# ** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

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## ** **

**FORM 10-Q**

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

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**For the quarterly period ended June 30, 2004**

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**Commission File Number: 333-93399-03**

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**REEF GLOBALENERGY III, L.P.**

(Exact name of registrant as specified in itscharter)

 

| **Nevada**                                                       |   | **20-0487245**                                             |
|------------------------------------------------------------------|--------|------------------------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)  |   | (I.R.S. employer  identification no.)                      |
|                                                             |   |                                                       |
| **1901 N. Central Expressway, Suite 300Richardson, Texas 75080** |   | **(972) 437-6792**                                         |
| (Address of principal executive offices,  including zip code)    |   | (Registrant’s telephone number,  including area code) |

 

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Indicate by ý whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes o   No ý

 

Indicate by ýwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). Yes o   No ý

** **

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**Reef Global Energy III, L.P.**

**Index**

 
| **PART I — FINANCIAL INFORMATION**                                                                 |   |
|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                                    |   |
| **ITEM 1. FINANCIAL STATEMENTS (Unaudited)**                                                            |   |
| *Condensed Balance Sheet*                                                                               |   |
| *Condensed Statement of Operations*                                                                     |   |
| *Condensed Statement 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 2. CHANGES IN SECURITIES, USE OF  PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**           |   |
|                                                                                                    |   |
| **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**                                                             |   |
|                                                                                                    |   |
| **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS**                                        |   |
|                                                                                                    |   |
| **ITEM 5. OTHER INFORMATION**                                                                           |   |
|                                                                                                    |   |
| **ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**                                                            |   |
|                                                                                                    |   |
| **SIGNATURES**                                                                                          |   |

 

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# **PART I FINANCIAL INFORMATION**

# ** **

## **Item 1. Financial Statements**

 

**Reef Global EnergyIII, L.P.**

### **Condensed Balance Sheet**

### **(unaudited)**

 
|                                                          |   | **June 30,  2004** |          |
|---------------------------------------------------------------|--------|--------------------|---------------|
| **Assets**                                                    |   |               | ** **    |
| **Current assets:**                                           |   |               | ** **    |
| Cash and cash equivalents                                     |   | $                  | 2,047,353     |   |
| Accrued interest receivable                                   |   | 29                 |          |
| **Total current assets**                                      |   | **2,047,382**      | ** **    |
|                                                          |   |               | ** **    |
| **Property and equipment:**                                   |   |               | ** **    |
| Oil and gas properties, full cost method of  accounting       |   | 124,623            |          |
| **Net property and equipment**                                |   | **124,623**        | ** **    |
|                                                          |   |               | ** **    |
| **Total assets**                                              |   | **$**              | **2,172,005** | ** ** |
|                                                          |   |               | ** **    |
| **Liabilities and partners’ equity**                     |   |               | ** **    |
| **Current liabilities:**                                      |   |               | ** **    |
| Accounts payable                                              |   | $                  | 1,829         |   |
| Accounts payable to affiliates                                |   | 148,094            |          |
| **Total current liabilities**                                 |   | **149,923**        | ** **    |
|                                                          |   |               | ** **    |
| **Partners’ equity:**                                    |   |               | ** **    |
| General partners                                              |   | 1,056,366          |          |
| Limited partners                                              |   | 1,073,234          |          |
| Less: subscriptions receivable from  managing general partner |   | (107,518           | )             |
| **Total partners’ equity**                               |   | **2,022,082**      | ** **    |
|                                                          |   |               | ** **    |
| **Total liabilities and partners’ equity**               |   | **$**              | **2,172,005** | ** ** |

 

*See accompanying notes*

 

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*** ***

**Reef Global EnergyIII, L.P.**

### **CondensedStatement of Operations**

### **(unaudited)**

*** ***
|                                          |   | **Period  from  inception (April  29, 2004) to  June 30,  2004** |        |
|-----------------------------------------------|--------|------------------------------------------------------------------|-------------|
| **Revenues:**                                 |   |                                                             |        |
| Interest income                               |   | $                                                                | 4,404       |   |
| **Total****revenues**                         |   | **4,404**                                                        | ** **  |
|                                          |   |                                                             |        |
| **Costs and expenses:**                       |   |                                                             |        |
| General and administrative                    |   | 51,489                                                           |        |
| **Total costs and expenses**                  |   | **51,489**                                                       | ** **  |
|                                          |   |                                                             |        |
| **Net loss**                                  |   | **$**                                                            | **(47,085** | **)** |
|                                          |   |                                                             |        |
| Net loss per managing general partner unit    |   | $                                                                | (37         | ) |
| Net loss per additional general partner  unit |   | $                                                                | (390        | ) |
| Net loss per limited partner unit             |   | $                                                                | (399        | ) |

