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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 March 31, 2012

 

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: 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

 

 

Richardson, Texas

 

75080-3610

(Address of principal executive offices)

 

(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 x   No o

 

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 May 11, 2012, the registrant had 48.620 units of general partner interest held by the managing general partner, and 923.783 units of limited partner interest outstanding.

 

 

 



Table of Contents

 

Reef Global Energy VII, 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 4.

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.

Mine Safety Disclosures

 

 

 

 

ITEM 5.

Other Information

 

 

 

 

ITEM 6.

Exhibits

 

 

 

 

Signatures

 

 

 


 


Table of Contents

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Reef Global Energy VII, L.P.

Condensed Balance Sheets

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

164,997

 

$

124,643

 

Accounts receivable

 

 

18

 

Accounts receivable from affiliates

 

97,044

 

130,487

 

Total current assets

 

262,041

 

255,148

 

 

 

 

 

 

 

Oil and gas properties, full cost method of accounting:

 

 

 

 

 

Proved properties, net of accumulated depletion of $12,803,691 and $12,745,522

 

442,424

 

500,593

 

Net oil and gas properties

 

442,424

 

500,593

 

 

 

 

 

 

 

Total assets

 

$

704,465

 

$

755,741

 

 

 

 

 

 

 

Liabilities and partnership equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

52,622

 

$

52,289

 

Total current liabilities

 

52,622

 

52,289

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Asset retirement obligation

 

130,940

 

119,260

 

Total long-term liabilities

 

130,940

 

119,260

 

 

 

 

 

 

 

Partnership equity:

 

 

 

 

 

Limited partners

 

418,710

 

457,284

 

Managing general partner

 

102,193

 

126,908

 

Partnership equity

 

520,903

 

584,192

 

 

 

 

 

 

 

Total liabilities and partnership equity

 

$

704,465

 

$

755,741

 

 

See accompanying notes to condensed financial statements (unaudited).

 

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Table of Contents

 

Reef Global Energy VII, L.P.

Condensed Statements of Operations

(Unaudited)

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Oil, gas and NGL sales

 

$

129,242

 

$

349,566

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Lease operating expenses

 

35,763

 

77,406

 

Production taxes

 

6,530

 

23,013

 

Depreciation, depletion and amortization

 

58,169

 

79,776

 

Accretion of asset retirement obligation

 

11,680

 

4,375

 

General and administrative

 

50,998

 

65,179

 

Total costs and expenses

 

163,140

 

249,749

 

 

 

 

 

 

 

Income (loss) from operations

 

(33,898

)

99,817

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

Interest income

 

4

 

23

 

Total other income

 

4

 

23

 

 

 

 

 

 

 

Net income (loss)

 

$

(33,894

)

$

99,840

 

 

 

 

 

 

 

Net income (loss) per limited partner unit

 

$

(36.84

)

$

83.63

 

Net income per managing general partner unit

 

$

2.82

 

$

464.55

 

 

See accompanying notes to condensed financial statements (unaudited).

 

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Table of Contents

 

Reef Global Energy VII, L.P.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

For the three months ended
March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(33,894

)

$

99,840

 

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

 

 

 

 

 

Adjustments for non-cash transactions:

 

 

 

 

 

Depreciation, depletion and amortization

 

58,169

 

79,776

 

Accretion of asset retirement obligation

 

11,680

 

4,375

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

18

 

(28

)

Accounts receivable from affiliates

 

33,443

 

7,616

 

Accounts payable

 

333

 

7,730

 

Net cash provided by operating activities

 

69,749

 

199,309

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Property acquisition and development

 

 

(21,442

)

Net cash used in investing activities

 

 

(21,442

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Partner distributions

 

(29,395

)

(166,970

)

Net cash used in financing activities

 

(29,395

)

(166,970

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

40,354

 

10,897

 

Cash and cash equivalents at beginning of period

 

124,643

 

63,713

 

Cash and cash equivalents at end of period

 

$

164,997

 

$

74,610

 

 

See accompanying notes to condensed financial statements (unaudited).

 

3



Table of Contents

 

Reef Global Energy VII, L.P.

