ITEM 1. BUSINESS.
Introduction
Reef Global Energy V, L.P. (the “Partnership”) is the fifth in a series of five limited partnerships formed to drill and own interests in oil and natural gas properties as part of the Reef Global Energy Ventures program (the “Program”). The Partnership was formed in the state of Nevada on December 21, 2004. The primary purposes of the Partnership are to generate revenue from the production of oil and gas, distribute cash to the partners, and provide tax benefits. Reef Oil & Gas Partners LLC (formerly known as Reef Partners LLC) (“Reef”) is the managing general partner of the Partnership.
The Partnership was formed to drill, complete and own oil and natural gas properties. These properties are located primarily onshore in the continental United States or in U.S. coastal waters in the Gulf of Mexico, and may also be located in such locations as Reef may deem advisable. The Partnership primarily acquires interests in oil and natural gas properties in which major or independent oil and gas companies also have interests. Reef believes that these acquisitions from major or independent oil and gas companies permit the Partnership to obtain the benefits of seismic, geological and geophysical exploration and initial drilling efforts conducted by such companies. To date, the Partnership has acquired interests in eleven prospects, all of which have other major and independent oil companies as partners. Reef purchased additional interests that have been assigned to other Partnerships in the Program as well private drilling partnerships managed by Reef in ten of these prospects. Reef Exploration Inc. (“REI”), an affiliate of Reef, will serve as operator of the wells to be drilled on these ten prospects. As of the date of this report, the Partnership has participated in the drilling of three wells. The first well was an exploratory well that is currently being completed. One exploratory well has been plugged and abandoned. One development well has been drilled and is awaiting completion. Five wells are currently drilling, and three wells will be drilled later this year. The Partnership anticipates purchasing an interest in one or two additional prospects during 2005. More detailed information concerning these projects can be found in “Item 2
ITEM 2. PROPERTIES.
Drilling Activities and Productive Wells
As of December 31, 2004, the Partnership had committed funds to eleven projects, one of which was drilling. The Partnership had no reserves as of that date. The Partnership commenced drilling in December 2004 and to date has drilled three wells and has five additional wells currently drilling. Of the three wells that have completed drilling, two are expected to be productive wells and one was a dry hole. None of these drilled wells is currently producing oil and gas. The Partnership expects to commit additional funds during 2005 to one or two additional projects. Reef anticipates that drilling activity will be substantially completed by December 31, 2005.
A “productive well” is a well producing or capable of producing oil and gas in commercial quantities.
The primary focuses of the Partnership’s operations are onshore in Texas and Louisiana and offshore in U.S. coastal waters of the Gulf of Mexico. However, there are no restrictions regarding project locations, and the Partnership expects to commit funds to one or two additional projects during 2005. The table below provides information concerning properties currently owned by or held by Reef on behalf of the Partnership as of May 10, 2005.
Title to Properties
The Partnership’s interests in producing and non-producing acreage are in the form of assigned direct interests in leases held by the Partnership or by Reef on behalf of the Partnership. Such properties are subject to customary royalty interests and could be subject to liens incident to operating agreements, liens for current taxes and overriding royalty interests and other burdens. The Partnership believes that none of these burdens materially interfere with the use of such properties in the operation of the Partnership’s business and that satisfactory title to all of its leases is currently held by the Partnership or by Reef on behalf of the Partnership.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Partnership is not, and has not been, a party to any legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
At March 31, 2005, the Partnership had one managing general partner, 44 limited partners, and 235 additional general partners. Reef holds a total of 18.922962 general partner units and the general and limited investor
partners hold 70.50 general partner units and 289.036272 limited partner units. No established trading market exists for the units.
Limited and additional general partnership interests are transferable; however, no assignee of a unit in the Partnership can become a substituted partner without the written consent of both the transferor and Reef.
The Partnership did not repurchase any units in 2004 and has not adopted a unit repurchase program.
Use of Proceeds
In connection with the Registration Statement filed on form S-1 (No. 333-93399) and declared effective May 31, 2001, Reef filed a post-effective amendment to the Registration Statement on behalf of the Program on September 14, 2001. On January 10, 2002 Reef filed a final prospectus and commenced the offering of units in the Program. All sales of Partnership units were made through the Program’s dealer-manager, Reef Securities, Inc., and a number of soliciting dealers. The Program filed a prospectus supplement describing Reef Global Energy V, L.P. on December 3, 2004 and commenced offering units. The offering period ended on December 31, 2004. Under the terms of the offering, a minimum of 50 Partnership units at a price of $20,000 per unit were required to be sold in order to form the Partnership. The maximum Partnership units offered were 375 units of limited partner interest and 125 units of general partner interest.
