# **UNITEDSTATES**

**SECURITIES 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) OF**

# **THESECURITIES EXCHANGE ACT OF 1934**

 

# **For thequarterly period ended September 30, 2004**

 

# **CommissionFile Number: 333-93399-03**

 

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**REEF GLOBAL ENERGY III, L.P.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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Indicateby ý whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý     No o

 

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 Statements  of Operations*                                                                    |   |
| * *                                 | *Condensed Statement  of Cash Flows*                                                                     |   |
| * *                                 | *Notes  to Interim 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

 

**ReefGlobal Energy III, L.P.**

### **Condensed Balance Sheet**

### **(unaudited)**

 
| ** **                                              | ** ** | **Sept 30,**  | ** **    |
|---------------------------------------------------------|------------|---------------|---------------|
| ** **                                              | ** ** | **2004**      | ** **    |
| **Assets**                                              |       |          |          |
| **Current  assets:**                                    |       |          |          |
| Cash and cash  equivalents                              |       | $             | 6,019,013     |   |
| Accrued interest  receivable                            |       | 38            |          |
| Prepaid drilling  costs                                 |       | 284,679       |          |
| **Total  current assets**                               | ** ** | **6,303,730** | ** **    |
|                                                    |       |          |          |
| **Property  and equipment:**                            |       |          |          |
| Oil and gas  properties, full cost method of accounting |       | 666,610       |          |
| **Net  property and equipment**                         | ** ** | **666,610**   | ** **    |
| ** **                                              | ** ** | ** **    | ** **    |
| **Total  assets**                                       | ** ** | **$**         | **6,970,340** | ** ** |
|                                                    |       |          |          |
| **Liabilities  and partners’ equity**              |       |          |          |
| **Current  liabilities:**                               |       |          |          |
| Accounts payable                                        |       | $             | 120,823       |   |
| Accounts payable  to affiliates                         |       | 798,574       |          |
| **Total  current liabilities**                          | ** ** | **919,397**   | ** **    |
|                                                    |       |          |          |
| **Partners’  equity:**                             |       |          |          |
| General partners                                        |       | 2,104,319     |          |
| Limited partners                                        |       | 6,412,372     |          |
| Less:  subscriptions receivable from partners           |       | (2,465,748    | )             |
| **Total  partners’ equity**                        | ** ** | **6,050,943** | ** **    |
| ** **                                              | ** ** | ** **    | ** **    |
| **Total  liabilities and partners’ equity**        | ** ** | **$**         | **6,970,340** | ** ** |
|                                                         |            |               |               |  |  |

 

*Seeaccompanying notes*

 

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*** ***

**ReefGlobal Energy III, L.P.**

### **CondensedStatements of Operations**

### **(unaudited)**

*** ***
| ** **                                             | ** ** | **Three months  ended  September 30,** | ** ** | **Period from  inception  (April 29,  2004) to  September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2004**                               | ** ** | **2004**                                                        | ** ** |
| **Revenues:**                                          |       |                                   |       |                                                            |       |
| ** **                                             |       |                                   |       |                                                            |       |
| Interest income                                        |       | $                                      | 12,639     |                                                            | $          | 17,043 |   |
| **Total  revenues**                                    | ** ** | **12,639**                             | ** ** | **17,043**                                                      | ** ** |
|                                                   |       |                                   |       |                                                            |       |
| **Costs  and expenses:**                               |       |                                   |       |                                                            |       |
| General and  administrative                            |       | 3,961                                  |       | 55,450                                                          |       |
| **Total  costs and expenses**                          | ** ** | **3,961**                              | ** ** | **55,450**                                                      | ** ** |
|                                                   |       |                                   |       |                                                            |       |
| **Net  income (loss)**                                 | ** ** | **$**                                  | **8,678**  | ** **                                                      | **$**      | **(38,407** | **)** |
|                                                   |       |                                   |       |                                                            |       |
| Net loss per  managing general partner unit            |       | $                                      | (16        | )                                                               | $          | (25 | ) |
| Net income  (loss) per additional general partner unit |       | $                                      | 98         |                                                            | $          | (80 | ) |
| Net loss per  limited partner unit                     |       | $                                      | (8         | )                                                               | $          | (80 | ) |
|                                                        |            |                                        |            |                                                                 |            |  |  |  |  |