Notes to Condensed Financial Statements (unaudited)

March 31, 2012

 

1. Organization and Basis of Presentation

 

The condensed 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 three months of 2012. Therefore, please read these unaudited condensed financial statements and notes to unaudited 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 year ended December 31, 2011 (the “Annual Report”).  The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

Going Concern

 

The accompanying financial statements have been prepared assuming the Partnership is a going concern, which assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

During 2011, the Partnership sold its interest in the Cole Ranch Properties (as defined below), which were comprised of eight productive wells. As a result of this sale, the Partnership has two significant producing properties that are expected to account for over 90% of future Partnership revenues. These two properties have estimated economic reserve lives of 66 and 10 months, respectively, utilizing current prices, costs, and projected production volumes at March 31, 2012. The Partnership distributed the proceeds from the sale of the Cole Ranch Properties to its partners, and has no plans to drill additional wells. The Partnership also has no plans to engage in commodity futures trading or hedging activities. Finally, the estimated economic reserve life of Partnership wells is computed based upon operating revenues and costs and does not consider Partnership general and administrative costs. Future cash flows generated from Partnership wells will be significantly impacted by actual prices received, and by actual production volumes from the Partnership’s most significant wells. While management believes that the Partnership will generate positive cash flows during 2012, variations in pricing and production volumes could lead to rapidly declining cash flows from operations and Partnership losses.   These conditions raise substantial doubt about its ability to continue as a going concern.  The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Partnership be unable to continue as a going concern.

 

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.  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

 

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Table of Contents

 

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 March 31, 2012 and 2011, the Partnership recognized no property impairment expense of proved properties.

 

Estimates of Proved Oil and Gas Reserves

 

Estimates of the Partnership’s proved reserves at March 31, 2012 and December 31, 2011 are 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-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.

 

The Partnership has recognized an estimated liability for future plugging and abandonment costs. A liability for the estimated fair value of the future plugging and abandonment costs is recorded with a corresponding increase in the full cost pool at the time a new well is drilled.  Depreciation expense associated with estimated plugging and abandonment costs is recognized in accordance with the full cost methodology.

 

The Partnership estimates a liability for plugging and abandonment costs based on historical experience and estimated well life.  The liability is discounted using the credit-adjusted risk-free rate.  Revisions to the liability could occur due to changes in well plugging and abandonment costs or well useful lives, or if federal or state regulators enact new well restoration requirements. The Partnership recognizes accretion expense in connection with the discounted liability over the remaining life of the well.

 

The following table summarizes the Partnership’s asset retirement obligation for the three month period ended March 31, 2012 and the year ended December 31, 2011.

 

 

 

Three months ended

 

Year Ended

 

 

 

March 31, 2012

 

December 31, 2011

 

Beginning asset retirement obligation

 

$

119,260

 

$

312,104

 

Accretion expense

 

11,680

 

12,182

 

Retirement related to sale of proved properties

 

 

(205,026

)

Ending asset retirement obligation

 

$

130,940

 

$

119,260

 

 

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Table of Contents

 

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 carrying value due to their short-term nature.

 

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 March 31, 2012 and 2011, the Partnership incurred no costs for technical services and incurred administrative costs totaling $13,235 and $42,521, respectively.  Administrative costs are included as general and administrative expenses on the condensed statements of operations.

 

RELP processes joint interest billings and revenue payments on behalf of the Partnership. At March 31, 2012 and December 31, 2011, RELP owed the Partnership $97,044 and $130,487, respectively, for net revenues processed in excess of joint interest and technical and administrative services 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. The Partnership settles its balances with Reef and RELP on at least a quarterly basis.

 

The Partnership reimbursed to Reef legal fees totaling $1,797 and $0, respectively, during the three months periods ended March 31, 2012 and 2011 pertaining to the Stevenson litigation matter described in Note 4 below.  The partners who brought the lawsuit are partners in several Reef affiliates, including this Partnership, and their claims involve their participation in these partnerships, including this Partnership. Pursuant to the Partnership Agreement of the Partnership, Reef is indemnified against litigation such as this, and the associated legal fees are being reimbursed to Reef by each of the partnerships involved on a quarterly basis.