 

*See accompanying notes*

 

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* *

**Reef Global EnergyIII, L.P.**

### **CondensedStatement of Cash Flows**

(unaudited)

 
|                                                                        |   | **Period  from  inception (April  29, 2004) to  June 30,  2004** |          |
|-----------------------------------------------------------------------------|--------|------------------------------------------------------------------|---------------|
| **Operating Activities**                                                    |   |                                                             |          |
| **Net loss**                                                                |   | **$**                                                            | **(47,085**   | **)** |
| Adjustments to reconcile net loss to net  cash used in operating activities |   |                                                             |          |
| **Changes in operating assets and liabilities**                             |   |                                                             |          |
| Accounts receivable                                                         |   | (29                                                              | )             |
| Accounts payable                                                            |   | 1,294                                                            |          |
| Accounts payable to affiliates                                              |   | 24,006                                                           |          |
| **Net cash used in operating activities**                                   |   | **(21,814**                                                      | **)**         |
|                                                                        |   |                                                             | ** **    |
| **Financing Activities**                                                    |   |                                                             |          |
| Partner capital contributions, net of  syndication costs                    |   | 2,069,167                                                        |          |
| **Net cash provided by financing activities**                               |   | **2,069,167**                                                    | ** **    |
|                                                                        |   |                                                             | ** **    |
| **Net increase in cash and cash equivalents**                               |   | **2,047,353**                                                    | ** **    |
| Cash and cash equivalents at beginning of  period                           |   | —                                                           |          |
| **Cash and cash equivalents at end of period**                              |   | **$**                                                            | **2,047,353** | ** ** |

 

*See accompanying notes*

 

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**Reef Global EnergyIII, L.P.**

**Notes to Condensed Financial Statements**

**June 30, 2004**

 

**1. Organization and Basis of Presentation**

 

Reef Global Energy III, L.P.(the “Partnership”) is the third in a series of up to ten Nevada limitedpartnerships to be formed comprising a program called Reef Global EnergyVentures (the “Program”), pursuant to an S-1 Registration Statement declaredeffective May 31, 2001. In order to be formed, each partnership is required tosell a minimum of 50 partnership units at $20,000 per unit, including unitspurchased by the managing general partner. A maximum of 500 units will be soldin each partnership, consisting of a maximum of 375 limited partner units and125 general partner units. Investor funds are held in escrow and are subject toreimbursement with interest if the minimum number of units is not sold. TheProgram filed a prospectus supplement describing the Partnership with theSecurities and Exchange Commission on December 15, 2003, and commenced theoffering of units in the Partnership. Upon reaching the minimum subscriptionlevel of 50 units, the Partnership was formed on April 29, 2004.

 

Reef Global Energy III, L.P. isa Nevada limited partnership formed under the Nevada Revised LimitedPartnership Act. Reef Partners LLC (“Reef Partners”) serves as its managinggeneral partner. Partnership interests are held by the managing general partnerand investor partners who are general and limited partners (“investorpartners”). The Partnership intends to acquire offshore and onshore interestsin oil and gas properties which may be located in the United States, the Gulfof Mexico and the North Sea in which major or independent oil companies alsohave interests. The Partnership will generally purchase less than a majorityinterest in the properties acquired and be a non-operator working interestowner. The Partnership expects to purchase interests in both exploratory anddevelopmental drilling projects located onshore and offshore. Presently, thePartnership is continuing its formation period and continues to offer units forsale to investors. Partnership activities consist of reviewing potentialprospects, the purchase of leasehold interests on projects selected forinclusion in the Partnership, and initial drilling activity. The Partnershipoffering period will terminate on September 30, 2004, unless the managinggeneral partner elects to terminate the offering at an earlier date.

 

During the year followingcompletion of the drilling phase of the Partnership, all additional generalpartner units purchased by investors will be converted into limited partnerunits. Limited partners do not have any rights to convert their units togeneral partner units.

 

Under the terms of thepartnership agreement, participation in distributions, profits, losses, costsand revenues is as follows:

 
| **Item:**                                 |   | **Managing  General Partner** |   | **Investor  Partners** |   |
|-------------------------------------------|--------|-------------------------------|--------|------------------------|--------|
| Revenues                                  |   | 15.45                         | %      | 84.55                  | %      |
| Operating costs                           |   | 15.45                         | %      | 84.55                  | %      |
| Direct and administrative costs           |   | 15.45                         | %      | 84.55                  | %      |
| Leasehold, drilling, and completion costs |   | 5.95                          | %      | 94.05                  | %      |
| Cash distributions                        |   | 15.45                         | %      | 84.55                  | %      |

 

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The financial statements havebeen prepared in accordance with the instructions to Form 10-Q and do notinclude all disclosures required by accounting principles generally accepted inthe United States. However, we have recorded all transactions and adjustmentsnecessary to fairly present the financial statements included in this Form10-Q. The adjustments are normal and recurring. Because the future results ofthe Partnership are dependent upon the success of drilling operations whichwill occur during the next fifteen months, the results for the second quartercannot necessarily be used to project results for the full year.

