plan

The Company established an Employee Stock Purchase Plan (the "Stock
Purchase Plan") that permits eligible employees to acquire Common Stock. Under
the Stock Purchase Plan, the Company is authorized to issue up to 200,000 shares
of Common Stock.

For each six-month period beginning on January 1 or July 1 during the
term of the Stock Purchase Plan, each eligible employee has the opportunity to
purchase Common Stock for a purchase price equal to 85% of the lesser of the
fair market value of the Common Stock on (i) the first day of the period, or
(ii) the last day of the period. No employee may purchase Common Stock under the
Stock Purchase Plan valued at more than $25,000 for each calendar year.

Under the Stock Purchase Plan, the Company has sold 23,124 shares,
23,990 shares and 25,946 shares to employees in 1997, 1996 and 1995,
respectively, which had weighted average prices of $17.48, $13.56 and $9.78,
respectively. In accordance with APB Opinion No. 25, the Company has not
recognized any compensation cost for the Stock Purchase Plan.

The weighted average fair market value of the option to purchase stock
during 1997, 1996 and 1995 was $7.15, $4.99 and $3.70, respectively. The fair
value of each option granted under the Stock Purchase Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997, 1996 and 1995: no dividend
yield for all years; expected volatility of 31.56%, 28.52% and 28.52%,
respectively; risk-free interest rates of 6.47%, 6.25% and 6.25%, respectively;
and an expected option life of six months for all years.

38
<PAGE> 40

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Pro Forma Net Income and Net Income Per Common Share

If the fair value based method of accounting in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") had been applied, the Company's net income and earnings per common share
for 1997, 1996 and 1995 would have approximated the pro forma amounts below (in
thousands except per share data):

Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income - as reported..................................... $ 40,603 $ 38,494 $ 16,264
Net income - pro forma....................................... $ 39,613 $ 37,956 $ 16,140
Basic earnings per common share - as reported................ $ 1.14 $ 1.10 $ 0.48
Diluted earnings per common share - as reported.............. $ 1.07 $ 1.03 $ 0.45
Basic earnings per common share - pro forma.................. $ 1.11 $ 1.09 $ 0.48
Diluted earnings per common share - pro forma................ $ 1.04 $ 1.01 $ 0.44
</TABLE>

The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. FAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plans.

Restricted Stock

The Company has adopted two plans pursuant to which restricted shares
of Common Stock may be granted. Under the Newfield Exploration Company 1995
Omnibus Stock Plan (the "Omnibus Plan"), the Company may grant to employees
(including an officer or a director who is also an employee) as restricted
Common Stock all or a portion of 400,000 shares of Common Stock reserved under
the Omnibus Plan. In 1997 and 1996 the Company issued 35,400 and 246,000 shares,
respectively, of restricted Common Stock which shares vest at the rate of 20%
per year on each anniversary of the date of issuance subject to the lapse of
certain performance-based forfeiture provisions.

Under the Newfield Exploration Company 1995 Non-Employee Director
Restricted Stock Plan (the "Non-Employee Director Plan"), subject to a maximum
of 50,000 shares, each non-employee director who is in office immediately after
each annual meeting of stockholders of the Company shall receive a number of
restricted shares determined by dividing $30,000 by the fair market value on the
date of the annual meeting of stockholders, subject to the terms of the
Non-Employee Director Plan. The forfeiture restrictions relating to shares
issued under the amended plan will lapse 100% effective the day before the first
annual meeting of stockholders following the date of issuance of the shares,
providing the lapse conditions have been satisfied. The Company issued 10,422
shares to seven Non-Employee Directors in 1997 and 10,000 shares to five
Non-Employee Directors in 1996, and 6,000 shares to three Non-Employee Directors
in 1995.

In accordance with APB Opinion No. 25, the Company recognized unearned
compensation for the fair value of the restricted Common Stock in the amount of
$1.0 million for 1997, $3.6 million for 1996 and $80,000 for 1995. This amount
is charged to stockholders' equity and recognized as compensation expense over
the applicable vesting period, in the amount of $0.8 million for 1997, $1.5
million for 1996 and $32,000 for 1995. The weighted average price for 45,822
shares of restricted Common Stock issued in 1997 is $22.65. The weighted average
price for 256,000 shares of restricted Common Stock issued in 1996 is $14.08.
The weighted average price for 6,000 shares of restricted Common Stock issued in
1995 is $13.28.