The Partnership sold 378.459234 units of partnership interest, consisting of 289.036272 units of limited partner interest and 89.422962 units of additional general partner interest. Reef purchased 18.922962 general partner units, equaling 5% of the total Partnership units sold. Total offering proceeds were $7,512,416.
All units except those purchased by Reef paid a 15% management fee to Reef to pay for the Partnership organization and offering costs, including sales commissions. These costs totaled $1,078,609, leaving capital contributions of $6,433,807 available for Partnership oil & gas operations. As of December 31, 2004, $412,814 of the management fee owed to Reef was unpaid. This amount is shown in accounts payable to affiliates in the accompanying financial statements. As of December 31, 2004 the Partnership had not expended any funds on oil and gas operations, and had made prepayments of intangible drilling costs totaling approximately $2.3 million. The Partnership intends to utilize all available Partnership capital during 2005.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data presented below has been derived from the audited financial statements of the Partnership.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Reef Global Energy V, L.P. is a Nevada limited partnership formed to explore, develop, acquire and produce crude oil, natural gas, and natural gas liquids for the benefit of its investor partners. The Partnership’s primary purposes are to generate revenues from the production of oil and gas, distribute cash flow to investors, and provide tax benefits to investors. While the majority of the Partnership’s proceeds have been used to purchase prospects upon which the Partnership will conduct drilling operations, a small portion of capital may be used to purchase existing reserves.
The Partnership currently operates solely in the United States, although there are no restrictions regarding prospect locations. REI, an affiliate of the managing general partner, has expertise and has drilled primarily in Texas and Louisiana since its inception in 1987, and the Partnership has acquired properties primarily in these areas to date. Many of the projects taken in Texas and Louisiana offer the potential for both natural gas and condensate production, and the quality of both the natural gas and condensate often bring premium prices. The Partnership has focused more heavily on natural gas than oil prospects, due to its belief that costs of production are generally lower for natural gas and that the price of natural gas is less influenced than the price of oil by foreign factors such as the Organization of Petroleum Exporting Countries (OPEC) production quotas. In addition, the areas in which the Partnership will focus its drilling have a highly developed pipeline system and a highly competitive market for sale of the Partnership’s production.
Through its agreements with CMI, the Partnership hopes to benefit from the expertise of larger oil and gas industry participants in other areas such as the Gulf of Mexico. The Partnership will actively seek participation in prospects and projects reviewed and developed by both CMI and other independent and major oil and gas industry participants. Such participation will allow the Partnership to benefit from the expertise of these entities and increase the diversity and therefore lessen the overall drilling risk to the investors.
The Partnership will not operate in any other industry segment. Should any prospect in which the Partnership has an interest be determined to warrant additional development activity, the Partnership may call for voluntary additional partner assessments of up to $20,000 per unit. The Partnership is not allowed to borrow funds during the drilling phase of Partnership operations, and therefore will not be impacted by interest rate fluctuations. In addition, the Partnership has not engaged in commodity futures trading or hedging activities, and therefore is subject to commodity price risk. See “Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
The partnership agreement prohibits bank borrowings during the Partnership’s drilling phase of operations. However, to the extent that changes in interest rates affect general economic conditions, the partnership will be affected by such changes.
Commodity Price Risk
The Partnership has not engaged in commodity futures trading or hedging activities and has not entered into derivative financial instrument transactions for trading or other speculative purposes. The Partnership expects to sell a vast majority of its production from successful oil and gas wells on a month-to-month basis at current spot market prices. Accordingly, the Partnership is at risk for the volatility in commodity prices inherent in the oil and gas industry, and the level of commodity prices will have a significant impact on the Partnership’s results of operations.
Exchange Rate Risk
The Partnership currently has no income from foreign sources or operations in foreign countries that would subject it to currency exchange rate risks.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership’s financial statements and supplementary data are set forth in a separate section to this Report, beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On December 22, 2004 (the “Effective Date”), Reef, as the managing general partner of the Partnership, dismissed Ernst & Young LLP (“EY”) as the independent registered public accounting firm of Reef and of all five partnerships formed as part of the Program. On the Effective Date, the manager of Reef approved the engagement of BDO Seidman LLP (“BDO”) as independent auditors for Reef and each of the five Program partnerships for the period ending December 31, 2004. BDO will act as certifying accountant on all future reports of the Partnership. The decision to dismiss EY and appoint BDO was made by Reef.