 

4. Commitments and Contingencies

 

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. The suit also names as defendants Reef Global Energy VII, L.P. and multiple other Reef-sponsored ventures and limited partnerships, as well as Reef Securities, Inc., among others (collectively, “Defendants”).  On September 22, 2010, James and Carol Estle (the “Estles”) and Nancy Dykes Thurmond Antolic (“Antolic”) joined the suit as additional plaintiffs. On January 27, 2011, Donna Stevenson (Frank Stevenson’s spouse) and Jaime Davis (“Davis”) joined the suit as additional plaintiffs (Stevenson, Estles, Antolic, and Davis are collectively refeered to as “Plaintiffs”). With respect to Davis’s claims, specifically, Reef Securities, Inc. did not offer or sell the interests in the Reef program that Davis purchased. Rather, she purchased her interests through an unaffiliated broker/dealer. In the First Amended Petition, plaintiffs alleged that, collectively, they were seeking in excess of $1 million in compensatory damages as well as exemplary damages, attorneys’ fees, pre- and post-judgment interest, and costs.  In the Sixth Amended Petition, Plaintiffs assert claims of misrepresentations and omissions under the Texas Securities Act (“TSA”), control person and aider and abettor liability under the TSA, fraud, breach of fiduciary duty, breach of contract, civil theft, negligent misrepresentation, and fraudulent concealment. Plaintiff Davis asserts against defendant Reef Oil & Gas Income and Development Fund, L.P. a claim for tortious interference with an existing contract.  Defendants believe Plaintiffs’ claims are meritless because, among other things, in connection with each Reef program in which Plaintiffs participated, each Plaintiff received offering documents that thoroughly disclosed all material facts and risks associated with participation in such programs, particularly the fact that no guarantees or promises could be made or relied upon.  Plaintiffs also claim that Defendants misallocated costs, expenses and deductions among unidentified Reef-sponsored ventures and limited partnerships.

 

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Plaintiffs seek approximately $2.2 million as actual damages, $620,000 as exemplary damages, as well as attorneys’ fees, pre- and post-judgment interest, and costs.  Defendants (including Reef Global Energy VII, L.P.) intend to vigorously defend the lawsuit and may seek damages from plaintiffs 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. Defendants have filed Motions for Partial Summary Judgment seeking the dismissal of certain of Plaintiffs Stevenson, Estles, and Antolic’s claims, and the parties are currently awaiting the Court’s entry of an order on said Motions.  However, following Defendants’ filing of their Motions for Summary Judgment, by filing their Sixth Amended Petition, Plaintiffs dismissed their claims for rescission under the TSA for failure of Defendants to register under the TSA, control person liability under the TSA in connections with such registration claims, and a majority of Plaintiffs’ fraud claims under the TSA.  As of this time, discovery is ongoing, and trial has been set for December 10, 2012.  The Partnership is reimbursing to Reef its share of the costs of defending this lawsuit as incurred, and has reimbursed $1,797 and $0, respectively, during the three months ended March 31, 2012 and 2011.

 

On December 22, 2011, TEPCO, LLC, Kiawah Resources, LLC, Meritage Energy, LLC and Ralph S. O’Connor (the “Plaintiffs”) filed a lawsuit styled TEPCO, LLC, Kiawah Resources, LLC, Meritage Energy, LLC and Ralph S. O’Connor v. Reef Exploration, L.P., RCWI, L.P., El Paso E&P Company, L.P., and Anchor International of Texas LP, Cause No. 2011-76727, in the 127th Judicial District Court of Harris County, Texas.  In their Petition, Plaintiffs assert claims for alleged breaches of contracts in regard to the drilling and operation of an oil and gas well located in Galveston County, Texas.  Plaintiffs seek compensatory damages in an unspecified amount as well as attorneys’ fees, pre- and post-judgment interest, and costs.  Through Reef Exploration, L.P. the Partnership owns an interest in the well in question, and if the Plaintiffs were successful, the Partnership (although it is not a named defendant in the lawsuit) would be required to contribute its pro rata share to any awards that Plaintiffs might receive.  The Defendants intend to vigorously defend the lawsuit.  As of this time, the parties are in the early stages of the discovery process.  No trial date has been set by the Court. The Partnership is expensing its share of the costs of defending this lawsuit as incurred, and has paid $7,500 and $0, respectively, during the three months ended March 31, 2012 and 2011.

