Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted making significant changes to the Internal Revenue Code. The Company has calculated its best estimate of the impact of the TCJA in its year end income tax provision in accordance with its understanding of the TCJA and guidance available as of the date of this filing. Many of the provisions in the TCJA have an effective date for years beginning after December 31, 2017, including the lowering of the U.S. corporate rate from 35 percent to 21 percent. However, as a result of the enactment date of December 22, 2017, the Company is required to remeasure the deferred tax assets and liabilities at the rate in which they are expected to reverse. The Company provisionally recorded an income tax benefit in the amount of $23.4 million related to the remeasurement of the net deferred tax liability. The Company is currently evaluating other potential impacts of the TCJA.
The SEC staff has issued Staff Accounting Bulletin No. 118, which allows registrants to record provisional amounts during a one year "measurement period" similar to that used when accounting for business combinations. Impacts of this TCJA are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed. The Company has made a reasonable estimate and recorded the provisional deferred tax liability regarding the 100% cost recovery of qualified property acquired and placed in service after September 27, 2017 in the amount of $13.0 million. Also, the Company has made a reasonable estimate and recorded a portion of the deferred tax asset of $13.9 million related to stock-based compensation as provisional associated with covered employees. We believe these compensation plans for covered employees continue to qualify as deductible and would be grandfathered under the IRC Sec. 162(m) as of December 31, 2017.
The tax consequences of items taking effect after December 31, 2017 will be analyzed by the Company during 2018, some of the items the Company has identified that will have an impact on the Company are; i) deductibility of future compensation and awards for covered employees, ii) deductibility of meals and entertainment, iii) interest expense deductions, iv) the repeal of like-kind exchanges for non-real property, v) the repeal of the corporate alternative minimum tax and vi) the limitation of the use of NOLs to 80 percent of taxable income. The Company will make a good faith effort to analyze and complete the accounting under ASC Topic 740 of these items prior to the end of the measurement period
Holdings, the Company’s accounting predecessor, was a limited liability company that was not subject to U.S. federal income tax. As part of the Corporate Reorganization, the members of Holdings exchanged all of their member units for shares of the Company’s common stock. For additional discussion on the Corporate Reorganization, see Note 1 — Business and Organization. As a result of the Corporate Reorganization, the Company identified and established the deferred tax assets and liabilities for differences between the book and tax basis of Holdings. The Company recorded a net deferred tax liability of approximately $135.3 million. As this Corporate Reorganization is being accounted for as a transaction under common control the offset of the net deferred tax liability was recorded to additional paid-in capital within the consolidated balance sheet.
The components of the income tax expense (benefit) were as follows (in thousands):
|
| | | | | | | |
| For the Year Ended |
| December 31, |
| 2017 | | 2016 |
Current: | |
| | |
Federal | $ | — |
| | $ | — |
|
State, net of federal benefit | — |
| | — |
|
Total current income tax benefit | $ | — |
| | $ | — |
|
| | | |
Deferred: | | | |
Federal | $ | (61,719 | ) | | $ | (26,962 | ) |
State, net of federal benefit | (1,981 | ) | | (2,318 | ) |
Total deferred income tax benefit | $ | (63,700 | ) | | $ | (29,280 | ) |
| | | |
|
Income tax benefit | $ | (63,700 | ) | | $ | (29,280 | ) |
The following table reconciles the income tax expense (benefit) with income tax expense at the federal statutory rate (in thousands):
|
| | | | | | | |
| For the Year Ended |
| December 31, |
| 2017 | | 2016 |
Loss before income taxes | (108,108 | ) | | (485,281 | ) |
Federal income taxes at statutory rate | (37,838 | ) | | (169,849 | ) |
Net loss prior to Corporate Reorganization | — |
| | 80,463 |
|
State income taxes, net of federal benefit | (3,118 | ) | | (2,318 | ) |
Nondeductible stock-based compensation | 2,264 |
| | 62,284 |
|
Enactment of the Tax Cuts and Jobs Act | (23,412 | ) | | — |
|
Other | (1,596 | ) | | 140 |
|
Income tax expense (benefit) | (63,700 | ) | | (29,280 | ) |
Net loss | $ | (44,408 | ) | | $ | (456,001 | ) |
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):
|
| | | | | | | |
| As of December 31, |
| 2017 | | 2016 |
Deferred Tax Assets: | |
| | |
Net operating loss carryforward | $ | 205,806 |
| | $ | 35,719 |
|
Commodity derivatives | 19,984 |
| | 24,068 |
|
Stock-based compensation | 13,853 |
| | 2,824 |
|
Other | 17,053 |
| | 14,309 |
|
Total deferred tax assets | 256,696 |
| | 76,920 |
|
Deferred Tax Liabilities: | |
| | |
|
Excess basis of oil and gas properties | (299,022 | ) | | (182,946 | ) |
Total deferred tax liabilities | (299,022 | ) | | (182,946 | ) |
Deferred Tax Liability, net | $ | (42,326 | ) | | $ | (106,026 | ) |
Management considers whether some portion or all of the deferred tax assets will be realized based on a more likely than not standard of judgment. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company has net operating loss carryforwards (NOLs) for U.S. income tax purposes that have been generated from the Company's operations of approximately $834.7 million. Due to the Act, these NOLs will not expire and are not subject to the 80 percent limitation of taxable income arising in future tax years.
The utilization of such NOL carryforwards may be limited upon the occurrence of certain ownership changes as stipulated in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). As of December 31, 2017, the Company determined that the statutory provision of Section 382 will not limit the Company’s ability to realize future tax benefits. As of December 31, 2017, the Company believes it will be able to generate sufficient future taxable income within the carryforward period and accordingly, believes that it is more likely than not that its deferred income tax assets will be fully realized. The Company files income tax returns in the U.S. federal jurisdiction and in Colorado. The statute of limitations related to the 2016 and 2017 tax returns are open through 2020 and 2021 respectively, however, the ability for the tax authority to adjust the NOL will continue until three years after the NOL is utilized.
As of December 31, 2017, the Company believes that it has no liability for uncertain tax positions. If the Company were to determine there were any uncertain tax positions, the Company would recognize the liability and related interest and penalties within income tax expense. As of December 31, 2017, the Company had no provision for interest or penalties related to uncertain tax positions.