Note 6 - Oil and Gas Properties

9 Months Ended

Sep. 30, 2015

Note 6 - Oil and Gas Properties

Brenham uses the full cost method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells used to find proved reserves, and to drill and equip development wells, including directly related overhead costs and related asset retirement costs are capitalized. Properties not subject to amortization consist of exploration and development costs that are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved, or their values become impaired and the corresponding costs are added to the capitalized costs subject to amortization. During the three and nine months ended September 30, 2015, depletion of oil and gas properties of $189 and $574, respectively was recorded. During the three and nine months ended September 30, 2014, depletion of oil and gas properties of $472 and $1,293, respectively, was recorded. Costs of oil and gas properties are amortized using the units of production method. Sales of oil and natural gas properties are accounted for as adjustments to the net full cost pool, and generally, no gain or loss is recognized.

In applying the full cost method, Brenham performs an impairment test (ceiling test) at each reporting date, whereby the carrying value of oil and gas properties is compared to the "estimated present value" of its proved reserves discounted at a 10-percent interest rate of future net revenues, based on current economic and operating conditions at the end of the period, plus the cost of properties not being amortized, plus the lower of cost or fair market value of unproved properties included in costs being amortized, less the income tax effects related to book and tax basis differences of the properties. If capitalized costs exceed this limit, the excess is charged as an impairment expense. During the nine months ended September 30, 2015 and 2014, impairment of oil and gas properties of $20,000 and $0 was recorded, respectively.

Below are the components of oil and gas properties balance:

	As of September 30, 2015			As of December 31, 2014
Royalty interest in 24 acres in Washington County, Texas (a)	$	-		$	-
Royalty interest in 700 acres in the Permian Basin (b)		8,400			8,400
10% working interest in the Pierce Junction Field (c)		87,500			87,500
Lease of 394 acres in the Gillock Field (d)		83,500			83,500
Lease of 332 acres in Inez Prospect (e)		-			250,000
Capitalized asset retirement costs		5,122			4,003
Total oil and gas properties		184,522			433,403
Accumulated depletion		(4,536	)		(3,962	)
Net capitalized costs	$	179,986		$	429,441

a) Lease of 332 acres in the Inez Prospect - On January 8, 2014, the Company entered into a letter of intent with a third party to acquire a 332-acre oil and gas lease, the "Inez Prospect," located in Victoria County, Texas, and the #1 Roberts Unit well-bore, and all the down-hole equipment and surface equipment associated therewith. On April 10, 2014, the Company and the third party entered into a prospect and lease acquisition agreement. Pursuant to the agreement, the Company agreed to acquire 100% of the working interest for a total purchase price of $250,000, consisting of a $20,000 deposit, which was paid during the year ended December 31, 2014, and a payment of the remaining $230,000 prior to the beginning of any exploration which is recorded in accounts payable and accrued expenses at December 31, 2014. The Company wrote the asset and related liabilities off in full during the nine months ended September 30, 2015 as the Company determined the asset was fully impaired.

AMERICAN INTERNATIONAL INDUSTRIES INC 10-Q