Annual report pursuant to Section 13 and 15(d)

Income Taxes

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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes 
The components of the Company’s income tax expense are as follows:
Years Ended December 31,
2021 2020 2019
(In thousands)
Current
Federal $—  $—  $— 
State 180  3,447  220 
Total current income tax expense 180  3,447  220 
Deferred
Federal —  126,903  33,584 
State —  (8,296) 1,497 
Total deferred income tax expense —  118,607  35,081 
Total income tax expense $180  $122,054  $35,301 
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,
2021 2020 2019
(In thousands)
Income (loss) before income taxes $365,331  ($2,411,567) $103,229 
Income tax expense (benefit) computed at the statutory federal income tax rate 76,720  (506,429) 21,678 
State income tax expense (benefit), net of federal benefit 2,905  (11,827) 1,253 
Non-deductible expenses related to capital structure transactions (11,875) —  — 
Non-deductible compensation 1,100  —  90 
Equity based compensation 564  2,746  1,222 
Non-deductible merger expenses —  —  5,537 
Statutory depletion carryforward —  —  5,381 
Other 9,147  (1,621) 140 
Change in valuation allowance (78,381) 639,185  — 
Income tax expense $180  $122,054  $35,301 
The income tax expense of $0.2 million for the year ended December 31, 2021 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.
As of December 31, 2021 and 2020, the net deferred income tax assets and liabilities are comprised of the following:
As of December 31,
2021 2020
(In thousands)
Deferred tax assets
Oil and natural gas properties $238,203  $431,142 
Federal net operating loss carryforward 221,900  141,308 
Net interest expense limitation 36,171  — 
Derivative asset 30,826  39,378 
Operating lease right-of-use assets 8,650  8,567 
Asset retirement obligations 12,244  10,134 
Unvested RSU equity awards 4,939  1,962 
Other 12,892  11,430 
Total deferred tax assets $565,825  $643,921 
Deferred income tax valuation allowance (560,804) (639,185)
Net deferred tax assets $5,021  $4,736 
Deferred tax liability
Operating lease liabilities ($5,021) ($4,736)
Total deferred tax liability ($5,021) ($4,736)
Net deferred tax asset (liability) $—  $— 
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, 2021, driven primarily by the impairments of evaluated oil and gas properties recognized beginning in the second quarter of 2020 and continuing through the fourth quarter of 2020. This limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Since the second 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 of December 31, 2021, the valuation allowance balance is $560.8 million, reducing the net deferred tax assets 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.
Federal Net Operating Losses (“NOLs”) & Interest Limitation Carryforwards
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, 2021, the Company had approximately $1.1 billion of NOLs of which $414.9 million expire between 2035 and 2037 and $641.8 million have an indefinite carryforward life. The Company also has a net interest expense carryforward of $172.2 million under Section 163(j) of the Code, subject to indefinite carryforward.
Uncertain Tax Positions
The Company had no significant unrecognized tax benefits at December 31, 2021. 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 2017.