(12) Oil and Gas Producing Activities (Unaudited)

The Company’s oil and gas exploration and production activities are conducted in Texas and the south central region of the United States, primarily along the Gulf Coast of Texas and Louisiana.

Oil and Gas Producing Activities -

Total costs incurred in oil and gas exploration and development activities, all within the United States, were as follows (in thousands):

	For the year Ended December 31,
	2015		2014		2013
Property acquisition costs
Unproved	$	348	$	1,144	$	1,444
Proved		-		-		-
Exploration costs
Expensed		1,667		5,054		1,619
Capitalized		-		-		-
Development costs		370		1,745		10,160
Total costs incurred	$	2,385	$	7,943	$	13,223

The aggregate capitalized costs relative to oil and gas producing activities are as follows (in thousands):

	As of December 31,
	2015			2014
Unproved oil and gas properties	$	231		$	3,104
Proved oil and gas properties		76,886			85,557
		77,117			88,661
Accumulated depreciation, depletion
and amortization		(69,116	)		(64,682	)
Net capitalized cost	$	8,001		$	23,979

Estimated Oil and Natural Gas Reserves -

The following information regarding estimates of the Company’s proved oil and gas reserves, substantially all located onshore in Texas and Louisiana, is based on reports prepared on behalf of the Company by its independent petroleum engineers. Because oil and gas reserve estimates are inherently imprecise and require extensive judgments of reservoir engineering data, they are generally less precise than estimates made in conjunction with financial disclosures. The revisions of previous estimates as reflected in the table below result from changes in commodity pricing assumptions and from more precise engineering calculations based upon additional production histories and price changes.

Proved developed and undeveloped reserves are presented as follows (in thousands):

	Years Ended December 31,
	2015						2014						2013
	Natural						Natural						Natural
	Gas			Oil			Gas			Oil			Gas			Oil
	(Mcf’s)			(Bbls.)			(Mcf’s)			(Bbls.)			(Mcf’s)			(Bbls.)
Total proved reserves-
Beginning of year		5,611			318			6,286			368			8,837			307
Revisions of previous estimates		27			(2	)		724			6			(1,438	)		(17	)
Oil and gas reserves sold		-			(3	)		(558	)		(11	)		(28	)		-
Extensions, discoveries and
other reserve additions		86			13			292			82			523			180
Production		(889	)		(100	)		(1,133	)		(127	)		(1,608	)		(102	)
End of year		4,835			226			5,611			318			6,286			368

The components of proved oil and gas reserves for the three years ended December 31, 2015 is presented below. All reserves are in the United States (in thousands):

	Years Ended December 31,
	2015				2014				2013
	Natural				Natural				Natural
	Gas		Oil		Gas		Oil		Gas		Oil
	(Mcf’s)		(Bbls.)		(Mcf’s)		(Bbls.)		(Mcf’s)		(Bbls.)
Proved developed reserves		4,813		223		5,482		299		6,157		367
Proved undeveloped reserves		22		3		129		19		129		1
Total proved reserves		4,835		226		5,611		318		6,286		368

The Company has developed internal policies and controls for estimating and recording oil and gas reserve data. The estimation and recording of proved reserves is required to be in compliance with SEC definitions and guidance. The Company assigns responsibility for compliance in reserve bookings to the office of President of AREC. No portion of this individual’s compensation is directly dependent on the quantity of reserves booked. Reserve estimates are required to be made by qualified reserve estimators, as defined by Society of Petroleum Engineers’ Standards.

The Company employed third party petroleum consultant, Ryder Scott Company, to prepare its oil and gas reserve data estimates as of December 31, 2015, 2014 and 2013. The firm of Ryder Scott is well recognized within the industry for more than 50 years. As prescribed by the SEC, such proved reserves were estimated using 12-month average oil and gas prices, based on the first-day-of-the-month price for each month in the period, and year-end production and development costs for each of the years presented, all without escalation.

The process of estimating oil and gas reserves is complex and requires significant judgment. Uncertainties are inherent in estimating quantities of proved reserves, including many factors beyond the estimator’s control. Reserve engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation thereof. As a result, assessments by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Accordingly, oil and gas quantities ultimately recovered will vary from reserve estimates.

