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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2011

 

or

 

o         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: 000-53795

 


 

REEF OIL & GAS INCOME AND DEVELOPMENT FUND III, L.P.

(Exact name of registrant as specified in its charter)

 

Texas

(State or other jurisdiction of

incorporation or organization)

 

26-0805120

(I.R.S. employer

identification no.)

 

 

 

1901 N. Central Expressway, Suite 300

Richardson, Texas

(Address of principal executive offices)

 

75080-3610

(Zip code)

 

(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 o   No x

 

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 x No o

 

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 o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

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 o   No x

 

As of November 14, 2011, the registrant had 490.9827 units of general partner interest outstanding, 8.9697 units of general partner interest held by the managing general partner, and 397.0172 units of limited partner interest outstanding.

 

 

 



Table of Contents

 

Reef Oil & Gas Income and Development Fund III, L.P.

Form 10-Q Index

 

PART I — FINANCIAL INFORMATION

 

 

ITEM 1.

Financial Statements (Unaudited)

 

Condensed Balance Sheets

 

Condensed Statements of Operations

 

Condensed Statements of Cash Flows

 

Notes to Condensed Financial Statements

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

ITEM 4T.

Controls and Procedures

 

 

PART II — OTHER INFORMATION

 

 

ITEM 1.

Legal Proceedings

 

 

ITEM 1A.

Risk Factors

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

ITEM 3.

Default Upon Senior Securities

 

 

ITEM 4.

(Removed and Reserved)

 

 

ITEM 5.

Other Information

 

 

ITEM 6.

Exhibits

 

 

Signatures

 

 

i



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Reef Oil & Gas Income and Development Fund III, L.P.

Condensed Balance Sheets

 

 

 

September 30,
2011

 

December 31,
2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

607,680

 

$

1,136,682

 

Accounts receivable

 

557,894

 

832,471

 

Accounts receivable from affiliates

 

36,130

 

105,094

 

Total current assets

 

1,201,704

 

2,074,247

 

 

 

 

 

 

 

Oil and gas properties, full cost method of accounting:

 

 

 

 

 

Proved properties, net of accumulated depletion of $61,908,344 and $61,089,909

 

12,557,199

 

14,318,440

 

Unproved properties

 

1,774,790

 

1,969,433

 

Net oil and gas properties

 

14,331,989

 

16,287,873

 

 

 

 

 

 

 

Deferred financing fees, net

 

42,307

 

 

 

 

 

 

 

 

Total assets

 

$

15,576,000

 

$

18,362,120

 

 

 

 

 

 

 

Liabilities and partnership equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,328

 

$

47

 

Accrued liabilities

 

 

9,819

 

Current portion of long-term note payable

 

360,000

 

 

Total current liabilities

 

363,328

 

9,866

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Note payable (Note 3)

 

1,495,000

 

4,750,000

 

Asset retirement obligation

 

1,799,055

 

903,946

 

Total long-term liabilities

 

3,294,055

 

5,653,946

 

 

 

 

 

 

 

Partnership equity (deficit)

 

 

 

 

 

General partners

 

6,919,497

 

7,336,215

 

Limited partners

 

5,011,446

 

5,348,414

 

Managing general partner

 

(12,326

)

13,679

 

Partnership equity

 

11,918,617

 

12,698,308

 

 

 

 

 

 

 

Total liabilities and partnership equity

 

$

15,576,000

 

$

18,362,120

 

 

See accompanying notes to condensed financial statements (unaudited).

 

1



Table of Contents

 

Reef Oil & Gas Income and Development Fund III, L.P.

Condensed Statements of Operations

(Unaudited)

 

 

 

For the three months ended
September 30,

 

For the nine months ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Oil, gas and NGL sales

 

$

1,350,349

 

$

1,591,310

 

$

4,278,030

 

$

4,294,616

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

698,023

 

767,167

 

1,898,111

 

1,995,665

 

Production taxes

 

88,618

 

104,031

 

282,212

 

270,016

 

Depreciation, depletion and amortization

 

217,919

 

560,987

 

817,896

 

1,710,675

 

Accretion of asset retirement obligation

 

27,998

 

17,043

 

49,813

 

49,834

 

Property impairment

 

 

 

 

3,524,682

 

General and administrative

 

285,454

 

444,414

 

1,087,691

 

2,236,437

 

Total costs and expenses

 

1,318,012

 

1,893,642

 

4,135,723

 

9,787,309

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

32,337

 

(302,332

)

142,307

 

(5,492,693

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Miscellaneous income

 

(31

)

(16,573

)

14

 

(7,559

)

Interest income

 

 

269

 

 

3,439

 

Interest expense

 

(24,690

)

(64,583

)

(137,377

)

(64,583

)

Amortization of deferred financing fees

 

(5,769

)

 

(7,509

)

 

Total other income (expense)

 

(30,490

)

(80,887

)

(144,872

)

(68,703

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,847

 

$

(383,219

)

$

(2,565

)

$

(5,561,396

)

 

 

 

 

 

 

 

 

 

 

Net loss per general partner unit

 

$

(22.69

)

$

(449.17

)

$

(83.44

)

$

(6,169.10

)

Net loss per limited partner unit

 

$

(22.69

)

$

(449.17

)

$

(83.44

)

$

(6,169.10

)

Net income (loss) per managing general partner unit

 

$

2,452.15

 

$

1,744.65

 

$

7,975.01

 

$

(9,279.51

)

 

See accompanying notes to condensed financial statements (unaudited).