 

*See accompanying notes*

* *

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**ReefGlobal Energy III, L.P.**

### **CondensedStatement of Cash Flows**

(unaudited)  

 
| ** **                                                                      | ** ** | **Period from  inception (April  29, 2004) to  September 30,** | ** **    |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------|---------------|
| ** **                                                                      | ** ** | **2004**                                                       | ** **    |
| **Operating  Activities**                                                       |       |                                                           |          |
| **Net  loss**                                                                   | ** ** | **$**                                                          | **(38,407**   | **)** |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       |                                                           |          |
| **Changes  in operating assets and liabilities**                                |       |                                                           |          |
| Accrued interest  receivable                                                    |       | (38                                                            | )             |
| Prepaid drilling  costs                                                         |       | (284,679                                                       | )             |
| Accounts payable                                                                |       | 120,823                                                        |          |
| Accounts payable  to affiliates                                                 |       | 264,401                                                        |          |
| **Cash  provided by operating activities**                                      | ** ** | **62,100**                                                     | ** **    |
|                                                                            |       |                                                           |          |
| **Investing  Activity**                                                         |       |                                                           |          |
| Property  acquisition and development                                           |       | (132,437                                                       | )             |
| **Cash  used in investing activity**                                            | ** ** | **(132,437**                                                   | **)**         |
|                                                                            |       |                                                           |          |
| **Financing  Activity**                                                         |       |                                                           |          |
| Partner capital  contributions, net of syndication costs                        |       | 6,089,350                                                      |          |
| **Cash  provided by financing activity**                                        | ** ** | **6,089,350**                                                  | ** **    |
| ** **                                                                      | ** ** | ** **                                                     | ** **    |
| **Net  increase in cash and cash equivalents**                                  | ** ** | **6,019,013**                                                  | ** **    |
| Cash and cash  equivalents at inception (April 29, 2004)                        |       | —                                                         |          |
| **Cash  and cash equivalents at September 30, 2004**                            | ** ** | **$**                                                          | **6,019,013** | ** ** |

 

*See accompanying notes*

 

3

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**ReefGlobal Energy III, L.P.**

**Notes toInterim Condensed Financial Statements****(unaudited)**

**September30, 2004**

 

**1.****             Organizationand Basis of Presentation**

 

Reef Global Energy III,L.P. (the “Partnership”) is the third in a series of Nevada limitedpartnerships to be formed comprising a program called Reef Global EnergyVentures (the “Program”), pursuant to an S-1 Registration Statement declaredeffective by the Securities and Exchange Commission (the “SEC”) on May 31,2001. In order to be formed, each partnership is required to sell a minimum of50 partnership units at $20,000 per unit, including units purchased by themanaging general partner. A maximum of 500 units will be sold in eachpartnership, consisting of a maximum of 375 limited partner units and 125general 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 with the SEC on December 15, 2003describing the Partnership, and commenced offering units in the Partnership.Upon reaching the minimum subscription level of 50 units, the Partnership wasformed on April 29, 2004.

 

Reef Global Energy III,L.P. is a Nevada limited partnership formed under the Nevada Revised LimitedPartnership Act. Reef Partners LLC (“Reef Partners”) serves as thePartnership’s managing general partner. Partnership interests are held by themanaging general partner and investor partners who are general and limitedpartners (“investor partners”). The Partnership intends to acquire offshore andonshore interests in oil and gas properties which may be located in the UnitedStates, the Gulf of Mexico and the North Sea in which major or independent oilcompanies also have interests. The Partnership will generally purchase lessthan a majority interest in the properties acquired and be a non-operatorworking interest owner. The Partnership expects to purchase interests in bothexploratory and developmental drilling projects located onshore and offshore.Partnership activities consist of reviewing potential prospects, purchasingleasehold interests on projects selected for inclusion in the Partnership, andinitial drilling activity. The Partnership offering period terminated onSeptember 20, 2004.