EY’s reports on the financial statements of Reef for the past two fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with the audits of Reef and the previous partnerships formed as part of the Program for the fiscal years ended December 31, 2002 and 2003 and in the subsequent interim periods, there were no disagreements
between Reef, the Program partnerships, and EY on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of EY would have caused them to make reference to the matter in their report.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As the Managing General Partner of the Partnership, Reef maintains a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. At December 31, 2004, Reef’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures with the assistance and participation of other members of management. Based upon that evaluation, Reef’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Partnership is required to disclose in the reports it files under the Securities Exchange Act of 1934 within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls
There have been no significant changes in Reef’s internal controls or in other factors which could significantly affect internal controls subsequent to the date Reef carried out its evaluation.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Partnership has no directors or executive officers; it is managed by Reef Oil & Gas Partners LLC.
Reef Oil & Gas Partners LLC
The Manager, officers and key personnel of the managing general partner, their ages, current positions with the managing general partner and/or REI, and certain additional information are set forth below:
Michael J. Mauceli is the Manager and a member of Reef, as well as the Chief Executive Officer and a Director of REI. Mr. Mauceli has held these positions with the managing general partner since its formation in February 1999. He has served in these positions with REI since 1987. Since its inception, Mr. Mauceli has also served as manager of Reef Operating Company LLC, a Nevada limited liability company formed in December 2001 by Reef and REI. Mr. Mauceli attended the University of Mississippi where he majored in business management and marketing as well as the University of Houston where he received his Commercial Real Estate License. He entered the oil and gas business in 1976 when he joined Tenneco Oil & Gas Company. Mr. Mauceli moved to Dallas in 1979, where he was independently
employed by several exploration and development firms in planning exploration and marketing feasibility of privately sponsored drilling programs.
H. Walt Dunagin is Vice President-Land Manager of REI. He has held this position since 1990. He is a 1979 graduate of the University of Mississippi. Mr. Dunagin began his career doing independent land work for Exxon Co. U.S.A. Since that time he has performed land work in Alabama, Mississippi, Louisiana, North Dakota, Montana, Oklahoma and Texas. For six years prior to joining REI, he was directly involved in the sale of producing properties for Mobil, Texaco, Oryx Energy and American Exploration Company. He became a Certified Professional Landman in August 1986 and is a member of the American Association of Petroleum Landmen, Dallas Association of Petroleum Landmen and the International Association of Petroleum Negotiators.
Dwight E. Roberts is Vice President-Exploration at REI. He was appointed to this position in 2003. He is a graduate of Eastern New Mexico University with a Bachelor’s degree in geology and did post-graduate work at the Colorado School of Mines in 1975-1976. Mr. Roberts has worked for several oil and gas companies as a geologist developing exploration prospects, and was also self-employed as a geologist from 1992-1997, generating exploration and exploitation prospects for clients as well as performing studies for well re-completions and infield development projects for clients. From 1997 to June 1999, Mr. Roberts was a senior staff geologist at Pioneer Natural Resources USA, Inc. From July 1999 to March 2002, he was the Manager of Geology/Geophysics at Prize Energy Corporation, and supervised the company’s exploration activity, which was concentrated in South Texas, the Texas Gulf Coast, Louisiana and the Permian Basin. He is a member of the American Association of Petroleum Geologists (AAPG) and the Society of Petroleum Engineers (SPE).
John M. Dees, PE is Vice President-Operations and Engineering of REI. From 1994 to 2004, Mr. Dees served as a petroleum engineering consultant with Dees Well Completions. Mr. Dees has over 30 years of industry experience. Mr. Dees has conducted well completion engineering and production operations for REI since September 2003, when he joined REI in a consulting capacity. He holds a Bachelor of Science degree in Chemistry from Southwestern Oklahoma State University and a Masters in Petroleum Engineering from the University of Oklahoma. Prior to consulting for Reef, Mr. Dees worked for Halliburton Services in fracturing fluids, fracturing research engineering, and field operations engineering, as well as for numerous oil and gas companies, including Getty Oil, Sun E&P, and Oryx Energy. Mr. Dees has published several peer-reviewed technical papers and was the inventor of several U.S. and international patents on extreme overbalancing perforating stimulation and resin formation sand control. Mr. Dees is a member of the American Chemical Society and the Society of Petroleum Engineers.