 

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Reef Oil & Gas Income and Development Fund III, L.P.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

For the nine months ended
September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(2,565

)

$

(5,561,396

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Plugging and abandonment costs paid from ARO

 

(14,342

)

 

Adjustments for non-cash transactions:

 

 

 

 

 

Depreciation, depletion and amortization

 

817,896

 

1,710,675

 

Property impairment

 

 

3,524,682

 

Accretion of asset retirement obligation

 

49,813

 

49,834

 

Amortization of deferred financing fees

 

7,509

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

274,577

 

(659,102

)

Accounts receivable from affiliates

 

9,509

 

871,262

 

Prepaid expenses

 

 

(527

)

Accounts payable

 

3,281

 

(550,245

)

Accounts payable to affiliates

 

 

(236,121

)

Accrued liabilities

 

(9,819

)

(231,569

)

Net cash provided by (used in) operating activities

 

1,135,859

 

(1,082,507

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Proceeds from sale of oil and gas properties

 

3,059,455

 

 

Purchase of oil and gas properties

 

 

(18,124,415

)

Property development

 

(1,002,374

)

(2,945,856

)

Net cash provided by (used in) investing activities

 

2,057,081

 

(21,070,271

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from note payable

 

 

5,000,000

 

Payment of note payable

 

(2,895,000

)

 

Payment of deferred financing fees

 

(49,816

)

 

Partner distributions

 

(777,126

)

(686,571

)

Net cash provided by (used in) financing activities

 

(3,721,942

)

4,313,429

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(529,002

)

(17,839,349

)

Cash and cash equivalents at beginning of period

 

1,136,682

 

18,243,848

 

Cash and cash equivalents at end of period

 

$

607,680

 

$

404,499

 

 

 

 

 

 

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest expense on note payable

 

$

137,377

 

$

43,750

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing transactions:

 

 

 

 

 

Property additions included in accounts payable to affiliates

 

$

 

$

(12,606

)

Additions to property and asset retirement obligation

 

$

865,155

 

$

747,138

 

Property additions related to Davric default

 

$

 

$

435,390

 

 

See accompanying notes to condensed financial statements (unaudited).

 

3


 


Table of Contents

 

Reef Oil & Gas Income and Development Fund III, L.P.

Notes to Condensed Financial Statements (unaudited)

 

1. Organization and Basis of Presentation

 

The condensed financial statements of Reef Oil & Gas Income and Development Fund III, 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 2011. 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, 2010 (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, 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 and nine month periods ended September 30, 2011, the Partnership recognized no property impairment expense of proved properties. During the three and nine month periods ended September 30, 2010, the Partnership recognized property impairment expense of proved properties totaling $0 and $3,524,682, respectively.

 

During the fourth quarter of 2010, the Partnership fully impaired its unproved properties associated with the Slaughter Dean project by recognizing $53,166,873 of property impairment expense. At December 31, 2010 and September 30, 2011, unproved properties consist of non-operated, undrilled infill and offset drilling locations associated with certain working interests acquired from Azalea Properties Ltd. on January 19, 2010 by RCWI L.P., an affiliate of Reef, and assigned to the Partnership (the “Azalea Acquired Properties”). Unproved properties are assessed for impairment quarterly as of the balance sheet date by considering drilling activity in the area of the unproved properties and other information.  Any impairment resulting from this quarterly assessment is reported as property impairment expense in the current period, as appropriate. During the three and nine month periods ended September 30, 2011 and 2010, the Partnership recognized no impairment of unproved properties.

 

Estimates of Proved Oil and Gas Reserves

 

Estimates of the Partnership’s proved reserves at September 30, 2011 and December 31, 2010 have been prepared and presented in accordance with SEC rules and accounting standards which require SEC reporting entities to prepare their reserve estimates using pricing based upon the un-weighted arithmetic average of the first-day-of-the-

 

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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.

 

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.

 

During the quarter ended September 30, 2011, the Partnership began plugging operations on seven wells located in the Slaughter Dean Field. Approximately $14,342 of plugging and abandonment costs were applied against the Partnership’s asset retirement obligation shown on the accompanying balance sheet, and the remaining amount of approximately $62,000 was recorded as current cost and is classified as a lease operating expense on the accompanying statement of operations. As a result of these plugging and abandonment operations, the Partnership determined during the quarter that its estimated liability for the Slaughter Dean Field (approximately 145 wells) was understated, and, in that regard, the Partnership increased the basis of the Slaughter Dean Field wells by $860,878 and recorded additional asset retirement obligation of this amount as a change in estimate.

 

The following table summarizes the Partnership’s asset retirement obligation for the nine month period ended September 30, 2011 and the year ended December 31, 2010.

 

 

 

Nine months ended
September 30, 2011

 

Year ended
December 31, 2010

 

Beginning asset retirement obligation

 

$

903,946

 

$

248,912

 

Additions related to new properties

 

4,277

 

668,800

 

Additions related to existing properties

 

860,878

 

 

Retirement related to property sales

 

(5,517

)

(76,156

)

Retirement related to property abandonment and restoration

 

(14,342

)

 

Accretion expense

 

49,813

 

62,390

 

Ending asset retirement obligation

 

$

1,799,055

 

$

903,946

 

 

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, accounts receivable from affiliates, and accounts payable approximates their

 

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carrying value due to their short-term nature. The fair market value of the Partnership’s long-term debt approximates the carrying value at September 30, 2011 as it yields interest at rates currently available in the market.

 

3. Long-Term Debt

 

On June 30, 2010, the Partnership and Texas Capital Bank, N.A. (“TCB”) entered into a Credit Agreement (the “Credit Agreement”) with a $5,000,000 borrowing base, and a related promissory note and security agreement for purposes of funding the acquisition of oil and gas properties purchased from Lett Oil & Gas, L.P. (“Lett”) by RCWI LP, (“RCWI”) a Reef affiliate, and assigned to the Partnership under the Assignment, Conveyance and Bill of Sale described in Note 2 of the Annual Report (the “Lett Acquired Properties”).  The per annum interest rate is equal to the U.S. prime rate as published by the Wall Street Journal’s “Monday Rates” plus 0.5%, with a minimum interest rate of 5%, payable monthly.  The obligations of TCB to the Partnership under the Credit Agreement expire on June 30, 2013, at which point the promissory note matures, and any unpaid principal and interest becomes due and payable.  The Credit Agreement is a reducing revolving credit facility, and is subject to semi-annual redetermination of the borrowing base in accordance with the TCB’s customary practices for oil and gas loans.  At June 30, 2010, the borrowing base was equal to $5,000,000.  The Partnership borrowed $5,000,000 from TCB under the Credit Agreement which was paid directly to Lett to satisfy the closing obligations of RCWI under the Lett Purchase Agreement as described in Note 2 of the Annual Report.  The principal and accrued interest thereon may generally be prepaid by the Partnership in whole or in part at any time and without premium or penalty.

