Income Taxes
The (expense) benefit for income taxes consisted of the following for the periods indicated:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Current: | | | | | |
Federal | $ | 1,402 |
| | $ | — |
| | $ | — |
|
State | — |
| | — |
| | — |
|
Deferred: | | | | | |
Federal | — |
| | — |
| | 158,757 |
|
State | — |
| | — |
| | 18,328 |
|
Total | $ | 1,402 |
| | $ | — |
| | $ | 177,085 |
|
Income tax (expense) benefit differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations as a result of the following:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands) |
Income tax (expense) benefit at the federal statutory rate | $ | 48,869 |
| | $ | 59,632 |
| | $ | 232,700 |
|
State income taxes, net of federal tax effect | 4,030 |
| | 4,971 |
| | 19,399 |
|
Change in federal tax rate | (64,949 | ) | | — |
| | — |
|
Refundable AMT credits | 1,402 |
| | — |
| | — |
|
Nondeductible equity-based compensation | (13,655 | ) | | (64 | ) | | (179 | ) |
Other permanent items | (37 | ) | | (62 | ) | | (100 | ) |
Change in valuation allowance | (35,684 | ) | | (64,477 | ) | | (74,978 | ) |
Change in valuation allowance due to TCJA | 64,949 |
| | — |
| | — |
|
Change in apportioned state tax rates | (1,086 | ) | | — |
| | (74 | ) |
Eliminate UT jurisdiction NOL's and credits | (2,647 | ) | | — |
| | — |
|
Other, net | 210 |
| | — |
| | 317 |
|
Income tax (expense) benefit | $ | 1,402 |
| | $ | — |
| | $ | 177,085 |
|
The tax effects of temporary differences that give rise to significant components of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
| (in thousands) |
Current: | | | |
Deferred tax assets (liabilities): | | | |
Derivative instruments | $ | — |
| | $ | (1,537 | ) |
Accrued expenses | — |
| | 256 |
|
Prepaid expenses | — |
| | (324 | ) |
Other | — |
| | 18 |
|
Total current deferred tax assets (liabilities) | $ | — |
| | $ | (1,587 | ) |
| | | |
Long-term: | | | |
Deferred tax assets: | | | |
Net operating loss carryforward | $ | 170,536 |
| | $ | 252,436 |
|
Stock-based compensation | 3,826 |
| | 18,048 |
|
Deferred rent | 163 |
| | 443 |
|
Minimum tax credit carryforward | — |
| | 1,402 |
|
Deferred compensation | 1,824 |
| | 1,058 |
|
State tax credit carryforwards | 6,499 |
| | 5,588 |
|
Financing obligation | 705 |
| | 1,260 |
|
Accrued expenses | 248 |
| | — |
|
Derivative instruments | 6,158 |
| | — |
|
Other assets | 228 |
| | 263 |
|
Less: Valuation allowance | (114,530 | ) | | (142,032 | ) |
Total long-term deferred tax assets | 75,657 |
| | 138,466 |
|
Deferred tax liabilities: | | | |
Oil and gas properties | (75,409 | ) | | (137,220 | ) |
Long-term derivative instruments | — |
| | 341 |
|
Prepaid expenses | (248 | ) | | — |
|
Total long-term deferred tax assets (liabilities) | (75,657 | ) | | (136,879 | ) |
Net long-term deferred tax assets (liabilities) | $ | — |
| | $ | 1,587 |
|
At December 31, 2017, the Company projected approximately $727.4 million of federal tax net operating loss ("NOL") carryforwards which expire beginning in 2025. At December 31, 2017, the Company had $485.7 million of state NOLs which begin to expire in 2029 and state tax credits of $8.2 million which begin to expire in 2018. As a result of the Merger which we anticipate to close on March 19, 2018, we expect to incur an ownership change and therefore anticipate losing a significant amount of our NOL carryforwards. This will result in a reduction of our deferred tax asset balance related to the NOL carryforward and the associated valuation allowance.
On December 22, 2017, Congress signed into law the Tax Cut and Jobs Act of 2017 ("TCJA"). The TCJA includes significant changes to the U.S. corporate tax systems including a rate reduction from 35% to 21% beginning in January of 2018, the elimination of the corporate alternative minimum tax ("AMT"), the acceleration of depreciation for US tax purposes, limitations on deductibility of interest expense, the elimination of net operating loss carrybacks and limitations on the use of future losses. In accordance with ASC 740, Income Taxes, the impact of a change in tax law is recorded in the period of enactment. Consequently, the Company has recorded a decrease to its net deferred tax assets ("DTA") of $64.9 million with a corresponding net adjustment to the valuation allowance for the year ended December 31, 2017. The Company also eliminated the $1.4 million DTA for its AMT credits and recorded a noncurrent tax receivable with a corresponding benefit to current income taxes. With respect to these particular aspects of the TCJA and the impacts to the 2017 financial statements, management believes the accounting is substantially complete. As a result of other changes introduced by the TCJA, starting with compensation paid in 2018, Section 162(m) will limit the Company from deducting compensation, including performance-based compensation, in excess of $1.0 million paid to anyone who, starting in 2018, serves as the Chief Executive Officer or Chief Financial Officer, or who is among the three most highly compensated executive officers for any fiscal year. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would have otherwise been deductible under the prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count towards the $1.0 million fiscal year deduction limit if paid to a covered executive. Additional information that may affect the Company's income tax accounts and disclosures would include further clarification and guidance on how the Internal Revenue Service will implement tax reform, including guidance with respect to 100% bonus depreciation on self-constructed assets and Section 162(m), further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of the Company's 2017 tax return filings, and the potential for additional guidance from the SEC or the FASB related to tax reform.
In assessing the ability to realize the benefit of the DTA, management must consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. Such evidence includes the scheduled reversal of DTL, projected future taxable income and tax planning strategies in making this assessment, and judgment is required in considering the relative weight of negative and positive evidence. In regard to the Company's DTAs, the Company considered all available evidence in assessing the need for a valuation allowance.
At December 31, 2017 and 2016, the Consolidated Balance Sheet reflected a net deferred tax asset and liability of zero.
The Company accounts for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits. The Company did not have any additions, reductions or settlements of unrecognized tax benefits. In 2017, the Company generated no uncertain tax positions.
The Company's policy is to classify accrued penalties and interest related to unrecognized tax benefits in the Company's income tax provision. As of December 31, 2017, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the current year.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in various states. With few exceptions, the Company is subject to U.S. federal tax examination for years 2014 through 2017 and is subject to state tax examination for years 2013 through 2017.