Note 14—Income Tax
For the year ended December 31, 2017, the Company’s annual effective tax rate is approximately 0.0%. The Company incurred a tax loss in the current year (due principally to intangible drilling cost amortization) and thus, no current federal income taxes will be due. This tax loss results in a net operating loss carryforward at December 31, 2017. Management assessed the realizability of the Company’s deferred tax assets based on the more likely than not standard. Management considered several factors such as: (i) the Company’s short tax history, (ii) the lack of carryback potential resulting in a tax refund, and (iii) in light of current commodity pricing uncertainty, there is insufficient external evidence to suggest that net federal tax attribute carryforwards are realizable. As such, the Company has provided a valuation allowance of $214 million as of December 31, 2017.
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
State |
|
|
— |
|
|
|
6 |
|
|
|
315 |
|
|
Total current |
|
|
— |
|
|
|
6 |
|
|
|
315 |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
(74,133 |
) |
|
State |
|
|
— |
|
|
|
540 |
|
|
|
(348 |
) |
|
Total deferred |
|
|
— |
|
|
|
540 |
|
|
|
(74,481 |
) |
|
Total income tax expense (benefit) |
|
$ |
— |
|
|
$ |
546 |
|
|
$ |
(74,166 |
) |
The Company’s income tax expense differs from the amount derived by applying the statutory federal rate to pretax loss principally due the effect of the following items (in thousands):
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Income (loss) before income taxes |
|
$ |
8,525 |
|
|
$ |
(206,189 |
) |
|
$ |
(1,035,957 |
) |
|
Statutory rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
Income tax benefit computed at statutory rate |
|
|
2,984 |
|
|
|
(72,166 |
) |
|
|
(362,585 |
) |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes |
|
|
— |
|
|
|
546 |
|
|
|
(21 |
) |
|
Other, net |
|
|
50 |
|
|
|
854 |
|
|
|
795 |
|
|
Gain on acquisition of Eclipse Operating |
|
|
— |
|
|
|
— |
|
|
|
(141 |
) |
|
Share-based compensation |
|
|
(576 |
) |
|
|
— |
|
|
|
— |
|
|
Executive compensation limitation |
|
|
496 |
|
|
|
— |
|
|
|
— |
|
|
Change in valuation allowance |
|
|
(145,449 |
) |
|
|
71,312 |
|
|
|
287,786 |
|
|
Change in Federal tax rate |
|
|
142,495 |
|
|
|
— |
|
|
|
— |
|
|
Income tax expense (benefit) |
|
$ |
— |
|
|
$ |
546 |
|
|
$ |
(74,166 |
) |
Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of our deferred taxes are detailed in the table below (in thousands):
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Deferred tax asset: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas properties and equipment |
|
$ |
93,854 |
|
|
$ |
193,095 |
|
|
$ |
235,884 |
|
|
Federal tax loss carryforwards |
|
|
114,652 |
|
|
|
145,628 |
|
|
|
61,006 |
|
|
Derivative instruments and other |
|
|
1,064 |
|
|
|
16,829 |
|
|
|
— |
|
|
State effect of deferreds |
|
|
— |
|
|
|
— |
|
|
|
540 |
|
|
Other, net |
|
|
4,639 |
|
|
|
4,259 |
|
|
|
3,434 |
|
|
Deferred tax asset |
|
|
214,209 |
|
|
|
359,811 |
|
|
|
300,864 |
|
|
Valuation allowance |
|
|
(213,800 |
) |
|
|
(359,098 |
) |
|
|
(287,786 |
) |
|
Net deferred tax assets |
|
$ |
409 |
|
|
$ |
713 |
|
|
$ |
13,078 |
|
|
Deferred tax liability: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments and other |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,054 |
|
|
Other, net |
|
|
409 |
|
|
|
713 |
|
|
|
484 |
|
|
Net deferred tax liability |
|
$ |
409 |
|
|
$ |
713 |
|
|
$ |
12,538 |
|
|
Reflected in the accompanying consolidated balance sheet as: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
540 |
|
|
Net deferred tax liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
The Company has U.S. federal tax loss carryforwards (“NOL”) of approximately $546 million as of December 31, 2017. The NOL carryforwards will begin to expire in 2034. The tax years ended December 31, 2016, 2015 and 2014 will remain open to examination under the applicable statute of limitations in the U.S. and other jurisdictions in which the Company and its subsidiaries file income tax returns. However, the statute of limitations for examination of NOLs and other similar attribute carryforwards does not commence until the year the attribute is utilized. In some instances, state statutes of limitations are longer than those under U.S. federal tax law.
The change in the Federal tax rate was due to the passage of Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Act”). Due to the reduction in the U.S. statuary tax rate from 35% to 21%, the Company recorded a $142 million reduction of tax benefit and a corresponding $142 million reversal of valuation allowance previously recorded, as it is required to reflect the change in the period in which the law is enacted. The impact of the Tax Reform resulted in a net $0 impact to the Company’s income tax provision. Based on the Company’s current interpretation of the Act and subject to the release of the related regulations and any future interpretive guidance, the Company believes the effects of the change in tax law incorporated herein are substantially complete.
As of December 31, 2017, 2016, and 2015 the Company has not recorded a reserve for any uncertain tax positions. No federal income tax payments are expected in the upcoming four quarterly reporting periods.
During the second quarter of 2017, the Internal Revenue Service completed its examination of Eclipse Resources Corporation for its tax year 2014. There were no adjustments to the Company’s tax returns as a result of the examination.