 

Under the terms of the Credit Agreement, on June 30, 2010 the Partnership paid TCB a facility fee of $50,000 (one percent (1.00%) of the initial borrowing base) and is obligated to further pay, upon each determination of an increase in the borrowing base, a facility fee in the amount of one percent (1.00%) of the amount by which the borrowing base is increased over that in effect on the date of determination.  On June 30, 2010, the Partnership also paid TCB an engineering fee in the amount of $5,000, and is obligated to further pay additional engineering fees in the amount of $5,000 if TCB’s internal engineers perform the engineering review of the collateral; or the actual fees and expenses of any third-party engineers retained by TCB to prepare an engineering report, payable at the time of a redetermination of the borrowing base.

 

The Credit Agreement is guaranteed by RCWI and RCWI GP LLC, both affiliates of Reef. Borrowings under the Credit Agreement are secured by a first priority lien on no less than 90% of the oil and gas properties utilized in determining the borrowing base, based on the net present value of the crude oil and natural gas to be produced from the oil and gas properties calculated using a discount rate of nine percent (9.00%) per annum.

 

On May 20, 2011, the Partnership entered into the First Amendment to Credit Agreement (“Amendment”) with TCB. Under the Amendment, the borrowing base was reduced to the Partnership’s outstanding balance of $4,100,000 effective May 20, 2011.  In addition, effective June 1, 2011, the borrowing base is reduced by $55,000 per month.  On May 24, 2011, the Partnership paid TCB fees of $43,500 in connection with the Amendment.  These fees have been capitalized as other non-current assets on the accompanying balance sheet and will be amortized over the term of the credit agreement.

 

During July 2011, the Partnership and TCB executed the Second Amendment to Credit Agreement (“Second Amendment”), which is effective as of June 30, 2011. Under the Second Amendment, the borrowing base was reduced to $1,945,000 as of June 30, 2011 and the Partnership made a principal payment of $2,100,000 to reduce the loan balance to this amount.  In addition, effective August 1, 2011, the borrowing base is reduced by $30,000 per month.  As such, the Partnership recognized $360,000 of the outstanding note payable as a current liability as of September 30, 2011 in the accompanying balance sheet.  During July 2011, the Partnership paid TCB fees of $6,316 in connection with the Second Amendment.  These fees have been capitalized as other non-current assets on the accompanying balance sheet and will be amortized over the term of the credit agreement.

 

The Credit Agreement contains various covenants, including among others:

 

·      restrictions on liens;

 

·      restrictions on incurring other indebtedness without the lenders’ consent;

 

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·      restrictions on distributions and other restricted payments;

 

·      maintenance of a current ratio as of the end of each fiscal quarter commencing September 30, 2010 of not less than 1.0 to 1.0, as adjusted; and

 

·      maintenance of an interest coverage ratio of cash flow to fixed charges as of the end of each fiscal quarter commencing September 30, 2010, to be at least 3.0 to 1.0.

 

All outstanding amounts owed under the Credit Agreement become due and payable upon the occurrence of certain usual and customary events of default, including among others:

 

·      failure to make payments under the Credit Agreement;

 

·      non-performance of covenants and obligations continuing beyond any applicable grace period; and

 

·      the occurrence of a “Change in Control” (as defined in the Credit Agreement).

 

At September 30, 2011, the Partnership was in compliance with the financial covenants under the Credit Agreement.

 

4. Transactions with Affiliates

 

Reef Exploration, L.P. (“RELP”), an affiliate of Reef Oil & Gas Partners, L.P. (“Reef”), the managing general partner of the Partnership, currently serves as the operator of a working interest in a producing oil property located in the Slaughter Field in Cochran County, Texas (“the Slaughter Dean Project”) and receives drilling compensation in an amount equal to 15% of the total well costs paid by the Partnership.  RELP also receives drilling compensation in an amount equal to 5% of the total well costs paid by the Partnership for non-operated wells included in the Azalea Acquired Properties and the Lett Acquired Properties. All of the wells included in these two purchases are non-operated. Total well costs include all drilling and equipment costs, including intangible development costs, surface facilities, and costs of pipelines necessary to connect the well to the nearest delivery point.  In addition, total well costs also include the costs of all developmental activities on a well, such as reworking, working over, deepening, sidetracking, fracturing a producing well, installing pipeline for a well or any other activity incident to the operations of a well, excluding ordinary well operating costs after completion.  Total well costs do not include costs relating to lease acquisitions.  During the nine month period ended September 30, 2011, RELP received $38,327 in drilling compensation. During the year ended December 31, 2010, RELP received $232,775 in drilling compensation.  Drilling compensation payments are included in oil and gas properties in the financial statements.

 

Additionally, Reef and its affiliates are reimbursed for direct costs and all documented out-of-pocket expenses incurred on behalf of the Partnership. During the three and nine month periods ended September 30, 2011, Reef and its affiliates received total reimbursements for direct costs of $72,967 and $284,193, respectively, and other documented out-of-pocket expenses of $700 and $1,429, respectively. During the three and nine month periods ended September 30, 2010, Reef and its affiliates received total reimbursements for direct costs of $113,735 and $331,891, respectively, and other documented out-of-pocket expenses of $1,770 and $8,472, respectively.