Laura S. Klein is Vice President-Drilling at REI, a position she has held since joining the company early in 2000. She is a 1981 graduate of the Colorado School of Mines with a Bachelor’s degree in Petroleum Engineering. Since receiving her degree, Ms. Klein has accumulated 24 years of experience as a drilling/completion engineer and as a worldwide rig operations supervisor. From 1996 until joining REI, she held the position of Senior Staff Drilling Engineer with Mobil’s International Drilling Services Unit and oversaw projects in Russia, China, Italy and the North Sea. Ms. Klein also managed recruiting and training for Mobil’s worldwide drilling organization. Ms. Klein’s professional affiliations include the Society of Petroleum Engineers, the American Association of Drilling Engineers and the American Society of Training and Development.
Daniel C. Sibley is Chief Financial Officer of Reef and REI. He became Chief Financial Officer of Reef in December 1999 and REI in 1998. From 1980 to 1998, Mr. Sibley was involved in the private practice of law. He received a B.B.A. in accounting from the University of North Texas in 1973, a law degree (J.D.) from the University of Texas in 1977, and a Master of Laws-Taxation degree (L.L.M.) from Southern Methodist University in 1984.
David M. Tierney has been employed by REI since March 2001, and is the Controller of the Reef Global Energy Ventures partnerships. Mr. Tierney received a Bachelor’s degree from Davidson College in 1974, a Masters of Business Administration (MBA) from Tulane University in 1976, and is a Texas Certified Public Accountant. Mr. Tierney has worked in public accounting, and has worked in the oil and gas industry since 1979. From 1992 through 2000 he served as controller/treasurer of an independent oil and gas exploration company.
Audit Committee and Nominating Committee
Because the Partnership has no directors, it does not have an audit committee, an audit committee financial expert or a nominating committee.
Code of Ethics
Because the Partnership has no employees, it does not have a code of ethics. Employees of the Partnership’s managing general partner, Reef, must comply with Reef’s Code of Ethics, a copy of which will be provided to investor partners, without charge, upon request made to Reef Oil and Gas Partners LLC, 1901 N. Central Expressway, Suite 300, Richardson, Texas 75080, Attention: Daniel C. Sibley.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the items of compensation to be received by Reef as the managing general partner from the Partnership.
Reef’s “partnership interest,” as described in the table above, refers only to its interest as managing general partner and does not include the interest Reef has as the result of its purchase of units in the Partnership, nor the 1% interest Reef has as the result of its payment of 1% of all lease costs, intangible drilling and development costs, and well completion costs. Reef has purchased 5% of the Partnership’s units, which along with the interests Reef received as managing general partner of the Partnership results in a total interest in the Partnership of 15.45%.
Reef received a management fee of $1,078,609, which is 15% of the Partnership subscriptions exclusive of the units purchased by Reef. From this amount Reef paid all of the Partnership’s organization and offering costs, including sales commissions. The Partnership recorded $1,028,609 of this payment as syndication costs and $50,000 as organization costs.
Reef will be reimbursed for direct costs and all documented out-of-pocket expenses incurred on behalf of the Partnership, including administrative costs. Reimbursable costs incurred by Reef for the period ending December 31, 2004 were $4,499, primarily for technical and administrative personnel.
Operators fees will be payable only if one of Reef’s affiliates serves as operator of a Partnership prospect. Under such circumstances, such affiliate will receive fees at the competitive rate in the area during the drilling and production phase of operations. Often these are charged as a monthly fee per well. At December 31, 2004, there was one Partnership well being drilled that is operated by REI. The Partnership has capitalized as drilling costs $592 of operator fees incurred in connection with the drilling of this well. It is anticipated that REI will serve as operator of ten of the Partnership’s prospects.
As the managing general partner, Reef or one of its affiliates may provide oil field or other services, equipment or supplies to the Partnership. If Reef or one of its affiliates provides such services, equipment or supplies as a part of its ordinary business, then the compensation, price or rental for such services, equipment and supplies provided to the Partnership will be at prices competitive with those charged by others in the geographical area of
operations that reasonably could be available to the Partnership. If Reef or one of its affiliates is not engaged in the business as set forth above, then the compensation, price or rental will be the cost of the services, equipment or supplies to such entity, or the competitive rate that could be obtained in the area, whichever is less. Any such services for which Reef or one of its affiliates is to receive compensation will be embodied in a written contract that precisely describes the services to be rendered and all compensation to be paid. During the period ended December 31, 2004, there were no such services rendered to the Partnership by Reef or any of its affiliates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 31, 2005 concerning all persons known by Reef to own beneficially more than 5% of the Partnership’s units. Unless expressly indicated otherwise, each partner exercises sole voting and investment power with respect to the shares beneficially owned.
Reef has calculated the percentages of units beneficially owned based on 378.459234 units of Partnership interest outstanding at March 31, 2005.