39
<PAGE> 41

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. EMPLOYEE BENEFIT PLANS:

The Company sponsors a 401(k) Profit Sharing Plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code. This plan covers all
employees of the Company. The Company matches $1.00 for each $1.00 of employee
deferral, with the Company's contribution not to exceed 8% of an employee's
salary, subject to limitations imposed by the Internal Revenue Service. The
Company's contributions to the 401(k) Plan totaled $466,000, $371,000 and
$301,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

The Company also sponsors the Newfield Employee 1993 Incentive
Compensation Plan (the "Plan"), which is a non-qualified plan funded by amounts
equal to revenues that would be attributable to a 1% overriding royalty interest
on acquired proved properties and a 2% overriding royalty interest from
exploration properties. Such amounts are attributable to both the Company's
interest and the interest of certain working interest owners in these
properties. Amounts available for distribution under the Plan and attributable
to the overriding royalty interests bearing against the Company are limited to
5% of the Company's adjusted net income as defined in the Plan. The Plan is
administered by the Compensation Committee of the Board of Directors with award
amounts recommended by the Chief Executive Officer of the Company, based on the
performance of the Company and the eligible employees during the performance
period. All employees of the Company are eligible for awards if employed on both
October 1 and December 31 of the performance period. Awards may have both a
current and a deferred component of compensation. Eligible employees may elect
for deferred amounts to be paid in Common Stock instead of cash. If the eligible
employee elects for a deferred amount to be paid in Common Stock, the number of
shares of Common Stock to be awarded is determined by using the fair market
value of Common Stock on the date of the award. Total expenses under the Plan
for the years ended December 31, 1997, 1996 and 1995 were $5.3 million, $4.9
million and $2.4 million, respectively.

During 1997, the Company implemented a highly compensated employee
Deferred Compensation Plan (the "Deferred Plan"). This non-qualified plan allows
an eligible employee to defer a portion of the employee's salary or bonus on an
annual basis. The Company matches $1.00 for each $1.00 of employee deferral,
with the Company's contribution not to exceed 8% of an employee's salary,
subject to limitations imposed by the Deferred Plan. The Company's contribution
will be reduced by the amount of contribution made by the Company to the 401(k)
Plan for each participant.

8. RELATED PARTY TRANSACTIONS:

The 401(k) Plan invests in several mutual funds (the "Warburg Funds")
affiliated with Warburg, Pincus & Co. Warburg, Pincus & Co. is general partner
of Warburg, Pincus Investors, L.P., a significant stockholder of the Company
which is represented on the Company's board of directors. The amount invested in
the Warburg Funds at any time depends upon the elections made by the
participants in the 401(k) Plan. The Company believes that the 401(k) Plan
invests on the same basis in terms of rates and fees as are offered generally to
similar employee investment vehicles. The aggregate amount of the 401(k) Plan's
assets invested in Warburg Funds were approximately $1,567,000 and $1,314,000 as
of December 31, 1997 and 1996, respectively.

40
<PAGE> 42

NEWFIELD EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

9. SUPPLEMENTAL CASH FLOW INFORMATION:

1997 1996 1995
--------- --------- ---------
(in thousands)

<S> <C> <C> <C>
Cash payments:
Interest payments (net of interest capitalized of
$3,481, $1,508 and $674 during 1997, 1996
and 1995, respectively)........................................ $ 1,196 $ 363 $ 127
Income tax payments.................................................... $ --- $ --- $ 550

Transactions excluded from the statement of cash flows:
Increase (decrease) in accrued capital expenditures.................... $ 10,850 $ 5,062 $ (2,772)
Other ............................................................... $ (50) $ (86) $ (48)

</TABLE>

10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The results of operations by quarter for the years ended December 31,
1997 and 1996 are as follows (in thousands, except per share amounts):

1997 Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Oil and gas revenues.......................... $ 46,927 $ 42,345 $ 49,863 $ 60,264
Income from operations........................ 18,207 12,252 14,223 19,885
Net income ................................ 11,887 7,773 8,715 12,228
Basic earnings per common share............... $ 0.34 $ 0.22 $ 0.24 $ 0.34
Diluted earnings per common share............. $ 0.31 $ 0.21 $ 0.23 $ 0.32
</TABLE>