 

RELP receives an administrative fee to cover all general and administrative costs in an amount equal to 1/12 th of 1% of all capital raised payable monthly.  During the three and nine month periods ended September 30, 2011 and 2010, RELP received $224,220 and $672,660, respectively, in administrative fees. Administrative fees are included in general and administrative expense in the financial statements. RELP’s general and administrative costs include all customary and routine expenses, accounting, office rent, telephone, secretarial, salaries and other incidental expenses incurred by RELP or its affiliates that are necessary to the conduct of the Partnership’s business, whether generated by RELP, its affiliates or by third parties, but excluding direct costs and operating costs.

 

RELP processes joint interest billings and revenue payments on behalf of the Partnership. At September 30, 2011 and December 31, 2010, RELP owed the Partnership $36,130 and $45,639, respectively, for net revenues processed

 

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in excess of joint interest, drilling compensation, direct 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.

 

In December 2010, the Partnership sold its interests in certain oil and gas properties in the Lusk Field in Lea County, New Mexico, to Reef 2010 Drilling Fund, L.P., a Reef affiliate. These interests were sold primarily due to the planned or actual drilling of exploratory wells on the acreage involved.  In accordance with its stated objectives, the Partnership will not participate in exploratory drilling activities.  The sale included the Partnership’s interests in five existing wells, as well as the undeveloped acreage upon which an exploratory well is intended to be drilled.  The Partnership accepted a sales price of $59,455 in exchange for these interests, which was included in accounts receivable from affiliates on the balance sheet as of December 31, 2010.  The Partnership received the entire sales price of $59,455 in cash during the first quarter of 2011.  The Partnership recorded no gain or loss associated with this transaction.

 

In January 2011, the Partnership sold a portion of its interests in the Thums Long Beach Unit to Reef Oil & Gas 2010-A Income Fund, L.P., a Reef affiliate.  The Thums Long Beach Unit is a long-lived waterflood project in the Wilmington Field, located underneath the Long Beach Harbor in southern California. The Partnership received $350,000 in cash in exchange for these interests.  In June 2011, the Partnership sold an additional portion of its interests in the Thums Long Beach Unit to Reef Oil & Gas 2010-A Income Fund, L.P.  The Partnership received $2,650,000 in cash in exchange for these additional interests.  These sales transactions reduced the full cost pool of capitalized oil and gas properties.  The Partnership recorded no gain or loss associated with these transactions.

 

5. Commitments and Contingencies

 

None.

 

6.  Partnership Equity

 

Information regarding the number of units outstanding and the net income (loss) per type of Partnership unit for the three and nine month periods ended September 30, 2011 is detailed below:

 

For the three months ended September 30, 2011

 

Type of Unit

 

Number of
Units

 

Net income
(loss)

 

Net income
(loss) per unit

 

Managing general partner

 

8.9697

 

$

21,995

 

$

2,452.15

 

General partner

 

490.9827

 

(11,140

)

$

(22.69

)

Limited partner

 

397.0172

 

(9,008

)

$

(22.69

)

Total

 

896.9696

 

$

1,847

 

 

 

 

For the nine months ended September 30, 2011

 

Type of Unit

 

Number of
Units

 

Net income
(loss)

 

Net income
(loss) per unit

 

Managing general partner

 

8.9697

 

$

71,533

 

$

7,975.01

 

General partner

 

490.9827

 

(40,970

)

$

(83.44

)

Limited partner

 

397.0172

 

(33,128

)

$

(83.44

)

Total

 

896.9696

 

$

(2,565

)

 

 

 

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.

 

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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.

 

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 Oil & Gas Income and Development Fund III, L.P. is a Texas limited partnership. The primary objectives of the Partnership are to purchase working interests in oil and gas properties with the purposes of (i) growing the value of properties through the development of proved undeveloped reserves, (ii) generating revenue from the production of crude oil and natural gas, (iii) distributing cash to the partners of the Partnership, and (iv) selling the properties no later than 2015, in order to maximize return to the partners of the Partnership.  Reef is the managing general partner of the Partnership.

 

On properties purchased by the Partnership, the Partnership plans to produce existing proved reserves and develop any proved undeveloped reserves, but does not expect to engage in exploratory drilling for unproved reserves, should acreage purchased by the Partnership be deemed to contain unproved drilling locations.  Drilling locations for unproved reserves, if any, may be farmed out or sold to third parties or other partnerships formed by Reef.

 

The Partnership purchased an initial 41% working interest in a producing oil property located in the Slaughter Field in Cochran County, Texas, approximately 50 miles southwest of Lubbock, Texas (the “Slaughter Dean Project”), in January 2008 from Sierra-Dean Production Company, L.P. (“Sierra Dean”).  Under the terms of the acquisition agreement, each month thereafter additional working interests are purchased based on the amount the Partnership spends developing the project through January 2013.  Under the acquisition agreement the Partnership generally pays 82% of all drilling, development and repair costs (including amounts allocable to the working interest initially retained by Sierra Dean), and Sierra Dean conveys additional working interests to the Partnership each month in payment of its share of such costs. In a separate transaction in May 2008, the Partnership purchased 11% of the 18% working interest in the Slaughter Dean Project owned by Davric Corporation (“Davric”).

 

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The management of the operations and other business of the Partnership is the responsibility of Reef.  Reef Exploration, L.P. (“RELP”), an affiliate of Reef, serves as the operator of the Slaughter Dean Project. This relationship with the Partnership is governed by two operating agreements.  One operating agreement (the “Sierra-Dean Operating Agreement” is between the Partnership, RELP and Sierra Dean.  The other operating agreement is between the Partnership, RELP, and Davric (the “Davric Operating Agreement”).

