5. Income Taxes
The components of income tax (expense) benefit from continuing operations were as follows:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Current income tax (expense) benefit | | | | | | |
U.S. Federal | |
| $— |
| |
| $— |
| |
| $— |
|
State | | (395 | ) | | — |
| | — |
|
Total current income tax (expense) benefit | | (395 | ) | | — |
| | — |
|
Deferred income tax (expense) benefit | | | | | | |
U.S. Federal | | — |
| | — |
| | 131,502 |
|
State | | (3,635 | ) | | — |
| | 9,373 |
|
Total deferred income tax (expense) benefit | | (3,635 | ) | | — |
| | 140,875 |
|
Total income tax (expense) benefit from continuing operations | |
| ($4,030 | ) | |
| $— |
| |
| $140,875 |
|
The Company’s income tax (expense) benefit from continuing operations differs from the income tax (expense) benefit computed by applying the U.S. federal statutory corporate income tax rate of 35% to income (loss) from continuing operations before income taxes as follows:
|
| | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | (In thousands) |
Income (loss) from continuing operations before income taxes | |
| $91,140 |
| |
| ($675,474 | ) | |
| ($1,298,760 | ) |
Income tax (expense) benefit at the statutory rate | | (31,899 | ) | | 236,416 |
| | 454,566 |
|
State income tax (expense) benefit, net of U.S. Federal income taxes | | (4,030 | ) | | 3,894 |
| | 9,373 |
|
Tax shortfalls from stock-based compensation expense | | (3,089 | ) | | — |
| | — |
|
Texas Franchise Tax rate reduction, net of U.S. Federal income tax expense | | — |
| | — |
| | 1,671 |
|
Provisional impact of Tax Cuts and Jobs Act | | (211,724 | ) | | — |
| | — |
|
Change in valuation allowance from provisional impact of Tax Cuts and Jobs Act | | 211,724 |
| | — |
| | — |
|
Change in valuation allowance from current year activity | | 35,376 |
| | (240,864 | ) | | (323,586 | ) |
Other | | (388 | ) | | 554 |
| | (1,149 | ) |
Income tax (expense) benefit | |
| ($4,030 | ) | |
| $— |
| |
| $140,875 |
|
Significant changes in the Company’s operations in 2017, including the ExL Acquisition in the Delaware Basin and divestitures of substantially all of the Company's assets in the Utica and Marcellus Shales, resulted in changes to the Company's anticipated future state apportionment for estimated state deferred tax liabilities. As a result of these changes, the Company recorded a $3.6 million state deferred tax expense primarily associated with future Texas deferred tax liabilities.
Deferred Income Taxes
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. As of December 31, 2017 and 2016, deferred tax assets and liabilities are comprised of the following:
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | (In thousands) |
Deferred income tax assets | | | | |
Net operating loss carryforward - U.S. Federal and State | |
| $242,915 |
| |
| $221,063 |
|
Oil and gas properties | | 50,177 |
| | 309,848 |
|
Asset retirement obligations | | 4,996 |
| | 7,434 |
|
Stock-based compensation | | — |
| | 5,238 |
|
Derivative liabilities | | 35,585 |
| | 17,545 |
|
Other | | 1,496 |
| | 3,739 |
|
Deferred income tax assets | | 335,169 |
| | 564,867 |
|
Deferred tax asset valuation allowance | | (333,029 | ) | | (564,434 | ) |
Net deferred income tax assets | | 2,140 |
| | 433 |
|
Deferred income tax liabilities | | | | |
Oil and gas properties | | (3,635 | ) | | — |
|
Derivative assets | | (2,140 | ) | | (433 | ) |
Net deferred income tax asset (liability) | |
| ($3,635 | ) | |
| $— |
|
Tax Cuts and Jobs Act
On December 22, 2017, the U.S. Congress enacted the Tax Cuts and Jobs Act (the “Act”) which made significant changes to U.S. federal income tax law, including lowering the federal statutory corporate income tax rate to 21% from 35% beginning January 1, 2018. The income tax effects of changes in tax laws are recognized in the period when enacted. While the Company continues to assess the impact of the tax reform legislation on its business and consolidated financial statements, the Company remeasured its deferred tax balances by applying the reduced rate and and recorded a provisional deferred tax expense of $211.7 million during the year ended December 31, 2017. This provisional deferred tax expense was fully offset by a $211.7 million deferred tax benefit as a result of the associated change in the valuation allowance against the net deferred tax assets. As reflected in the rate reconciliation above, the change in the deferred tax balances due to the rate reduction had no impact on the net deferred tax balances reported in the consolidated balance sheets as of December 31, 2017 and no impact in the consolidated statements of operations for the year ended December 31, 2017.