 

**2. Summary of Accounting Policies**

 

**Use of Estimates**

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Actualresults could differ from these estimates.

 

**Cash and Cash Equivalents**

 

The Partnership considers allhighly liquid investments with maturity dates of no more than three months fromthe purchase date to be cash equivalents. Cash and cash equivalents consist ofdemand deposits and money market investments invested with a major nationalbank. The carrying value of the Partnership’s cash equivalents approximatesfair value.

 

# **Risks and Uncertainties**

 

Historically, the oil and gasmarket has experienced significant price fluctuations. Prices are significantlyimpacted by local weather, supply in the area, availability and price ofcompetitive fuels, seasonal variations in local demand, limited transportationcapacity to other regions, and the worldwide supply and demand balance forcrude oil.

 

The Partnership will notengage in commodity futures trading or hedging activities and will not enterinto derivative financial instrument transactions for trading or otherspeculative purposes. Accordingly, the Partnership will be at risk for thevolatility in commodity prices inherent in the oil and gas industry, and thelevel of commodity prices will have a significant impact on the Partnership’sresults of operations

 

**Segment Reporting**

 

Oil and gas activities comprisethe Partnership’s sole business segment.

 

**Organization and Syndication Costs**

 

Organization and syndicationcosts total 15% of investor capital contributions, except for units purchasedby the managing general partner, which are purchased net of the 15% cost.Partnership organization costs totaling $50,000 have been expensed in thefinancial statements. Syndication costs represent costs incurred in conjunctionwith the offering of Partnership units. These costs, totaling $306,323 as ofJune 30, 2004, are recorded as a reduction of the proceeds of the offering.

 

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**Oil and Gas Properties**

 

The Partnership will follow thefull cost method of accounting for its oil and gas properties. Under the fullcost method, all costs incurred in connection with the acquisition of oil andgas properties and exploration and development of oil and gas reserves arecapitalized when incurred. Costs include lease acquisition, propertyacquisition, geological and geophysical costs, the cost of drilling bothproductive and non-productive wells, and overhead associated directly withexploration and land acquisition activities. All capitalized costs plus theundiscounted estimated future development costs of proved reserves are depletedusing the unit-of-production method based on total proved reserves. Gas isconverted to equivalent barrels at a rate of 6 Mcf to 1 Bbl.

 

Net capitalized costs arelimited to the estimated future net revenues, discounted at 10% per annum, fromproved reserves. Estimated future net revenues are calculated using prices andcosts in effect at period end. Prices are held constant without futureescalation unless contractual arrangements provide otherwise. If netcapitalized costs exceed discounted future net revenues, the excess is chargedto expense as impairment of oil and gas properties. The impairment calculationis performed quarterly. The Partnership held no productive oil and gas assetsrequiring this calculation as of June 30, 2004.

 

**Recognition of Revenue**

 

The Partnership expects toenter into sales contracts for disposition of its share of oil and gasproduction from productive wells. Revenue will be recognized based upon thePartnership’s share of metered volumes delivered to those purchasers eachmonth.

 

Gas imbalances sometimes occurwhen certain working interest parties do not take their entitled share of gasproduction. The Partnership will utilize the sales method of accounting forrecording gas imbalances. Under this method, the Partnership records as revenueall gas delivered for its account. Any significant over or under balanced gaspositions will be recorded in the financial statements. As of June 30, 2004,the Partnership had no oil and gas production, and therefore had no gasimbalances.

 

**Income Taxes**

 

The Partnership net income orloss flows directly through to its partners, who are responsible for thepayment of federal taxes on their respective share of any income or loss.Therefore, there is no provision for federal income taxes in the accompanyingfinancial statements.

 

The following is areconciliation of the loss reported in the financial statements to taxableincome:

 
| Financial statement loss                       |   | $      | (47,085 | )      |
|------------------------------------------------|--------|--------|---------|--------|
| Organization costs deferred for tax  reporting |   | 50,000 |    |
| Taxable income                                 |   | $      | 2,915   |   |

 

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**3. Transactions with Affiliates**

 

The Partnership has noemployees. Reef Exploration, Inc. (“Reef Exploration”), an affiliate of ReefPartners, employs a staff including geologists, petroleum engineers, landmen,and accounting personnel who administer all of the Partnership’s operations.The Partnership reimburses Reef Exploration for direct and administrativeservices at cost. During the period from inception (April 29, 2004) to June 30,2004, the Partnership incurred no technical services or administrative costs.