 

The Partnership was advised during the second quarter of 2010 that Davric, who is unrelated to Reef and owns a 7% working interest in the Dean Unit and the Dean “B” unit, was unable to pay $538,443 of its share of costs incurred subsequent to February 28, 2009.  Pursuant to the Davric Operating Agreement, the Partnership assumed the 7% working interest of Davric and Davric is now a non-consenting working interest owner. The unpaid costs were recorded as property additions and operating costs on the books of the Partnership during the second quarter of 2010, and the Partnership will retain the assumed Davric 7% working interest until the net revenues related to this interest exceed the unpaid costs, plus penalties ranging from 300% to 450% of the amount in default.

 

On January 19, 2010, RCWI, an affiliate of the Partnership, completed the acquisition of certain working interests in oil and gas properties from Azalea Properties Ltd. for a purchase price of $21,610,116 pursuant to the Azalea Purchase Agreement.  The Azalea Purchase Agreement was subject to three Side Letter Agreements regarding the post-closing acquisition of proven undeveloped properties, the post-closing resolution of properties with title defects, and the post-closing resolution of third-party consents for certain properties.

 

Subsequently, RCWI entered into a Purchase and Sale Agreement with the Partnership, dated January 19, 2010, to sell portions of the working interests acquired from Azalea Properties Ltd. to the Partnership.  The Partnership acquired 61% of the working interests initially acquired by RCWI from Azalea Properties Ltd. for a purchase price of $13,182,171 in cash subject to post-closing adjustments.  RCWI also assigned portions of the acquired working interests to other affiliates of RCWI and the Partnership on the same terms. The Azalea Acquired Properties cover more than 400 properties, including more than 1,400 wells, located in Texas, California, New Mexico, Louisiana, Oklahoma, North Dakota, Mississippi, Alabama, Kansas, Montana, Colorado, and Arkansas, and include undrilled infill and offset locations.  The acquired working interests represent minority non-operated interests.  The properties are operated by more than 100 different operators, none of which are affiliates of the Partnership or Reef. Approximately $10.7 million of the purchase price is associated with proved developed reserves.

 

On June 15, 2010, Reef Oil & Gas Income and Development Fund IV, L.P., an affiliate of Reef, paid $1,252,844 to Azalea Properties Ltd. for the post closing settlement related to the Side Letter Agreements which were a part of the original Azalea Purchase Agreement. The Partnership reimbursed Reef Oil & Gas Income and Development Fund IV, L.P. $764,235 for its 61% of the post closing settlement amount. There was no additional payment for undeveloped properties; the entire post closing settlement is associated with proved developed reserves related to seventeen properties that were not included in the January 19, 2010 closing as a result of title issues and preferential purchase rights held by other parties that were unresolved at January 19, 2010.

 

On June 23, 2010, RCWI entered into the Lett Purchase Agreement for certain oil and gas property interests owned by Lett Oil & Gas, L.P. for a purchase price of $6,000,000.  The Lett Acquired Properties are located in the Thums Long Beach Unit and include approximately 870 producing wells and 485 injection wells.  The entire $6,000,000 purchase price is associated with proved developed reserves. The Thums Long Beach Unit is a long-lived waterflood project in the Wilmington Field, located underneath the Long Beach Harbor in southern California.  The Lett Purchase Agreement acknowledged two $500,000 deposits which were refundable to RCWI only upon certain terms set forth in the agreement and which were credited towards the purchase price at closing.  The Partnership advanced the two $500,000 deposits as well as the remaining $5,000,000 of the purchase price payable at closing by RCWI under the Lett Purchase Agreement.  The oil and gas properties included in the purchase transaction were acquired by RCWI for benefit of the Partnership and were assigned directly to the Partnership at closing pursuant to an Assignment, Conveyance and Bill of Sale dated June 30, 2010, but effective June 1, 2010. Revenues and expenses related to June 2010 are treated as a purchase price adjustment.

 

In December 2010, the Partnership sold its interests in certain oil and gas properties in the Granite Wash formation located in Wheeler County, Texas and Roger Mills County, Oklahoma, to Reef 2010 Drilling Fund, L.P., a Reef affiliate.  These interests were sold primarily due to the intended or actual drilling of exploratory wells on the

 

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acreage involved.  In accordance with its stated objectives, the Partnership will not participate in exploratory drilling activities. The sale included the Partnership’s interests in nine existing wells, as well as the undeveloped acreage on which additional wells are intended to be drilled.  The Partnership received a cash payment of $933,300 during December 2010 in exchange for these interests.  Approximately $478,981 of the sales price was received in exchange for undeveloped acreage, with the remaining $454,319 attributed to the existing wells.  The Partnership recorded no gain or loss associated with this transaction.

 

In December 2010, the Partnership sold its interests in certain oil and gas properties in the Lusk Field in Lea County, New Mexico, to Reef 2010 Drilling Fund, L.P., a Reef affiliate. These interests were sold primarily due to the planned or actual drilling of exploratory wells on the acreage involved.  In accordance with its stated objectives, the Partnership will not participate in exploratory drilling activities.  The sale included the Partnership’s interests in five existing wells, as well as the undeveloped acreage upon which an exploratory well is intended to be drilled.  The Partnership received $59,455 in exchange for these interests, which is included in accounts receivable from affiliates on the balance sheet as of December 31, 2010. This amount was paid in cash to the Partnership during the first quarter of 2011.  Approximately $1,800 of the sales price was received in exchange for undeveloped acreage, with the remaining $57,655 attributed to the existing wells.  The Partnership recorded no gain or loss associated with this transaction.

 

In January 2011, the Partnership sold a portion of its interests in the Thums Long Beach Unit to Reef Oil & Gas 2010-A Income Fund, L.P., a Reef affiliate.  In June 2011, the Partnership sold an additional portion of its interests in the Thums Long Beach Unit to the same affiliate. The Thums Long Beach Unit is a long-lived waterflood project in the Wilmington Field, located underneath the Long Beach Harbor in southern California. The Partnership received $350,000 in cash in exchange for the interests sold in January and $2,650,000 for the interests sold in June.  The Partnership recorded no gain or loss associated with this transaction.