 

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:

 

| ** **                                 | ** ** | **% Participation**           | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| **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% |   |

 

The financial statementshave been 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 twelve months, the results for the third quartercannot necessarily be used to project results for the full year.

 

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**2.****             Summaryof Accounting Policies**

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from these estimates.

 

**Cash and Cash Equivalents**

 

The Partnership considersall highly liquid investments with maturity dates of no more than three monthsfrom the purchase date to be cash equivalents. Cash and cash equivalentsconsist of demand deposits and money market investments invested with a majornational bank. The carrying value of the Partnership’s cash equivalentsapproximates fair value.

 

# **Risks and Uncertainties**

 

Historically, the oil andgas market has experienced significant price fluctuations. Prices aresignificantly impacted by local weather, supply in the area, availability andprice of competitive fuels, seasonal variations in local demand, limitedtransportation capacity to other regions, and the worldwide supply and demandbalance for crude oil.

 

The Partnership will not engage in commodity futurestrading or hedging activities and will not enter into derivative financialinstrument transactions for trading or other speculative purposes. Accordingly,the Partnership will be at risk for the volatility in commodity prices inherentin the oil and gas industry, and the level of commodity prices will have asignificant impact on the Partnership’s results of operations.

 

**Segment Reporting**

 

Oil and gas activitiescomprise the Partnership’s sole business segment.

 

**Organization and SyndicationCosts**

 

Organization andsyndication costs total 15% of investor capital contributions, except for unitspurchased by 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 $1,375,000 as ofSeptember 30, 2004, are recorded as a reduction of the proceeds of theoffering.

 

**Oil and Gas Properties**

 

The Partnership willfollow the full cost method of accounting for its oil and gas properties. Underthe full cost method, all costs incurred in connection with the acquisition ofoil and gas properties and exploration and development of oil and gas reservesare capitalized 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 and costs are held constant withoutfuture escalation unless contractual arrangements provide otherwise. If net capitalized costs exceed discountedfuture net revenues, the excess is charged to expense as impairment of oil andgas properties. The impairment calculation is performed quarterly. The Partnership held no productive oil andgas assets requiring this calculation as of September 30, 2004.

 

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**Recognition of Revenue**

 

The Partnership expectsto enter 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 sometimesoccur when certain working interest parties do not take their entitled share ofgas production. 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 September 30,2004, the Partnership had no oil and gas production, and, therefore, had no gasimbalances.

 

**Income Taxes**

 

The Partnership’s netincome or loss flows directly through to its partners, who are responsible forthe payment 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                      |   | $      | (38,407 | )      |
|------------------------------------------------|--------|--------|---------|--------|
| Organization  costs deferred for tax reporting |   | 50,000 |    |
| Taxable income                                 |   | $      | 11,593  |   |

 

**3.****            ****Transactionswith 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. ThePartnership reimburses Reef Exploration for direct and administrative servicesat cost. During the period from inception (April 29, 2004) to September 30,2004, the Partnership incurred technical services and administrative coststotaling $1,421.

 

During the Partnershipformation period, all costs of organization were borne directly by ReefPartners out of the 15% management fee received by Reef Partners from investorcapital contributions. Therefore, there are no direct charges included in thefinancial statements at September 30, 2004.

 

The Partnership has areceivable from Reef Partners at September 30, 2004 related to its capitalcontribution. The balance due consists of $318,728 for the purchase ofPartnership units and $3,852 for the obligation to pay 1% of all leasehold,drilling, and completion costs. Reef Partners paid the $318,728 during November2004. This $322,580 affiliate receivable is netted against total partners’equity on the accompanying balance sheet.

 

The Partnership hasaccounts receivable from ten general and twenty-three limited partners relatedto their capital contributions as of September 30, 2004. The balance dueconsists of $87,500 for the purchase of 4.375 general partner units and$2,055,668 for the purchase of 102.7834 limited partner units. Thesereceivables are netted against total partners' equity on the accompanyingbalance sheet. Reef Partners held this balance on the closing date. The balanceincludes $630,087 received from investors for investment in the Partnership throughIRA accounts, and $1,513,081 received from investors for investment in thePartnership through non-IRA accounts. The $1,513,081 was transferred to thePartnership subsequent to September 30, 2004. However, an administrative requirement governing these particular IRAaccounts required Reef Partners to direct the $630,087 to the authorized IRAcustodians for these investors. After processing, the IRA custodians direct thefunds to the Partnership's escrow account. To date, the Partnership hasreceived $224,087 from the various IRA custodians, and expects to receive theremaining balance due during the fourth quarter of 2004.

