Annual report pursuant to Section 13 and 15(d)

Income Taxes

v2.4.0.6
Income Taxes
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Taxes
Income Taxes
 
The following table presents Callon’s net tax benefits relating to its reported net losses and other temporary differences from operations:
 
For the year ended December 31
 
2012
 
2011
Deferred tax asset:
 
 
 
   Federal net operating loss carryforward
$
87,774

 
$
89,457

   Statutory depletion carryforward
8,184

 
7,032

   Alternative minimum tax credit carryforward
208

 
208

   Asset retirement obligations
3,357

 
3,552

   Other
9,571

 
9,182

Total deferred tax asset
109,094

 
109,431

Deferred tax liability:
 
 
 
   Crude oil and natural gas properties
41,336

 
40,782

   Other
3,375

 
2,906

Total deferred tax liability
44,711

 
43,688

Net deferred tax asset
$
64,383

 
$
65,743



Prior to 2012, the Company carried a full valuation allowance against its net deferred tax assets. The Company considered both the positive and negative evidence in determining whether it was more likely than not that its deferred tax assets were recoverable. The Company incurred a loss in 2008, primarily as a result of a write-down of its crude oil and natural gas properties following the ceiling test, which created a loss on an aggregate basis for the three-year period ended December 31, 2008. Primarily as a result of recent cumulative losses, the Company established a full valuation allowance as of December 31, 2008, and continued to carry the full valuation allowance each reporting period until December 31, 2011.

The Company reported profitable operations from 2009 to 2012, and had income on an aggregate basis for the three-year periods ended December 31, 2011 and 2012. After considering all available positive and negative evidence, the Company believed that it was more likely than not that it would fully utilize its deferred tax assets recorded at December 31, 2011 and 2012. Among other factors, the Company believed its recent cumulative income, together with its future operating results using current proved reserves, provided sufficient positive evidence to reach this conclusion. Based upon this analysis, the Company reversed its related valuation allowance at December 31, 2011.

If not utilized, the Company’s federal operating loss ("NOL") carryforwards will expire as follows:
 
 
 
 
Year Expiring
 
 
Total
 
2013-2018

 
2019-2021
 
2022-2024
 
2025-2027
 
2028-2031
Federal NOL carryforwards
 
$
250,783

 
$

 
$
56,929

 
$
101,495

 
$
39,714

 
$
52,645



The Company has limited state taxable income. Accordingly, the Company has established a full valuation allowance on the tax benefit associated with the state net operating loss carryforwards of approximately $169,672 which expire in years through 2032, as the Company does not anticipate generating taxable state income in the states in which these carryforwards apply. These amounts are not included in the deferred tax summary table above.

In 2009, the Company began to shift its operational focus from exploration, development and production in the Gulf of Mexico to the acquisition and development of onshore properties. This shift in exploration and development activity resulted in an increase in Texas income from production by the end of 2012. This, coupled with the sale of one of the Company's primary federal offshore producing properties, the Habanero field, in December 2012, results in a change in the projected future Texas state tax rate beyond 2012 as a component of overall anticipated future taxes.

The Company had no significant unrecognized tax benefits at December 31, 2012.  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.  Tax periods for years 2000 through 2012 remain open to examination by the federal and state taxing jurisdictions to which the Company is subject.

In addition, the NOL carryback provision of the Internal Revenue Code was amended on November 6, 2009, as part of The Worker, Homeownership and Business Assistance Act of 2009 (the “WHB Act”). The WHB Act allows businesses with NOLs for 2008 and 2009 to carry back losses for up to five years and suspends the 90% limitation on the use of any alternative minimum tax NOL deduction attributable to carrybacks of the applicable NOL. There would be no limit on the NOL carrybacks for the first four preceding years of the carryback period, but for the fifth preceding year, the NOL carryback would be limited to fifty percent of a company’s taxable income in that year.  In applying the new five-year NOL carryback rule, the Company was able to file during 2010 for a refund claim to recover approximately $174.

Below is a reconciliation of the reported amount of income tax expense attributable to continuing operations to the amount of income tax expense that would result from applying domestic federal statutory tax rates to pretax income from continuing operations.
 
 
For the years ended December 31,
Component of Income Tax Rate Reconciliation
 
2012
 
2011
 
2010
Income tax expense computed at the statutory federal income tax rate
 
35
 %
 
35
 %
 
35
 %
Change in valuation allowance
 
 %
 
(227
)%
 
(18
)%
Percentage depletion carryforward
 
(22
)%
 
(3
)%
 
(15
)%
State taxes net of federal benefit
 
6
 %
 
 %
 
 %
Section 162m
 
22
 %
 
 %
 
 %
Restricted stock and stock options
 
2
 %
 
 %
 
 %
Other
 
4
 %
 
4
 %
 
 %
Effective income tax rate
 
47
 %
 
(191
)%
 
2
 %
 
 
 
 
 
 
 
 
 
For the years ended December 31,
Components of Income Tax Expense
 
2012
 
2011
 
2010
Current federal income tax benefit
 
$

 
$

 
$
(174
)
Current state income tax expense
 
110

 

 

Deferred federal income tax expense
 
1,777

 
13,176

 
1,503

Change in deferred rate
 
336

 

 

Valuation allowance
 

 
(82,459
)
 
(1,503
)
Total income tax expense (benefit)
 
$
2,223

 
$
(69,283
)
 
$
(174
)