Quarterly report pursuant to Section 13 or 15(d)

Income Taxes

v3.20.2
Income Taxes
9 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes The Company provides for income taxes at the statutory rate of 21% adjusted for permanent differences expected to be realized, which primarily relate to non-deductible executive compensation expenses, restricted stock windfalls, and state income taxes. The following
table presents a reconciliation of the reported amount of income tax expense (benefit) to the amount of income tax expense (benefit) that would result from applying domestic federal statutory tax rates to pretax income (loss) from continuing operations:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Income tax provision computed at statutory federal income tax rate 21  % 21  % 21  % 21  %
State taxes net of federal expense % % % %
Section 162(m) —  % —  % —  % —  %
Effective income tax rate, before discrete items 22  % 22  % 22  % 22  %
Valuation allowance (22  %) —  % (28  %) —  %
Other discrete items (1)
—  % % —  % %
Effective income tax rate, after discrete items —  % 24  % (6  %) 24  %

(1)    Accounts for the potential impact of periodic volatility of stock-based compensation tax deductions on future effective tax rates.
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 September 30, 2020, driven primarily by the impairments of evaluated oil and gas properties recognized beginning in the second quarter of 2020 and continuing through the three months ended September 30, 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 third quarter 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 $520.8 million, reducing the net deferred tax assets as of September 30, 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.
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 net operating losses (“NOLs”) prior to the acquisition are subject to an annual limitation under Internal Revenue Code Section 382. At September 30, 2020, the Company had approximately $897.0 million of NOLs, including $288.2 million acquired from Carrizo, of which approximately $496.5 million expire between 2035 and 2037 and $400.5 million have an indefinite carryforward life.