Note 6—Income Taxes
In 2016, the Company became the sole managing member of CRP, and as a result, began consolidating the financial results of CRP. CRP is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CRP is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by CRP is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of CRP, as well as any stand-alone income or loss generated by the Company.
Income tax expenses and benefits included in the consolidated statements of operations are detailed below:
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2017 | | October 11, 2016
through
December 31, 2016 | | | January 1, 2016
through
October 10, 2016 | | Year Ended December 31, 2015 |
(in thousands) | | | | |
Current taxes | | | | | | | | |
Federal | $ | — |
| | $ | — |
| | | $ | — |
| | $ | — |
|
State | — |
| | — |
| | | — |
| | — |
|
| — |
| | — |
| | | — |
| | — |
|
Deferred taxes | | | | | | | | |
Federal | (26,713 | ) | | — |
| | | — |
| | — |
|
State | (3,217 | ) | | — |
| | | 406 |
| | 572 |
|
| (29,930 | ) | | — |
| | | 406 |
| | 572 |
|
Income tax benefit (expense) | $ | (29,930 | ) | | $ | — |
| | | $ | 406 |
| | $ | 572 |
|
A reconciliation of the statutory federal income tax expense to the income tax expense or benefit from continuing operations provided at December 31, 2017, is as follows:
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Year Ended December 31, 2017 | | October 11, 2016
through
December 31, 2016 | | | January 1, 2016
through
October 10, 2016 | | Year Ended December 31, 2015 |
(in thousands) | | | | |
Income tax (expense) benefit at the federal statutory rate | $ | (39,720 | ) | | $ | 3,145 |
| | | $ | — |
| | $ | — |
|
State income tax (expense) benefit - net of federal income tax benefits | (2,788 | ) | | — |
| | | 406 |
| | 572 |
|
Change in Federal tax rate (net of state benefit and VA) | 4,425 |
| | — |
| | | — |
| | — |
|
Excess depletion | — |
| | — |
| | | — |
| | — |
|
Noncontrolling interest in partnership | 2,795 |
| | (273 | ) | | | — |
| | — |
|
Equity based compensation | 241 |
| | — |
| | | — |
| | — |
|
Nondeductible expenses | (31 | ) | | (4 | ) | | | — |
| | — |
|
Change in valuation allowance | 5,148 |
| | (2,868 | ) | | | — |
| | — |
|
Other | — |
| | — |
| | | — |
| | — |
|
Income tax benefit (expense) | $ | (29,930 | ) | | $ | — |
| | | $ | 406 |
| | $ | 572 |
|
The change in the Federal tax rate was due to the passage of Public Law No. 115-97, commonly referred to as the Jobs Act. The passage of this legislation resulted in the Company generating a deferred tax benefit primarily due to the reduction in the U.S. statutory rate from 35% to 21%. Based on the Company's current interpretation 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.
The tax effects of temporary differences that give rise to significant positions of the deferred income tax assets and liabilities are presented below:
|
| | | | | | | |
(in thousands) | December 31, 2017 | | December 31, 2016 |
Deferred tax assets: | | | |
Net operating loss carryforwards | $ | 88,968 |
| | $ | 2,590 |
|
Capitalized intangible drilling cost | 5,137 |
| | 10,314 |
|
Equity-based compensation | 2,631 |
| | 467 |
|
Other assets | 288 |
| | 291 |
|
Total deferred tax assets | 97,024 |
| | 13,662 |
|
Deferred tax liabilities: | | | |
Investment in Centennial Resource Production, LLC | (106,923 | ) | | (8,514 | ) |
Other liabilities | — |
| | — |
|
Total deferred tax liabilities | (106,923 | ) | | (8,514 | ) |
| | | |
Valuation allowance | — |
| | (5,148 | ) |
| | | |
Net deferred tax asset (liabilities) | $ | (9,899 | ) | | $ | — |
|
During 2017 in connection with the conversion of shares from a noncontrolling interest owner, a tax benefit was recorded in equity of $20.0 million. For the period from October 11, 2016 through December 31, 2016 (Successor), equity was debited $5.6 million in connection with the issuance of shares from a noncontrolling interest owner. No tax benefit was recorded in equity as a $2.0 million valuation allowance fully offset the attendant tax benefit.
As of December 31, 2017, the Company had approximately $415.9 million and $82.0 million of U.S. federal and state net operating loss carryovers, respectively, which expire variously from 2035 to 2037.
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets, including net operating loss carry forwards. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends, and its outlook for future years. As of December 31, 2017, in part because the Company achieved cumulative pre-tax income, management determined that sufficient positive evidence exists as of December 31, 2017, to conclude that it is more likely than not deferred tax assets will be realized prior to their expiration.
The calculation of the Company’s tax liabilities involves uncertainties in the application of complex tax laws and regulations. The Company gives financial statement recognition to those tax positions that it believes are more-likely-than-not to be sustained upon the examination by the Internal Revenue Service or other governmental agency. As of 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. Interest and penalties related to uncertain tax positions are reported in income tax expense.
The Company is subject to the following material taxing jurisdictions: U.S., Colorado, New Mexico, and Texas. As of December 31, 2017, the Company has no current tax years under audit. The Company remains subject to examination for federal income taxes and state income taxes for tax years 2015 through 2017.