Attached files
file | filename |
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EX-32.2 - EX-32.2 - Reef Oil & Gas Income & Development Fund III LP | a16-11527_1ex32d2.htm |
EX-32.1 - EX-32.1 - Reef Oil & Gas Income & Development Fund III LP | a16-11527_1ex32d1.htm |
EX-31.2 - EX-31.2 - Reef Oil & Gas Income & Development Fund III LP | a16-11527_1ex31d2.htm |
EX-31.1 - EX-31.1 - Reef Oil & Gas Income & Development Fund III LP | a16-11527_1ex31d1.htm |
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 June 30, 2016
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 |
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26-0805120 |
1901 N. Central Expressway, Suite 300, Richardson, Texas 75080-3610
(Address of principal executive offices including zip code)
(Registrants telephone number, including area code) (972) 437-6792
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 ¨ |
Accelerated filer ¨ |
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 August 12, 2016, the registrant had 885.6999 units of limited partner interest outstanding, and 8.9697 units of general partner interest and 1.3000 of limited partner interest held by the managing general partner.
Reef Oil & Gas Income and Development Fund III, L.P.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | |
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PART I - FINANCIAL INFORMATION
Reef Oil & Gas Income and Development Fund III, L.P.
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June 30, 2016 |
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December 31, |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
545,798 |
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$ |
1,515,010 |
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Accounts receivable from affiliates |
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159,503 |
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135,851 |
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Prepaid expenses |
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3,352 |
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Total current assets |
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708,653 |
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1,650,861 |
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Oil and gas properties, full cost method of accounting: |
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Proved properties, net of accumulated depletion of $12,566,334 and $14,737,574 |
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416,470 |
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760,460 |
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Net oil and gas properties |
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416,470 |
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760,460 |
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Total assets |
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$ |
1,125,123 |
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$ |
2,411,321 |
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Liabilities and partnership equity |
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Current liabilities: |
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Accounts payable |
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$ |
22,040 |
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$ |
9,996 |
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Total current liabilities |
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22,040 |
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9,996 |
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Long term liabilities |
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Asset retirement obligation |
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427,589 |
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591,945 |
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Total long term liabilities |
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427,589 |
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591,945 |
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Partnership equity |
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General partners |
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1,302,555 |
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Limited partners |
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742,424 |
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468,462 |
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Managing general partner |
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(66,930 |
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38,363 |
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Total partnership equity |
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675,494 |
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1,809,380 |
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Total liabilities and partnership equity |
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$ |
1,125,123 |
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$ |
2,411,321 |
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See accompanying notes to condensed financial statements (unaudited).
Reef Oil & Gas Income and Development Fund III, L.P.
Condensed Statements of Operations
(Unaudited)
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For the three months ended June |
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For the six months ended June |
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2016 |
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2015 |
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2016 |
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2015 |
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Oil, gas and NGL sales |
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$ |
100,279 |
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$ |
568,829 |
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$ |
169,033 |
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$ |
1,063,942 |
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Costs and expenses: |
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Lease operating expenses |
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(53,064 |
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436,415 |
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58,564 |
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946,779 |
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Production taxes |
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6,648 |
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33,430 |
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18,510 |
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62,963 |
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Depreciation, depletion and amortization |
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23,216 |
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149,324 |
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54,341 |
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376,867 |
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Accretion of asset retirement obligation |
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5,215 |
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5,627 |
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10,495 |
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45,957 |
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Property impairment |
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22,816 |
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824,350 |
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140,003 |
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3,469,416 |
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Gain on sale of oil & gas properties |
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(1,673,100 |
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(100,543 |
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(1,673,100 |
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General and administrative |
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51,218 |
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148,073 |
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143,370 |
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314,689 |
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Total costs and expenses |
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56,049 |
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(75,881 |
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324,740 |
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3,543,571 |
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Income (loss) from operations |
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44,230 |
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644,710 |
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(155,707 |
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(2,479,629 |
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Other income |
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Miscellaneous income |
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4 |
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1,821 |
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Interest income |
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2 |
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Total other income |
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4 |
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1,821 |
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2 |
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Net income (loss) |
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$ |
44,234 |
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$ |
644,710 |
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$ |
(153,886 |
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$ |
(2,479,627 |
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Net income (loss) per general partner unit |
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$ |
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$ |
537 |
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$ |
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$ |
(2,918 |
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Net income (loss) per limited partner unit |
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$ |
39 |
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$ |
537 |
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$ |
(177 |
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$ |
(2,918 |
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Net income per managing partner unit |
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$ |
1,056 |
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$ |
18,762 |
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$ |
280 |
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$ |
12,472 |
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See accompanying notes to condensed financial statements (unaudited).