Due to the uncertainty or diversity in views about the application of ASC 740 in the period of enactment of the Act, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”) which allows the Company to provide a provisional estimate of the impacts of the Act in its earnings for the year ended December 31, 2017. The Company's estimate does not reflect changes in current interpretations of performance based executive compensation deduction limitations, effects of any state tax law changes and uncertainties regarding interpretations that may arise as a result of federal tax reform. The Company will continue to analyze the effects of the Act in its consolidated financial statements and operations. Additional impacts from the enactment of the Act will be recorded as they are identified during the one-year measurement period provided for in SAB 118. As of December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Act; however, the Company has made a reasonable estimate of the effects on it existing deferred tax balances.
Deferred Tax Assets Valuation Allowance
Deferred tax assets are recorded for net operating losses and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions in future periods. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. The Company assesses the realizability of its deferred tax assets on a quarterly basis by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) when determining whether a valuation allowance is required. In making this assessment, the Company evaluated possible sources of taxable income that may be available to realize the deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies.
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, 2017, driven primarily by the impairments of proved oil and gas properties recognized beginning in the third quarter of 2015 and continuing through the third quarter of 2016, which limits the ability to consider other subjective evidence such as the Company’s potential for future growth. Beginning in the third quarter of 2015 and continuing through the fourth quarter of 2017, the Company concluded that it was more likely than not the deferred tax assets will not be realized. As a result, the net deferred tax assets at the end of each quarter, including December 31, 2017 were reduced to zero.
Effective January 1, 2017, the Company adopted ASU 2016-09, and the Company recognized previously unrecognized windfall tax benefits which resulted in a cumulative-effect adjustment to retained earnings of approximately $15.7 million. This adjustment increased deferred tax assets, which in turn increased the valuation allowance by the same amount as of the beginning of 2017, resulting in a net cumulative-effect adjustment to retained earnings of zero and brought the valuation allowance to $580.1 million as of January 1, 2017.
For the year ended December 31, 2017, the Company reduced the valuation allowance by $247.1 million. This was primarily due to the re-measurement of its deferred tax assets as a result of the Act as mentioned above as well as partial releases of $35.4 million, as a result of current year activity. After the impact of the re-measurement and the partial releases, the valuation allowance as of December 31, 2017 was $333.0 million, of which $12.7 million is a valuation allowance against state deferred tax assets.
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 transactions. The valuation allowance does not preclude the Company from utilizing the tax attributes if the Company recognizes sufficient taxable income within the carryforward periods. 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 federal deferred income tax expense or benefit. However, the Company currently expects to continue to have state deferred income tax expense or benefit as a result of change in state deferred tax liabilities as the Company's operations become more heavily weighted towards Texas.
Net Operating Loss Carryforwards and Other
Net Operating Loss Carryforwards. As of December 31, 2017, the Company had U.S. federal net operating loss carryforwards of approximately $1,096.2 million. If not utilized in earlier periods, the U.S. federal net operating loss will expire between 2026 and 2037.
The ability of the Company to utilize its U.S. loss carryforwards to reduce future taxable income is subject to various limitations under the Internal Revenue Code of 1986, as amended (the “Code”). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the purchase or sale of stock by 5% shareholders and the offering of stock by the Company during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of the Company. In the event of an ownership change, Section 382 of the Code imposes an annual limitation on the amount of the Company’s taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the Company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are recognized built-in gains during any post-change year, but only to the extent of any net unrealized built-in gains inherent in the assets sold.
Due to the issuance of the Preferred Stock and the common stock offering associated with the ExL Acquisition, the Company’s calculated ownership change percentage increased, however, as of December 31, 2017, the Company does not believe it has a Section 382 limitation on the ability to utilize its U.S. loss carryforwards. Future equity transactions involving the Company or 5% shareholders of the Company (including, potentially, relatively small transactions and transactions beyond the Company’s control) could cause further ownership changes and therefore a limitation on the annual utilization of the U. S. loss carryforwards.
Other. The Company files income tax returns in the U.S. Federal jurisdiction and various states, each with varying statutes of limitations. The 1999 through 2017 tax years generally remain subject to examination by federal and state tax authorities. As of December 31, 2017, 2016 and 2015, the Company had no uncertain tax positions.