(11) 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,
	2014		2013		2012
Property acquisition costs
Unproved	$	1,144	$	1,444	$	1,965
Proved		-		-		-
Exploration costs
Expensed		5,054		1,619		1,151
Capitalized		-		-		-
Development costs		1,745		10,160		20,219
Total costs incurred	$	7,943	$	13,223	$	23,335

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

	As of December 31,
	2014			2013
Unproved oil and gas properties	$	3,104		$	7,578
Proved oil and gas properties		85,557			91,369
		88,661			98,947
Accumulated depreciation, depletion
and amortization		(64,682	)		(64,169	)
Net capitalized cost	$	23,979		$	34,778

Estimated Oil and Natural Gas Reserves -

The following information regarding estimates of the Company’s proved oil and gas reserves, all located in Texas and the south central region of the United States, 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,
	2014						2013						2012
	Natural						Natural						Natural
	Gas			Oil			Gas			Oil			Gas			Oil
	(Mcf’s)			(Bbls.)			(Mcf’s)			(Bbls.)			(Mcf’s)			(Bbls.)
Total proved reserves-
Beginning of year		6,286			368			8,837			307			9,661			292
Revisions of previous estimates		724			6			(1,438	)		(17	)		(507	)		29
Oil and gas reserves sold		(558	)		(11	)		(28	)		-			(104	)		(54	)
Extensions, discoveries and
other reserve additions		292			82			523			180			2,395			138
Production		(1,133	)		(127	)		(1,608	)		(102	)		(2,608	)		(98	)
End of year		5,611			318			6,286			368			8,837			307

The components of proved oil and gas reserves for the three years ended December 31, 2014 is presented below. All reserves are in the United States (in thousands):

	Years Ended December 31,
	2014				2013				2012
	Natural				Natural				Natural
	Gas		Oil		Gas		Oil		Gas		Oil
	(Mcf’s)		(Bbls.)		(Mcf’s)		(Bbls.)		(Mcf’s)		(Bbls.)
Proved developed reserves		5,482		299		6,157		367		8,708		306
Proved undeveloped reserves		129		19		129		1		129		1
Total proved reserves		5,611		318		6,286		368		8,837		307

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, 2014, 2013 and 2012. 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,
	2014			2013			2012
Future gross revenues	$	58,885		$	64,495		$	59,793
Future costs -
Lease operating expenses		(16,421	)		(19,207	)		(16,357	)
Development costs		(1,068	)		(119	)		(299	)
Future net cash flows before income taxes		41,396			45,169			43,137
Discount at 10% per annum		(17,175	)		(17,729	)		(17,976	)
Discounted future net cash flows
before income taxes		24,221			27,440			25,161
Future income taxes, net of discount at
10% per annum		(8,477	)		(9,604	)		(8,806	)
Standardized measure of discounted
future net cash flows	$	15,744		$	17,836		$	16,355

The reserve estimates provided at December 31, 2014, 2013 and 2012 are based on aggregate prices of $89.60, $94.99 and $93.85 per barrel for crude oil and $5.42, $4.69 and $3.51 per mcf for natural gas, respectively. 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. Hydrocarbon prices declined significantly during the fourth quarter of 2014. Realized domestic crude oil prices averaged in the $54 per barrel range during the month of December with additional price declines continuing into 2015.

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,
	2014			2013			2012
Future net cash flows before income taxes	$	41,396		$	45,169		$	43,137
Future income taxes		(14,489	)		(15,809	)		(15,098	)
Future net cash flows		26,907			29,360			28,039
Discount at 10% per annum		(11,163	)		(11,524	)		(11,684	)
Standardized measure of discounted
future net cash flows	$	15,744		$	17,836		$	16,355

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

	Years Ended December 31,
	2014			2013			2012
Beginning of year	$	17,836		$	16,355		$	20,931
Sale of oil and gas reserves		(981	)		-			(3,802	)
Net change in prices and production costs		(72	)		9,341			(5,313	)
New field discoveries and extensions, net of future
production costs		4,456			9,767			9,513
Sales of oil and gas produced, net of production costs		(6,590	)		(8,373	)		(8,953	)
Net change due to revisions in quantity estimates		2,460			(3,624	)		(940	)
Accretion of discount		1,773			1,797			1,944
Production rate changes and other		(4,265	)		(6,629	)		511
Net change in income taxes		1,127			(798	)		2,464
End of year	$	15,744		$	17,836		$	16,355

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,
	2014			2013			2012
Revenues	$	13,361		$	14,129		$	15,954
Costs and expenses -
Production		(6,771	)		(5,756	)		(7,091	)
Producing property impairment		(4,001	)		(1,373	)		(4,699	)
Exploration		(5,054	)		(1,619	)		(1,151	)
Oil and natural gas property sale gain		2,528			-			2,203
Depreciation, depletion and amortization		(7,573	)		(7,494	)		(8,848	)
Operating income (loss) before income taxes		(7,510	)		(2,113	)		(3,632	)
Income tax benefit		2,628			739			1,271
Operating income (loss)	$	(4,882	)	$	(1,374	)	$	(2,361	)