(1) Reef Oil & Gas Partners LLC’s address is 1901 N. Central Expressway, Suite 300, Richardson, Texas 75080.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reef is the managing general partner of the Partnership. Along with its affiliates, Reef has entered into agreements with, and received compensation from, the Partnership for services it performs for the Partnership. See Item 11. - Executive Compensation.
In addition, the Partnership paid $237,961 to Reef as reimbursement for its pro-rata share of the Challenger Fees paid by Reef, and purchased two properties from Reef for approximately $2,000.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees:
The Partnership reached minimum subscription levels on December 13, 2004 and was formed December 21, 2004. The Partnership expects to incur professional fees totaling approximately $35,000 in connection with the audit of the 2004 financial statements. There have been no audit fees incurred by the Partnership for the last two fiscal years since the Partnership was not yet formed.
Audit Related Fees:
The Partnership reached minimum subscription levels on December 13, 2004 and was formed December 21, 2004. There have been no audit related fees incurred by the Partnership for the last two fiscal years since the Partnership was not yet formed.
Tax Fees:
The Partnership reached minimum subscription levels on December 13, 2004 and was formed December 21, 2004. There have been no tax fees incurred by the Partnership for the last two fiscal years since the Partnership was not yet formed.
All Other Fees:
The Partnership reached minimum subscription levels on December 13, 2004 and was formed December 21, 2004. There have been no other fees incurred by the Partnership for the last two fiscal years since the Partnership was not yet formed.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheet
Statement of Operations
Statement of Partnership Equity
Statement of Cash Flows
Notes to Financial Statements
2. Financial Statement Schedules
None
3. Exhibits.
A list of the exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously filed or furnished by us) is provided in the Exhibit Index beginning on 27 of this report. Those exhibits incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. Otherwise, the exhibits are filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ MICHAEL J. MAUCELI
Manager and Member (Principal Executive Officer)
May 13, 2005
Michael J. Mauceli
/s/ DANIEL C. SIBLEY
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
May 13, 2005
Daniel C. Sibley
Reef Global Energy V, L.P.
Financial Statements
For the Period from Inception (December 21, 2004) to December 31, 2004
Contents
Report of Independent Registered Public Accounting Firm
Audited Financial Statements
Balance Sheet
Statement of Operations
Statement of Partnership Equity
Statement of Cash Flows
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
The Partners
Reef Global Energy V, L.P.
We have audited the accompanying balance sheet of Reef Global Energy V, L.P. as of December 31, 2004, and the related statements of operations, partnership equity, and cash flows for the period from inception (December 21, 2004) to December 31, 2004. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Reef Global Energy V, L.P. at December 31, 2004, and the results of its operations and its cash flows for the period from inception (December 21, 2004) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
BDO Seidman, LLP
Dallas TX
April 25, 2005
Reef Global Energy V, L.P.
Balance Sheet
See accompanying notes to financial statements.
Reef Global Energy V, L.P.
Statement of Operations
See accompanying notes to financial statements.
Reef Global Energy V, L.P.
Statement of Partnership Equity
For the Period from Inception (December 21, 2004)
To December 31, 2004
See accompanying notes to financial statements.
Reef Global Energy V, L.P.
Statement of Cash Flows
See accompanying notes to financial statements.
Reef Global Energy V, L.P.
Notes to Financial Statements
December 31, 2004
1. Organization and Basis of Presentation
Reef Global Energy V, L.P. (the Partnership) is the fifth in a series of five Nevada limited partnerships comprising a program called Reef Global Energy Ventures (the Program), pursuant to an S-1 Registration Statement declared effective by the Securities and Exchange Commission (the SEC) on May 31, 2001. In order to be formed, each partnership is required to a sell a minimum of 50 partnership units at $20,000 per unit, including units purchased by the managing general partner. A maximum of 500 units will be sold in each partnership, consisting of a maximum of 375 limited partner units and a maximum of 125 general partner units. Investor funds are held in escrow and are subject to reimbursement with interest if the minimum number of units is not sold. The Program filed a prospectus supplement with the SEC on December 3, 2004 describing the Partnership, and commenced offering units in the Partnership. Upon reaching the minimum subscription level, the Partnership was formed on December 21, 2004.
The Partnership is a Nevada limited partnership formed under the Nevada Revised Limited Partnership Act. Reef Oil & Gas Partners LLC (formerly known as Reef Partners LLC) (Reef) serves as the Partnership’s managing general partner. Partnership interests are held by the managing general partner and investor partners who are general and limited partners (investor partners). The Partnership acquires leases and drills oil and gas wells located primarily onshore in the continental United States and in U.S. coastal waters in the Gulf of Mexico. The Partnership primarily purchases working interests in exploratory and developmental drilling prospects in which major or independent oil companies also have interests. The Partnership generally purchases less than a majority interest in the properties acquired. The Partnership began drilling activities during December 2004.
