Income taxes
On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among other things, (i) permanently reduces the U.S. corporate income tax rate, (ii) repeals the corporate alternative minimum tax, (iii) imposes new limitations on the utilization of net operating losses and (iv) provides for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. The Company recognizes the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The enactment date in the U.S. is the date the bill becomes law, which is when the President signs the bill. Specific effects of the Tax Act are discussed below.
The Company is subject to federal and state income taxes and the Texas franchise tax. Income tax (expense) benefit for the periods presented consisted of the following: |
| | | | | | | | | | | | |
| | For the years ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Current taxes: | | | | | | |
Federal | | $ | — |
| | $ | — |
| | $ | — |
|
State | | (1,800 | ) | | — |
| | — |
|
Deferred taxes: | | | | | | |
Federal | | — |
| | — |
| | 152,590 |
|
State | | — |
| | — |
| | 24,355 |
|
Income tax (expense) benefit | | $ | (1,800 | ) | | $ | — |
| | $ | 176,945 |
|
Current tax expense recorded of $1.8 million is comprised of Texas franchise tax, mainly as a result of the Medallion Sale. Additionally, the Company paid Alternative Minimum Tax ("AMT") related to the Medallion Sale. The payment of AMT creates an AMT credit carryforward. Due to changes in the Tax Act, AMT credit carryforwards do not expire and are now refundable over the next five years, and therefore, a receivable has been recorded in the amount of $5.0 million which is included in the "Other noncurrent assets, net" line item on the consolidated balance sheets. If the actual amount of tax due and paid on the 2017 tax return differs, the associated AMT credit carryforward receivable will also change.
The following table presents the expected years in which the Company's AMT credit carryforward will be refunded:
|
| | | | |
(in thousands) | | December 31, 2017 |
2019 | | $ | 2,513 |
|
2020 | | 1,257 |
|
2021 | | 628 |
|
2022 | | 628 |
|
AMT credit carryforward | | $ | 5,026 |
|
Income tax (expense) benefit differed from amounts computed by applying the applicable federal income tax rate of 35% for the years ended December 31, 2017, 2016 and 2015 to pre-tax earnings as a result of the following: |
| | | | | | | | | | | | |
| | For the years ended December 31, |
(in thousands) | | 2017 | | 2016 | | 2015 |
Income tax (expense) benefit computed by applying the statutory rate | | $ | (192,141 | ) | | $ | 91,259 |
| | $ | 835,408 |
|
Decrease (increase) in deferred tax valuation allowance | | 417,518 |
| | (86,569 | ) | | (668,702 | ) |
Change in tax rate applicable to net deferred tax assets | | (226,263 | ) | | — |
| | — |
|
State income tax and change in valuation allowance | | 696 |
| | (370 | ) | | 13,975 |
|
Stock-based compensation tax deficiency | | (64 | ) | | (4,144 | ) | | (3,274 | ) |
Non-deductible stock-based compensation | | — |
| | — |
| | (256 | ) |
Other items | | (1,546 | ) | | (176 | ) | | (206 | ) |
Income tax (expense) benefit | | $ | (1,800 | ) | | $ | — |
| | $ | 176,945 |
|
The effective tax rates for the Company's operations were 0% for each of the years ended December 31, 2017 and 2016, and 7% for the year ended December 31, 2015. The Company's effective tax rate is affected by changes in tax rates, valuation allowances, recurring permanent differences and by discrete items that may occur in any given year, but are not consistent from year to year. Based on the reduction in the federal corporate tax rate from 35% to 21% effective on January 1, 2018, the Company currently expects that its effective tax rate will not be impacted because of the valuation allowance against its net deferred tax assets. The Company's effective tax rate is expected to remain at 0%.