Reef Oil & Gas Income and Development Fund III, L.P.
Condensed Statements of Cash Flows
(Unaudited)
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For the six months ended |
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2016 |
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2015 |
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Cash flows from operating activities |
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Net loss |
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$ |
(153,886 |
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$ |
(2,479,627 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Plugging and abandonment costs paid from ARO |
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(8,840 |
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(2,686 |
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Adjustments for non-cash transactions: |
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Depletion, depreciation and amortization |
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54,341 |
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376,867 |
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Accretion of asset retirement obligation |
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10,495 |
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45,957 |
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Gain on sale of oil and gas properties |
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(100,543 |
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(1,673,100 |
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Property impairment |
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140,003 |
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3,469,416 |
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Changes in operating assets and liabilities |
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Accounts receivable from affiliates |
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(23,652 |
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(164,751 |
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Prepaid expenses |
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(3,352 |
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Accrued liabilities |
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3,677 |
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Net cash used in operating activities |
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(85,434 |
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(424,247 |
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Cash flows from investing activities: |
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Proceeds from sale of oil and gas properties |
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121,607 |
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778,567 |
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Property development |
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(37,429 |
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(229,878 |
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Net cash provided by investing activities |
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84,178 |
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548,689 |
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Cash flows from financing activities: |
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Distributions to partners |
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(967,956 |
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(280 |
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Net cash used in financing activities |
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(967,956 |
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(280 |
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Net increase (decrease) in cash and cash equivalents |
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(969,212 |
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124,162 |
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Cash and cash equivalents, beginning of period |
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1,515,010 |
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368,620 |
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Cash and cash equivalents, end of period |
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$ |
545,798 |
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$ |
492,782 |
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Supplemental cash flow disclosure |
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Supplemental disclosure of non-cash investing transactions |
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Asset retirement obligation reduction resulting from sale and disposition of proved properties |
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$ |
166,011 |
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$ |
1,851,493 |
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Partner distributions suspensed and included in accounts payable |
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$ |
12,044 |
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$ |
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Property sales included in accounts receivable from affiliates |
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$ |
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$ |
229,542 |
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See accompanying notes to condensed financial statements (unaudited).
Reef Oil & Gas Income and Development Fund III, L.P.
Notes to Condensed Financial Statements (unaudited)
June 30, 2016
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 six months of 2016. 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 Partnerships Annual Report on Form 10-K for the year ended December 31, 2015 (the Annual Report). The results of operations for the three and six month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.
Going Concern
The accompanying financial statements have been prepared assuming the Partnership is a going concern. Our independent registered public accounting firms opinion included in our Annual Report includes an explanatory paragraph regarding the Partnerships limited life, and managements plan to sell all remaining assets of the Partnership, wind up and terminate the Partnership during 2016, as specified in the Partnerships governing documents at its inception. Reef does not expect sales proceeds from the sale of the Partnerships remaining assets will allow partners to recover their investment in the Partnership. In accordance with generally accepted accounting principles for a limited life entity, the Partnership has not applied the liquidation basis of accounting to these financial statements.
Conversion of General Partner Interests
In accordance with the Partnerships Limited Partnership Agreement, all units of general partner interest are to be converted to units of limited partner interest in the year following completion of drilling activities of the Partnership. During October of 2015, management of the Partnership initiated a plan to sell all of the Partnerships assets, and, in connection with that plan, the Partnership has ceased participation in drilling activities. Effective March 1, 2016, with the exception of certain interest held by the managing general partner, all other units of general partner interest held by investor partners were converted into units of limited partner interest. Investor general partners will have limited liability as a limited partner for any Partnership operations conducted after the conversion date. However, investor general partners continue to have unlimited liability regarding Partnership activities that occurred prior to the conversion date.
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. For these purposes, proved natural gas reserves are converted to barrels of oil equivalent (BOE) at a rate of 6 thousand cubic feet (Mcf) of natural gas to 1 barrel (Bbl) of crude oil. Under the full cost method of accounting, sales or other dispositions of oil and gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded unless such disposition would significantly alter the relationship between capitalized costs and proved reserves. During the three and six month
periods ended June 30, 2016, the Partnership recognized gain on sale of oil and gas properties totaling $0 and $100,543, respectively. During the three and six month periods ended June 30, 2015, the Partnership recognized gain on sale of oil and gas properties totaling $1,673,100 and $1,673,100, respectively.
