Attached files
file | filename |
---|---|
EX-32.2 - Reef Global Energy VII, L.P. | v202070_ex32-2.htm |
EX-32.1 - Reef Global Energy VII, L.P. | v202070_ex32-1.htm |
EX-31.1 - Reef Global Energy VII, L.P. | v202070_ex31-1.htm |
EX-31.2 - Reef Global Energy VII, L.P. | v202070_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended September 30, 2010
or
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Transition Period from ________ to ________
Commission
File Number: 333-122935-02
REEF
GLOBAL ENERGY VII, L.P.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-3963203
|
|
(State
or other jurisdiction of
|
(I.R.S.
employer
|
|
incorporation
or organization)
|
identification
no.)
|
1901
N. Central Expressway, Suite 300
|
75080-3610
|
|
Richardson,
Texas
|
(Zip
code)
|
|
(Address
of principal executive offices)
|
(972)-437-6792
|
Registrant’s
telephone number, including area
code
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
November 15, 2010, the registrant had 48.620 units of general partner interest
held by the managing general partner, and 923.784 units of limited partner
interest outstanding.
Reef
Global Energy VII, L.P.
Form
10-Q Index
PART
I — FINANCIAL INFORMATION
|
||||
|
||||
ITEM
1.
|
Financial
Statements (Unaudited)
|
3
|
||
Condensed
Balance Sheets
|
3
|
|||
Condensed
Statements of Operations
|
4
|
|||
Condensed
Statements of Cash Flows
|
5
|
|||
Notes
to Condensed Financial Statements
|
6
|
|||
|
||||
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
||
|
||||
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
14
|
||
|
||||
ITEM
4T.
|
Controls
and Procedures
|
14
|
||
|
||||
PART
II — OTHER INFORMATION
|
||||
|
||||
ITEM
1.
|
Legal
Proceedings
|
14
|
||
|
||||
ITEM
1A.
|
Risk
Factors
|
14
|
||
|
||||
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
15
|
||
|
||||
ITEM
3.
|
Default
Upon Senior Securities
|
15
|
||
|
||||
ITEM
4.
|
(Removed
and Reserved)
|
15
|
||
|
||||
ITEM
5.
|
Other
Information
|
15
|
||
|
||||
ITEM
6.
|
Exhibits
|
15
|
||
|
||||
Signatures
|
|
16
|
2
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
Reef
Global Energy VII, L.P.
Condensed
Balance Sheets
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 63,442 | $ | 63,432 | ||||
Accounts
receivable
|
— | 3,471 | ||||||
Accounts
receivable from affiliates
|
55,193 | 314,397 | ||||||
Total
current assets
|
118,635 | 381,300 | ||||||
Oil
and gas properties, full cost method of accounting:
|
||||||||
Proved
properties, net of accumulated depletion of $20,721,289 and
$20,279,005
|
1,205,716 | 1,323,360 | ||||||
Net
oil and gas properties
|
1,205,716 | 1,323,360 | ||||||
Total
assets
|
$ | 1,324,351 | $ | 1,704,660 | ||||
Liabilities
and partnership equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 1,176 | $ | 5,677 | ||||
Accounts
payable to affiliates
|
— | 70,096 | ||||||
Total
current liabilities
|
1,176 | 75,773 | ||||||
Long-term
liabilities:
|
||||||||
Asset
retirement obligation
|
301,664 | 289,494 | ||||||
Total
long-term liabilities
|
301,664 | 289,494 | ||||||
Partnership
equity:
|
||||||||
Limited
partners
|
896,851 | 1,205,145 | ||||||
Managing
general partner
|
124,660 | 134,248 | ||||||
Partnership
equity
|
1,021,511 | 1,339,393 | ||||||
Total
liabilities and partnership equity
|
$ | 1,324,351 | $ | 1,704,660 |
See
accompanying notes to condensed financial statements
(unaudited).
3
Reef
Global Energy VII, L.P.
Condensed
Statements of Operations
(Unaudited)
For the three months ended
September 30,
|
For the nine months ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
$ | 357,456 | $ | 336,209 | $ | 1,138,543 | $ | 1,015,127 | ||||||||
Costs
and expenses:
|
||||||||||||||||
Lease
operating expenses
|
99,776 | 67,811 | 212,501 | 236,272 | ||||||||||||
Production
taxes
|
24,971 | 14,109 | 19,473 | 61,772 | ||||||||||||
Depreciation,
depletion and amortization
|
145,983 | 125,549 | 442,284 | 494,991 | ||||||||||||
Property
impairment
|
— | — | — | 566,482 | ||||||||||||
Accretion
of asset retirement obligation
|
4,126 | 4,262 | 12,170 | 14,403 | ||||||||||||
General
and administrative
|
45,067 | 69,000 | 211,798 | 232,125 | ||||||||||||
Total
costs and expenses
|
319,923 | 280,731 | 898,226 | 1,606,045 | ||||||||||||
Income
(loss) from operations
|
37,533 | 55,478 | 240,317 | (590,918 | ) | |||||||||||
Other
income:
|
||||||||||||||||
Interest
income
|
46 | 113 | 171 | 1,358 | ||||||||||||
Total
other income
|
46 | 113 | 171 | 1,358 | ||||||||||||
Net
income (loss)
|
$ | 37,579 | $ | 55,591 | $ | 240,488 | $ | (589,560 | ) | |||||||
Net
income (loss) per limited partner unit
|
$ | 20.18 | $ | 50.88 | $ | 177.32 | $ | (633.26 | ) | |||||||
Net
income (loss) per managing general partner unit
|
$ | 389.43 | $ | 176.65 | $ | 1,577.09 | $ | (93.93 | ) |
See
accompanying notes to condensed financial statements
(unaudited).
