Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes 
The components of the Company’s income tax expense are as follows:

 
Years Ended December 31,
 
 
2019
 
2018
 
2017
 
 
(In thousands)
Current
 
 
 
 
 
 
Federal
 

$—

 

$—

 

($48
)
State
 
220

 

 

Total current income tax expense (benefit)
 
220

 

 
(48
)
 
 
 
 
 
 
 
Deferred
 
 
 
 
 
 
Federal
 
33,584

 
3,594

 
(45
)
State
 
1,497

 
4,516

 
1,366

Total deferred income tax expense
 
35,081

 
8,110

 
1,321

Total income tax expense
 

$35,301

 

$8,110

 

$1,273


A reconciliation of the income tax expense calculated at the federal statutory rate of 21% in 2019 and 2018 and 35% in 2017, to income tax expense is as follows:

 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Income before income taxes
 

$103,229

 

$308,470

 

$121,697

Income tax expense computed at the statutory federal income tax rate
 
21,678

 
64,779

 
42,594

State income tax expense, net of federal benefit
 
1,253

 
3,568

 
1,273

Equity based compensation
 
1,222

 
(494
)
 

Non-deductible compensation
 
90

 
1,209

 

Non-deductible merger expenses
 
5,537

 

 

Statutory depletion carryforward
 
5,381

 

 

Other
 
140

 
168

 

Change in valuation allowance
 

 
(61,120
)
 
(42,594
)
Income tax expense
 

$35,301

 

$8,110

 

$1,273


At December 31, 2019, the Company recorded a tax expense of $5.5 million associated with non-deductible merger expenses from the Carrizo Acquisition which primarily relate to non-deductible executive compensation expenses and transaction costs that are inherently facilitative in nature and permanently capitalized for tax purposes.
The Company recorded an income tax expense of $5.4 million related to the statutory depletion carryforward of $24.9 million. The percentage depletion deductions are in excess of the Company’s net depletable basis and can be carried forward indefinitely. The tax benefit for the special deduction will be recognized in the year the carryforward is deducted on the federal tax return.
As of December 31, 2019 and 2018, the net deferred income tax assets and liabilities are comprised of the following:

 
As of December 31,
 
 
2019
 
2018
 
 
(In thousands)
Deferred tax assets
 
 
 
 
Federal net operating loss carryforward
 

$110,703

 

$151,497

Interest expense carryforward
 

 
7,335

Statutory depletion carryforward
 

 
5,381

Asset retirement obligations
 
9,981

 
2,347

Derivative asset
 
14,823

 

Unvested RSU equity awards
 
4,928

 
2,751

Operating lease right-of-use assets
 
29,897

 

Other
 
10,445

 
991

Total deferred tax assets
 

$180,777

 

$170,302

Deferred income tax valuation allowance
 

 

Net deferred tax assets
 

$180,777

 

$170,302

Deferred tax liability
 
 
 
 
Oil and natural gas properties
 

($38,546
)
 

($169,682
)
Derivative liability
 

 
(10,184
)
Operating lease liabilities
 
(26,511
)
 

Total deferred tax liability
 

($65,057
)
 

($179,866
)
Net deferred tax asset (liability)
 

$115,720

 

($9,564
)

For federal income tax purposes, the Carrizo Acquisition qualified as a tax-free merger whereby the Company acquired carryover tax basis in Carrizo’s assets and liabilities. The Company recorded an opening balance sheet deferred tax asset of $159.3 million related to tax attributes acquired from Carrizo. The acquired income tax attributes primarily consist of future deductions related to oil and gas properties, derivative assets, and federal net operating losses (“NOLs”). The acquired NOLs are subject to an annual limitation under Internal Revenue Code Section 382 and the Company reduced the total NOL balance and associated deferred tax asset for the NOLs to the amount expected to be fully utilized prior to expirations. The Company expects that these tax attributes will be fully utilized prior to expiration.
Due to the issuance of common stock associated with the Carrizo acquisition, the Company incurred a cumulative ownership change and as such, the Company’s NOLs prior to the acquisition are subject to an annual limitation under Internal Revenue Code Section 382. At December 31, 2019, the Company had approximately $527.2 million of NOLs, including $288.2 million acquired from Carrizo, of which approximately $496.5 million expire between 2035 and 2037 and $30.7 million have an indefinite carryforward life. The Company expects that the NOL balance will be fully utilized prior to expiration.
Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that the Company’s net deferred tax assets will be utilized prior to their expiration. At December 31, 2019, management considered all factors including the expected reversal of deferred tax liabilities (including the impact of available carryforward periods), historical operating income tax planning strategies and projected future taxable income and determined that it is more likely than not that the Company will realize its remaining deferred tax assets.
The Company had no significant unrecognized tax benefits at December 31, 2019. Accordingly, the Company does not have any interest or penalties related to uncertain tax positions. However, if interest or penalties were to be incurred related to uncertain tax positions, such amounts would be recognized in income tax expense. In the Company’s major tax jurisdictions, the earliest year open to examination is 2015.