During the year following completion of the drilling phase of the Partnership, all additional general partner units purchased by investors will be converted into limited partner units. Limited partners do not have any rights to convert their units to general partner units.
Under the terms of the partnership agreement, participation in distributions, profits, losses, costs and revenues is as follows:
The managing general partner was not allocated any portion of the interest income during the period from inception (December 21, 2004) to December 31, 2004, as its capital contribution was not received as of December 31, 2004.
2. Summary of Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with maturity dates of no more than three months from the purchase date to be cash equivalents. Cash and cash equivalents consist of demand deposits and money market investments invested with a major national bank. The carrying value of the Partnership’s cash equivalents approximates fair value.
Risks and Uncertainties
Historically, the oil and gas market has experienced significant price fluctuations. Prices are significantly impacted by local weather, supply in the area, availability and price of competitive fuels, seasonal variations in local demand, limited transportation capacity to other regions, and the worldwide supply and demand balance for crude oil.
The Partnership has not engaged in commodity futures trading or hedging activities and has not entered into derivative financial instrument transactions for trading or other speculative purposes. Accordingly, the Partnership is at risk for the volatility in commodity prices inherent in the oil and gas industry, and the level of commodity prices will have a significant impact on the Partnership’s results of operations.
Organization and Syndication Costs
Organization and syndication costs total 15% of investor capital contributions, except for units purchased by the managing general partner, which are purchased net of the 15% cost. Partnership organization costs totaling $50,000 have been expensed in the financial statements. Syndication costs represent costs incurred in conjunction with the offering of partnership units. These costs, totaling $1,028,609, are recorded as a reduction of the proceeds of the offering.
Oil and Gas Properties
The Partnership will follow the full cost method of accounting for crude oil and natural gas properties. Under this method, all direct costs and certain indirect costs associated with acquisition of properties and successful as well as unsuccessful exploration and development activities are capitalized. Depreciation, depletion, and amortization of capitalized crude oil and
natural gas properties and estimated future development costs, excluding unproved properties, are based on the unit-of-production method using proved reserves. Proved gas reserves are converted to equivalent barrels at a rate of 6 Mcf to 1 Bbl. Net capitalized costs of crude oil and natural gas properties, as adjusted for asset retirement obligations, are limited to the lower of unamortized cost or the cost ceiling, defined as the sum of the present value of estimated future net revenues from proved reserves based on un-escalated prices discounted at 10 percent, plus the cost of properties not being amortized, if any, plus the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any. Excess costs are charged to property impairment expense. No gain or loss is recognized upon sale or disposition of crude oil and natural gas properties, except in unusual circumstances. The Partnership held no productive oil and gas assets at December 31, 2004 and recognized no property impairment.
Restoration, Removal, and Environmental Liabilities
The Partnership is subject to extensive Federal, state and local environmental laws and regulations. These laws regulate the discharge of materials into the environment and may require the Partnership to remove or mitigate the environmental effects of the disposal or release of petroleum substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed.
Liabilities for expenditures of a noncapital nature are recorded when environmental assessments and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted values unless the timing of cash payments for the liability or component is fixed or reliably determinable.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, “Accounting for Retirement Obligations” (SFAS 143). SFAS 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset’s retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the related asset. SFAS 143 is effective for the Partnership as of its inception date. As of December 31, 2004 the Partnership had no productive long-lived assets and therefore had no asset retirement obligations.
Recognition of Revenue
The Partnership expects to enter into sales contracts for disposition of its share of oil and gas production from productive wells. Revenues are recognized based upon the Partnership’s share of metered volumes delivered to its purchasers each month.
Gas imbalances sometimes occur when certain working interest parties do not take their entitled share of gas production. The Partnership utilizes the sales method of accounting for recording imbalances. Under this method, the Partnership records as revenue all gas delivered for its account. Any significant over or under balanced gas positions will be recorded in the financial statements. As of December 31, 2004, the Partnership had no oil and gas production, and, therefore, had no gas imbalances.
Income Taxes
The Partnership’s net income or loss flows directly through to its partners, who are responsible for the payment of Federal taxes on their respective share of any income or loss. Therefore, there is no provision for federal income taxes in the accompanying financial statements.
