Entity information:

• Entity registrant name: Chaparral Energy, Inc.
• CIK: 0001346980
• SEC filing page: http://www.sec.gov/Archives/edgar/data/1346980/000156459018007003/0001564590-18-007003-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/1346980/000156459018007003/chpe-20171231.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/1346980/000156459018007003/chpe-20171231.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0001346980
• Generator: Donnelley Financial Solutions
• Total assets: 1,139,306,000
• Income tax expense (benefit):
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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Note 12: Income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We are subject to U.S. federal corporate income taxes, state income tax in states where business is conducted (most notably Oklahoma), and margin tax in the state of Texas.

Tax Cuts and Jobs Act. On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act amends existing U.S. tax laws that impact the company, most notably a reduction of the maximum U.S. federal corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017.

The other changes to existing U.S. tax laws as a result of the 2017 Tax Act, which we believe have the most significant impact on the our federal corporate income taxes are as follows:

Reduction of the U.S. Corporate Income Tax Rate. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, our deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a $112,715 decrease in net deferred tax assets for the year ended December 31, 2017 and a 95% decrease to our effective tax rate. A corresponding change was recorded to the valuation allowance, and therefore there was no impact to current period income tax expense.

Section 162(m) Limitation on Compensation. Chaparral’s management compensation includes performance based compensation that has been previously deductible.  The 2017 Tax Act made certain changes to section 162(m) of the Internal Revenue Code which impacts the deductibility of performance based stock compensation paid to executives after January 1, 2018 including expanding the definition of a covered employee and eliminating the exception for performance based compensation. As a result, we recorded a provisional Section 162(m) adjustment of $8,200 related to stock based compensation. We will monitor future guidance set forth by the U.S. Treasury Department, the IRS, state tax authorities and other standard-setting bodies with regard to Section 162(m) provisions under the 2017 Tax Act, and anticipate completing our analysis prior to filing our 2017 tax return in the third quarter of 2018, which is within the one year measurement period required under Staff Accounting Bulletin No. 118 issued by the SEC.

We recognized the income tax effects of the 2017 Tax Act in our 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, issued by SEC Staff to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. We have recognized the tax impacts related to the remeasurement of deferred tax assets and liabilities and included these amounts in our Consolidated Financial Statements for the year ended December 31, 2017. The ultimate impact may differ from these amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued and actions we may take as a result of the 2017 Tax Act. Any subsequent adjustment to these amounts will be recorded to adjust the initial recognition of tax reform in the quarter of 2018 when the analysis is complete.

 

Income tax (benefit) expense from continuing operations consists of the following:

 

A reconciliation of the U.S. federal statutory income tax rate to the effective tax rate is as follows:

 

Components of the deferred tax assets and liabilities are as follows:

Deferred tax asset valuation allowance. The ultimate realization of our deferred tax assets is dependent upon the generation of future taxable income during the periods in which those deferred tax assets would be deductible. We assess the realizability of our deferred tax assets each period by considering whether it is more likely than not that all or a portion of our deferred tax assets will not be realized. We consider all available evidence (both positive and negative) when determining whether a valuation allowance is required. We evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including projected future taxable income, the reversal of existing temporary differences, taxable income in carryback years and available tax planning strategies in making this assessment.

Due to continued tax losses, we maintained our deferred tax asset position at December 31, 2017. We believe that it is more likely than not that these deferred tax assets will not be realized and as such we are maintaining the full valuation allowance against our net deferred tax assets. As a result of the reduction in U.S. federal corporate rate and favorable temporary differences, we reduced our valuation allowance by $359,181 against our deferred tax assets at December 31, 2017, and remain in a full valuation allowance position. The net change in the U.S. federal and state valuation allowance for the year ended December 31, 2017, including discrete items of $408,039 primarily as a result of increase in value of our oil and gas properties in conjunction with implementation of fresh start accounting and the reduction of the maximum U.S. federal corporate income tax under the 2017 Tax Act offset by increases applicable to current year losses.

We will continue to evaluate whether the valuation allowance is needed in future reporting periods. The valuation allowance will remain until we can determine that the net deferred tax assets are more likely than not to be realized. Future events or new evidence which may lead us to conclude that it is more likely than not that its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings, improvements in oil prices, and taxable events that could result from one or more transactions. The valuation allowance does not prevent future utilization of the tax attributes if we recognize taxable income. As long as we conclude that the valuation allowance against its net deferred tax assets is necessary, we likely will not have any additional deferred income tax expense or benefit.

Net operating loss carryforwards. We have federal net operating loss carryforwards of approximately $919,097 at December 31, 2017, which will expire between 2028 and 2037 if not utilized in earlier periods. At December 31, 2017, we have state net operating loss carryforwards of approximately $1,121,523, which will expire between 2018 and 2037 if not utilized in earlier periods. In addition, at December 31, 2017 we had federal percentage depletion carryforwards of approximately $13,668, which are not subject to expiration.

Our ability to utilize our loss carryforwards to reduce future taxable income is subject to various limitations under the Internal Revenue Code of 1986, as amended (the “IRC”). The utilization of such carryforwards may be limited upon the occurrence of certain ownership changes, including the purchase or sale of stock by 5% stockholders 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 IRC imposes an annual limitation on the amount of the Company’s taxable income that can be offset by these carryforwards after an ownership change. The limitation is generally equal to the product of (a) the fair market value of the equity of the Company multiplied by (b) 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.

Important in the determination of the tax attributes of a debtor corporation following emergence from Chapter 11 is the amount of cancellation of indebtedness income realized.  On the emergence date, as described in “Note 3—Chapter 11 reorganization,” pursuant to the Reorganization Plan, $1,267,410 of indebtedness, including accrued interest, attributable to our Senior Notes and $2,439 of general unsecured claims were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The IRC of 1986, as amended provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. While we are currently in the process of finalizing the bankruptcy related calculations, it is our expectation that the fair market value of the consideration received by our creditors upon emergence is substantially the same as the adjusted issue price of the indebtedness extinguished. Accordingly, the amount of CODI realized upon emergence may be relatively low, possibly zero.  However, to the extent the finally determined fair market value of the consideration is less than the adjusted issue price of the indebtedness, and CODI was realized, such amount of CODI would be excluded from taxable income and would reduce our prior tax attributes, which could include net operating losses, capital losses, alternative minimum tax credits and tax basis in assets. Any reduction of tax attributes is expected to be fully offset by a corresponding decrease in valuation allowance.

The IRC provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future taxable income in the event of a change in ownership. The Company’s emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of the IRC. However, the IRC provides alternatives for taxpayers emerging from a Chapter 11 bankruptcy proceeding that may mitigate or even eliminate an annual limitation. The Company is in the process of analyzing these alternatives in order to minimize the impact of the ownership change on its ability to utilize tax attributes in future periods. This analysis will be dependent on a number of factors, including verifying qualification for each alternative, analyzing the possibility of a second ownership change during the two year period following emergence, and analyzing transactions subsequent to emergence generating taxable gains or losses.  The Company will make a final determination regarding the most beneficial alternative upon filing its 2017 U.S. Federal income tax return prior to its extended due date in the fall of 2018.