INCOME TAXES
The Company is a corporation and is subject to U.S. federal income tax and the Texas Margins Tax. On December 22, 2017, the Tax Act was enacted by the U.S. government. The Tax Act significantly impacts the Company’s 2017 effective tax rate and made broad and complex changes to the U.S. corporate income tax code. Among other changes, the Tax Act: (i) reduces the U.S. federal corporate income tax rate from 35% to 21%; (ii) repeals the corporate alternative minimum tax and provides for a refund of previously accrued alternative minimum tax credits; (iii) modifies the provisions relating to the limitations on deductions for executive compensation of publicly traded corporations; (iv) enacts new limitations regarding the deductibility of interest expense and (v) imposes new limitations on the utilization of net operating losses arising in taxable years beginning after December 31, 2017.
GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Act, the Company remeasured its deferred tax assets and liabilities based on the federal income and state income tax rates at which they are now expected to reverse, and they now generally reflect a federal income tax rate of 21%. The enacted rate change resulted in a noncash increase of approximately $23.9 million to the Company’s income tax provision, a corresponding reduction of $23.9 million to the Company’s net noncurrent deferred tax asset balance and a reduction in valuation allowance of $24.3 million December 31, 2017. Any adjustments recorded to these estimates through 2018 will be included in income from operations as an adjustment to tax expense. The ultimate impact of the Tax Act may differ from the Company’s estimates based on the Company’s further analysis of the new law and additional regulatory guidance that may be issued. Further, the amount of the Company’s future federal income tax will be dependent upon its future taxable income.
The Company’s effective combined U.S. federal and state income tax rate as of December 31, 2017, 2016 and 2015 was 4.4%, 16.4% and 24.5% respectively.
During the years ended December 31, 2017, 2016 and 2015, the Company recognized an income tax expense of $5.7 million and income tax benefits of $17.4 million and $23.8 million, respectively. Total income tax differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to the change in the valuation allowance, the change in the TRA liability, state taxes and the impact of income (loss) attributable to noncontrolling ownership interests.
At December 31, 2017, the Company did not have any accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. The Company’s policy is to record interest and penalties relating to uncertain tax positions in income tax expense.
The components of the income tax expense (benefit) were as follows for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Federal: | | | | | | |
Current | | $ | (44 | ) | | $ | 158 |
| | $ | 286 |
|
Deferred | | (423 | ) | | (18,461 | ) | | (27,535 | ) |
Total federal | | (467 | ) | | (18,303 | ) | | (27,249 | ) |
State, net of federal benefit: | | | | | | |
Deferred | | 6,175 |
| | 879 |
| | 3,494 |
|
Total state | | 6,175 |
| | 879 |
| | 3,494 |
|
Income tax expense (benefit) | | $ | 5,708 |
| | $ | (17,424 | ) | | $ | (23,755 | ) |
The following table reconciles the income tax expense (benefit) with income tax expense at the federal statutory rate for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Income (loss) before income taxes | | $ | 129,628 |
| | $ | (106,341 | ) | | $ | (96,785 | ) |
Less: net loss (income) before income taxes attributable
to noncontrolling interest | | (18,725 | ) | | 14,579 |
| | 22,438 |
|
Income (loss) attributable to Parsley Energy, Inc. Stockholders before income taxes | | 110,903 |
| | (91,762 | ) | | (74,347 | ) |
Income taxes at the federal statutory rate | | 38,816 |
| | (32,120 | ) | | (26,022 | ) |
State income taxes, net of federal benefit | | 6,175 |
| | 879 |
| | 3,494 |
|
Provision to return adjustment | | 178 |
| | (237 | ) | | (1,217 | ) |
Permanent and other | | 166 |
| | (61 | ) | | (10 | ) |
TRA Liability change | | (12,547 | ) | | (2,573 | ) | | — |
|
Valuation allowance | | (26,657 | ) | | 32,215 |
| | — |
|
Valuation allowance charged to equity | | — |
| | (15,527 | ) | | — |
|
Valuation allowance due to the reduction in federal statutory rate | | (24,356 | ) | | — |
| | — |
|
Income tax provision due to change in federal statutory rate | | 23,933 |
| | — |
| | — |
|
Income tax expense (benefit) | | $ | 5,708 |
| | $ | (17,424 | ) | | $ | (23,755 | ) |
| | | | | | |
Net income (loss) attributable to Parsley Energy, Inc. Stockholders | | $ | 106,774 |
| | $ | (74,182 | ) | | $ | (50,484 | ) |
Net income (loss) attributable to noncontrolling interest | | $ | 17,146 |
| | $ | (14,735 | ) | | $ | (22,547 | ) |
As of December 31, 2017, the Company had approximately $0.4 million of alternative minimum tax credits available that are expected to be refunded between 2018 and 2021 as a result of the Tax Act. In addition, the Company had approximately $229.1 million of federal net operating loss carryovers that expire during the years 2034 through 2037. The tax benefits of carryforwards are recorded as an asset to the extent that management assesses the utilization of such carryforwards to be more likely than not. When the future utilization of some portion of the carryforwards is determined not be more likely than not, a valuation allowance is provided to reduce the recorded tax benefits from such assets. As of December 31, 2017, the Company had a valuation allowance of $9.3 million as a result of management’s assessment of the realizability of deferred tax assets.