The book basis of the partnership’s assets exceeds the tax basis of the assets by approximately $1.56 million at December 31, 2004, primarily due to the deduction of intangible drilling costs and prepaid drilling costs for tax purposes.
New Accounting Pronouncements
In September 2004, the Securities and Exchange Commission issued “Staff Accounting Bulletin No. 106” (SAB No. 106). SAB No. 106 applies to entities using the full cost method of accounting for crude oil and natural gas properties. SAB No. 106 affects the way in which entities calculate their full cost ceiling limitation (including asset retirement cost related to proved developed properties in the calculation of the ceiling) and the way entities calculate depletion on oil and gas properties (only asset retirement cost for new re-completions and new wells will be included in future development costs in calculating depletion rates). The Partnership does not anticipate that SAB No. 106 will have a significant impact on its financial position or results of operations.
3. Transactions with Affiliates
The Partnership has no employees. Reef Exploration, Inc. (REI), an affiliate of Reef, employs a staff including geologists, petroleum engineers, landmen, and accounting personnel who administer all of the Partnership’s operations. The Partnership reimburses REI for direct and administrative services at cost. During the period from inception (December 21, 2004) to December 31, 2004, the partnership incurred technical services and administrative costs totaling $4,499. Of this amount, $3,323 represents technical services capitalized as project costs, and $1,176 represents administrative costs included as general and administrative expenses.
The Partnership has a receivable from Reef at December 31, 2004 related to its capital contribution. The balance due consists of $321,690 for the purchase of 18.922962 Partnership units. Reef paid the $321,690 during February 2005.
Accounts payable to affiliates totaled $969,252 at December 31, 2004. The balance includes $237,961 due Reef for the Challenger Fee described below, $412,814 due Reef for the unpaid portion of the 15% management fee paid for organization and syndication costs, including sales commissions (see note 7), as well $36,158 due as reimbursement for property acquisition costs paid by Reef. The balance also includes $282,319 due REI for technical and administrative services provided by REI and for joint interest billings on properties currently drilling and operated by REI. All payables to affiliates at December 31, 2004 were paid in full during the first quarter of 2005.
If an affiliate of Reef serves as operator of a Partnership prospect, then operator fees will be payable to the affiliate. Under such circumstances, such affiliate will receive fees at the competitive rate in the area during the drilling and production phase of operations. Often these are charged as a monthly fee per well as agreed to in an operating agreement signed by the Partnership as well as outside third party working interests in the well. At December 31, 2004, there is one Partnership well being drilled which is operated by REI. The Partnership has capitalized as drilling costs $592 of operator fees incurred in connection with the drilling of this well.
As the managing general partner, Reef or one of its affiliates may provide oil field or other services, equipment or supplies to the Partnership. If Reef or one of its affiliates provides such services, equipment or supplies as part of its ordinary business, the compensation, price or rental for such services, equipment and supplies provided to the Partnership will be at prices competitive with those charged by others in the geographical area of operations that reasonably could be available to the Partnership. If Reef or one of its affiliates is not engaged in the business as set forth above, the compensation, price or rental will be the cost of the services, equipment or supplies to each entity, or the competitive rate that could be obtained in the area, whichever is less. Any such services, equipment or supplies for which Reef or one of its affiliates is to receive compensation will be embodied in a written contract that precisely describes the services, equipment or supplies to be rendered and all compensation to be paid. During the period from inception (December 21, 2004) to December 31, 2004, there were no such services, equipment or supplies rendered to the Partnership by Reef or any of its affiliates.
The Partnership has acquired two properties from Reef, at cost, for approximately $2,000. Properties transferred to the Partnership from Reef are transferred at Reef’s cost, unless Reef has reason to believe that cost is marginally higher than the current fair market value, in which case the properties are transferred to the Partnership at their fair market value.
Reef has entered into two agreements (the CMI Agreements) with Challenger Minerals, Inc. (CMI), a subsidiary of Global Santa Fe Corporation and a screener of oil and gas prospects in the Gulf of Mexico and North Sea regions. The CMI Agreements allow Reef the opportunity to review and selectively participate in exploratory and developmental prospects either originated or previewed by CMI. Reef pays CMI for the geological and geophysical services provided by CMI under the CMI Agreements.
Prospects approved for acquisition by Reef under the CMI Agreements are assigned to this Partnership as well as other limited partnerships formed as part of the Program. Each partnership formed as a part of the Program pays Reef a single payment as reimbursement, on a pro rata basis, of the fees paid by Reef to CMI under the CMI agreements. This payment is based upon
total Partnership capital contributions. The amount of the fees to be reimbursed to Reef by the Partnership, based upon total capital contributions, is $237,961. This amount has been capitalized as geological and geophysical costs in accordance with the full cost method of accounting for oil and gas properties.