 

Accounts payable toaffiliates includes $264,401, representing the portion of the 15% managementfee which had not been paid to Reef Partners as of September 30, 2004, $372,162due Reef Partners as reimbursement of the

 

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**3.****            ****Transactionswith Affiliates (continued)**

 

Challenger Fees (see Note5), $1,421 due Reef Exploration for costs of technical and administrativepersonnel, and $160,590 due Reef Exploration for reimbursement of third partydrilling costs paid by Reef Exploration. All payables to affiliates will bepaid in full during the fourth quarter of 2004.

 

Reef Partners will be reimbursedfor direct costs and all documented out-of-pocket expenses incurred on behalfof the Partnership, including administrative costs. During the period frominception (April 29, 2004) to September 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 had no propertiesoperated by any of Reef Partners’ affiliates as of September 30, 2004.

 

As the managing generalpartner, Reef Partners or one of its affiliates may provide oil field or otherservices, equipment or supplies to the Partnership. If Reef Partners or one ofits affiliates 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, equipment or supplies for whichReef Partners or one of its affiliates is to receive compensation will beembodied in a written contract that precisely describes the services, equipmentor supplies to be rendered and all compensation to be paid. During the periodfrom inception (April 29, 2004) to September 30, 2004, there were no suchservices, equipment or supplies rendered to the Partnership by Reef Partners orany of its affiliates.

 

**4.****            ****MajorCustomers**

 

The Partnership will selloil and 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 ofSeptember 30, 2004, the Partnership had no oil and gas production and, therefore,had no customers.

 

**5.****            ****Commitmentsand 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 otherthings, that CMI would present a minimum of 50 prospects in the Gulf of Mexicoregion to Reef Partners, and that Reef Partners would have the option topurchase up to 12.5% in any Gulf of Mexico exploration project or developmentalproject made available to Reef Partners for purchase.  Under the New Gulf Agreement, CMI willcontinue to present Reef Partners with a minimum of 50 Gulf of Mexico prospectsper year, which Reef Partners is under no obligation to purchase. Reef Partnerspays CMI $300,000 per year (the “CMI Gulf Fee”) for the geological andgeophysical services provided by CMI under the New Gulf Agreement, which is a$75,000 reduction in the CMI fee charged under the Original Agreement.  The New Gulf Agreement amends the OriginalAgreement for the period between January 31, 2004 and January 31, 2005, byreducing Reef Partners’ participation interest in Gulf of Mexico explorationprojects from 12.5% to 7.5%.

 

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 the NorthSea 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 CMI in alloffshore prospects located in the North Sea region that are identified andinitially 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

 

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**5.****            ****Commitmentsand Contingencies (continued)**

 

North Sea Fee” andtogether with the CMI Gulf Fee, the “Challenger 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 theChallenger Fees to be reimbursed to Reef Partners by the Partnership, basedupon final capital contributions as of September 30, 2004, is $496,250. TheChallenger Fees have been capitalized as geological and geophysical costs inaccordance with the full cost method of accounting for oil and gas properties,with an offsetting payable to Reef Partners. The September 30, 2004 payable toReef Partners totaled $372,162, and was paid during November 2004. Total feesreimbursed to Reef Partners by the global ventures partnerships will not exceedthe fees paid by Reef Partners under the terms of the CMI agreements. If, atthe conclusion of the offering of interests in all partnerships formed as partof the Program, it is determined that the Partnership has paid more than itspro-rata share of the Challenger Fees, Reef Partners will refund the portionoverpaid. However, in the event it is determined that the Partnership has paidless than its pro-rata share of the Challenger Fees, no additional payment willbe made by the Partnership and the un-reimbursed costs will be paid by ReefPartners.

 

The Partnership is notcurrently involved in any legal proceedings.