1996 Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Oil and gas revenues.......................... $ 32,962 $ 33,013 $ 35,799 $ 47,482
Income from operations........................ 12,123 12,162 13,078 21,426
Net income ................................ 7,929 7,949 8,673 13,943
Basic earnings per common share............... $ 0.23 $ 0.23 $ 0.25 $ 0.40
Diluted earnings per common share............. $ 0.22 $ 0.21 $ 0.23 $ 0.37
</TABLE>

41
<PAGE> 43

NEWFIELD EXPLORATION COMPANY
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES - UNAUDITED

Users of this information should be aware that the process of
estimating quantities of "proved" and "proved developed" natural gas and crude
oil reserves is very complex, requiring significant subjective decisions in the
evaluation of all available geological, engineering and economic data for each
reservoir. The data for a given reservoir may also change substantially over
time as a result of numerous factors including, but not limited to, additional
development activity, evolving production history and continual reassessment of
the viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.

Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing equipment economic and operating conditions.

Proved developed reserves are proved reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods.

No major discovery or other favorable or adverse event subsequent to
December 31, 1997 is believed to have caused a material change in the estimates
of proved or proved developed reserves as of that date.

42
<PAGE> 44

NEWFIELD EXPLORATION COMPANY
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES - UNAUDITED - (CONTINUED)

ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES

The following table sets forth the Company's net proved reserves (at
15.025 pounds per square inch absolute), including the changes therein, and
proved developed reserves (all within the United States) at the end of each of
the three years in the period ended December 31, 1997, as estimated by the
Company's petroleum engineering staff:

<TABLE>
<CAPTION>
Oil, Condensate
and Natural Natural
Gas Liquids Gas
Proved developed and undeveloped reserves: (MBbls) (MMcf)
-------- --------
<S> <C> <C>
December 31, 1994............................................................ 8,610 153,967
Revisions of previous estimates........................................... 166 (575)
Extensions, discoveries and other additions............................... 926 62,035
Purchases of properties................................................... 2,002 22,556
Sales of properties....................................................... --- (684)
Production................................................................ (2,071) (33,719)
-------- --------
December 31, 1995............................................................ 9,633 203,580
Revisions of previous estimates........................................... 850 (1,829)
Extensions, discoveries and other additions............................... 3,479 68,011
Purchases of properties................................................... 2,306 13,063
Sales of properties....................................................... (51) (117)
Production................................................................ (2,558) (41,323)
-------- --------
December 31, 1996............................................................ 13,659 241,385
Revisions of previous estimates........................................... 6 3,014
Extensions, discoveries and other additions............................... 3,716 83,783
Purchases of properties................................................... 2,426 66,594
Sales of properties....................................................... (76) (3,790)
Production................................................................ (3,424) (53,505)
-------- --------
December 31, 1997............................................................ 16,307 337,481
======== ========
</TABLE>

<TABLE>
<CAPTION>
Crude Natural
Oil Gas
(MBbls) (MMcf)
------- --------
<S> <C> <C>
Proved developed reserves:
December 31, 1994....................................................... 8,196 140,742
December 31, 1995....................................................... 8,292 154,726
December 31, 1996....................................................... 11,820 199,452
December 31, 1997....................................................... 15,712 252,018
</TABLE>

43
<PAGE> 45
NEWFIELD EXPLORATION COMPANY
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES - UNAUDITED - (CONTINUED)

Capitalized costs for oil and gas producing activities consist of the
following at the end of each of the three years in the period ended December 31,
1997 (in thousands):

Other
December 31, 1997 Domestic China Foreign Total
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Properties................................ $ 718,915 $ --- $ --- $ 718,915
Unproved Properties.............................. 48,820 7,424 426 56,670
----------- ------------- ------------ -------------
767,735 7,424 426 775,585
Accumulated depreciation, depletion
and amortization................................. (291,631) --- --- (291,631)
----------- ------------- ------------ -------------

Net capitalized cost............................. $ 476,104 $ 7,424 $ 426 $ 483,954
=========== ============= ============ =============