 

The table below summarizes Partnership expenditures for property purchases, development, and waterflood enhancement by type and classification of well as of September 30, 2011.

 

 

 

Leasehold
Costs

 

Drilling and
Facilities Costs

 

Workovers

 

Total Costs

 

Purchase Existing Wells

 

$

32,311,871

 

$

 

$

 

$

32,311,871

 

 

 

 

 

 

 

 

 

 

 

New Wells

 

 

 

 

 

 

 

 

 

Producing Wells

 

26,587

 

28,360,100

 

 

28,386,687

 

Waterflood Injector Wells

 

 

5,149,620

 

 

5,149,620

 

Facilities

 

 

1,795,397

 

 

1,795,397

 

 

 

 

 

 

 

 

 

 

 

Existing Wells

 

 

 

6,926,008

 

6,926,008

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

32,338,458

 

$

35,305,117

 

$

6,926,008

 

$

74,569,583

 

 

The Partnership has expended approximately $57.1 million (included in the expenditures shown in the table above) on the Slaughter Dean Project as of September 30, 2011.  At December 31, 2010, the Partnership fully impaired its unproved properties associated with the Slaughter Dean Project by recognizing approximately $53.2 million of property impairment expense.  The Partnership continues to monitor the implementation of waterflood operations and daily production of total fluids (oil and water), which are less than the total water injected each day, to determine the cause of the underperformance of the waterflood operations.  The Partnership may gather additional data in order to determine whether alternate configurations of water injection wells may be more effective in producing a better waterflood response in the future, though such alternative configurations may be cost prohibitive to the Partnership to implement.  In the event that the Partnership determines, based on its monitoring activities, that additional or alternative configurations of water injection wells will not materially increase production from the Slaughter Dean Project, the Partnership may decide to continue waterflood operations without any changes.

 

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With the acquisition of the Lett Acquired Properties, the Partnership has expended all of its available capital, and no additional property purchases are anticipated.

 

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 $89,410,519 from both non-Reef partners and Reef.  Non-Reef partners purchased 490.9827 general partner units and 397.0172 limited partner units for $88,648,094, net of adjustments for sales to brokers for their own accounts, who were permitted to buy units at a price net of the commission that they would normally earn on sales of units. Reef contributed $762,425 for the purchase of 8.9697 general partner units at a price of $85,000 per unit, which is net of all offering costs. Organization and offering costs totaled $13,168,094, leaving capital contributions of $76,242,425 available for Partnership activities. As of September 30, 2011, the Partnership has expended $57,145,068 on property acquisitions and development costs related to the Slaughter Dean Project, $14,179,243 on property acquisitions and development related to the Azalea Properties, and $3,245,272 related to the Lett Acquired Properties.

 

The Partnership had working capital of $838,376 at September 30, 2011. The Partnership has expended $74,569,583 on the property acquisitions and development costs detailed above.  Subsequent to expending the initial available Partnership capital contributions on property acquisitions and development, the Partnership working capital consists primarily of cash flows from productive properties utilized to pay cash distributions to investors.  Sources of future funding consist of cash on hand, cash flow from operations, and sales of properties.  The Partnership may not be able to sell properties at the values desired.  As a result, the Partnership’s future ability to participate in the further development of properties in which the Partnership holds an interest may be restricted, unless the Partnership chooses to utilize cash flows from operations available for 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 unaudited condensed financial statements and the related notes to the unaudited 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 crude oil.

 

 

 

For the three months
ended September 30,

 

For the nine months
ended September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Sales volumes:

 

 

 

 

 

 

 

 

 

Oil (Barrels)

 

14,722

 

18,730

 

47,102

 

50,934

 

Natural gas (Mcf)

 

11,422

 

79,556

 

89,139

 

175,132

 

 

 

 

 

 

 

 

 

 

 

Average sales prices received:

 

 

 

 

 

 

 

 

 

Oil (Barrels)

 

$

88.60

 

$

67.81

 

$

81.53

 

$

68.03

 

Natural gas (Mcf)

 

$

4.03

 

$

4.04

 

$

4.91

 

$

4.74

 

 

The estimated net proved crude oil and natural gas reserves as of September 30, 2011 and 2010 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

 

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changes in future prices, costs, regulations, technology or other unforeseen factors could materially increase or decrease the proved reserve estimates.

 

Net proved reserves

 

Oil (Bbl)

 

Gas (Mcf)

 

September 30, 2011

 

761,816

 

1,177,383

 

September 30, 2010

 

707,161

 

1,527,998

 

 

Three months ended September 30, 2011 compared to the three months ended September 30, 2010

 

The Partnership had net income of $1,847 for the three month period ended September 30, 2011, compared to a net loss of $383,219 for the three month period ended September 30, 2010. The primary causes of this change were reductions in property depreciation, depletion, and amortization, and in general and administrative costs.

 

Depreciation, depletion and amortization decreased from $560,987 for the three month period ended September 30, 2010 to $217,919 for the three month period ended September 30, 2011. This decrease resulted primarily from the lower property depletable basis between the two periods which resulted from selling a portion of the Thums Long Beach Unit to Reef Oil & Gas 2010-A Income Fund, L.P during the first and second quarter of 2011, combined with rising oil prices.  In periods of rising prices, the reserves that can be economically produced from a given well generally increase, which results in a lower depletion rate.

 

General and administrative costs incurred during the three month periods ended September 30, 2011 and 2010 decreased from $444,414 in 2010 to $285,454 in 2011. This decline is primarily due to decreased direct costs, acquisition costs and legal fees related to the Lett Property Acquisition that occurred during 2010, compared to no such costs related to property acquisitions during 2011.