 

**6.****             PartnershipEquity**

 

Sale of Partnership unitsbegan on December 15, 2003. Proceeds received were placed into an interestbearing escrow account until the Partnership reached the minimum subscriptionlevel of 50 units. The Partnership was formed on April 29, 2004, and the saleof Partnership units was terminated on September 20, 2004. The Partnershipraised $9,500,000 from the sale of 475 Partnership units. Reef Partners has anobligation to purchase a total of 25 units and to contribute 1% of leasehold,drilling, and completion costs. The unpaid portion of this obligation totaled$322,580 at September 30, 2004.  Asummary of Partnership capital at September 30, 2004 is as follows:

 

•      163 investorshave purchased limited partner units. At September 30, 2004, $5,087,594 hadbeen received from these investors.

•      117 investorshave purchased general partner units. At September 30, 2004, $2,375,510 hadbeen received from these investors.

•      The totalsabove include the general partner unit purchased by Reef Partners for $17,000and the 5.251290 limited partner units purchased by Reef Partners for $89,272.

•      Additionally,in the third fiscal quarter of 2004, Reef Partners made an additional capitalcontribution of $1,246 representing 1% of leasehold, drilling, and completioncosts incurred as of June 30, 2004, as required by the Partnership Agreement.

 

The capital listed aboveexcludes the $322,580 capital obligation attributable to Reef Partners and the$2,143,168 capital obligation attributable to the investor partners asdescribed in Note 3 above. These amounts have been netted from partners’ equityon the 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.These costs total $1,425,000, leaving capital of $8,505,098 available forPartnership oil and gas activities. Of the $1,425,000, syndication costs were$1,375,000 and organization costs were $50,000. Under Nevada law, partners purchasing additional general partner unitshave unlimited liability for obligations and liabilities which arise fromPartnership operations. Additional limited partners have limited liability thatcannot exceed the amount of their partnership capital contribution.

 

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

 

8

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**6.****             PartnershipEquity (continued)**

 

Information regarding thenumber of units outstanding and the net loss per type of Partnership unit forthe quarter ended September 30, 2004 and for the period from inception (April29, 2004) to September 30, 2004 is detailed below:

 
| **Type of unit**                  | ** ** | **Number  of units** | ** ** | **Net income  (loss) for 3  months  ended  September  30, 2004** | ** ** | **Net income  (loss) per unit  for 3 months  ended  September  30, 2004** | ** ** | **Net loss for  period from  inception  (April 29,  2004) to  September  30, 2004** | ** ** | **Net (loss) per unit for period from  inception (April  29, 2004) to  September 30,  2004** | ** ** |
|-----------------------------------|------------|----------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| Managing general  partner units   |       | 25.0000              |       | $                                                                | (397       | )                                                                         | $          | (16                                                                                 | )          | $                                                                                            | (627       | ) | $ | (25 | ) |
| Additional  general partner units |       | 122.3005             |       | 11,987                                                           |       | 98                                                                        |       | (9,727                                                                              | )          | (80                                                                                          | )          |
| Limited partner  units            |       | 352.6995             |       | (2,912                                                           | )          | (8                                                                        | )          | (28,053                                                                             | )          | (80                                                                                          | )          |
| Total                             |       | 500.0000             |       | $                                                                | 8,678      |                                                                      |       |                                                                                | $          | (38,407                                                                                      | )          |   |   |
|                                   |            |                      |            |                                                                  |            |                                                                           |            |                                                                                     |            |                                                                                              |            |  |  |  |  |

 

**7.****            ****PartnershipProjects**

 

Asof September 30, 2004, the Partnership has committed funds to fourdevelopmental projects and one exploration project. Information concerning thePartnership’s working and net revenue interest and the estimated cost ofthese projects to the Partnership is set forth below. The costs shown areestimated third party costs and do not include the management fee, anallocation of the Challenger Fees nor any direct and administrative costs ofReef Exploration personnel. Third party costs may be revised at the time theprojects are ready to drill and the project operators issue formal AFE’s(Authority for Expenditure). Subsequent to September 30, 2004, the Partnershipcommitted its remaining funds as described below in Note 8.