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 lower of unamortized cost or the cost ceiling, which is defined as the sum of the estimated future net revenues from the Partnerships proved reserves using prices that are the preceding 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 Partnerships statements of operations. During the three and six month periods ended June 30, 2016, the Partnership recognized $22,816 and $140,003 of impairment expense of proved properties, respectively. During the three and six month periods ended June 30, 2015, the Partnership recognized $824,350 and $3,469,416 of impairment expense of proved properties, respectively.
Estimates of Proved Oil and Gas Reserves
The estimates of the Partnerships proved reserves at June 30, 2016 and December 31, 2015 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-month commodity prices over the preceding 12-month period and end of period 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. The Partnerships proved reserve information at June 30, 2016 and December 31, 2015 was based upon evaluations prepared by the senior reservoir engineer for Reef Exploration, L.P. (RELP), an affiliate of the Partnership and Reef Oil and Gas Partners, L.P. (Reef), the managing general partner of the Partnership.
Reservoir engineering, which is the process of estimating quantities of crude oil and natural gas reserves, is complex, requiring significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data for each reservoir. These estimates are dependent upon many variables, and changes occur as knowledge of these variables evolves. Therefore, these estimates are inherently imprecise, and are subject to considerable upward or downward adjustments. Actual production, revenues and expenditures with respect to reserves will likely vary from estimates, and such variances could be material. In addition, reserve estimates for properties which have not yet been drilled, or properties with a limited production history may be less reliable than estimates for properties with longer production histories.
Reserves and their relation to estimated future net cash flows impact the Partnerships 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 future net income. A decline in estimated proved reserves and future cash flows, whether caused by declining commodity prices or downward adjustments to the rate of production from Partnership wells, 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 or acquired. 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 Partnerships asset retirement obligation for the six month period ended June 30, 2016 and the year ended December 31, 2015.
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Six months ended |
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Year ended |
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Beginning asset retirement obligation |
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$ |
591,945 |
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$ |
2,528,422 |
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Retirement related to sale and disposition of proved properties |
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(166,011 |
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(1,988,403 |
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Retirement related to property abandonment and restoration |
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(8,840 |
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(4,170 |
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Accretion expense |
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10,495 |
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56,096 |
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Ending asset retirement obligation |
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$ |
427,589 |
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$ |
591,945 |
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Fair Value of Financial Instruments
The estimated fair value of cash and cash equivalents, accounts receivable from affiliates, prepaid expenses and accounts payable approximates their carrying value due to their short-term nature.
Recent Accounting Developments Revenue Recognition
The following recently issued accounting pronouncement has been adopted or may impact the Partnership in future periods:
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) in May 2014, which provides accounting guidance for all revenues arising from contracts to provide goods or services to customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following five steps: (1) identify the contract(s) with the customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract(s); (5) recognize revenue when (or as) the entity satisfies a performance obligation. The requirements of ASU 2014-09 will supersede prior revenue recognition requirements and most prior industry-specific guidance throughout the FASBs accounting standards codification, and will be effective for all interim and annual periods beginning after December 15, 2017. The Partnership is still considering the method of adoption but does not expect the adoption of this guidance to materially impact its operating results, financial position or cash flow.
3. Transactions with Affiliates
Reef initially purchased 1% of the total Partnership units (8.9697 units of general partner interest), and received an additional 10% general partner interest as compensation for forming the Partnership. This 10% interest is carried by the Investor Partners and Reef pays no drilling or completion expenses for this interest. In addition, Reef has purchased 1.30 units of Partnership interest from investor partners. Effective September 1, 2015 Reef receives 11.13% and investor partners receive 88.87% of total cash distributions. During the six month periods ended June 30, 2016 and 2015, Reef received $109,088 and $0, respectively, in cash distributions related to its Partnership interest.
The Partnership has no employees. RELP employs a staff including geologists, petroleum engineers, landmen and accounting personnel who administer all of the Partnerships operations. RELP is entitled to receive drilling compensation in an amount equal to 15% of the total well costs paid by the Partnership for wells operated by RELP.