 

5. Partnership Equity

 

Information regarding the number of units outstanding and the net income (loss) per type of Partnership unit for the three month periods ended March 31, 2012 and 2011 is detailed below:

 

For the three months ended March 31, 2012

 

Type of Unit

 

Number of
Units

 

Net income
(loss)

 

Net income
(loss) per unit

 

Managing general partner units

 

48.620

 

$

137

 

$

2.82

 

Limited partner units

 

923.783

 

(34,031

)

$

(36.84

)

Total

 

972.403

 

$

(33,894

)

 

 

 

For the three months ended March 31, 2011

 

Type of Unit

 

Number of
Units

 

Net income

 

Net income
per unit

 

Managing general partner units

 

48.620

 

$

22,586

 

$

464.55

 

Limited partner units

 

923.783

 

77,254

 

$

83.63

 

Total

 

972.403

 

$

99,840

 

 

 

 

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Table of Contents

 

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 audited 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.

 

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 six developmental prospects and participated in the drilling of eighteen successful developmental wells and three unsuccessful developmental wells on those prospects. The Partnership sold its interest in the Cole Ranch Properties (as defined below), which were comprised of eight productive wells, during the third quarter of 2011 (see below) and has six successful wells that are productive, one that has been converted to a salt water disposal well, and three that are shut-in at March 31, 2012. 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 completed its drilling program during the second quarter of 2008, having participated in the drilling of twenty-nine wells using the original capital raised by the Partnership. Subsequent to initial drilling operations, the Partnership is permitted to conduct additional drilling on existing Partnership prospects. The Partnership has not participated in and currently has no plans for participating in additional drilling activities.

 

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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.

 

On August 24, 2011, the Partnership completed the sale of certain assets in accordance with a Purchase and Sale Agreement (“Agreement”) between the Partnership, Reef Exploration, L.P., Reef Global Energy VIII, L.P., and Reef Global Energy IX, L.P., affiliates of the Partnership, as sellers (collectively, the “Sellers”), and with Energen Resources Corporation (“Energen”) as buyer.  The Agreement included the sale of all rights, title, and interest in leases, lands, and wells owned by the Sellers located in Glasscock County, Texas (the “Cole Ranch Properties”) for an aggregate purchase price to the Sellers of $10,000,000, subject to certain purchase price adjustments. The Partnership received approximately $4,438,400 of the purchase price, prior to purchase price adjustments. The Cole Ranch Properties were assigned directly to Energen at closing pursuant to an Assignment, Conveyance and Bill of Sale as of July 1, 2011.

 

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. All units of general partner interest purchased by investor partners were converted to units of limited partner interest during 2008. 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.  Expenditures in excess of Partnership capital were deducted from Partnership distributions. There are no plans to conduct any additional drilling on Partnership prospects at his time; however, additional drilling activity is permitted on the Partnership prospects at the discretion of the Partnership’s managing general partner. 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 $209,419 at March 31, 2012. 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 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.

 

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For the three months
ended March 31,

 

 

 

2012

 

2011

 

Sales volumes:

 

 

 

 

 

Crude oil (Barrels)

 

1,224

 

3,044

 

Natural gas (Mcf)

 

7,840

 

16,860

 

 

 

 

 

 

 

Average sales prices received:

 

 

 

 

 

Crude oil (Barrels)

 

$

89.62

 

$

86.43

 

Natural gas (Mcf)

 

$

2.49

 

$

5.13

 

 

The estimated net proved crude oil and natural gas reserves as of March 31, 2012 and 2011 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.

 

Net proved reserves

 

Oil (Bbl)

 

Gas (Mcf)

 

March 31, 2012

 

6,000

 

79,530

 

March 31, 2011

 

45,642

 

211,486

 

 

Three months ended March 31, 2012 compared to the three months ended March 31, 2011

 

The Partnership incurred a net loss of $33,894 for the three month period ended March 31, 2012, compared to net income of $99,840 for the three month period ended March 31, 2011. The primary cause of this decrease in net income is decreased sales volumes and revenues as discussed below.

 

Partnership crude oil and natural gas sales volumes are declining due to natural production declines from existing Partnership wells, the fact that the Partnership has not drilled any new productive wells since 2008 and has no plans to conduct additional drilling activity, and as a result of the sale of eight producing wells on the Cole Ranch Properties sold during the third quarter of 2011.  The Cole Ranch Properties accounted for 31.6% and 18.9% of crude oil and natural gas sales volumes, respectively, during the period ended March 31, 2011 and accounted for 35.8% of the Partnership’s sales revenues during the period ended March 31, 2011. There are no sales volumes or revenues from the Cole Ranch Properties included in the results of operations for the period ended March 31, 2012.