 

During the Partnershipformation period, all costs of organization are borne directly by Reef Partnersout of the 15% management fee received by Reef Partners from investor capitalcontributions. Therefore, there are no direct charges included in the financialstatements at June 30, 2004.

 

The Partnership has areceivable from Reef Partners at June 30, 2004 related to its pending capitalcontribution. The balance due consists of $106,272 for the purchase ofPartnership units and $1,246 for the obligation to pay 1% of all leasehold,drilling, and completion costs. Reef Partners paid these two balances duringJuly 2004. This $107,518 affiliate receivable is netted against total partners’equity on the accompanying balance sheet.

 

 Accounts payable to affiliates includes $24,006, representing theportion of the 15% management fee which had not been paid to Reef Partners asof June 30, 2004, and $124,088 due Reef Partners as reimbursement of theChallenger Fees (see Note 5). All payables to affiliates were paid during July2004.

 

Reef Partners will bereimbursed for direct costs and all documented out-of-pocket expenses incurredon behalf of the Partnership, including administrative costs. During the periodfrom inception (April 29, 2004) to June 30, 2004, the Partnership did not incurany fees for accounting services and administrative costs.

 

If an affiliate of ReefPartners serves as operator of a Partnership prospect, then operator fees willbe payable to the affiliate. Under such circumstances, such affiliate willreceive fees not exceeding the competitive rate in the area during the drillingand production phase of operations. Often these are charged as a monthly feeper well for operations, field supervision, accounting, engineering, managementand general and administrative expenses. The Partnership has no propertiesoperated by any of Reef Partners’ affiliates as of June 30, 2004.

 

As the managing general partner,Reef Partners or one of its affiliates may provide oil field or other services,equipment or supplies to the Partnership. If Reef Partners or one of itsaffiliates provides such services, equipment or supplies as part of itsordinary business, the compensation, price or rental for such services,equipment and supplies provided to the Partnership will be at pricescompetitive with those charged by others in the geographical area of operationsthat reasonably could be available to the Partnership. If Reef Partners or oneof its affiliates is not engaged in the business as set forth above, thecompensation, price or rental will be the cost of the services, equipment orsupplies to each entity, or the competitive rate that could be obtained in thearea, whichever is less. Any such services for which Reef Partners or one ofits affiliates is to receive compensation will be embodied in a writtencontract that precisely describes the services to be rendered and allcompensation to be paid. During the period from inception (April 29, 2004) toJune 30, 2004, there were no such services rendered to the Partnership by ReefPartners or any of its affiliates.

 

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**4. Major Customers**

 

The Partnership will sell oiland natural gas on credit terms to refiners, pipelines, and other users ofpetroleum commodities. Revenues will be received directly from these partiesor, in certain circumstances, paid to the operator of the property whodisburses to the Partnership its percentage share of the revenues. As of June30, 2004, the Partnership had no oil and gas production and, therefore, had nocustomers.

 

**5. Commitments and Contingencies**

 

On December 3, 2003, andeffective as of December 1, 2003, Reef Partners, the Partnership’s managinggeneral partner, entered into two agreements (the “CMI Agreements”) withChallenger Minerals, Inc. (“CMI”), a subsidiary of Global Santa Fe Corporationand a screener of oil and gas prospects in the Gulf of Mexico and North Searegions.  The first of the agreements(the “New Gulf Agreement”) amended certain provisions of Reef Partners’ October2001 agreement with CMI (the “Original Agreement”).  The Original Agreement provided, among other things, that CMI wouldpresent a minimum of 50 prospects in the Gulf of Mexico region to ReefPartners, and that Reef Partners would have the option to purchase up to 12.5%in any Gulf of Mexico exploration project or developmental project madeavailable to Reef Partners’ for purchase. Under the New Gulf Agreement, CMI will continue to present Reef Partnerswith a minimum of 50 Gulf of Mexico prospects per year, which Reef Partners isunder no obligation to purchase. Reef Partners pays CMI $300,000 per year (the“CMI Gulf Fee”) for the geological and geophysical services provided by CMIunder the New Gulf Agreement, which is a $75,000 reduction in the CMI feecharged under the Original Agreement. The New Gulf Agreement amends the Original Agreement for the periodbetween January 31, 2004 and January 31, 2005, by reducing Reef Partners’participation interest in Gulf of Mexico exploration projects from 12.5% to7.5%.

