It is very important to understand the annular multiphase flow behavior and the effect of hydrate phase transition during deep water drilling. The basic hydrodynamic models, including mass, momentum, and energy conservation equations, were established for annular flow with gas hydrate phase transition during gas kick. The behavior of annular multiphase flow with hydrate phase transition was investigated by analyzing the hydrate-forming region, the gas fraction in the fluid flowing in the annulus, pit gain, bottom hole pressure, and shut-in casing pressure. The simulation shows that it is possible to move the hydrate-forming region away from sea floor by increasing the circulation rate. The decrease in gas volume fraction in the annulus due to hydrate formation reduces pit gain, which can delay the detection of well kick and increase the risk of hydrate plugging in lines. Caution is needed when a well is monitored for gas kick at a relatively low gas production rate, because the possibility of hydrate presence is much greater than that at a relatively high production rate. The shut-in casing pressure cannot reflect the gas kick due to hydrate formation, which increases with time.