4
Reef
Global Energy VII, L.P.
Condensed
Statements of Cash Flows
(Unaudited)
For the nine months ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Operating
Activities
|
||||||||
Net
income (loss)
|
$ | 240,488 | $ | (589,560 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by
operating activities:
|
||||||||
Adjustments
for non-cash transactions:
|
||||||||
Depreciation,
depletion and amortization
|
442,284 | 494,991 | ||||||
Property
impairment
|
— | 566,482 | ||||||
Accretion
of asset retirement obligation
|
12,170 | 14,403 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
3,471 | (456 | ) | |||||
Accounts
receivable from affiliates
|
259,204 | (92,494 | ) | |||||
Accounts
payable
|
(4,501 | ) | 45,140 | |||||
Accounts
payable to affiliates
|
(140,041 | ) | (290,339 | ) | ||||
Net
cash provided by operating activities
|
813,075 | 148,167 | ||||||
Investing
Activities
|
||||||||
Property
acquisition and development
|
(254,695 | ) | (182,346 | ) | ||||
Net
cash used in investing activities
|
(254,695 | ) | (182,346 | ) | ||||
Financing
Activities
|
||||||||
Partner
capital contributions
|
— | 3,440 | ||||||
Offering
costs
|
— | (270,000 | ) | |||||
Partner
distributions
|
(558,370 | ) | (51,784 | ) | ||||
Net
cash used in financing activities
|
(558,370 | ) | (318,344 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
10 | (352,523 | ) | |||||
Cash
and cash equivalents at beginning of period
|
63,432 | 444,655 | ||||||
Cash
and cash equivalents at end of period
|
$ | 63,442 | $ | 92,132 | ||||
Supplemental
disclosure of non-cash financing transactions
|
||||||||
Property
additions included in accounts payable to affiliates
|
$ | (69,945 | ) | $ | — | |||
Offering
costs included in accounts payable to affiliates
|
$ | — | $ | 160,096 |
See
accompanying notes to condensed financial statements
(unaudited).
5
Reef
Global Energy VII, L.P.
Notes
to Condensed Financial Statements (unaudited)
September
30, 2010
1.
Organization and Basis of Presentation
The
financial statements of Reef Global Energy VII, L.P. (the “Partnership”) have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). Certain information and footnote disclosure
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations. We have recorded
all transactions and adjustments necessary to fairly present the financial
statements included in this Quarterly Report on Form 10-Q (this “Quarterly
Report”). The adjustments are normal and recurring. The following notes describe
only the material changes in accounting policies, account details, or financial
statement notes during the first nine months of 2010. Therefore, please read
these condensed financial statements and notes to condensed financial statements
together with the audited financial statements and notes to financial statements
contained in the Partnership’s Annual Report on Form 10-K for the period ended
December 31, 2009 (the “Annual Report”).
2.
Summary of Accounting Policies
Oil
and Gas Properties
The
Partnership follows the full cost method of accounting for oil and gas
properties. Under this method, all direct costs and certain indirect costs
associated with acquisition of properties and successful as well as unsuccessful
exploration and development activities are capitalized. Depreciation, depletion,
and amortization of capitalized oil and gas properties and estimated future
development costs, excluding unproved properties, are based on the
unit-of-production method using estimated proved reserves, as determined by
independent petroleum engineers. For these purposes, proved natural
gas reserves are converted to equivalent barrels of crude oil at a rate of 6 Mcf
to 1 Bbl.
In
applying the full cost method at September 30, 2010, the Partnership performs a
quarterly ceiling test on the capitalized costs of oil and gas properties,
whereby the capitalized costs of oil and gas properties are limited to
the sum of the estimated future net revenues from proved reserves
using prices that are the 12-month un-weighted arithmetic average of the
first-day-of-the-month price for crude oil and natural gas held constant and
discounted at 10%, plus the lower of cost or estimated fair value of unproved
properties, if any. If capitalized costs exceed the ceiling, an impairment loss
is recognized for the amount by which the capitalized costs exceed the ceiling,
and is shown as a reduction of oil and gas properties and as property impairment
expense on the Partnership’s statements of operations. No gain or loss is
recognized upon sale or disposition of oil and gas properties, unless such a
sale would significantly alter the rate of depletion and amortization. During
the three month periods ended September 30, 2010 and 2009, the Partnership
recognized no property impairment expense of proved properties. During the nine
month periods ended September 30, 2010 and 2009, the Partnership recognized
property impairment expense of proved properties totaling $0 and $566,482,
respectively.