 

Partnership revenues totaled $1,350,349 for the three month period ended September 30, 2011 compared to $1,591,310 for the comparable period in 2010.  Overall, sales volumes decreased during the three month period ended September 30, 2011 compared to the three month period ended September 30, 2010, due primarily to decreased production from the Azalea Acquired Properties and the Lett Acquired Properties, and due to the sales of a portion of the Thums Long beach Unit completed during the first and second quarters of 2011 as described above.   As a result of the sales price for crude oil rising by 30.7%, to an average price of $88.60 per Bbl for the three month period ended September 30, 2011, compared to an average price of $67.81 for the three month period ended September 30, 2010, the overall decline in sales revenues was $240,961, or 15.1% on a comparative basis. Gas prices were stable on a comparative basis. While the Partnership is currently involved in some drilling activity, the recent property sales described above are expected to lead to reduced volumes during the remainder of 2011. There has been a drop in prices for both crude oil and natural gas during the third quarter, and fourth quarter average sales prices for both crude oil and natural gas are expected to be below the third quarter averages

 

Lease operating expenses decreased from $767,167 for the three month period ended September 30, 2010 to $698,023 for the three month period ended September 30, 2011.  Workover expenses and overhead charges related to the Azalea Acquired Properties decreased during the comparative periods.  These decreases were partially offset by increased expenses on the Lett Acquired Properties, as well as increased costs in the Slaughter Dean Field as a result of the plugging and abandonment expenses incurred during the three month period ended September 30, 2011.

 

Total other income and expense for the three month periods ended September 30, 2011 and 2010 decreased from expense of $80,887 in 2010 to expense of $30,490 in 2011.  Interest expense decreased from $64,583 during the three month period ended September 30, 2010 to $24,690 during the three month period ended September 30, 2011 due to the Partnership’s payment of principal on its note payable.

 

Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

 

The Partnership had a net loss of $2,565 for the nine month period ended September 30, 2011, compared to a net loss of $5,561,396 for the nine month period ended September 30, 2010. The primary causes of this change were reductions in property impairment, depreciation, depletion and amortization, and in general and administrative costs as discussed below.

 

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The Partnership recognized property impairment expense of $3,534,682 during the nine month period ended September 30, 2010 compared to no impairment expense during the nine month period ended September 30, 2011.  This impairment was primarily related to the Azalea Acquired Properties and the Lett Acquired Properties, for which the quarterly ceiling test was calculated using prices that were 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% for the entire life of these very long-lived properties, as opposed to using the prices in effect at the time of the transactions.  No impairment was necessary during the first nine months of 2011 as higher oil prices caused an increase in the discounted present value of the Partnership’s estimated future net cash flows from its’ reserves.

 

Depreciation, depletion and amortization decreased from $1,710,675 for the nine month period ended September 30, 2010 to $817,896 for the nine month period ended September 30, 2011. This decrease resulted from the lower property depletable basis between the two periods resulting from the property impairment taken during 2010, as well as the selling of a portion of the Thums Long beach Unit to Reef Oil & Gas 2010-A Income Fund during the first and second quarters of 2012, combined with rising oil prices.  In periods of rising prices, the reserves that can be economically produced from a given well generally increase, which results in a lower depletion rate.

 

General and administrative costs incurred during the nine month periods ended September 30, 2011 and 2010 decreased from $2,236,437 in 2010 to $1,087,691 in 2011. This decrease is primarily due to the expensing of acquisition costs totaling approximately $791,100 related to the Azalea Acquired Properties and the Lett Acquired Properties that were incurred during the first nine months of 2010. These two acquisitions also resulted in higher legal, audit, and professional fees during the nine month period ended September 30, 2010.

 

Partnership revenues totaled $4,278,030 for the nine month period ended September 30, 2011 compared to $4,294,616 for the comparable period in 2010.  Sales volumes decreased by approximately 23.3% during the nine month period ended September 30, 2011 compared to the nine month period ended September 30, 2010, primarily due to natural declines in production from the Partnership’s Slaughter Dean project and Azalea Acquired Properties, and declines resulting from the sale of a portion of the Thums Long Beach Unit completed during the first and second quarters of 2011 as described above.  Because the sales prices for crude oil and natural gas rose by 19.8%, and 3.6%, respectively during the nine month period ended September 30, 2011 compared to the nine month period ended September 30, 2010, the overall decline in sales revenues was only $16,586, or 0.4% on a comparative basis. While the Partnership is currently involved in some drilling activity, the recent property sales described above are expected to lead to reduced volumes during the remainder of 2011. The Partnership has not and is currently not engaged in commodity futures trading, hedging activities, or derivative financial instrument transactions for trading or other speculative purposes.  The Partnership sells a vast majority of its production from successful oil and gas wells on a month-to-month basis at current spot market prices. Accordingly, the Partnership is at risk for the volatility in commodity prices inherent in the oil and gas industry, and the level of commodity prices has a significant impact on the Partnership’s results of operations. There has been a drop in prices for both crude oil and natural gas during the third quarter, and fourth quarter average sales prices for both crude oil and natural gas are expected to be below the third quarter averages.

 

Lease operating expenses decreased from $1,995,665 for the nine month period ended September 30, 2010 to $1,898,111 for the nine month period ended September 30, 2011. The decrease relates to lower workover expenses and overhead charges related to the Azalea Acquired Properties, as well as lower repair and maintenance expenses on the Slaughter Dean Field during 2011.  These expense decreases were partially offset by increased expenses on the Lett Acquired Properties during the comparative quarters.

 

Total other income and expense for the nine month periods ended September 30, 2011 and 2010 increased from expense of $68,703 in 2010 to expense of $144,872 in 2011.  There was no interest income during the nine month period ended September 30, 2011 due to the fact that the Partnership spent its remaining capital available during 2010 to acquire the Azalea Acquired Properties and the Lett Acquired Properties. On June 30, 2010, the Partnership borrowed $5,000,000 in connection with the purchase of the Lett Acquired Properties. During the first nine months of 2011, the Partnership incurred interest expense of $137,377 related to its borrowings described in Note 3 to the financial statements, compared to $64,583 of interest expense which was solely incurred during the third quarter of 2010.