** **
| **Project**                | ** ** | **Location**   | ** ** | **Working  Interest** | ** ** | **Estimated Net  Revenue  Interest** | ** ** | **Estimated  Cost** | ** ** | **Status**           | ** **                                                                    |
|----------------------------|------------|----------------|------------|-----------------------|------------|--------------------------------------|------------|---------------------|------------|----------------------|-------------------------------------------------------------------------------|
| Bayou Carlin               |       | Louisiana      |       | 1.55% BPO             |       | 1.11% BPO                            |       | $                   | 272,000    |                 | Well has been completed and                                                   |   |
|                       |       |           |       | 1.35% APO             |       | 0.97 % APO                           |       |                |       | is awaiting pipeline |                                                                          |
|                       |       |           |       |                  |       |                                 |       |                |       | connection           |                                                                          |
| Mobile Block 961           |       | Gulf of Mexico |       | 12.5%                 |       | 9.54%                                |       | $                   | 601,000    |                 | Dry Hole                                                                      |   |
| Halls Bayou  Ranch Tr 4 #2 |       | Texas          |       | 10.00%                |       | 7.58%                                |       | $                   | 691,000    |                 | Well spud date November 11, 2004                                              |   |
| State of Texas  #4         |       | Texas          |       | 6.00%                 |       | 4.58%                                |       | $                   | 540,000    |                 | Expected drill date April 2005                                                |   |
| Devon State of Texas #1    |       | Texas          |       | 3.00%                 |       | 2.44%                                |       | $                   | 465,000    |                 | In process of  acquiring project interest, expected drill date September 2005 |   |

 

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BPO – Before Payout

APO – After Payout

 

**8.****            ****Subsequent Events**

 

Subsequent to September 30, 2004, the Partnershipcommitted funds to six additional developmental projects and two explorationprojects. In addition, the Partnership purchased a royalty interest in aproducing field with four current productive wells. Three new wells will bedrilled in this field by the Partnership, and the Partnership will have both aworking interest and a royalty interest in these three wells. Informationconcerning the Partnership’s working and net revenue interest and theestimated cost of these projects to the Partnership is set forth below. Thecosts shown are estimated third party costs and do not include the managementfee, an allocation of the Challenger Fees nor any direct and administrativecosts of Reef Exploration personnel.Third party costs may be revised at the time the projects are ready to drilland the project operators issue formal AFE’s (Authority for Expenditure).

 

9

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| **Project**                  | ** ** | **Location**  | ** ** | **Estimated  Working  Interest** | ** ** | **Estimated  Net  Revenue  Interest** | ** ** | **Estimated  Cost** | ** **  | **Status** | ** **                                                     |
|------------------------------|------------|---------------|------------|----------------------------------|------------|---------------------------------------|------------|---------------------|-------------|------------|----------------------------------------------------------------|
| **St. Amelia**               | ** ** | **Louisiana** | ** ** | **10.00%**                       | ** ** | **7.50%**                             | ** ** | **$**               | **360,000** | ** ** | **In process of  acquiring. Projected drilling date Feb 2005** | ** ** |
| **S Little Cheniere**        | ** ** | **Louisiana** | ** ** | **12.50%**                       | ** ** | **8.87%**                             | ** ** | **$**               | **324,000** | ** ** | **In process of  acquiring. Projected drilling date Dec 2004** | ** ** |
| **Avondale Royalty Package** | ** ** | **Louisiana** | ** ** | **N/A**                          | ** ** | **0.25%**                             | ** ** | **$**               | **534,000** | ** ** | **Purchased effective  Oct 2004**                              | ** ** |
| **Terpsichore**              | ** ** | **Louisiana** | ** ** | **10.50%**                       | ** ** | **7.87%**                             | ** ** | **$**               | **408,000** | ** ** | **In process of  acquiring. Projected drilling date Jan 2005** | ** ** |
| **Euterpe**                  | ** ** | **Louisiana** | ** ** | **6.25%**                        | ** ** | **4.68%**                             | ** ** | **$**               | **689,000** | ** ** | **In process of  acquiring. Projected drilling date Feb 2005** | ** ** |
| **Dryades**                  | ** ** | **Louisiana** | ** ** | **13.00%**                       | ** ** | **9.75%**                             | ** ** | **$**               | **694,000** | ** ** | **In process of  acquiring. Projected drilling date Mar 2005** | ** ** |
| **Hog Island**               | ** ** | **Texas**     | ** ** | **7.00%**                        | ** ** | **5.04%**                             | ** ** | **$**               | **692,000** | ** ** | **In process of  acquiring. Projected drilling date Feb 2005** | ** ** |
| **Bayou Grand Cheniere**     | ** ** | **Louisiana** | ** ** | **14.03%**                       | ** ** | **10.52%**                            | ** ** | **$**               | **696,000** | ** ** | **In process of  acquiring. Projected drilling date Feb 2005** | ** ** |
| **Oakville**                 | ** ** | **Texas**     | ** ** | **27.38%**                       | ** ** | **20.53%**                            | ** ** | **$**               | **747,000** | ** ** | **In process of  acquiring. Projected drilling date Feb 2005** | ** ** |

