Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.20.4
Income Taxes
 12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes 
The components of the Company’s income tax expense are as follows:
Years Ended December 31,
2020 2019 2018
(In thousands)
Current
Federal $—  $—  $— 
State 3,447  220  — 
Total current income tax expense 3,447  220  — 
Deferred
Federal 126,903  33,584  3,594 
State (8,296) 1,497  4,516 
Total deferred income tax expense 118,607  35,081  8,110 
Total income tax expense $122,054  $35,301  $8,110 
A reconciliation of the income tax expense calculated at the federal statutory rate of 21% to income tax expense is as follows:
Years Ended December 31,
2020 2019 2018
(In thousands)
Income (loss) before income taxes ($2,411,567) $103,229  $308,470 
Income tax expense (benefit) computed at the statutory federal income tax rate (506,429) 21,678  64,779 
State income tax expense (benefit), net of federal benefit (11,827) 1,253  3,568 
Equity based compensation 2,746  1,222  (494)
Non-deductible compensation —  90  1,209 
Non-deductible merger expenses —  5,537  — 
Statutory depletion carryforward —  5,381  — 
Other (1,621) 140  168 
Change in valuation allowance 639,185  —  (61,120)
Income tax expense $122,054  $35,301  $8,110 
The income tax expense of $122.1 million for the year ended December 31, 2020 is primarily due to the valuation allowance recorded against the Company’s net deferred tax assets. See “— Deferred Tax Asset Valuation Allowance” below for additional details.
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.
As of December 31, 2020 and 2019, the net deferred income tax assets and liabilities are comprised of the following:
As of December 31,
2020 2019
(In thousands)
Deferred tax assets
Oil and natural gas properties $431,142  $— 
Federal net operating loss carryforward 141,308  110,703 
Derivative asset 39,378  14,823 
Operating lease right-of-use assets 8,567  29,897 
Asset retirement obligations 10,134  9,981 
Unvested RSU equity awards 1,962  4,928 
Other 11,430  10,445 
Total deferred tax assets $643,921  $180,777 
Deferred income tax valuation allowance (639,185) — 
Net deferred tax assets $4,736  $180,777 
Deferred tax liability
Oil and natural gas properties $—  ($38,546)
Derivative liability —  — 
Operating lease liabilities (4,736) (26,511)
Total deferred tax liability ($4,736) ($65,057)
Net deferred tax asset (liability) $—  $115,720 
Deferred Tax Asset Valuation Allowance
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. A significant item of objective negative evidence considered was the cumulative historical three year pre-tax loss and a net deferred tax asset position at December 31, 2020, driven primarily by the impairments of evaluated oil and gas properties recognized beginning in the second quarter of 2020 and continuing through the rest of 2020. This limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Beginning in the second quarter of 2020 and continuing through the rest of 2020, based on the evaluation of the evidence available, the Company concluded that it is more likely than not that the net deferred tax assets will not be realized. As a result, the Company has recorded a valuation allowance of $639.2 million, reducing the net deferred tax assets as of December 31, 2020 to zero.
The Company will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until the Company can conclude that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead the Company to conclude that it is more likely than not its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in crude oil prices, and taxable events that could result from one or more future potential transactions. The valuation allowance does not preclude the Company from utilizing the tax attributes if the Company recognizes taxable income. As long as the Company continues to conclude that the valuation allowance against its net deferred tax assets is necessary, the Company will have no significant deferred income tax expense or benefit.
Carrizo Acquisition
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 $162.6 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, as described below, and the Company reduced the total NOL balance and associated deferred tax asset for the NOLs to the amount that was expected at that time to be fully utilized prior to expirations. See above for discussion of the valuation allowance against the Company’s net deferred tax assets.
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, 2020, the Company had approximately $672.9 million of NOLs, including $284.1 million acquired from Carrizo. $414.9 million expire between 2035 and 2037 and $258.0 million have an indefinite carryforward life.
The Company had no significant unrecognized tax benefits at December 31, 2020. 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 2016.