 

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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, 2011 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

 

None.

 

Item 1A.  Risk Factors

 

There were no material changes in the Risk Factors applicable to the Partnership as set forth in the Annual Report.

 

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.

 

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Item 6.  Exhibits

 

Exhibits

 

 

 

 

 

10.1

 

Purchase and Sale Agreement, dated January 19, 2010, by and between Azalea Properties Ltd. and RCWI, L.P. (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.2

 

Purchase and Sale Agreement, dated January 19, 2010, by and between RCWI, L.P., and Reef Oil & Gas Income and Development Fund III, L.P. (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.3

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Post Closing PUDs (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.4

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Post Closing Properties/Title Defect Notice (incorporated by reference to Exhibit 10.4 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.5

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Third Party Consents (incorporated by reference to Exhibit 10.5 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.6

 

Purchase and Sale Agreement by and between Lett Oil & Gas, L.P., as seller and RCWI, L.P., as buyer dated as of June 23, 2010 (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.7

 

Assignment, Conveyance and Bill of Sale between Lett Oil & Gas, L.P. (“Assignor”) and Reef Oil & Gas Income and Development Fund III, L.P. (“Assignee”) executed June 30, 2010 and dated effective June 1, 2010 (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.8

 

$50,000,000 Credit Agreement dated June 30, 2010 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.9

 

Form of Security Agreement (General) dated June 30, 2010 by Reef Oil & Gas Income and Development Fund III, L.P., in favor of Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.4 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.10

 

Promissory Note in the principal amount of up to $50,000,000 dated June 30, 2010 payable to Texas Capital Bank, N.A. (incorporated by reference to Exhibit 10.5 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.11

 

Purchase and Sale Agreement, effective June 1, 2011, between the Partnership and Reef 2010 -A Income Fund, L.P. (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on August 2, 2011).

 

 

 

10.12

 

First Amendment to the Credit Agreement dated May 20, 2011 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on May 23, 2011).

 

 

 

10.13

 

Second Amendment to the Credit Agreement dated June 30, 2011 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on August 2, 2011).

 

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Table of Contents

 

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.*

 

 

 

101.INS

 

XBRL Instance Document*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document*

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*

 


*Filed herewith

 

17



Table of Contents

 

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 OIL & GAS INCOME AND DEVELOPMENT FUND III, L.P.

 

 

 

 

By:

Reef Oil & Gas Partners, L.P.

 

 

Managing General Partner

 

 

 

 

By:

Reef Oil & Gas Partners, GP, LLC,

 

 

its general partner

 

 

 

 

 

 

Dated:  November 14, 2011

By:

/s/ Michael J. Mauceli

 

 

Michael J. Mauceli

 

 

Manager and Member

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Dated:  November 14, 2011

By:

/s/ Daniel C. Sibley

 

 

Daniel C. Sibley

 

 

Chief Financial Officer and General Counsel of Reef Exploration, L.P.

 

 

(Principal Financial and Accounting Officer)

 

18



Table of Contents

 

EXHIBIT INDEX

 

Exhibits

 

 

 

 

 

10.1

 

Purchase and Sale Agreement, dated January 19, 2010, by and between Azalea Properties Ltd. and RCWI, L.P. (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.2

 

Purchase and Sale Agreement, dated January 19, 2010, by and between RCWI, L.P., and Reef Oil & Gas Income and Development Fund III, L.P. (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.3

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Post Closing PUDs (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.4

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Post Closing Properties/Title Defect Notice (incorporated by reference to Exhibit 10.4 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.5

 

Side Letter Agreement, dated January 19, 2010, between RCWI, L.P. and Azalea Properties Ltd. Regarding Third Party Consents (incorporated by reference to Exhibit 10.5 to the Partnership’s Form 8-K, as filed with the SEC on January 22, 2010).

 

 

 

10.6

 

Purchase and Sale Agreement by and between Lett Oil & Gas, L.P., as seller and RCWI, L.P., as buyer dated as of June 23, 2010 (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.7

 

Assignment, Conveyance and Bill of Sale between Lett Oil & Gas, L.P. (“Assignor”) and Reef Oil & Gas Income and Development Fund III, L.P. (“Assignee”) executed June 30, 2010 and dated effective June 1, 2010 (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.8

 

$50,000,000 Credit Agreement dated June 30, 2010 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.3 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.9

 

Form of Security Agreement (General) dated June 30, 2010 by Reef Oil & Gas Income and Development Fund III, L.P., in favor of Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.4 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.10

 

Promissory Note in the principal amount of up to $50,000,000 dated June 30, 2010 payable to Texas Capital Bank, N.A. (incorporated by reference to Exhibit 10.5 to the Partnership’s Form 8-K, as filed with the SEC on July 9, 2010).

 

 

 

10.11

 

Purchase and Sale Agreement, effective June 1, 2011, between the Partnership and Reef 2010 -A Income Fund, L.P. (incorporated by reference to Exhibit 10.2 to the Partnership’s Form 8-K, as filed with the SEC on August 2, 2011).

 

 

 

10.12

 

First Amendment to the Credit Agreement dated May 20, 2011 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on May 23, 2011).

 

19



Table of Contents

 

10.13

 

Second Amendment to the Credit Agreement dated June 30, 2011 between Reef Oil & Gas Income and Development Fund III, L.P., as borrower and Texas Capital Bank, N.A., as lender (incorporated by reference to Exhibit 10.1 to the Partnership’s Form 8-K, as filed with the SEC on August 2, 2011).

 

 

 

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.*

 

 

 

101.INS

 

XBRL Instance Document*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document*

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document*

 


*Filed herewith

 

20