4. Prepaid Drilling Costs
At December 31, 2004, the Partnership has prepaid $2,315,561 in connection with intangible drilling costs to be incurred on wells in which the Partnership has a working interest and which will be drilled during the first quarter of 2005.
5. Major Customers
The Partnership will sell crude oil and natural gas on credit terms to refiners, pipelines, marketers, and other users of petroleum commodities. Revenues will be received directly from these parties or, in certain circumstances, paid to the operator of the property who disburses to the Partnership its percentage share of the revenues. As of December 31, 2004, the Partnership had no oil and gas production and, therefore, had no customers.
6. Commitments and Contingencies
The Partnership is not currently involved in any legal proceedings.
7. Partnership Equity
Sales of Partnership units began on December 3, 2004. Proceeds received were placed into an interest bearing escrow account until the Partnership reached the minimum subscription level of 50 units. The Partnership was formed on December 21, 2004, and the sale of Partnership units was closed on December 31, 2004. The Partnership raised $7,190,726 from the sale of 359.536 Partnership units to investor partners. Reef purchased 18.923 units (5%) for $321,690. The units purchased by Reef were paid for in February 2005. Reef will also contribute 1% of all leasehold, drilling, and completion costs when incurred, in addition to paying its pro rata share (4.95%) of the leasehold, drilling, and completion costs paid by the Partnership.
All units except those purchased by Reef paid a 15% management fee to Reef to pay for Partnership organization and syndication costs, including sales commissions. These costs totaled $1,078,609, leaving net capital contributions of $6,433,807 available for Partnership oil and gas activities. Of the $1,078,609, syndication costs were $1,028,609 and organization costs were $50,000. Under Nevada law, partners purchasing general partner units have unlimited liability for obligations and liabilities which arise from Partnership operations. Limited partners have limited liability that cannot exceed the amount of their Partnership capital contribution.
Reef will exclusively manage and control all aspects of the business of the Partnership. The Partnership agreement prohibits participation by investor partners in the Partnership’s day-to-day business decisions.
Information regarding the number of units outstanding and the net loss per type of Partnership unit for the period from inception (December 21, 2004) to December 31, 2004 is detailed below:
8. Partnership Projects
At December 31, 2004, the Partnership had committed funds to four exploratory and seven developmental projects. The Partnership will commit additional funds to projects during 2005. The eleven projects to which the fund has committed drilling monies are all expected to be drilled during 2005.
REI has been named operator of ten of the eleven wells in which the Partnership will participate. One of the wells operated by REI was drilling at year end, and six wells operated by REI and one outside operated well have begun drilling operations subsequent to year end. Other partnerships in the Program also own working interests in all of the wells. In certain instances, private drilling partnerships managed by Reef also own interests in these wells.
9. Subsequent Events (Unaudited)
Subsequent to December 31, 2004, the Partnership completed the drilling of two of the exploratory projects and one of the developmental projects. One of the exploratory projects was a dry hole and has been plugged and abandoned. Casing has been set and completion operations are in progress on the second exploratory project. Casing has been set but completion operations have not yet begun on the developmental project.
The partnership currently has two exploratory projects and three developmental projects drilling. Three other developmental projects are scheduled for drilling later this year.
10. Supplemental Information on Oil & Gas Exploration and Production Activities (Unaudited)
Capitalized Costs
The capitalized costs of oil and gas properties are as follows:
Costs Incurred
Costs incurred in property acquisition, exploration, development, and production activities consisted of the following:
Results of Operations
The Partnership began drilling activities during December 2004 and has no crude oil and natural gas sales or production activities to report for the period from inception (December 21, 2004) to December 31, 2004.
Oil and Gas Reserves
At December 31, 2004, the Partnership had no crude oil and natural gas reserves.
Standardized Measure of Discounted Cash Flows
At December 31, 2004, the Partnership had no crude oil and natural gas reserves and, therefore, had no standardized measure of discounted cash flows related to proved reserves.
EXHIBIT INDEX
4.1
Form of Limited Partnership Agreement (incorporated by reference to Exhibit 3.1 to Reef Global Energy Ventures’ Registration Statement on Form S-1, File No. 333-93399).
10.1
Letter Agreement, dated November 7, 2001, by and between Reef Partners LLC and Challenger Minerals Inc. (incorporated by reference to Exhibit 10.2 of the Report on Form 10-K of Reef Global Energy Ventures as filed with the Commission on March 5, 2002).
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350.