December 31, 1996

Proved Properties................................ $ 501,328 $ --- $ --- $ 501,328
Unproved Properties.............................. 25,352 --- --- 25,352
----------- ------------- ----------- -------------
526,680 --- --- 526,680
Accumulated depreciation, depletion
and amortization................................. (198,065) --- --- (198,065)
----------- ------------- ----------- -------------
Net capitalized cost............................. $ 328,615 $ --- $ --- $ 328,615
=========== ============= =========== =============

December 31, 1995

Proved Properties................................ $ 348,226 $ --- $ --- $ 348,226
Unproved Properties.............................. 14,631 --- --- 14,631
----------- ------------- ----------- -------------
362,857 --- --- 362,857
Accumulated depreciation, depletion
and amortization............................ (134,348) --- --- (134,348)
----------- ------------- ----------- -------------
Net capitalized cost............................. $ 228,509 $ --- $ --- $ 228,509
=========== ============= =========== =============

</TABLE>

44
<PAGE> 46

NEWFIELD EXPLORATION COMPANY
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES - UNAUDITED - (CONTINUED)

Costs incurred for oil and gas property acquisition, exploration and
development activities for each of the three years in the period ended December
31, 1997 are as follows (in thousands):

Other
1997 Domestic China Foreign Total
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Property acquisition:
Unproved*................................... $ 31,541 $ 6,770 $ 426 $ 38,737
Proved...................................... 30,368 --- --- 30,368
Exploration...................................... 61,825 4,908 --- 66,733
Development...................................... 117,321 --- --- 117,321
----------- ----------- ----------- ---------
Total costs incurred........................ $ 241,055 $ 11,678 $ 426 $ 253,159
=========== =========== =========== =========

1996

Property acquisition:
Unproved*................................... $ 5,670 $ --- $ --- $ 5,670
Proved...................................... 28,480 --- --- 28,480
Exploration...................................... 49,337 --- --- 49,337
Development...................................... 80,336 --- --- 80,336
----------- ----------- ----------- ---------
Total costs incurred........................ $ 163,823 $ --- --- $ 163,823
=========== =========== =========== =========

1995

Property acquisition:
Unproved*................................... $ 10,154 $ --- $ --- $ 10,154
Proved...................................... 29,393 --- --- 29,393
Exploration...................................... 33,192 --- --- 33,192
Development...................................... 31,446 --- --- 31,446
----------- ----------- ----------- ---------
Total costs incurred........................ $ 104,185 $ --- $ --- $ 104,185
=========== =========== =========== =========
</TABLE>

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

* These amounts represent costs incurred by the Company and excluded from the
amortization base until proved reserves are established or impairment is
determined.

45
<PAGE> 47

NEWFIELD EXPLORATION COMPANY
SUPPLEMENTARY FINANCIAL INFORMATION
SUPPLEMENTARY OIL AND GAS DISCLOSURES - UNAUDITED - (CONTINUED)

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES

The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" ("FAS 69") and based on natural gas and
crude oil reserve and production volumes estimated by the Company's engineering
staff. It may be useful for certain comparative purposes, but should not be
solely relied upon in evaluating the Company or its performance. Further,
information contained in the following table should not be considered as
representative of realistic assessments of future cash flows, nor should the
Standardized Measure of Discounted Future Net Cash Flows be viewed as
representative of the current value of the Company.

The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and selling
prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual rates of production achieved in future years may vary significantly from
the rate of production assumed in the calculations; (3) selection of a 10%
discount rate is arbitrary and may not be reasonable as a measure of the
relative risk inherent in realizing future net oil and gas revenues; and (4)
future net revenues may be subject to different rates of income taxation.

Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end proved reserves.
Future cash inflows at December 31, 1997 do not reflect the impact of future
production that is subject to open hedge positions (see Note 2). Future cash
inflows were reduced by estimated future development, abandonment and production
costs based on period-end costs in order to arrive at net cash flow before tax.
Future income tax expense has been computed by applying period-end statutory tax
rates to aggregate future pre-tax net cash flows, reduced by the tax basis of
the properties involved and tax carryforwards. Use of a 10% discount rate is
required by FAS 69.