 

As an inducement to therelinquishment of this 5% participation interest, CMI agreed to enter into anew screening program for prospects in the North Sea region pursuant to asecond agreement (the “North Sea Agreement”). Pursuant to the terms of theNorth Sea Agreement, for the period between December 1, 2003 and November 30,2006, Reef Partners may acquire up to 5% of the interest made available to CMIin all offshore prospects located in the North Sea region that are identifiedand initially reviewed by CMI during the term of the North Sea Agreement.  Reef Partners will pay CMI a fee of $75,000per year, or a total of $225,000 over the three-year term (the “CMI North SeaFee” and together with the CMI Gulf Fee, the “Fees”) under the North SeaAgreement.  CMI is not obligated topresent Reef Partners with a specific number of prospects under the North SeaAgreement, and under certain circumstances further described in the North SeaAgreement, Reef Partners may be excluded from participation in certainprospects.

 

Projects approved foracquisition by Reef Partners under both CMI Agreements will be assigned to thePartnership as well as other limited partnerships formed as part of theProgram. Based upon initial estimates prepared by Reef Partners, eachpartnership in the Program will reimburse Reef Partners an amount equal to 5%of the gross capital contributions made to such partnership. The amount of theFees to be reimbursed to Reef Partners by the Partnership, based upon capitalcontributions as of June 30, 2004, is $124,088. The Fees have been capitalizedas geological and geophysical costs in accordance with the full cost method ofaccounting for oil and gas properties, with an offsetting payable to ReefPartners. The ultimate amount that will be reimbursable to Reef Partners willnot be known until the Partnership’s formation period closes.  If at the conclusion of the offering ofinterests in all partnerships formed as part of the Program, it is determinedthat the Partnership has paid more than its pro-rata share of the Fees, ReefPartners will refund the portion overpaid. However, in the event it isdetermined that the

 

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Partnership has paid less thanits pro-rata share of the Fees, no additional payment will be made by thePartnership and the un-reimbursed costs will be paid by Reef Partners.

 

The Partnership is notcurrently involved in any legal proceedings.

 

**6.  Partnership Equity**

 

Sale of Partnership units beganon December 15, 2003. Proceeds received were placed into an interest bearingescrow account until the Partnership reached the minimum subscription level of50 units. The Partnership was formed on April 29, 2004 and the sale ofPartnership units continues. As of June 30, 2004, the Partnership has raised$2,375,490 from the sale of 118.7745 Partnership units. In addition, ReefPartners has an obligation to purchase 6.25129 units and to contribute 1% ofleasehold, drilling, and completion costs. This obligation totals $107,518 atJune 30, 2004.  A summary of partnershipcapital is as follows:

 

•                  Sixty-twolimited partners have purchased 63.049007 units totaling $1,260,980

•                  Forty-twogeneral partners have purchased 55.725500 units totaling $1,114,510

•                  Reef Partnershas obligations to purchase 6.251290 units totaling $106,272

•                  Reef Partnershas additional capital obligations of $1,246 representing 1% of leasehold,drilling, and completion costs incurred as of June 30, 2004, as required by thePartnership Agreement.

 

The capital listed aboveincludes the $107,518 capital obligation attributable to Reef Partners asdescribed in Note 3 above. This amount has been netted from partners’ equity onthe accompanying balance sheet.

 

All units except thosepurchased by Reef Partners pay a 15% management fee to Reef Partners to coverthe Partnership organization and offering costs, including sales commissions.As of June 30, 2004, these costs total $356,323, leaving capital of $2,126,685available for Partnership oil and gas activities. Of the $356,323, syndicationcosts were $306,323 and organization costs were $50,000. The ultimate amount offunds available to conduct oil and gas activities will not be known until theoffering of units in the Partnership expires or is terminated. Under Nevadalaw, partners purchasing additional general partner units have unlimitedliability for obligations and liabilities which arise from Partnershipoperations. Additional limited partners have limited liability which cannotexceed the amount of their partnership capital contribution.

 

Reef Partners will exclusivelymanage and control all aspects of the business of the Partnership. ThePartnership agreement prohibits participation by investor partners in thePartnership’s day-to-day business decisions.

 

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Information regarding thenumber of units outstanding and the net loss per type of Partnership unit forthe period from inception (April 29, 2004) to June 30, 2004 is detailed below:

 

**Period from inception (April 29,2004) to June 30, 2004**

 

| **Type of unit**                 |   | **Number of  units** |   | **Net loss** |    | **Net loss  per  unit** |   |
|----------------------------------|--------|----------------------|--------|--------------|---------|-------------------------|--------|
| Managing general partner units   |   | 6.251290             |   | $            | (230    | )                       | $      | (37 | ) |
|                             |   |                 |   |         |    |                    |   |   |   |
| Additional general partner units |   | 55.72550             |   | (21,714      | )       | (390                    | )      |
|                             |   |                 |   |         |    |                    |   |
| Limited partner units            |   | 63.049007            |   | (25,141      | )       | (399                    | )      |
|                             |   |                 |   |         |    |                    |   |
| Total                            |   | 125.025797           |   | $            | (47,085 | )                       |   |   |