Unproved
properties consist of undeveloped leasehold interest in the Sand Dunes prospect
(as discussed in Item 2 below). Investments in unproved properties are not
depleted pending determination of the existence of proved reserves. Unproved
properties are assessed for impairment quarterly as of the balance sheet date by
considering the primary lease term, the holding period of the properties,
geologic data obtained relating to the properties, and other drilling activity
in the immediate area of the properties. Any impairment resulting from this
quarterly assessment is reported as property impairment expense in the current
period, as appropriate. The Partnership fully impaired its unproved properties
during 2008 and has no plans to conduct any development operations on the
leasehold interest in the Sand Dunes prospect.
Estimates
of Proved Oil and Gas Reserves
Estimates
of the Partnership’s proved reserves at September 30, 2010 and December 31, 2009
have been prepared and presented in accordance with new SEC rules and accounting
standards. These new rules are effective for fiscal years ending on or after
December 31, 2009, and require SEC reporting entities to prepare their reserve
estimates using revised reserve definitions and revised pricing based upon the
un-weighted arithmetic average of the first-day-of-the-month commodity prices
over the preceding 12-month period and current costs. Future prices and costs
may be materially higher or lower than these prices and costs, which would
impact the estimate of reserves and future cash flows.
6
Reserves
and their relation to estimated future net cash flows impact the Partnership’s
depletion and impairment calculations. As a result, adjustments to depletion and
impairment are made concurrently with changes to reserve estimates. If proved
reserve estimates decline, the rate at which depletion expense is recorded
increases, reducing net income. A decline in estimated proved reserves and
future cash flows also reduces the capitalized cost ceiling and may result in
increased impairment expense.
Restoration,
Removal, and Environmental Liabilities
The
Partnership is subject to extensive Federal, state and local environmental laws
and regulations. These laws regulate the discharge of materials into the
environment and may require the Partnership to remove or mitigate the
environmental effects of the disposal or release of petroleum substances at
various sites. Environmental expenditures are expensed or capitalized depending
on their future economic benefit. Expenditures that relate to an existing
condition caused by past operations and that have no future economic benefit are
expensed.
Liabilities
for expenditures of a non-capital nature are recorded when environmental
assessments and/or remediation is probable, and the costs can be reasonably
estimated. Such liabilities are generally undiscounted values unless the timing
of cash payments for the liability or component is fixed or reliably
determinable.
Asset
retirement costs and liabilities associated with future site restoration and
abandonment of long-lived assets are initially measured at fair value, which
approximates the cost a third party would incur in performing the tasks
necessary to retire such assets. The fair value is recognized in the financial
statements as the present value of expected future cash expenditures for site
restoration and abandonment. Subsequent to the initial measurement, the effect
of the passage of time on the liability for the net asset retirement obligation
(accretion expense) and the amortization of the asset retirement cost are
recognized in the results of operations.
The
following table summarizes the Partnership’s asset retirement obligation for the
nine months ended September 30, 2010 and the year ended December 31,
2009.
Nine months ended
|
Year Ended
|
|||||||
September 30, 2010
|
December 31, 2009
|
|||||||
Beginning
asset retirement obligation
|
$ | 289,494 | $ | 270,772 | ||||
Accretion
expense
|
12,170 | 18,722 | ||||||
Ending
asset retirement obligation
|
$ | 301,664 | $ | 289,494 |
Fair
Value of Financial Instruments
The
estimated fair values for financial instruments have been determined at discrete
points in time based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated fair
value of cash, accounts receivable and accounts payable approximates their
carrying value due to their short-term nature.
7
Recently
Adopted Accounting Pronouncements
Modernization
of Oil and Gas Reporting
In
January 2009, the SEC adopted a new rule related to modernizing reserve
calculation and disclosure requirements for oil and gas companies, which became
effective prospectively for annual reporting periods ending on or after December
31, 2009. In addition to expanding the definition and disclosure requirements
for crude oil and natural gas reserves, the new rule changes the requirements
for determining quantities of crude oil and natural gas reserves. The new rule
requires disclosure of crude oil and natural gas proved reserves by geographical
area, using the unweighted arithmetic average of first-day-of-the-month
commodity prices over the preceding 12-month period, rather than end-of-period
prices, and allows the use of reliable technologies to estimate proved crude oil
and natural gas reserves, if those technologies have been demonstrated to result
in reliable conclusions about reserve volumes. In addition, in
January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance
relating to crude oil and natural gas reserve estimation and disclosures to
provide consistency with the new SEC rules. The Partnership adopted
the new standards effective December 31, 2009. The new standards are
applied prospectively as a change in estimate. In April 2010, the FASB issued a
further accounting standards update regarding extractive oil and gas industries
to incorporate in accounting standards the revisions to Rule 4-10 of the SEC’s
Regulation S-X. The amendment primarily consists of the addition and deletion of
definitions of terms related to fossil fuel exploration and production arising
from technology changes over the past several decades. The accounting guidance
in Rule 4-10 did not change.