RELP served as the operator of the Partnerships Slaughter Field in Cochran County, Texas and the wells in which the Partnership held an interest thereon (the Slaughter Dean Wells) prior to their sale during the second quarter of 2015. RELP also receives drilling compensation in an amount equal to 5% of the total well costs paid by the Partnership for all non-operated wells. Total well costs include all drilling and equipment costs, including intangible development costs, tangible costs during drilling and completion of a well, costs of storage and other surface facilities, and the costs of gathering pipelines necessary to connect the well to the nearest appropriate delivery point. In addition, total well costs 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 six month period ended June 30, 2016 and the year ended December 31, 2015, RELP received $1,158 and $13,564, respectively, 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 documented out-of-pocket expenses incurred on behalf of the Partnership. During the three and six month periods ended June 30, 2016, the Partnership paid Reef and its affiliates $20,063 and $53,012, respectively, for direct costs and paid Reef and its affiliates $740 and $2,805, respectively, for out of pocket expenses. During the three and six month periods ended June 30, 2015, the Partnership paid Reef and its affiliates $26,019 and $50,068, respectively, for direct costs and paid Reef and its affiliates $1,406 and $2,373, respectively, for out of pocket expenses.
RELP allocates its general and administrative expenses as overhead to all of the partnerships to which it provides services, and this allocation is a significant portion of the Partnerships general and administrative expenses. The allocation of RELPs overhead to the partnerships to which it provides services 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. During the three and six month periods ended June 30, 2016, the administrative overhead charged by RELP to the Partnership totaled $3,241 and $29,247, respectively. During the three and six month periods ended June 30, 2015, the administrative overhead charged by RELP to the Partnership totaled $99,282 and $192,209, respectively. The administrative overhead charged by RELP is included in general and administrative expense in the accompanying condensed statements of operations. RELPs 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 Partnerships business, whether generated by RELP, its affiliates or third parties, but excluding direct and operating costs.
RELP processes joint interest billings and revenue payments on behalf of the Partnership. At June 30, 2016, and December 31, 2015, RELP owed the Partnership $159,503 and $135,851, respectively, for net revenues processed in excess of joint interest, drilling compensation, direct costs, and out-of-pocket expenses. The cash associated with net revenues processed by RELP is normally received by RELP from oil and gas purchasers 30-60 days after the end of the month to which the revenues pertain. The Partnership settles its balances with Reef and RELP on at least a quarterly basis.
4. Partnership Equity
Information regarding the number of units outstanding and the net income (loss) per type of Partnership unit for the three and six month periods ended June 30, 2016 is detailed below:
For the three months ended June 30, 2016
Type of Unit |
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Number of |
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Net income |
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Net income |
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Managing general partner |
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8.9697 |
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$ |
9,469 |
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$ |
1,056 |
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Limited partner |
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886.9999 |
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34,765 |
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$ |
39 |
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Total |
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895.9696 |
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$ |
44,234 |
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For the six months ended June 30, 2016
Type of Unit |
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Number of |
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Net income |
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Net income |
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Managing general partner |
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8.9697 |
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$ |
2,507 |
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$ |
280 |
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Limited partner |
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886.9999 |
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(156,393 |
) |
$ |
(177 |
) | |
Total |
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895.9696 |
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$ |
(153,886 |
) |
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5. Subsequent Events
We have evaluated subsequent events through the filing date of this Form 10-Q and determined that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the Partnerships financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our unaudited condensed financial statements and related notes thereto, included in this Quarterly Report, and the 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, many of which are beyond our control. All statements, other than statements of historical fact, regarding strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, and plans and objectives of management are forward looking statements. 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 Partnerships overall strategy for acquiring and disposing of oil and gas properties;
· 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 amounts and timing of distributions;
· 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 our investors. Forward-looking statements reflect the current view of management with respect to future events and are subject to numerous risks, uncertainties and assumptions. 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. All forward looking statements speak as of the filing date of this report. All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement.
Except as otherwise required by applicable law, we disclaim any duty to update forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.
Going Concern
Management is currently pursuing the sale of all Partnership assets with the intent to wind up and terminate the Partnership during 2016. As a result, the Partnership is not expected to continue as a going concern. Reef does not expect sales proceeds from the sale of the Partnerships remaining assets will allow partners to recover their investment in the Partnership. In accordance with generally accepted accounting principles for a limited life entity, the Partnership has not applied the liquidation basis of accounting to these financial statements.
Overview / Outlook
Reef Oil & Gas Income and Development Fund III, L.P. is a Texas limited partnership formed on November 27, 2007. The Partnership was formed 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, subject to certain market conditions, no earlier than 2010, but expected no later than 2015, in order to maximize return to the partners of the Partnership. The term of the Partnership commenced on the formation date and continues until December 31, 2016, unless terminated sooner. Reef is the managing general partner of the Partnership.