 

**7.  PartnershipProjects**

 

As ofJune 30, 2004, the Partnership has committed funds to two developmentalprojects. Information concerning the Partnership’s working and net revenueinterest and the estimated cost of these projects to the Partnership is setforth below. The costs shown are estimated third party costs and do not includethe management fee, an allocation of the Challenger Fees nor any direct andadministrative costs of Reef Exploration personnel. Third party costs may berevised at the time the projects are ready to drill and the project operatorsissue formal AFE’s (Authority for Expenditure). The total number of projectsthe Partnership will be able to participate in will not be known until thePartnership offering period closes and the total amount of funds available isfixed.

 
| **Project**                  |   | **Location**                |   | **Working  Interest**                |   | **Net  Revenue  Interest**     |   | **Estimated  Cost** |        | **Status** |
|------------------------------|--------|-----------------------------|--------|--------------------------------------|--------|--------------------------------|--------|---------------------|-------------|------------|
| **Bayou Carlin**             |   | **Louisiana**               |   | **1.55%  BPO  1.35%  APO** |   | **1.11%  BPO  0.97% APO** |   | **$**               | **243,000** |       | **Well is drilling** |
| **Mobile Block 961**         |   | **Gulf of Mexico**          |   | **12.5% BPO  10.0% APO**             |   | **9.54% BPO  8.16% APO**       |   | **$**               | **602,000** |       | **Projected drilling date October  2004** |
| **BPO – Before Payout** |   | **APO – After Payout** |   |                                 |   |                           |

 

**8. Subsequent Events**

 

Subsequent to June 30, 2004,the Partnership committed funds to two additional developmental projectslocated in Galveston County, Texas and Reef Partners has entered into a letterof intent to acquire a third prospect, a portion of which will be assigned tothe Partnership upon finalization of the purchase. Information concerning thePartnership’s working and net revenue interest and the estimated cost of theseprojects to the Partnership is set forth below. The costs shown are estimatedthird party costs and do not include the management fee, an allocation of theChallenger Fees nor any direct and administrative costs of Reef Explorationpersonnel. Third party costs may be revised at the time the projects are readyto drill and the project operators issue formal AFE’s (Authority forExpenditure).

 

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| **Project**                 |   | **Location** |       | **Estimated  Working  Interest** |   | **Estimated  NetRevenue  Interest** |   | **Estimated  Cost** |        | **Status** |                                                                                            |
|-----------------------------|--------|--------------|------------|----------------------------------|--------|-------------------------------------|--------|---------------------|-------------|------------|-------------------------------------------------------------------------------------------------|
| **State of Texas #4**       |   | **Texas**    | ** ** | **6.00**                         | **%**  | **4.59**                            | **%**  | **$**               | **429,000** | ** ** | **Projected drilling date 4th Qtr 2004**                                                        | ** ** |
| **HBR Tract 4 Unit #2**     |   | **Texas**    | ** ** | **5.00**                         | **%**  | **3.80**                            | **%**  | **$**               | **358,000** | ** ** | **Purchased project interest, expected drill  date 4th Qtr 2004**                               | ** ** |
| **Devon State of Texas #1** |   | **Texas**    | ** ** | **3.00**                         | **%**  | **2.44**                            | **%**  | **$**               | **441,000** | ** ** | **In process of acquiring project interest,  expected drill date 4th Qtr 2004 or 1st Qtr 2005** | ** ** |

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

The following discussion will assist you in understanding thePartnership’s financial position and results of operations. The informationbelow should be read in conjunction with the condensed financial statements andthe related notes to condensed financial statements.

 

This discussion contains both historical and forward-lookinginformation. We assess risks and uncertainties about our business, strategy,and financial condition before we make any forward-looking statements, but wecannot guarantee that our assessment is accurate or that our goals andprojections can or will be met. Statements concerning our strategy foracquiring prospects, estimating the number, type, and percentage interest inprospects we may acquire, estimated drilling and completion costs for prospectsacquired, future uses of Partnership funds, and the state of the oil and gasindustry are all forward-looking statements.

 

**CriticalAccounting Policies**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires us to makeestimates and use assumptions that can affect the reporting of assets,liabilities, equity, revenues, and expenses. We base our estimates onhistorical experience and various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions. We are also required toselect among alternative acceptable accounting policies. See Note 1 to theFinancial Statements for a complete list of significant accounting policies.