 

**Item 2.****   ****Management’sDiscussion and Analysis ofFinancial 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 the 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 withaccounting principles generally accepted in the United States requires us tomake estimates 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 to selectamong alternative acceptable accounting policies. See Note 2 to the condensedfinancial statements for a list of significant accounting policies.

 

*Oiland Gas Properties*

 

The Partnership follows the full cost method of accounting for itsoil and gas properties. Under this method, all costs incurred in connectionwith the acquisition of oil and gas properties and exploration and developmentof oil 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.

 

10

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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 costs in effect at period end.  Prices and costs are held constant withoutfuture escalation 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.  Impairment is assessed on a quarterly basis.

 

The estimate of proved oil and gas reserves used to determinecapital asset impairment is prepared by an independent petroleum engineerutilizing the period end prices and costs as promulgated by the SEC. Reserveengineering is the subjective process of estimating underground accumulationsof oil and natural gas that cannot be measured in an exact manner. The accuracyof any reserve estimate is a function of the quality of available data and ofengineering and geological interpretation and judgment. Accordingly, reserveestimates are often different from the quantities of oil and gas ultimatelyrecovered.

 

The determination of depreciation and depletion expense recognizedin the financial statements is also dependent upon the estimates of proved oiland gas 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, rather it utilizes a forecast of oiland gas pricing and costs, which management determines to be reasonable, butthat may be higher or lower than the period end market prices. Depreciation anddepletion is computed based upon the units-of-production method.

 

The Partnership will follow Statement of Financial AccountingStandards No. 143, “Accounting for Asset Retirement Obligations,” for allproductive oil and gas wells drilled by the Partnership. This statementrequires the Partnership to estimate the discounted fair value of assetretirement obligations (dismantlement and abandonment of oil and gas wells andsite restoration) 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 orhedging activities and will not enter into derivative financial instrumenttransactions for trading or other speculative purposes. Accordingly, thePartnership will be at risk for the volatility in commodity prices inherent inthe oil and gas industry, and the level of commodity prices will have a significantimpact on the Partnership’s results of operations.

 

**Liquidity and Capital Resources**

 

The Partnership’soffering period terminated September 20, 2004. The Partnership sold 475 unitsto outside investors at $20,000 per unit for a total of $9,500,000. Themanaging general partner has purchased 6.25129 units for $106,272 andcontributed an additional $1,246, representing its 1% of leasehold, drilling,and completion costs through September 30, 2004.   The Partnership had a receivable from ReefPartners at September 30, 2004 related to its capital contribution. The balancedue consisted of $318,728 for the purchase of Partnership units and $3,852 forthe obligation to pay 1% of all leasehold, drilling, and completion costs. ReefPartners paid the $318,728 during November 2004. This $322,580 affiliatereceivable is netted against total partners’ equity on the accompanying balancesheet.  In addition, the Partnership hadaccounts receivable from ten general and twenty-three limited partners relatedto their capital contributions as of September 30, 2004. The balance dueconsisted of $87,500 for the purchase of 4.375 general partner units and$2,055,668 for the purchase of 102.7834 limited partner units. Thesereceivables are netted against total partners' equity on the accompanyingbalance sheet. Reef Partners held this balance on the closing date. The balanceincludes $630,087 received from investors for investment in the Partnershipthrough IRA accounts, and $1,513,081 received from investors for investment inthe Partnership through non-IRA accounts. The $1,513,081 was transferred to thePartnership subsequent to September 30, 2004. However, an administrative requirement governing these particular IRAaccounts required Reef

 

11

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Partners to direct the $630,087to the authorized IRA custodians for these investors. After processing, the IRAcustodians direct the funds to the Partnership's escrow account. To date, thePartnership has received $224,087 from the various IRA custodians, and expectsto receive the remaining balance due during the fourth quarter of 2004.