The Partnership sought to purchase working interests in oil and gas properties with both proved producing reserves and proved undeveloped reserves. Between November 27, 2007 and June 30, 2010, the Partnership made three major property acquisitions with the capital raised by the Partnership, referred to as the Slaughter Dean acquisition, Azalea acquisition, and Lett acquisition, and acquired working interests in over 1,500 wells located in twelve states. On all properties purchased, the Partnership planned to produce existing proved reserves and develop any proved undeveloped reserves, but not to engage in exploratory drilling for unproved reserves. Drilling locations with unproved reserves, if any, could be farmed out or sold to third parties or other partnerships formed by Reef.
The management of the operations and other business of the Partnership is the responsibility of RELP, an affiliate of Reef and the Partnership. RELP served as operator of the Slaughter Dean acquisition properties prior to their sale in 2015. All wells included in the Azalea and Lett acquisitions are operated by third parties not affiliated with the Partnership, Reef, or any other Reef affiliate. The most significant property acquired in the Azalea and Lett acquisitions was a working interest in the Thums Long Beach Unit located underneath the Long Beach Harbor in Southern California. The Thums Long Beach Unit was sold during the fourth quarter of 2015.
As a result of the decrease in commodity prices which began during the third quarter of 2014, Reef decided to delay the sale of Partnership properties until prices recovered, with the hope of maximizing return to the investor partners. The sole exception to this policy was the Partnerships working interest in the Slaughter Dean acquisition properties. The waterflood development project implemented by Reef on the Slaughter Dean acquisition properties had not proven to be successful, and this older field exhibited high operating costs and also high workover costs. The Slaughter Dean acquisition properties were sold during the second quarter of 2015.
As commodity prices continued to decline throughout 2015, the Partnership saw its results of operations, financial position, and cash flows being severely adversely affected. The Partnership is not engaged in commodity futures trading or hedging activities, and does not have significant cash reserves on hand, since cash flows are normally distributed on a regular basis to the investor partners. During the first two quarters of 2015 working capital was being drained because the Slaughter Dean acquisition properties were being operated at a deficit. During the third quarter of 2015, lease operating costs, production taxes, and general and administrative expenses of the remaining Azalea and Lett acquisition properties exceeded revenues. Without a recovery in commodity prices, the Partnership would need to either borrow funds from Reef or sell properties to generate cash to cover the deficits. As Reef was unable to project when or if commodity prices would significantly recover, a decision was made in October 2015 to begin marketing the remaining assets of the Partnership, with expectation to complete the divestiture of properties, wind up, and terminate the Partnership during 2016.
During the first quarter of 2016, the Partnership made six oil and gas property sales, totaling approximately 75 wells and representing, in the aggregate, approximately 6.5% of the Partnerships total reserves on a BOE basis, as
measured by the Partnerships December 31, 2015 reserve report. Cash proceeds from these oil and gas property sales totaled $104,567.
During the second quarter of 2016, the Partnership made four oil and gas property sales, totaling approximately 125 wells and representing, in the aggregate, approximately 9.5% of the Partnerships total reserves on a BOE basis, as measured by the Partnerships December 31, 2015 reserve report. Cash proceeds from these oil and gas property sales totaled $17,040.
As of June 30, 2016, the Partnership continues to own working interests in more than 375 wells acquired in the Azalea acquisition, located in Texas, New Mexico, Louisiana, Oklahoma, North Dakota, Mississippi, Montana and Colorado. The Partnership divested of all of its Kansas, Alabama, and Arkansas properties during the first half of 2016.
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 units of general partner interest and 397.0172 units of limited partner interest 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 units of general partner interest at a price of $85,000 per unit, which is net of the 15% management fee paid by non-Reef investors. The 15% management fee used to pay organization and offering costs, including sales commissions, totaled $13,168,094, leaving capital contributions of $76,242,425 available for Partnership activities. As of June 30, 2016, the Partnership had expended $81,406,972 on property acquisition and development costs, prior to sales of the Partnerships interests or portions of its interests in certain properties. Expenditures in excess of available capital have been financed through debt or property sales, or have been recovered from cash flows by reducing Partnership distributions.
Working capital declined during the first half of 2016, from $1,640,865 at December 31, 2015 to $686,613 at June 30, 2016, primarily as a result of the distribution of proceeds received from property sales made during 2015 to the investor partners during the first quarter of 2016. The Partnership has maintained a portion of the cash received from property sales to cover any deficits during the divestiture of all remaining properties and the winding up and termination of the Partnership. The Partnership generally maintains nominal working capital, as cash flows are normally utilized to pay monthly cash distributions to investors. Sources of future funding consist of cash on hand, cash flow from operations, and cash flow from sales of properties. The Partnership may not be able to sell properties at the values desired in order to achieve its objective of selling Partnership properties on terms that provide a favorable return to investors.