Fair
Value Measurements
In
January 2010, the FASB issued new guidance related to improving disclosures
about fair value measurements. This guidance requires separate disclosures of
the amounts of transfers in and out of Level 1 and Level 2 fair value
measurements and a description of the reason for such transfers. In the
reconciliation for Level 3 fair value measurements using significant
unobservable inputs, information about purchases, sales, issuances and
settlements shall be presented separately. These disclosures are required for
interim and annual reporting periods effective January 1, 2010, except for
the disclosures related to the purchases, sales, issuances and settlements in
the roll forward activity of Level 3 fair value measurements, which are
effective on January 1, 2011. This guidance was adopted on January 1,
2010 for Level 1 and Level 2 fair value measurements and did not impact the
Partnership’s operating results, financial position or cash flows or disclosures
regarding the fair value of financial instruments.
3.
Transactions with Affiliates
The
Partnership has no employees. Reef Exploration, L.P. (“RELP”), an affiliate of
Reef Oil & Gas Partners, L.P. (“Reef”), the managing general partner of the
Partnership, employs a staff including geologists, petroleum engineers, landmen
and accounting personnel who administer all of the Partnership’s operations. The
Partnership reimburses RELP for technical and administrative services at cost.
During the three month periods ended September 30, 2010 and 2009, the
Partnership incurred technical services and administrative costs totaling
$38,244 and $53,175, respectively. Of these amounts, $5,443 and $0 represent
technical services costs capitalized as project costs, and $32,801 and $53,175
represent administrative costs included as general and administrative expenses.
During the nine month periods ended September 30, 2010 and 2009, the Partnership
incurred technical services and administrative costs totaling $144,321 and
$178,926, respectively. Of these amounts, $7,844 and $1,207 represent technical
services costs capitalized as project costs, and $136,477 and $177,719 represent
administrative costs included as general and administrative
expenses.
Reef
contributed 1% of all leasehold, drilling, and completion costs when incurred
during the drilling and completion phases of Partnership operations. Reef
contributed $202,585 in connection with this obligation. Reef also purchased 5%
of the Partnership units and paid 5% of the 99% of these costs paid by the unit
holders (4.95%). Reef has had no remaining obligations related to
these additional costs since December 31, 2009.
RELP
processes joint interest billings and revenue payments on behalf of the
Partnership. At September 30, 2010 and December 31, 2009, RELP owed the
Partnership $55,193 and $314,397, respectively, for net revenues processed in
excess of joint interest and technical and administrative charges. The cash
associated with net revenues processed by RELP is normally received by RELP from
oil and gas purchasers 30-60 days after the end of the month to which the
revenues pertain.
Accounts
payable to affiliates at December 31, 2009 included $70,096 for the unpaid
portion of the 15% management fee due to Reef for organization and offering
costs, including sales commissions. The management fee was payable in two parts.
Reef initially received an amount not to exceed 13.5% of the total offering
proceeds to recover actual commissions and organization and offering costs. The
portion of the management fee in excess of actual commissions and organization
and offering costs was paid to Reef from the oil and gas cash flows available
for partner distributions, at a rate not to exceed $1 million per year. The
Partnership completed payment of the December 31, 2009 balance to Reef in
February 2010.
8
4.
Commitments and Contingencies
The
Partnership is not currently involved in any legal proceedings.
5.
Partnership Equity
Information
regarding the number of units outstanding and the net income per type of
Partnership unit for the three and nine month periods ended September 30, 2010
is detailed below:
For the
three months ended September 30, 2010
Type of Unit
|
Number of
Units
|
Net income
|
Net income
per unit
|
|||||||||
Managing
general partner units
|
48.620 | $ | 18,934 | $ | 389.43 | |||||||
Limited
partner units
|
923.783 | 18,645 | $ | 20.18 | ||||||||
Total
|
972.403 | $ | 37,579 |
For the
nine months ended September 30, 2010
Type of Unit
|
Number of
Units
|
Net income
|
Net income
per unit
|
|||||||||
Managing
general partner units
|
48.620 | $ | 76,678 | $ | 1,577.09 | |||||||
Limited
partner units
|
923.783 | 163,810 | $ | 177.32 | ||||||||
Total
|
972.403 | $ | 240,488 |
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The
following is a discussion of the Partnership’s financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our financial statements and the related notes thereto,
included in the Annual Report.
This
Quarterly Report contains forward-looking statements that involve risks and
uncertainties. You should exercise extreme caution with respect to all
forward-looking statements made in this Quarterly Report. Specifically,
the following statements are forward-looking:
|
·
|
statements
regarding the state of the oil and gas industry and the opportunity to
profit within the oil and gas industry, competition, pricing, level of
production, or the regulations that may affect the
Partnership;
|
|
·
|
statements
regarding the plans and objectives of Reef for future operations,
including, without limitation, the uses of Partnership funds and the size
and nature of the costs the Partnership expects to incur and people and
services the Partnership may
employ;
|
|
·
|
any
statements using the words “anticipate,” “believe,” “estimate,” “expect”
and similar such phrases or words;
and
|
|
·
|
any
statements of other than historical
fact.
|
Reef
believes that it is important to communicate its future expectations to the
partners. Forward-looking statements reflect the current view of
management with respect to future events and are subject to numerous risks,
uncertainties and assumptions, including, without limitation, the risk factors
listed in the section captioned “RISK FACTORS” contained in the
Partnership’s Annual Report. Although Reef believes that the expectations
reflected in such forward-looking statements are reasonable, Reef can give no
assurance that such expectations will prove to have been correct. Should
any one or more of these or other risks or uncertainties materialize or should
any underlying assumptions prove incorrect, actual results are likely to vary
materially from those described herein. There can be no assurance that the
projected results will occur, that these judgments or assumptions will prove
correct or that unforeseen developments will not occur.