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company does not believe it experienced an ownership change within the meaning of IRC Section 382 during 2017. Even if the Company did experience an ownership change in 2017, any resulting limitation on the use of the Company’s net operating loss carryforwards under IRC Section 382 would not result in a current federal tax liability at December 31, 2017, and the Company does not believe that the resulting Section 382 annual limitation would prevent its utilization of NOLs prior to their expiration
.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands):
|
| | | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
Assets: | | | | |
Asset retirement obligations | | $ | 4,854 |
| | $ | 3,535 |
|
Deferred stock-based compensation | | 7,874 |
| | 6,868 |
|
Derivative fair value loss | | 12,493 |
| | 8,252 |
|
Accrued compensation | | 4,241 |
| | 3,398 |
|
Net operating loss carryforward | | 48,666 |
| | 44,407 |
|
Other | | 78 |
| | 166 |
|
Total deferred tax assets | | 78,206 |
| | 66,626 |
|
Less: Valuation allowance | | (9,264 | ) | | (32,215 | ) |
Net deferred tax assets | | 68,942 |
| | 34,411 |
|
Liabilities: | | | | |
Book basis of oil and natural gas properties
in excess of tax basis | | (89,299 | ) | | (38,489 | ) |
Earnings in investment in subsidiary | | (828 | ) | | (1,116 | ) |
Other | | (218 | ) | | (289 | ) |
Total deferred tax liabilities | | (90,345 | ) | | (39,894 | ) |
Net deferred tax liability | | $ | (21,403 | ) | | $ | (5,483 | ) |
With respect to income taxes, the Company’s policy is to account for interest charges as interest expense, net and any penalties as Other income (expense) in the Company’s consolidated statements of operations. The Company files income tax returns in the U.S. federal jurisdiction and the Texas state jurisdiction, a number of which remain open for examination. The Company’s earliest open years in its key jurisdictions are as follows: |
| |
U.S. federal | 2014 |
State of Texas | 2013 |
The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained by examination. Therefore, at December 31, 2017, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions.
Tax Receivable Agreement
In connection with the IPO, on May 29, 2014, the Company entered into a Tax Receivable Agreement (the “TRA”) with Parsley LLC and certain PE Unit Holders prior to the IPO (each such person a “TRA Holder”), including certain executive officers. The TRA generally provides for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax or franchise tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of (i) any tax basis increases resulting from the contribution in connection with the IPO by such TRA Holder of all or a portion of its PE Units to the Company in exchange for shares of Class A Common Stock, (ii) the tax basis increases resulting from the exchange by such TRA Holder of PE Units for shares of Class A Common Stock or, if either the Company or Parsley LLC so elects, cash, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. The term of the TRA commenced on May 29, 2014, and continues until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA. If the Company elects to terminate the TRA early, it would be required to make an immediate payment equal to the present value of the anticipated future tax benefits subject to the TRA (based upon certain assumptions and deemed events set forth in the TRA). In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.
The actual amount and timing of payments to be made under the TRA will depend upon a number of factors, including the amount and timing of taxable income generated in the future, changes in future tax rates, the use of loss carryovers and the portion of the Company’s payments under the TRA constituting imputed interest. As of December 31, 2017, there have been no payments associated with the TRA.
As a result of the Tax Act corporate rate reduction from 35% to 21% and the reduction in the valuation allowance recorded in 2016, during the year ended December 31,2017, the Company recorded a net decrease to the TRA liability of $35.8 million, which is comprised of a decrease of $55.9 million associated with the corporate rate reduction and an increase of $20.1 million related to the change in valuation allowance.
As of December 31, 2017 and December 31, 2016, the Company had recorded a TRA liability of $58.5 million and $94.3 million, respectively, for the estimated payments that will be made to the PE Unit Holders who have exchanged shares along with corresponding deferred tax assets, net of valuation allowance, of $68.8 million and $111.0 million, respectively, as a result of the increase in tax basis arising from such exchanges and decrease in tax basis as a result of the decrease in the future statutory tax rate.