Management does not rely solely upon the following information in
making investment and operating decisions. Such decisions are based upon a wide
range of factors, including estimates of probable as well as proved reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.

46
<PAGE> 48

The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves (all within the United States) is as follows (in
thousands):

As of December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ ------------

<S> <C> <C> <C>
Future cash inflows............................................... $ 1,150,023 $ 1,312,815 $ 642,019
Less related future:
Production costs ............................................... (159,619) (113,937) (84,999)
Development and abandonment costs............................... (170,537) (107,205) (83,262)
------------- ------------ ------------
Future net cash flows before income taxes......................... 819,867 1,091,673 473,758
10% annual discount for estimating timing of cash flows........... (165,198) (231,856) (108,879)
------------- ------------ ------------
Standardized measure of discounted future net cash
flows before income taxes........................................ 654,669 859,817 364,879
Future income tax expense, net of 10% annual discount............. (151,721) (247,889) (88,553)
------------- ------------ ------------
Standardized measure of discounted future net cash flows.......... $ 502,948 $ 611,928 $ 276,326
============= ============ ============
</TABLE>

A summary of the changes in the standardized measure of discounted
future net cash flows applicable to proved oil and gas reserves (all within the
United States) is as follows (in thousands):

As of December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ ------------

<S> <C> <C> <C>
Beginning of the period........................................... $ 611,928 $ 276,326 $ 180,002
------------- ------------ ------------
Revisions of previous estimates:
Changes in prices and costs.................................. (356,858) 254,227 61,917
Changes in quantities........................................ 5,535 9,544 691
Changes in future development costs.......................... (7,464) --- 1,026
Development costs incurred during the period...................... 35,810 24,895 2,839
Additions to proved reserves resulting from extensions,
discoveries and improved recovery, less related costs........... 136,977 229,314 87,760
Purchases of reserves in place.................................... 101,266 55,910 45,324
Accretion of discount............................................. 85,982 36,488 23,059
Sales of oil and gas, net of production costs..................... (175,091) (132,310) (80,371)
Net change in income taxes........................................ 96,168 (159,336) (37,961)
Production timing and other....................................... (31,305) 16,870 (7,960)
------------- ------------ ------------
Net increase...................................................... (108,980) 335,602 96,324
------------- ------------ ------------
End of the period................................................. $ 502,948 $ 611,928 $ 276,326
============= ============ ============
</TABLE>

47
<PAGE> 49
CORPORATE INFORMATION

DIRECTORS

CHARLES W. DUNCAN, JR. (*)(**)(71)
Private Investor

JOE B. FOSTER (63)
Chairman, President and
Chief Executive Officer
Newfield Exploration Company

JEFFREY A. HARRIS (*)(42)
Managing Director
E.M. Warburg, Pincus & Co., LLC

DENNIS R. HENDRIX (*)(**)(57)
Retired Chairman
PanEnergy Corp.
Director
Duke Energy Corporation

TERRY HUFFINGTON (*)(**)(43)
Chairman and President
Huffco Group, Inc.

HOWARD H. NEWMAN (*)(50)
Managing Director
E.M. Warburg, Pincus & Co., LLC

THOMAS G. RICKS (*)(**)(44)
President and Chief Executive Officer
The University of Texas
Investment Management Company

C. E. (CHUCK) SHULTZ (*)(**)(58)
Chairman and Chief Executive Officer
Dauntless Energy, Inc.

ROBERT W. WALDRUP (53)
Vice President - Operations
Newfield Exploration Company

DALE E. ZAND (*)(**)(71)
Professor of Management
Stern Graduate School of Business,
New York University