9
Reef does
not intend to update its forward-looking statements. All subsequent
written and oral forward-looking statements attributable to Reef or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
Overview
Reef
Global Energy VII, L.P. is a Nevada limited partnership formed to acquire,
explore, develop and produce crude oil, natural gas, and natural gas liquids for
the benefit of its investor partners. The Partnership’s primary purposes are to
generate revenues from the production of crude oil and natural gas, distribute
cash flow to investors, and provide tax benefits to investors. The Partnership
purchased working interests in five developmental prospects and participated in
the drilling of ten successful developmental wells and three unsuccessful
developmental wells on those prospects. All ten successful wells are productive
at September 30, 2010. The Partnership purchased a working interest in the Sand
Dunes developmental prospect in Eddy County, New Mexico, and has participated in
the drilling of eight developmental wells on this prospect (see below). The
Partnership purchased working interests in seven exploratory prospects and
participated in the drilling of one successful exploratory well, six
unsuccessful exploratory wells, and one successful developmental well on those
prospects. The successful exploratory well ceased production during 2007. The
Partnership has completed its drilling program of twenty-nine wells using the
original capital raised by the Partnership. The final well completed drilling in
February 2008 and was placed into production during May 2008. Subsequent to
initial drilling operations, the Partnership is permitted to conduct additional
drilling on existing Partnership prospects. Currently, the Partnership has no
plans for additional drilling.
In this
Quarterly Report, we use the term “successful” to refer to wells that are
drilled, tested, and either capable of or actually producing in commercial
quantities. We use the term “unsuccessful” to refer to wells that do not meet
one or more of these criteria.
The
Partnership participated in the drilling of eight developmental wells on the
Sand Dunes prospect located in Eddy County, New Mexico during the fourth quarter
of 2007 and the first quarter of 2008. Initial testing confirmed the presence of
crude oil and natural gas in all eight wells. However, the field was temporarily
shut-in because of the lack of electric service and because of the high cost of
trucking offsite the salt water volumes associated with the production of the
crude oil and natural gas from the wells. Electrical service to the eight Sand
Dunes wells was connected in September 2008. Based upon initial testing, larger
bottom hole pumps were placed below the well perforations in three of the wells
and testing was resumed in late September 2008 to determine the three wells’
commercial productivity. Water continued to be trucked offsite, and RELP applied
for and received a permit which would allow for the conversion of one of the
existing eight Sand Dunes wells into a salt water disposal well. RELP also
explored the possibility of drilling a ninth well as a salt water disposal well
for the field. Testing results on two of the three wells were positive, and salt
water production volumes declined as a result of pumping off the wells using the
larger bottom hole pumps. However, the price of crude oil also declined at a
rapid rate while testing was being conducted. In late December 2008, two of the
three testing wells were shut-in again. Crude oil prices continued declining to
a level below $40 per barrel. In February 2009, following a mechanical failure
in the third testing well, RELP, as operator, shut-in the field. The eight wells
cannot be commercially productive without efficient salt water disposal
capabilities, and none of the options regarding salt water disposal were
economically viable at first quarter 2009 commodity prices. As a result, as of
December 31, 2008, the eight Sand Dunes wells were classified as
unsuccessful.
Beginning
with March 2009, oil prices increased from levels below $40 per barrel to
between $60 and $70 per barrel by the third quarter of 2009. As a result of this
increase in prices, in October 2009, Reef approved the conversion of one of the
eight wells on the Sand Dunes development prospect located in Eddy County, New
Mexico to a salt water disposal well. The conversion work on the well began in
March 2010 and was completed during April 2010. Upon completion
of the disposal facilities, the new disposal well became operational during
August 2010. Based on updated testing performed on the disposal capacity of the
converted well, it is expected that all of the remaining seven Sand Dunes wells
will be able to be placed into production. During the third quarter of 2010,
five wells were placed back on full-time production. The remaining
two Sand Dune wells are expected to be placed back in production during the
fourth quarter of 2010. The cost of the well conversion to this Partnership as
of September 30, 2010 was approximately $186,000. This cost was paid for by the
Partnership by retaining a portion of the funds normally paid out in
distributions to the partners. There are 6,257 BBL of crude oil and 9,843 Mcf of
natural gas reserves net to the Partnership’s interest for the five wells placed
on full time production during the third quarter of 2010. Reserve
estimates may be increased if additional wells are able to be placed on
full-time production or if daily production rates increase.
10
The
Partnership also owns interests in unproved property consisting of un-drilled
leasehold interest (11 potential drilling locations) in the Sand Dunes prospect.
The Partnership fully impaired this unproved property during the fourth quarter
of 2008 based upon the eight already drilled Sand Dunes wells being classified
as unsuccessful at December 31, 2008. The Partnership currently has no plans to
conduct any drilling operations on this acreage.
Critical
Accounting Policies
There
have been no changes from the Critical Accounting Policies described in the
Annual Report.