 

The Partnership’s share of sales volumes from the two most significant wells in which the Partnership has an interest, the Rob L RA SUA CL&F #1 (“Gumbo II”) and the HBR A Big Gas (“HBR A”), totaled 1,142 barrels of crude oil and 7,730 Mcf of natural gas, or 93.3% and 98.6% of sales volumes for the three month period ended March 31, 2012, respectively. During the three month period ended March 31, 2011, the Partnership’s share of sales volumes from these two wells totaled 2,000 barrels of crude oil and 13,520 Mcf of natural gas, or 65.7% and 80.2% of the Partnership’s total sales volumes, respectively.   Production from existing Partnership wells will continue to decline in future quarters, and combined with the loss of production from the Cole Ranch Properties will lead to continuing declines in sales volumes in future periods. The economic life of the Partnership is dependent upon the lives of the most significant wells in which it participates. The current estimated reserve lives of the Gumbo II and HBR A wells are estimated to be approximately 66 and 10 months, respectively, using current prices and costs.

 

While the sales prices for crude oil rose by 3.7%, to an average price of $89.62 per Bbl for the three month period ended March 31, 2012 , compared to an average price of $86.43 for the three month period ended March 31, 2011, the sales price for natural gas fell by 51.5%, to an average price of $2.49  per Mcf for the three month period ended  March 31, 2012, compared to an average price of $5.13  per Mcf for  the three month period ended March 31, 2011. Total sales revenues decreased by $220,324, or 63.0% on a comparative period-to-period basis. The Partnership has

 

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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. The Partnership anticipates continued weakening in natural gas prices during the second quarter of 2012. Natural gas sales revenues accounted for 15.1% of first quarter 2012 overall sales revenues, compared to 24.7% of first quarter 2011 overall sales revenues.

 

Lease operating expenses decreased from $77,406 during the three month period ended March 31, 2011 to $35,763 during the three month period ended March 31, 2012, primarily due to the sale of the Partnership’s interest in the Cole Ranch Properties.  Operating costs of the Partnership’s Sand Dunes wells increased slightly during the three month period ended March 31, 2012 compared to the three month period ended March 31, 2011 due to increased workover expenses for repairs of parted rods on three of the Sand Dunes wells.  Production taxes decreased from $23,013 during the three months ended March 31, 2011 to $6,530 during the three months ended March 31, 2012 due primarily to declining production.

 

The Partnership incurred $58,169 of depletion, depreciation, and amortization expense during the three month period ended March 31, 2012 compared to $79,776 of depletion, depreciation, and amortization expense during the three month period ended March 31, 2011.  This decrease is due to the reduced depletable basis of the Partnership and the combination of declining production rates and rising oil prices between the comparative periods, which have led to a reduced depletion rate applied to the remaining basis. The Partnership recognized $11,680 of accretion expense during the three month period ended March 31, 2012 compared to $4,375 of accretion expense during the comparable period during 2011, as the Partnership revised the estimated asset retirement date of the Gumbo II well due to its recent declining production and shortened estimated reserve life.

 

General and administrative costs decreased from $65,179 incurred during the three months ended March 31, 2011 to $50,998 incurred during the three months ended March 31, 2012, primarily due to decreased overhead charges from RELP.  Legal fees increased by approximately $9,000 as the Partnership reimbursed Reef for legal expenses incurred, but the administrative overhead charge to the Partnership decreased from $35,503 for the three months ended March 31, 2011 to $9,269 for the three months ended March 31, 2012.  The allocation of RELP’s overhead to partnerships is a significant factor in general and administrative expenses, and is based upon several factors, including the level of drilling activity, revenues, and capital and operating expenditures of each partnership compared to the total levels of all partnerships.

 

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 4. 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

 