(*) Member of the Compensation Committee
(**) Member of the Audit Committee

OFFICERS

JOE B. FOSTER (63)
Chairman, President and
Chief Executive Officer

ROBERT W. WALDRUP (53)
Vice President - Operations

DAVID A. TRICE (49)
Vice President - Finance and International

TERRY W. RATHERT (45)
Vice President - Planning and
Administration and Secretary

DAVID F. SCHAIBLE (37)
Vice President - Acquisitions and
Development

WILLIAM D. SCHNEIDER (46)
Vice President - International Exploration

ELLIOTT PEW (43)
Vice President - Exploration

RONALD P. LEGE (53)
Controller and Assistant Secretary

C. WILLIAM AUSTIN (45)
Legal Counsel and Assistant Secretary

JAMES P. ULM, II (35)
Treasurer

MARKET INFORMATION

The Company's common stock is traded on the NYSE under the symbol NFX. The stock
began trading November 12, 1993. The range of high and low quarterly sales
prices for 1996 and 1997, as reported by the NYSE, are set forth below:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter 15 1/4 12 1/2
Second Quarter 20 15 1/8
Third Quarter 22 3/4 18 1/16
Fourth Quarter 26 1/2 22 5/16

1997
First Quarter 28 18 1/2
Second Quarter 23 7/8 16 7/8
Third Quarter 28 1/8 19 15/16
Fourth Quarter 33 20
</TABLE>

TRANSFER AGENT

For more information regarding change of address or other matters concerning
your stockholder account, please contact the transfer agent directly at:

ChaseMellon Shareholders Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 635-9270

On December 31, 1997, the closing sale price for the Company's stock was $23
5/16 per share. Management believes after inquiry, that the number of beneficial
owners of the Company's common stock is in excess of 2,000.

ANNUAL MEETING

The Annual Meeting of Stockholders of Newfield Exploration Company will be held
May 7, 1998, 11:00 a.m. at the Wyndham Greenspoint Hotel, 12400 Greenspoint
Drive, Houston, Texas.

CORPORATE ADDRESS

363 North Sam Houston Parkway East,
Suite 2020
Houston, Texas 77060
(281) 847-6000
www.newfld.com

OUTSIDE LEGAL COUNSEL

Vinson & Elkins L.L.P.
Houston, Texas

AUDITORS

Coopers & Lybrand L.L.P.
Houston, Texas

PHOTOGRAPHY CREDITS

Newfield employees Jack Burman, Chris Clark, Andy Lundy, Chris Mabie and Mike
Minarovic contributed photographs to this annual report.

FORM 10-K

Stockholders may obtain without charge a copy of Newfield's Form 10-K report as
filed with the Securities and Exchange Commission. For copies or answers to
questions about Newfield Exploration Company, you are invited to contact
Stockholder Relations at the corporate address.

<PAGE> 50

[NEWFIELD LOGO]

NEWFIELD EXPLORATION COMPANY

363 North Sam Houston Parkway East,
Suite 2020
Houston, Texas 77060
Telephone: (281) 847-6000
Fax: (281) 847-6006
http://www.newfld.com

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference into the Registration
Statements on Form S-8 (Registration Nos. 33-72848, 33-79826 and 33-92182) of
Newfield Exploration Company (the "Company") of our report dated February 6,
1998 on our audits of the financial statements of Newfield Exploration Company
as of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, which reports are included or incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.

/s/ COOPERS & LYBRAND L.L.P.

Coopers & Lybrand L.L.P.
Houston, Texas
February 23, 1998

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS

We hereby consent to the use of our name in "Item 2. Properties" of
the Annual Report on Form 10-K of Newfield Exploration Company (the "Company")
for the year ended December 31, 1997 (the "Form 10-K"), and the incorporation
by reference of the Form 10-K into the Company's Registration Statements on
Form S-8 (Registration No. 33-72848, No. 33- 79826 and No. 33-92182).

/S/ RYDER SCOTT COMPANY

Ryder Scott Company
Petroleum Engineers
February 23, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEWFIELD
EXPLORATION COMPANY'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997, THAT ARE
CONTAINED IN ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. THE SCHEDULE IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,217
<SECURITIES> 0
<RECEIVABLES> 54,123
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,766
<PP&E> 778,685
<DEPRECIATION> 293,111
<TOTAL-ASSETS> 553,621
<CURRENT-LIABILITIES> 64,394
<BONDS> 129,623
161,032
0
<COMMON> 0
<OTHER-SE> 131,016
<TOTAL-LIABILITY-AND-EQUITY> 553,621
<SALES> 199,399
<TOTAL-REVENUES> 199,399
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 118,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,268
<INCOME-PRETAX> 62,421
<INCOME-TAX> 21,818
<INCOME-CONTINUING> 40,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,603
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.07

</TABLE>