Liquidity
and Capital Resources
The
Partnership was funded with initial capital contributions totaling $24,127,769.
Reef purchased 48.620 general partner units, or 5% of the total units sold, for
$1,033,179. Investor partners purchased 741.001 units of general partner
interest and 182.783 units of limited partner interest for $23,094,590. Reef
also contributed $202,585 in connection with its obligation to pay 1% of all
leasehold, drilling, and completion costs. Organization and offering costs
totaled $3,464,188, leaving capital contributions of $20,866,166 available for
Partnership activities. The Partnership expended $21,574,409 on prospect and
property acquisitions, drilling and completion costs in connection with its
participation in the drilling of twenty-nine wells and expended $137,512 on
general and administrative expenses during its drilling and completion phase of
operations. The Partnership has also expended $324,639 subsequent to
its drilling and completion phase of operations on the Sand Dunes well
conversion and other capital items. Expenditures in excess of available
Partnership capital have been recovered from the cash flow from successful wells
by reducing Partnership distributions. Any additional capital
expenditures will also be recovered from cash flow by reducing Partnership
distributions. The Partnership does not operate in any other industry segment,
and operates solely in the United States.
The
Partnership has working capital of $117,459 at September 30, 2010. Subsequent to
expending the initial available Partnership capital contributions on prospect
acquisitions and drilling and completion costs of Partnership wells, the
Partnership’s working capital consists primarily of cash flows from productive
properties utilized to pay cash distributions to investors.
Results
of Operations
The
following is a comparative discussion of the results of operations for the
periods indicated. It should be read in conjunction with the condensed financial
statements and the related notes to the condensed financial statements included
in this Quarterly Report.
The
following table provides information about sales volumes and crude oil and
natural gas prices for the periods indicated. Equivalent barrels of oil (“EBO”)
are computed by converting 6 Mcf of natural gas to 1 barrel of oil.
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales volumes:
|
||||||||||||||||
Crude
oil (Barrels)
|
3,414 | 3,129 | 10,370 | 11,706 | ||||||||||||
Natural
gas (Mcf)
|
23,707 | 37,989 | 76,316 | 110,015 | ||||||||||||
Average
sales prices received:
|
||||||||||||||||
Crude
oil (Barrels)
|
$ | 70.13 | $ | 67.30 | $ | 71.54 | $ | 49.17 | ||||||||
Natural
gas (Mcf)
|
$ | 4.98 | $ | 3.31 | $ | 5.20 | $ | 4.00 |
11
The
Partnership had interests in eleven productive wells during the third quarters
of 2010 and 2009. The Partnership has interests in two significant wells, the
Rob L RA SUA CL&F #1 (“Gumbo II”) well and the HBR A Big Gas Unit (“HBR A”)
well. During the third quarter of 2009, the HBR A and Gumbo II wells accounted
for 63.0% and 92.2% of the Partnership’s crude oil and natural gas sales
volumes, respectively. During the third quarter of 2010, the HBR A and the Gumbo
II accounted for 65.7% and 84% of the Partnership’s crude oil and natural gas
sales volumes, respectively. The operator of the Gumbo II well slowly increased
production volumes from the well during the first seven months of 2010,
resulting in increased volumes for the three and nine month periods ended
September 30, 2010. Third quarter 2010 sales volumes from the Gumbo
II well were also higher than third quarter 2009 sales volumes because the well
was shut-in for thirteen days during the third quarter of 2009 due to issues
with the oil pipeline. The Gumbo II well did produce at full
production rates during the third quarter of 2010. However, production volumes
from the HBR A well have declined significantly over the past
year. Production volumes from the HBR A well, net to this
Partnership, were 278 Bbl and 10,563 Mcf during the third quarter of 2010
compared to 799 Bbl and 27,007 MCF during the third quarter of
2009. The eight Cole Ranch field wells, which began production in
April 2007, averaged 37 barrels of crude oil production and 119 Mcf of natural
gas production per day during the third quarter of 2009. The Partnership owns a
50% working interest and a 37.5% revenue interest in these wells. During the
third quarter of 2010, these same eight wells averaged approximately 34 barrels
of crude oil production and 112 Mcf of natural gas production per
day.
Crude oil
and natural gas average sales prices increased from the third quarter of
2009. Average crude oil sales prices increased by 4.2% and
average natural gas sales prices increased by 50.5% over the comparative
quarters. Total revenues increased by $21,247, or 6.3% in the third
quarter of 2010 compared to the third quarter of 2009 as a result of these
increased prices. The declining volumes from the HBR A well will lead to
continuing declines in sales volumes in future quarters. The current estimated
reserve life of the HBR A well is estimated to be approximately 14 months using
current prices and costs. In addition, gas prices have decreased and
it is expected that average gas prices received during the fourth quarter will
decline from third quarter levels.
In
January 2009, the SEC adopted a new rule related to modernizing reserve
calculation and disclosure requirements for oil and gas companies, which became
effective prospectively for annual reporting periods ending on or after December
31, 2009. In addition to expanding the definition and disclosure
requirements for crude oil and natural gas reserves, the new rule changes the
requirements for determining quantities of crude oil and natural gas reserves.