Standardized Measure of Discounted Future Net Cash Flows from Oil and Gas Operations and Changes Therein -

The standardized measure of discounted future net cash flows was determined based on the economic conditions in effect at the end of the years presented, except in those instances where fixed and determinable gas price escalations are included in contracts. The disclosures below do not purport to present the fair market value of the Company’s oil and gas reserves. An estimate of the fair market value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and risks inherent in reserve estimates. The standardized measure of discounted future net cash flows is presented as follows (in thousands):

	Years Ended December 31,
	2015			2014			2013
Future gross revenues	$	23,040		$	58,885		$	64,495
Future costs -
Lease operating expenses		(14,524	)		(16,421	)		(19,207	)
Development costs		(103	)		(1,068	)		(119	)
Future net cash flows before income taxes		8,413			41,396			45,169
Discount at 10% per annum		(2,987	)		(17,175	)		(17,729	)
Discounted future net cash flows
before income taxes		5,426			24,221			27,440
Future income taxes, net of discount at
10% per annum		(1,899	)		(8,477	)		(9,604	)
Standardized measure of discounted
future net cash flows	$	3,527		$	15,744		$	17,836

The estimated value of oil and natural gas reserves and future net revenues, derived therefrom are highly dependent upon oil and gas commodity price assumptions. For such estimates, the Company’s independent petroleum engineers assumed market prices as presented in the table below:

	Years ended December 31,
	2015		2014		2013
Market price
Crude oil per barrel	$	45.83	$	89.60	$	94.99
Natural gas per thousand cubic feet (mcf)	$	2.62	$	5.42	$	4.69

Such prices were based on the unweighted arithmetic average of the prices in effect on the first day of the month for each month of the respective twelve month periods as required by SEC regulations. The prices reported in the reserve disclosures for natural gas include the value of associated natural gas liquids. Oil and gas reserve values and future net cash flow estimates are very sensitive to pricing assumptions and will vary accordingly.

The effect of income taxes and discounting on the standardized measure of discounted future net cash flows is presented as follows (in thousands):

	Years ended December 31,
	2015			2014			2013
Future net cash flows before income taxes	$	8,413		$	41,396		$	45,169
Future income taxes		(2,945	)		(14,489	)		(15,809	)
Future net cash flows		5,468			26,907			29,360
Discount at 10% per annum		(1,941	)		(11,163	)		(11,524	)
Standardized measure of discounted
future net cash flows	$	3,527		$	15,744		$	17,836

The principal sources of changes in the standardized measure of discounted future net flows are as follows (in thousands):

	Years Ended December 31,
	2015			2014			2013
Beginning of year	$	15,744		$	17,836		$	16,355
Sale of oil and gas reserves		(54	)		(981	)		-
Net change in prices and production costs		(17,622	)		(72	)		9,341
New field discoveries and extensions, net of future
production costs		292			4,456			9,767
Sales of oil and gas produced, net of production costs		1,038			(6,590	)		(8,373	)
Net change due to revisions in quantity estimates		38			2,460			(3,624	)
Accretion of discount		1,116			1,773			1,797
Production rate changes and other		(3,603	)		(4,265	)		(6,629	)
Net change in income taxes		6,578			1,127			(798	)
End of year	$	3,527		$	15,744		$	17,836

Results of Operations for Oil and Gas Producing Activities -

The results of oil and gas producing activities, excluding corporate overhead and interest costs, are as follows (in thousands):

	Years Ended December 31,
	2015			2014			2013
Revenues	$	5,063		$	13,361		$	14,129
Costs and expenses -
Production		(7,022	)		(6,771	)		(5,756	)
Producing property impairment		(10,324	)		(4,001	)		(1,373	)
Exploration		(1,667	)		(5,054	)		(1,619	)
Oil and natural gas property sale gain		-			2,528			-
Depreciation, depletion and amortization		(5,066	)		(7,573	)		(7,494	)
Operating income (loss) before income taxes		(19,016	)		(7,510	)		(2,113	)
Income tax benefit		6,656			2,628			739
Operating income (loss)	$	(12,360	)	$	(4,882	)	$	(1,374	)