 

*Oil andGas Properties*

 

The Partnership follows the full cost method of accounting for its oiland gas properties. Under this method, all costs incurred in connection withthe acquisition of oil and gas properties and exploration and development ofoil and gas reserves are capitalized when incurred. Costs include leaseacquisition, property acquisition, geological and geophysical costs, the costof drilling both productive and non-productive wells, and overhead associateddirectly with exploration and land acquisition activities. All capitalizedcosts plus the undiscounted estimated future development costs of provedreserves are depleted using the units-of-production method based upon totalproved reserves. Gas is converted to equivalent barrels at a rate of 6 MCF to 1BBL.

 

Net capitalized costs using the full cost method of accounting arelimited to the estimated future net revenues, discounted at 10% per annum, fromproved reserves.  Estimated future netrevenues are calculated using prices and

 

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costs in effect at period end. Prices and costs are held constant unless contractual arrangementsprovide otherwise. If net capitalized costs exceed discounted future netrevenues, the excess is charged to expense as impairment of capitalassets.  Impairment is assessed on aquarterly basis.

 

The estimate of proved oil and gas reserves used to determine capitalasset impairment is prepared by an independent petroleum engineer utilizing theperiod end prices and costs as promulgated by the Securities and ExchangeCommission (“SEC”). Reserve engineering is the subjective process of estimatingunderground accumulations of oil and natural gas that cannot be measured in anexact manner. The accuracy of any reserve estimate is a function of the qualityof available data and of engineering and geological interpretation andjudgment. Accordingly, reserve estimates are often different from thequantities of oil and gas ultimately recovered.

 

The determination of depreciation and depletion expense recognized inthe financial statements is also dependent upon the estimates of proved oil andgas reserves. The Partnership utilizes an independent petroleum engineer toprepare an estimate of proved reserves which it uses to determine depreciationand depletion. This estimate of reserves does not use the non-escalated pricingand cost assumptions required by the SEC, but utilizes a forecast of oil andgas pricing and costs, which management determines to be reasonable, that maybe higher or lower than the period end market prices. Depreciation anddepletion is computed based upon the units-of production method. Gas isconverted to equivalent barrels at a rate of 6 MCF to 1 BBL.

 

The Partnership will follow Statement of Financial Accounting Standards(“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, for allproductive oil and gas wells drilled by the Partnership. The statement requiresthe Partnership to estimate the discounted fair value of asset retirementobligations (dismantlement and abandonment of oil and gas wells and siterestoration) in the period in which the asset is placed in service. Theliability recognized is offset by a corresponding increase in the carryingvalue of the asset. Each period the liability is accreted to its net presentvalue with a corresponding charge to accretion expense, and the additionalasset cost is amortized using the straight-line method. Upon settlement of theobligation a gain or loss is recognized to the extent actual charges are lessthan or exceed the liability recorded.

 

*DerivativeInstruments*

 

Derivative financial instruments are sometimes used by entities inorder to manage the price risk inherent in the oil and gas industry. Oil andgas commodity prices are subject to fluctuation based upon a variety of factorsthat are beyond our control.

 

The Partnership will not engage in commodity futures trading or hedgingactivities and will not enter into derivative financial instrument transactionsfor trading or other speculative purposes. Accordingly, the Partnership will beat risk for the volatility in commodity prices inherent in the oil and gasindustry, and the level of commodity prices will have a significant impact onthe Partnership’s results of operations.

 

**Liquidity and Capital Resources**

 

Although the Partnership hasbeen formed, it continues to raise capital. The Partnership will continue toaccept new investors until the earlier of (i) September 30, 2004 or (ii) themanaging general partner elects to terminate the offering. As of June 30, 2004,the Partnership had raised $2,375,490 from the sale of partnership units, andhad total capital obligations of $2,483,008. Additional general partnerscontributed $1,114,510 for unit purchases, additional

 

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limited partners contributed$1,260,980 for unit purchases, and Reef Partners had obligations to contribute$106,272 for unit purchases and $1,246 for additional capital costs.Syndication costs of $306,323 and organization costs of $50,000 were alsoincurred during the period, leaving available cash of $2,126,685 forPartnership activities. The Partnership is actively evaluating projects andpurchasing leasehold interests on projects selected for participation.

 

As of June 30, 2004, thePartnership has identified and committed funds to two developmental drillingprojects. One of the projects is located onshore in Louisiana and the second isin United States waters in the Gulf of Mexico. Projected third party costs,based upon initial expenditure estimates, are $845,000 for these projects (seeNote 7 to condensed financial statements). The Partnership has also committed$124,088 to be paid to Reef Partners as reimbursement of its portion of theChallenger Fees (see Note 5 to condensed financial statements). The Partnershiphas also expended $1,489 for general and administrative costs.  These committed and expended funds total$970,577. The Partnership Agreement prohibits bank borrowings during thePartnership’s drilling phase of operations. The remaining Partnership funds, aswell as additional funds raised prior to closing, will be allocated toadditional projects (see Note 8 to financial statements).