The new rule requires disclosure of crude oil and natural gas proved reserves by
significant geographic area, using the un-weighted arithmetic average of
first-day-of-the-month commodity prices over the preceding 12-month period,
rather than end-of-period prices, and allows the use of reliable technologies to
estimate proved crude oil and natural gas reserves, if those technologies have
been demonstrated to result in reliable conclusions about reserves volumes.
Reserve and related information for September 30, 2010 is presented consistent
with the requirements of the new rule. The new rule does not allow prior-year
reserve information to be restated, so all information related to September 30,
2009 is presented consistent with prior SEC rules for the estimation of proved
reserves. The effect of applying the new definition of reliable technology and
other non-price related aspects of the updated rules did not significantly
impact 2010 net proved reserve volumes. All of the Partnership’s
reserves are located in the United States.
The
estimated net proved crude oil and natural gas reserves as of September 30, 2010
and 2009 are summarized below. The quantities of proved crude oil and natural
gas reserves discussed in this section include only the amounts which the
Partnership reasonably expects to recover in the future from known oil and gas
reservoirs under the current economic and operating conditions. Proved reserves
include only quantities that the Partnership expects to recover commercially
using current prices, costs, existing regulatory practices, and technology.
Therefore, any changes in future prices, costs, regulations, technology or other
unforeseen factors could materially increase or decrease the proved reserve
estimates.
12
Net proved reserves
|
Oil (Bbl)
|
Gas (Mcf)
|
|||
September
30, 2010
|
38,607
|
146,678
|
|||
September
30, 2009
|
30,424
|
278,722
|
Three
months ended September 30, 2010 compared to the three months ended September 30,
2009
The
Partnership had net income of $37,579 for the three month period ended September
30, 2010, compared to net income of $55,591 for the three month period ended
September 30, 2009.
While
overall sales volumes decreased during the three months ended September 30,
2010, sales prices received for the Partnership’s production increased. The
average oil price received on a comparative basis increased from $67.30 per
barrel of crude oil during the three months ended September 30, 2009 to $70.13
per barrel during the three months ended September 30, 2010, an increase of
4.2%. Natural gas prices also increased from an average price of $3.31 per Mcf
of natural gas produced during the quarter ended September 30, 2009 to $4.98 per
Mcf for the quarter ended September 30, 2010, an increase of 50.5%. As a result
of the sales price increases, oil and gas sales revenues increased by $21,247,
or 6.3% for the three months ended September 30, 2010.
Lease
operating costs increased from $67,811 during the quarter ended September 30,
2009 to $99,776 during the quarter ended September 30, 2010, primarily due to a
true up of lease operating expense accruals associated with the Cole Ranch
wells.
Depletion
expense rose from $125,549 incurred during the three month period ended
September 30, 2009 to $145,983 incurred for the three month period ended
September 30, 2010, primarily due to the rise in the overall depletion rate
resulting from the overall drop in reserve estimates related to the
Partnership’s interest in the HBR A well.
General
and administrative costs decreased from $69,000 incurred during the three months
ended September 30, 2009 to $45,067 incurred during the three months ended
September 30, 2010. RELP has gradually been reducing its total overhead costs
and total overhead charged to partnerships has decreased in 2010 from 2009
levels. The administrative overhead charge to the Partnership
decreased from $48,782 for the three months ended September 2009 to $32,657 for
the three months ended September 30, 2010.
Nine
months ended September 30, 2010 compared to the nine months ended September 30,
2009
The
Partnership had net income of $240,488 for the nine month period ended September
30, 2010, compared to a net loss of $589,560 for the nine month period ended
September 30, 2009. The primary cause of this increase in net income is lower
property impairment expenses, as discussed below.
While
overall sales volumes decreased during the nine months ended September 30, 2010,
sales prices received for the Partnership’s production increased. The average
oil price received on a comparative basis increased from $49.17 per barrel of
crude oil during the first nine months of 2009 to $71.54 per barrel during the
first nine months of 2010, an increase of 45.5%. Natural gas prices also
increased from an average price of $4.00 per Mcf of natural gas produced during
the nine months ended September 30, 2009 to $5.20 per Mcf for the nine months
ended September 30, 2010, an increase of 30%. Because of these large increases
in average prices for crude oil and natural gas sales, the Partnership’s oil and
gas sales revenues rose by $123,417, or 12.2% for the nine months ended
September 30, 2010.
Lease
operating costs decreased from $236,272 during the nine months ended September
30, 2009 to $212,501 during the nine months ended September 30, 2010, primarily
as a result of reduced ad valorem tax expenses. Production taxes decreased
during the nine month period ended September 30, 2010 compared to the nine month
period ended September 30, 2009 by approximately $42,000, from $61,772 to
$19,473. This was the result of an approximate $45,000 adjustment received from
the operator of the Gumbo II well during the second quarter of 2010. The
operator refunded prior production tax payments because the well obtained a
severance tax exemption from the state of Louisiana for the period from
inception through February 2010.