Results of Operations
The following is a comparative discussion of the results of operations for the periods indicated. This discussion 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 sales prices received for the periods indicated.
|
|
Three months |
|
Three months |
|
Six months |
|
Six months |
| ||||
Sales volumes: |
|
|
|
|
|
|
|
|
| ||||
Oil and NGLs (Bbls) |
|
2,137 |
|
10,866 |
|
3,927 |
|
20,993 |
| ||||
Natural gas (Mcf) |
|
11,005 |
|
19,325 |
|
27,122 |
|
37,222 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Sales revenues: |
|
|
|
|
|
|
|
|
| ||||
Oil and NGLs (Bbls) |
|
$ |
81,991 |
|
$ |
524,248 |
|
$ |
129,125 |
|
$ |
971,601 |
|
Natural gas (Mcf) |
|
$ |
18,288 |
|
$ |
44,581 |
|
$ |
39,908 |
|
$ |
92,341 |
|
|
|
|
|
|
|
|
|
|
| ||||
Average sales price received: |
|
|
|
|
|
|
|
|
| ||||
Oil and NGLs (Bbls) |
|
$ |
38.37 |
|
$ |
48.16 |
|
$ |
32.88 |
|
$ |
46.28 |
|
Natural gas (Mcf) |
|
$ |
1.66 |
|
$ |
2.31 |
|
$ |
1.47 |
|
$ |
2.48 |
|
Sales revenues declined primarily as a result of the property sales made beginning in the second quarter of 2015, but also as a result of the decline in sales prices received during the comparable periods. The second quarter of 2016 saw oil prices begin to recover from their low point of under $30.00 per Bbl reached during the first quarter of 2016, and also saw natural gas prices begin to rise. Second quarter 2016 average prices of $38.37 per Bbl of crude oil and $1.66 per Mcf of natural gas were an improvement from the average prices of $26.33 per Bbl and $1.34 received during the first quarter of 2016. However, second quarter 2016 prices for both crude oil and natural gas were still below second quarter 2015 prices by more than 20%, and average crude oil and natural gas prices for the first half of 2016 were below prices received during the first half of 2015 by 29.0% and 40.7%, respectively. Prices for crude oil have continued to hold in excess of $40 per barrel during July 2016, and natural gas prices have also been in excess of $2.00 per Mcf since July 1, 2016. Nonetheless, as a result of the property sales already made by the Partnership, it is difficult for oil and gas revenues from the Partnerships remaining properties to cover both operating as well as administrative costs at current price levels.
The estimated net proved crude oil and natural gas reserves at June 30, 2016 and 2015 are summarized below. Reserve estimates are calculated 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 end of period costs. At June 30, 2016, the un-weighted arithmetic average prices were $42.91 per Bbl of crude oil and $2.24 per Mcf of natural gas, compared to $71.73 per Bbl of crude oil and $3.32 per Mcf of natural gas at June 30, 2015.
Proved crude oil and natural gas reserves discussed in this section include only the amounts which the Partnership can estimate with reasonable certainty to be economically producible in future years from known oil and gas reservoirs under existing economic conditions, operating methods, and government regulations. 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) |
|
June 30, 2016 |
|
33,250 |
|
250,650 |
|
June 30, 2015 |
|
390,180 |
|
547,390 |
|
Three months ended June 30, 2016 compared to the three months ended June 30, 2015
The Partnership had net income of $44,234 for the three month period ended June 30, 2016, compared to net income of $644,710 for the three month period ended June 30, 2015. The Partnership recorded a gain on the sale of its Slaughter Dean properties totaling $1,673,100 in June 2015, which was the primary reason for the $644,710 in net income for the three months ended June 30, 2015. During the second quarter of 2016, the Partnership reversed an accrual for 2015 ad valorem taxes totaling $140,000 related to the Slaughter Dean properties sold during 2015, which was the primary reason for the Partnership having net income during the second quarter of 2016.
During the three month periods ended June 30, 2016 and 2015, the Partnership recognized impairment expense of proved property totaling $22,816 and $824,350, respectively, primarily due to declines in the un-weighted arithmetic average of the first-day-of-the-month commodity price over the preceding 12 month periods ended June 30, 2016 and 2015. Property impairment expense in 2016 is greatly reduced from 2015 levels, as the Partnership recorded impairment expense in excess of $5.4 million during 2015, resulting in a proved property valuation of only $760,460 as of December 31, 2015.