A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. During the year ended December 31, 2017, in evaluating whether it was more likely than not that the Company's net deferred tax assets were realizable through future net income, management considered all available positive and negative evidence, including (i) its earnings history, (ii) its ability to recover net operating loss carry-forwards, (iii) the existence of significant proved oil, NGL and natural gas reserves, (iv) its ability to use tax planning strategies, (v) its current price protection utilizing oil, NGL and natural gas hedges, (vi) its future revenue and operating cost projections and (vii) the current market prices for oil, NGL and natural gas. Based on all the evidence available, during the year ended December 31, 2017, management determined it was more likely than not that the net deferred tax assets were not realizable. The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized.
As of December 31, 2016, a total valuation allowance of $764.8 million had been recorded against the deferred tax asset. The Company revalued its deferred tax assets and liabilities as of December 31, 2017, at the new rate of 21%. Based upon preliminary analysis of the changes in the Tax Act, the Company decreased its net deferred tax assets by approximately $226.0 million in the fourth quarter of 2017. A corresponding adjustment to the Company's valuation allowance was also recorded of approximately $226.0 million. Due to the full valuation allowance, no related deferred income tax expense was recorded. The Company's actual write-down may vary materially from the estimated amount due to a number of uncertainties and factors, including the completion of the analysis of all impacts of the Tax Act. An additional adjustment of $197.4 million was made to the valuation allowance due to the reduction of net deferred tax assets in the normal course of business, resulting in a total adjustment to the valuation allowance of $423.4 million during the year ended December 31, 2017.
The following table presents significant components of the Company's net deferred tax asset as of December 31: |
| | | | | | | | |
(in thousands) | | 2017 | | 2016 |
Net operating loss carryforward | | $ | 355,100 |
| | $ | 573,521 |
|
Oil and natural gas properties, midstream service assets and other fixed assets | | (80,153 | ) | | 186,473 |
|
Gain on sale of assets | | 40,177 |
| | — |
|
Equity method investee | | — |
| | (24,293 | ) |
Stock-based compensation | | 14,025 |
| | 15,639 |
|
Accrued bonus | | 4,343 |
| | 8,834 |
|
Derivatives | | 3,788 |
| | 150 |
|
Materials and supplies impairment | | 1,206 |
| | 1,982 |
|
Capitalized interest | | 721 |
| | 1,767 |
|
Other | | 2,195 |
| | 743 |
|
Net deferred tax asset before valuation allowance(1) | | 341,402 |
| | 764,816 |
|
Valuation allowance | | (341,402 | ) | | (764,816 | ) |
Net deferred tax asset | | $ | — |
| | $ | — |
|
| |
(1) | The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the impact of the Tax Act on a company's financial statements. The Company has substantially completed the analysis of the Tax Act and does not expect a material change due to the transition impacts. Any changes that do arise due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts will be disclosed in future periods as they arise. |
The following presents the Company's federal net operating loss carryforwards and their applicable expiration dates as of the period presented: |
| | | | |
(in thousands) | | December 31, 2017 |
2026 | | $ | 2,741 |
|
2027 | | 38,651 |
|
2028 | | 228,661 |
|
2029 | | 101,932 |
|
2030 | | 80,963 |
|
Thereafter | | 1,228,819 |
|
Total | | $ | 1,681,767 |
|
The Company had federal net operating loss carry-forwards totaling $1.7 billion and state of Oklahoma net operating loss carryforwards totaling $40.7 million as of December 31, 2017, which begin expiring in 2026 and 2032, respectively. As of December 31, 2017, the Company believes a portion of the net operating loss carry-forwards are not fully realizable. The Company considered all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance was needed. Such consideration included projected future cash flows from its oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of December 31, 2017, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carry-forward from expiring unused, and future projections of Oklahoma sourced income.
The Company files a single return. The Company's income tax returns for the years 2014 through 2017 remain open and subject to examination by federal tax authorities and/or the tax authorities in Oklahoma and Texas, which are the jurisdictions where the Company has or had operations. Additionally, the statute of limitations for examination of federal net operating loss carryforwards typically does not begin to run until the year the attribute is utilized in a tax return. See Note 2.t for further discussion of accounting policies regarding income taxes.