Entity information:

Note 11. Income taxes

 

The Company uses an asset and liability approach for financial accounting and reporting for income taxes. The Company’s objectives of accounting for income taxes are to recognize (i) the amount of taxes payable or refundable for the current year and (ii) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in its financial statements or tax returns. The Company and its subsidiaries file a federal corporate income tax return on a consolidated basis. The tax returns and the amount of taxable income or loss are subject to examination by federal and state taxing authorities.

On December 22, 2017, the President signed into law the TCJA, which enacted significant changes to federal income tax laws, including a decrease in the federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. In accordance with the guidance stated in ASC 740, “Income Taxes,” the Company is required to account for the effects of an enacted tax law or rate change in the period of enactment, which is the date it is signed by the President. Set forth below is a discussion of certain provisions enacted by the TCJA and the Company’s assessment of the impact of such provisions on its consolidated results.

In accordance with SAB 118, the Company has calculated its best estimate of the impact of the TCJA, including the federal statutory tax rate change noted above, in accordance with its understanding of the TCJA and guidance available as of the date of this filing and as a result has recorded $398 million as a decrease to its income tax provision at December 31, 2017. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future, was $398 million.

The TCJA also repealed the corporate alternative minimum tax (“AMT”) for tax years beginning after December 31, 2017, and provides that existing AMT credit carryovers are refundable beginning with the 2018 tax year. The Company has approximately $10 million of AMT credit carryovers that are expected to be fully refunded by 2022. At December 31, 2017, the Company had current income tax receivables of approximately $5 million.

At December 31, 2017, the Company did not have any significant uncertain tax positions requiring recognition in the financial statements. The tax years 2013 through 2017 remain subject to examination by the major tax jurisdictions.

The Company’s income tax expense (benefit) attributable to income (loss) from operations consisted of the following for the years ended December 31, 2017, 2016 and 2015:

Years Ended December 31,
(in millions)201720162015
Current:
U.S. federal $(6)$(12)$-
U.S. state and local 2-1
Total current income tax expense (benefit)(4)(12)1
Deferred:
U.S. federal (94)(771)40
U.S. state and local 23(93)(10)
Total deferred income tax expense (benefit)(71)(864)30
Total income tax expense (benefit) attributable to income from operations$(75)$(876)$31

The reconciliation between the income tax expense (benefit) computed by multiplying pre-tax income (loss) from operations by the U.S. federal statutory rate and the reported amounts of income tax expense (benefit) from operations is as follows:

Years Ended December 31,
(in millions)201720162015
Income (loss) at U.S. federal statutory rate $308$(818)$34
Provisional change in deferred tax assets and liabilities(398)--
State income taxes, net of federal tax effect17(41)3
Revisions of previous estimates -1(1)
Change in estimated effective statutory state income tax -(21)(9)
Excess tax benefit related to stock-based compensation(6)--
Nondeductible expense and other 434
Income tax expense (benefit)$(75)$(876)$31
Effective tax rate (9)%38%32%

The Company monitors changes in enacted tax rates for the jurisdictions in which it operates. The Company monitors its state tax apportionment footprint and makes updates for changes in its projected activity, including changes in budgets and drilling plans. During 2013, the State of New Mexico passed legislation to phase in a tax rate reduction over the next five years. In June of 2015, the State of Texas enacted legislation to reduce its rate. Based upon the Company’s projected future activity for the states in which it conducts business, the timing for when it anticipates its deferred tax items to become taxable and enacted tax rates at such time deferred items become taxable, the Company did not revise its estimated state rate and, as such, did not record an additional deferred state tax benefit during 2017. The Company did revise its estimated state rate and recorded an additional deferred state tax benefit of approximately $21 million and $9 million during 2016 and 2015, respectively.

The Company recorded a discrete income tax benefit of approximately $6 million for the year ended December 31, 2017 related to excess tax benefits on stock-based awards, which is recorded in the income tax provision pursuant to ASU No. 2016-09 adopted on January 1, 2017.

The Company’s 2017 effective tax rate decreased as compared to 2016 primarily due to the provisional $398 million income tax benefit recognized as a result of the re-measurement of the Company’s net deferred tax liability based on changes enacted by the TCJA. This benefit more than offset the $308 million income tax expense on income before income taxes during 2017 at the federal statutory rate.

The Company’s effective tax rate increased in 2016 as compared to 2015 primarily due to a shift from pre-tax earnings of $97 million in 2015 to a pre-tax loss of $2.3 billion in 2016, resulting in a less pronounced effect on the effective tax rate for each reconciling item. In particular, the reduction in the Company’s effective statutory state rate caused a 1 percent increase in 2016 as compared to a 9 percent reduction in 2015, partially offset by other reconciling and non-deductible items for a net rate increase of 5 percent over 2015.

At December 31, 2016, the Company had approximately $539 million of federal net operating losses (“NOLs”), of which $6 million was carried back to the 2014 tax year. During 2017, the Company projects it will utilize approximately $411 million of the remaining NOLs available of $533 million. At December 31, 2017, the Company had approximately $122 million of NOLs that will expire in 2036 but are allowable as a deduction against 100 percent of future taxable income since they were generated prior to the effective date of limitations imposed by the TCJA. Additionally, the Company has estimated an apportioned New Mexico NOL of approximately $111 million expiring in 2036.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

December 31,
(in millions)20172016
Deferred tax assets:
Stock-based compensation $18$39
Derivative instruments 8764
Asset retirement obligation 3348
Net operating losses and credits31177
Other 1324
Total deferred tax assets 182352
Deferred tax liabilities:
Oil and natural gas properties, principally due to differences in basis and
depreciation and the deduction of intangible drilling costs for tax purposes (852)(1,095)
Intangible assets (5)(9)
Other (12)(14)
Total deferred tax liability (869)(1,118)
Net deferred tax liability $(687)$(766)

The Company had net deferred tax liabilities of approximately $687 million and $766 million as of December 31, 2017 and 2016, respectively.

Pursuant to management’s assessment, the Company does not believe a cumulative ownership change has occurred as of December 31, 2017. As such, Section 382 of the Internal Revenue Code of 1986, as amended, is not expected to limit the Company’s ability to utilize its NOL carryforward as of December 31, 2017.

Management monitors company-specific, oil and natural gas industry and worldwide economic factors and assesses the likelihood that the Company’s NOLs and other deferred tax attributes will be utilized prior to their expiration. At December 31, 2017, management considered all factors including the expected reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), historical operating income tax planning strategies and projected future taxable income. Based on the results of the assessment, management determined that it is more likely than not that the Company will realize its deferred tax assets.