13
The
Partnership incurred no property impairment expense during the nine month period
ended September 30, 2010. However, the decline in oil and gas prices during that
occurred during the first quarter of 2009 resulted in impairment expense of
proved properties totaling $566,482 for the nine month period ending September
30, 2009. Depletion expense decreased from $494,991 for the first nine months of
2009 to $442,284 for the first nine months of 2010. While overall depletion
rates have increased during 2010 because of the drop in reserves associated with
the Partnership’s interest in the HBR A well, the Partnership has a lower
overall property basis in 2010 as a result of the 2009 property impairment
totaling $566,482.
General
and administrative costs decreased from $232,125 incurred during the nine months
ended September 30, 2009 to $211,798 incurred during the nine months ended
September 30, 2010. RELP has gradually been reducing its total overhead costs
and total overhead charged to partnerships has decreased in 2010 from 2009
levels. The administrative overhead charge to the Partnership
decreased from $138,310 for the nine months ended September 2009 to $129,029 for
the nine months ended September 30, 2010. This decrease was
partially offset by increased professional fees.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
The
Partnership is a “smaller reporting company” as defined by Rule 12b-2
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and as such, is not required to provide the information required under
this Item.
Item
4T. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As the
managing general partner of the Partnership, Reef maintains a system of controls
and procedures designed to provide reasonable assurance as to the reliability of
the financial statements and other disclosures included in this report, as well
as to safeguard assets from unauthorized use or disposition. The Partnership,
under the supervision and with participation of its management, including the
principal executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of its “disclosure controls and
procedures” as such term is defined in Rule 13a-15(e) promulgated under the
Exchange Act, as of the end of the period covered by this Quarterly Report.
Based on that evaluation, the principal executive officer and principal
financial officer have concluded that the Partnership’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Partnership in reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in SEC rules and forms, and includes controls and procedures designed to ensure
that information required to be disclosed by us in such reports is accumulated
and communicated to our management, including the principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding financial disclosure.
Changes
in Internal Controls
There
have not been any changes in the Partnership’s internal controls over financial
reporting during the fiscal quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, the
Partnership’s internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
On August 26, 2010, Frank
Stevenson ("Stevenson") filed a lawsuit, styled Stevenson v. Wayne Kirk, Michael J.
Mauceli, Reef Global Energy Ventures II, et al., (Cause No. 10-10647)
in the 191st Judicial District Court, Dallas County, Texas.
Stevenson also named as defendants Reef Global Energy VII and multiple other
Reef Joint Ventures as well as Reef Securities, Inc. On September 22,
2010, James and Carol Estle (the “Estles”) and Nancy Dykes Thurmond Antolic
(“Antolic”) joined the suit as additional plaintiffs. Stevenson, the
Estles, and Antolic were participants in many of the named Reef defendant
programs/Joint Ventures. Stevenson invested in Reef Global
Energy VII, L.P. but the Estles and Antolic did not. Collectively,
Stevenson, the Estles, and Antolic are seeking in excess of $1 million in
compensatory damages as well as exemplary damages, attorneys’ fees, pre- and
post-judgment interest, and costs and they assert vague claims, with
virtually no factual allegations in support, for fraud, rescission under the
Texas Securities Act, control person liability under the Texas Securities Act,
and breach of fiduciary duty.. Notwithstanding the fact
that the Petition is wholly deficient and fails to allege a factual
basis for any of the claims asserted, Defendants believe Stevenson's, the
Estles’, and Antolic’s claims are meritless, and with respect to many of the
Reef programs referred to in the Petition, Defendants believe
that the claims for fraud, particularly if based upon
any purported guarantees or projections, are barred by limitations, as are
any claims for rescission or breach of fiduciary duty with respect to those
programs. In addition, with respect to all programs in which
Stevenson, the Estles, and Antolic invested, they received thorough disclosure
documents that disclosed all material facts and risks with respect to
participation in such programs, particularly the fact that no guarantees or
promises could be made or relied upon. Defendants (including
Reef Global Energy VII, L.P.) intend to vigorously defend this lawsuit and
to seek damages against Stevenson, the Estles, and Antolic based upon, among
other things, breaches of representations and warranties made by them as well as
the indemnification provisions of the documents executed by each of them.
Item
1A. Risk Factors
There
were no material changes in the Risk Factors applicable to the Partnership as
set forth in the Annual Report.
14
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item
3. Default Upon Senior Securities
None.
Item
4. (Removed and Reserved)
Item
5. Other Information
None.
Item
6. Exhibits
Exhibits
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of the Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
Certification
of the Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
15
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
REEF
GLOBAL ENERGY VII, L.P.
|
||
By:
|
Reef
Oil & Gas Partners, L.P.
|
|
Managing
General Partner
|
||
By:
|
Reef
Oil & Gas Partners, GP, LLC,
|
|
its
general partner
|
||
Dated:
November 15, 2010
|
By:
|
/s/
Michael J. Mauceli
|
Michael
J. Mauceli
|
||
Manager
and Member
|
||
(Principal
Executive Officer)
|
||
Dated:
November 15, 2010
|
By:
|
/s/
Daniel C. Sibley
|
Daniel
C. Sibley
|
||
Chief
Financial Officer and General Counsel of
|
||
Reef
Exploration, L.P.
|
||
(Principal
Financial and Accounting
Officer)
|
16
EXHIBIT
INDEX
Exhibits
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of the Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32.2
|
Certification
of the Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
17