Estimates of reserves and future net revenues from those reserves are calculated based upon the un-weighted arithmetic average of the first-day-of-the-month commodity prices over the preceding 12-month period. At June 30, 2015, estimated reserves were calculated using average prices of $71.73 per Bbl for crude oil and $3.32 per Mcf of natural gas. At June 30, 2016, estimated reserves were calculated using average prices of $42.91 per Bbl for crude oil and $2.24 per Mcf of natural gas. While the Partnership has seen improving commodity prices during June and July 2016, it is likely that the average commodity prices during the third quarter of 2016 will be lower than the
average commodity prices during the third quarter of 2015. Therefore, the Partnership may incur additional impairment charges in during the third quarter of 2016.
Partnership revenues totaled $100,279 for the three month period ended June 30, 2016 compared to $568,829 for the three month period ended June 30, 2015, a decrease of 82.4% due primarily to the sale of oil and gas properties during 2015 and 2016, as well as continued depressed oil and natural gas sales prices. Oil and gas sales volumes decreased during the three month period ended June 30, 2016 compared to the three month period ended June 30, 2015 by approximately 71.8% on a BOE basis, primarily as a result of the 2015 and 2016 property sales. Prices also had a significant impact on sales revenues, with the average sales price for crude oil decreasing by 20.3%, to an average price of $38.37 per Bbl for the three month period ended June 30, 2016 compared to an average price of $48.16 per Bbl for the three month period ended June 30, 2015. The average sales price for natural gas decreased by 28.1%, to an average price of $1.66 per Mcf for the three month period ended June 30, 2016 compared to an average price of $2.31 per Mcf for the three month period ended June 30, 2015. At June 30, 2016, approximately 44.3% of the Partnerships reserves are crude oil reserves and 55.7% of the Partnerships reserves are natural gas reserves on a BOE basis, so the average price of both commodities significantly impacts Partnership results.
While crude oil prices have risen into the mid-forties during June and July 2016, Reef believes they are likely to remain volatile, and commodity prices will have a significant impact on the Partnerships future results of operations. 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 substantially all 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 natural gas industry, and the level of commodity prices has a significant impact on the Partnerships results of operations.
Lease operating expenses, after removing the $140,000 credit for ad valorem taxes recorded during the second quarter of 2016, decreased from $436,415 for the three month period ended June 30, 2015 to $86,936 for the three month period ended June 30, 2016. Lease operating expenses on the Thums Unit and the Slaughter Dean properties, which were sold in 2015, totaled $330,757 of the $436,415 in lease operating expense incurred during the second quarter of 2015. Improved sales prices received during the second quarter of 2016, when compared to the first quarter of 2016, allowed the Partnership to post an operating profit of $6,695 during the second quarter of 2016, compared to an operating deficit totaling $54,736 during the first quarter of 2016. During the second quarter of 2015, the Partnerships operating profit was $98,984. While the Partnership posted an operating profit for the three months ended June 30, 2016, the Partnership was unable to cover both operating and general and administrative costs. As the Partnership continues to sell properties in order to terminate the Partnership prior to December 31, 2016, sales revenues are not expected to cover both operating and general and administrative costs.
General and administrative costs decreased from $148,073 for the three month period ended June 30, 2015 to $51,218 for the three month period ended June 30, 2016. The allocation of RELPs overhead to the Partnership is a significant portion of general and administrative expenses. The allocation of RELPs overhead to partnerships 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. As properties are sold and the Partnerships operations wind down, its overhead allocation has decreased accordingly. The administrative overhead charged to the Partnership decreased from $99,282 for the three month period ended June 30, 2015 to $3,241 for the three month period ended June 30, 2016.
Six months ended June 30, 2016 compared to the six months ended June 30, 2015
The Partnership had a net loss of $153,886 for the six month period ended June 30, 2016, compared to a net loss of $2,479,627 for the six month period ended June 30, 2015. After adjusting for the gain on sales of oil and gas properties, the Partnership had a net loss of $254,429 for the six month period ended June 30, 2016, compared to a net loss of $4,152,727 for the six month period ended June 30, 2015. The primary reasons for the change in operating results are depreciation, depletion and amortization expense and impairment expense.
During the six month periods ended June 30, 2016 and 2015, the Partnership recognized impairment expense of proved property totaling $140,003 and $3,469,416, respectively, primarily due to declines in the un-weighted arithmetic average of the first-day-of-the-month commodity price over the preceding 12 month periods ended June
30, 2016 and 2015. Property impairment expense in 2016 is greatly reduced from 2015 levels, as the Partnership recorded impairment expense in excess of $5.4 million during 2015, resulting in a proved property valuation of only $760,460 as of December 31, 2015. Given the higher property basis that existed during 2015, depletion expense for the six month period ended June 30, 2015 totaled $376,867, compared to $54,341 for the six month period ended June 30, 2016.