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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 March 31, 2012 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. The suit also names as defendants Reef Global Energy VII, L.P. and multiple other Reef-sponsored ventures and limited partnerships, as well as Reef Securities, Inc., among others (collectively, “Defendants”).  On September 22, 2010, James and Carol Estle (the “Estles”) and Nancy Dykes Thurmond Antolic (“Antolic”) joined the suit as additional plaintiffs. On January 27, 2011, Donna Stevenson (Frank Stevenson’s spouse) and Jaime Davis (“Davis”) joined the suit as additional plaintiffs (Stevenson, Estles, Antolic, and Davis are collectively refeered to as “Plaintiffs”). With respect to Davis’s claims, specifically, Reef Securities, Inc. did not offer or sell the interests in the Reef program that Davis purchased. Rather, she purchased her interests through an unaffiliated broker/dealer. In the First Amended Petition, plaintiffs alleged that, collectively, they were seeking in excess of $1 million in compensatory damages as well as exemplary damages, attorneys’ fees, pre- and post-judgment interest, and costs.  In the Sixth Amended Petition, Plaintiffs assert claims of misrepresentations and omissions under the Texas Securities Act (“TSA”), control person and aider and abettor liability under the TSA, fraud, breach of fiduciary duty, breach of contract, civil theft, negligent misrepresentation, and fraudulent concealment. Plaintiff Davis asserts against defendant Reef Oil & Gas Income and Development Fund, L.P. a claim for tortious interference with an existing contract.  Defendants believe Plaintiffs’ claims are meritless because, among other things, in connection with each Reef program in which Plaintiffs participated, each Plaintiff received offering documents that thoroughly disclosed all material facts and risks associated with participation in such programs, particularly the fact that no guarantees or promises could be made or relied upon.  Plaintiffs also claim that Defendants misallocated costs, expenses and deductions among unidentified Reef-sponsored ventures and limited partnerships.

 

Plaintiffs seek approximately $2.2 million as actual damages, $620,000 as exemplary damages, as well as attorneys’ fees, pre- and post-judgment interest, and costs.  Defendants (including Reef Global Energy VII, L.P.) intend to vigorously defend the lawsuit and may seek damages from plaintiffs 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. Defendants have filed Motions for Partial Summary Judgment seeking the dismissal of certain of Plaintiffs Stevenson, Estles, and Antolic’s claims, and the parties are currently awaiting the Court’s entry of an order on said Motions.  However, following Defendants’ filing of their Motions for Summary Judgment, by filing their Sixth Amended Petition, Plaintiffs dismissed their claims for rescission under the TSA for failure of Defendants to register under the TSA, control person liability under the TSA in connections with such registration claims, and a majority of Plaintiffs’ fraud claims under the TSA.  As of this time, discovery is ongoing, and trial has been set for December 10, 2012.  The Partnership is reimbursing to Reef its share of the costs of defending this lawsuit as incurred, and has reimbursed $1,797 and $0, respectively, during the three months ended March 31, 2012 and 2011.

 

On December 22, 2011, TEPCO, LLC, Kiawah Resources, LLC, Meritage Energy, LLC and Ralph S. O’Connor (the “Plaintiffs”) filed a lawsuit styled TEPCO, LLC, Kiawah Resources, LLC, Meritage Energy, LLC and Ralph S. O’Connor v. Reef Exploration, L.P., RCWI, L.P., El Paso E&P Company, L.P., and Anchor International of Texas LP, Cause No. 2011-76727, in the 127th Judicial District Court of Harris County, Texas.  In their Petition, Plaintiffs assert claims for alleged breaches of contracts in regard to the drilling and operation of an oil and gas well located in Galveston County, Texas.  Plaintiffs seek compensatory damages in an unspecified amount as well as attorneys’ fees, pre- and post-judgment interest, and costs.  Through Reef Exploration, L.P. the Partnership owns an interest in the well in question, and if the Plaintiffs were successful, the Partnership (although it is not a named defendant in the lawsuit) would be required to contribute its pro rata share to any awards that Plaintiffs might receive.  The

 

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Defendants intend to vigorously defend the lawsuit.  As of this time, the parties are in the early stages of the discovery process.  No trial date has been set by the Court. The Partnership is expensing its share of the costs of defending this lawsuit as incurred, and has paid $7,500 and $0, respectively, during the three months ended March 31, 2012 and 2011.

 

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.  Mine Safety Disclosures

 

Not applicable.

 

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.

 

 

 

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

 

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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: May 11, 2012

By:

/s/ Michael J. Mauceli

 

 

Michael J. Mauceli

 

 

Manager and Member

 

 

(Principal Executive Officer)

 

 

 

 

 

 

Dated: May 11, 2012

By:

/s/ Daniel C. Sibley

 

 

Daniel C. Sibley

 

 

Chief Financial Officer and General Counsel of

 

 

Reef Exploration, L.P.

 

 

(Principal Financial and Accounting Officer)

 

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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.

 

 

 

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

 

15