 

**Results of Operations**

 

Because the Partnership wasformed on April 29, 2004, there is no comparable information for the threemonth period ended June 30, 2003.

 

The Partnership incurred a netloss of $47,085 during the second quarter. Organization costs totaled $50,000, and third party general andadministrative costs totaled $1,489. These costs were offset by $4,404 ininterest income earned by the Partnership. The Partnership expects general andadministrative costs to increase as the Partnership begins drilling andoperations. The primary components of general and administrative costs will bethird party legal and accounting costs associated with financial statementpreparation and required Securities and Exchange Commission filings, and directand administrative costs provided by Reef Exploration.

 

**Item 3.  Quantitative and QualitativeDisclosures about Market Risk.**

 

*Interest Rate Risk*

 

The Partnership Agreementprohibits bank borrowings during the Partnership’s drilling phase ofoperations. However, to the extent that changes in interest rates affectgeneral economic conditions, the Partnership will be affected by such changes.

 

*Commodity Price Risk*

 

The Partnership will not engagein commodity futures trading or hedging activities and will not enter intoderivative financial instrument transactions for trading or other speculativepurposes.  The Partnership expects tosell a vast majority of its production from successful oil and gas wells on amonth-to-month basis at current spot market prices. Accordingly, the Partnershipwill be at risk for the volatility in commodity prices inherent in the oil andgas industry, and the level of commodity prices will have a significant impacton the Partnership’s results of operations.

 

**Item 4.  Controls andProcedures**

 

Based upon their evaluation asof the end of the period covered by this Quarterly Report on Form 10-Q, theprincipal executive officer, principal financial officer and principalaccounting officer of the managing general partner of the Partnership haveconcluded that the Partnership’s disclosure controls and procedures (as definedin Rule 13a-15(e)

 

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under the Securities ExchangeAct of 1934) are effective.  During ourfiscal quarter ended June 30, 2004, no change occurred in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II – OTHERINFORMATION**

 

**Item1.  Legal Proceedings**

 

None

 

**Item 2.**** Changes in Securities, Use of Proceeds andIssuer Purchases of Equity Securities**

 

None

 

**Item 3****.  Defaults Upon Senior Securities**

 

None

 

**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5****.  Other Information**

 

None

 

**Item 6****.  Exhibits and Reports on Form 8-K**

 

(a)   Exhibits

 
| 10.1   |   | Letter  Agreement dated December 4, 2003 from Challenger Minerals, Inc. to Reef  Partners LLC, regarding the amendment to the Reef/CMI Gulf of Mexico Joint  Venture Agreement and the new Reef CMI North Sea Joint Venture Agreement  (incorporated by reference to the Report on Form 8-K of Reef Global Energy  Ventures dated August 13, 2004). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.2   |   | Letter  Agreement dated December 4, 2003 from Challenger Minerals, Inc. to Reef  Partners LLC regarding the Reef/CMI North Sea Joint Venture Agreement  (incorporated by reference to the Report on Form 8-K of Reef Global Energy  Ventures dated August 13, 2004).                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.3   |   | Assignment  and Assumption Agreement effective as of June 15, 2004 assigning interest in  Mobile Block 961 Prospect from Reef Global Energy I, L.P. to Reef Global  Energy III, L.P.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 10.4   |   | Assignment  Agreement effective as of June 1, 2004 assigning interest in Bayou Carlin  Prospect from Reef Partners LLC to Reef Global Energy III, L.P.                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 31.1   |   | Certification  of Chief Executive Officer                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 31.2   |   | Certification  of Chief Financial Officer                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                |
| 32     |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                    |

 

(b)   Reportson Form 8-K

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | REEF GLOBAL  ENERGY III, L.P. |
|------------------------------|-------------------------------|
|                         |                          |
|                         | By:                           | Reef  Partners LLC, |
|                         |                          | Managing  General Partner |
|                         |                          |   |
|                         |                          |   |
| Dated:  August 24, 2004 | By:                           | /s/ Michael  J. Mauceli |   |
|                         |                          | **Michael J. Mauceli** |
|                         |                          | Manager and  Member |
|                         |                          | (*Principal  Executive Officer)* |
|                         |                          |   |
|                         |                          |   |
| Dated:  August 24, 2004 | By:                           | /s/ Daniel C.  Sibley |   |
|                         |                          | **Daniel C. Sibley** |
|                         |                          | General  Counsel and Chief Financial Officer |
|                         |                          | (*Principal  Financial and Accounting Officer)* |
|                              |                               |  |  |  |

 

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