Estimates of reserves and future net revenues from those reserves are calculated based upon the un-weighted arithmetic average of the first-day-of-the-month commodity prices over the preceding 12-month period. At June 30, 2015, estimated reserves were calculated using average prices of $71.73 per Bbl for crude oil and $3.32 per Mcf of natural gas. At June 30, 2016, estimated reserves were calculated using average prices of $42.91 per Bbl for crude oil and $2.24 per Mcf of natural gas. While the Partnership has seen improving commodity prices during June and July 2016, it is likely that the average commodity prices during the third quarter of 2016 will be lower than the average commodity prices during the third quarter of 2015. Therefore, the Partnership may incur additional impairment charges in during the third quarter of 2016.
Partnership revenues totaled $169,033 for the six month period ended June 30, 2016 compared to $1,063,942 for the six month period ended June 30, 2015, a decrease of 84.1% due primarily to the sale of oil and gas properties during 2015 and 2016, as well as continued depressed oil and natural gas sales prices. Sales revenues from the Partnerships two major properties sold during 2015, the Slaughter Dean properties and the Thums Unit, totaled $723,991 of the $1,063,942 in revenues received during the first six months of 2015. Oil and gas sales volumes decreased during the six month period ended June 30, 2016 compared to the six month period ended June 30, 2015 by approximately 68.9% on a BOE basis, primarily as a result of the 2015 and 2016 property sales. Prices also had a significant impact on sales revenues, with the average sales price for crude oil decreasing by 29.0%, to an average price of $32.88 per Bbl for the six month period ended June 30, 2016 compared to an average price of $46.28 per Bbl for the six month period ended June 30, 2015. The average sales price for natural gas decreased by 40.7%, to an average price of $1.47 per Mcf for the six month period ended June 30, 2016 compared to an average price of $2.48 per Mcf for the six month period ended June 30, 2015. At June 30, 2016, approximately 44.3% of the Partnerships reserves are crude oil reserves and 55.7% of the Partnerships reserves are natural gas reserves on a BOE basis, so the average price of both commodities significantly impacts Partnership results.
While crude oil prices have risen into the mid-forties during June and July 2016, Reef believes they are likely to remain volatile, and commodity prices will have a significant impact on the Partnerships future results of operations. 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 substantially all 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 natural gas industry, and the level of commodity prices has a significant impact on the Partnerships results of operations.
Lease operating expenses, after removing the $140,000 credit for ad valorem taxes recorded during the second quarter of 2016, decreased from $946,779 for the six month period ended June 30, 2015 to $198,564 for the six month period ended June 30, 2016. Lease operating expenses on the Thums Unit and the Slaughter Dean properties, which were sold in 2015, totaled $690,149 of the $947,729 in lease operating expense incurred during the six month period ended June 30, 2015. As a result of property sales made to date, and expected continued property sales as the Partnership moves to wind up operations and terminate during 2016, the Partnerships sales revenues are currently unable to cover both operating and general and administrative costs. While sales prices have improved during June and July 2016 we do not expect this situation to change.
General and administrative costs decreased from $314,689 for the six month period ended June 30, 2015 to $143,370 for the six month period ended June 30, 2016. The allocation of RELPs overhead to the Partnership is a significant portion of general and administrative expenses. The allocation of RELPs overhead to partnerships 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. As properties are sold and the Partnerships operations wind down, its overhead allocation has decreased accordingly. The administrative overhead charged to the Partnership decreased from $192,209 for the six month period ended June 30, 2015 to $29,247 for the six month period ended June 30, 2016.
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 Partnerships 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 Partnerships internal controls over financial reporting during the fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Partnerships internal control over financial reporting.
None.
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 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.
None.
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 * |
*Filed herewith
**Furnished herewith
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: August 12, 2016 |
By: |
/s/ Michael J. Mauceli |
|
|
Michael J. Mauceli |
|
|
Manager and Member |
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
Dated: August 12, 2016 |
By: |
/s/ Daniel C. Sibley |
|
|
Daniel C. Sibley |
|
|
Chief Financial Officer and General Counsel of |
|
|
Reef Oil & Gas Partners, L.P. |
|
|
(Principal Financial and Accounting Officer) |
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 * |
*Filed herewith
**Furnished herewith