 

Upon receipt of allfunds, the Partnership will have capital totaling $9,930,098. Syndication coststotal $1,375,000 and organization costs total $50,000, leaving available cashof $8,505,098 for Partnership activities. Of this amount, $496,250 has beenpaid to the managing general partner as reimbursement of the Challenger Mineralfees as described in the notes to the condensed financial statements. ThePartnership has committed its remaining funds to ten developmental projects, threeexploration projects, a royalty acquisition package, and general andadministrative costs during the drilling phase of Partnership operations.

 

As of September 30, 2004,none of the Partnership wells had completed drilling operations. Subsequent toSeptember 30, 2004, the Mobile Block 961 developmental project was determinedto be a dry hole. On October 18, 2004, the Bayou Carlin developmental well flowtested 6600 Mcf of gas and 360 Bbl of oil per day. The well is currently shut in pendingcompletion of a pipeline connection, with first sales expected in January 2005.

 

**Results of Operations**

 

Because the Partnershipwas formed on April 29, 2004, there is no comparable information for the threemonth period ended September 30, 2003.

 

The Partnership had netincome of $8,678 during the second quarter. The Partnership had $12,639 ofinterest income earned from investment of Partnership capital contributions,offset by $3,961 of general and administrative costs. The Partnership hasearned $17,043 of interest income since inception. These funds are being heldby the Partnership as a contingency during drilling operations. The Partnershipexpects general and administrative costs to increase as the Partnership beginsdrilling and operations. The primary components of general and administrativecosts will be third party legal and accounting costs associated with financialstatement preparation and required SEC filings, and direct and administrativecosts provided by Reef Exploration.

 

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

 

*InterestRate 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.

 

*CommodityPrice Risk*

 

The Partnership will notengage in 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, thePartnership will be at risk for the volatility in commodity prices inherent inthe oil and gas industry, and the level of commodity prices will have asignificant impact on the Partnership’s results of operations.

 

**Item 4.****    Controls and Procedures**

 

Based upon theirevaluation as of the end of the period covered by this Quarterly Report on Form10-Q, the principal executive officer and principal financial officer of themanaging general partner of the Partnership have concluded that the Partnership’sdisclosure controls and procedures (as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934) are effective. During our fiscal quarter ended September 30, 2004, no change occurredin our internal control over financial reporting that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

12

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**PART II – OTHERINFORMATION**

 

**Item 1.****    Legal Proceedings**

 

None

 

**Item 2.****    Changesin 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                                                                                                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                            |
| 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)    | Reports on Form 8-K                                                                                                                                                             |

 

None.

 

13

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|       |              | REEF GLOBAL ENERGY III,  L.P. |
|------------|-------------------|-------------------------------|
|       |              |                          |
|       |              | By:                           | Reef Partners LLC, |
|       |              |                          | Managing General  Partner |
|       |              |                          |
|       |              |                          |
| Dated:     | November 22, 2004 | By:                           | /s/ Michael J. Mauceli |   |
| ** ** | ** **        |                          | **Michael J. Mauceli** |
|       |              |                          | Manager and Member |
|       |              |                          | (*Principal  Executive Officer)* |
|       |              |                          |
|       |              |                          |
| Dated:     | November 22, 2004 | By:                           | /s/ Daniel C. Sibley |   |
| ** ** | ** **        |                          | **Daniel C. Sibley** |
|       |              |                          | Chief Financial Officer |
|       |              |                          | (*Principal  Financial and Accounting Officer)* |

 

14

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**ExhibitsIndex**

 
| 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. |

 

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