5. Income Taxes

The Company’s estimated annual effective income tax rates are used to allocate expected annual income tax expense or benefit to interim periods. The rates are the ratio of estimated annual income tax expense or benefit to estimated annual income or loss before income taxes by taxing jurisdiction, except for discrete items, which are significant, unusual or infrequent items for which income taxes are computed and recorded in the interim period in which the discrete item occurs. The estimated annual effective income tax rates are applied to the year-to-date income or loss before income taxes by taxing jurisdiction to determine the income tax expense or benefit allocated to the interim period. The Company updates its estimated annual effective income tax rates on a quarterly basis considering the geographic mix of the estimated annual income or loss attributable to the tax jurisdictions in which the Company operates.

The Company’s income tax expense differs from the income tax expense computed by applying the U.S. federal statutory corporate income tax rate of 21% for the three and six months ended June 30, 2018 and 35% for the three and six months ended June 30, 2017, to income before income taxes as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
Income before income taxes		$35,792			$56,306			$63,603			$96,327
Income tax expense at the statutory rate	(7,517		)	(19,707		)	(13,357		)	(33,714		)
State income tax expense, net of U.S. federal income taxes	(487		)	(1,017		)	(806		)	(1,727		)
Tax shortfalls from stock-based compensation expense	(16		)	(164		)	(2,542		)	(2,756		)
Decrease in deferred tax assets valuation allowance	8,048			20,948			16,449			38,317
Other	(511		)	(60		)	(546		)	(120		)
Income tax expense		($483	)		$—			($802	)		$—

Significant changes in the Company’s operations, including the ExL Acquisition in the Delaware Basin in the third quarter of 2017 and divestitures of substantially all of the Company’s assets in the Utica and Marcellus in the fourth quarter of 2017 and the Niobrara in the first quarter of 2018, resulted in changes to the Company’s state apportionment for estimated state deferred tax liabilities. As a result of these changes, the Company recorded current and deferred state income tax expense of $0.5 million and $0.8 million for the three and six months ended June 30, 2018, respectively.

Tax Cuts and Jobs Act

On December 22, 2017, the U.S. Congress enacted the Tax Cuts and Jobs Act (the “Act”) which made significant changes to U.S. federal income tax law, including lowering the U.S. federal statutory corporate income tax rate to 21% from 35% beginning January 1, 2018. Due to the uncertainty regarding the application of ASC 740 in the period of enactment of the Act, the SEC issued Staff Accounting Bulletin 118 which allowed the Company to provide a provisional estimate of the impacts of the Act in earnings for the year ended December 31, 2017 and also provided a one-year measurement period in which the Company would record additional impacts from the enactment of the Act as they are identified. As of June 30, 2018, the Company has not made any changes to the provisional estimate recorded in earnings for the year ended December 31, 2017. While the Company has made a reasonable estimate of the effects on its existing deferred tax balances, it has not completed its accounting for the tax effects of the enactment of the Act and will continue to monitor provisions with discrete rate impacts, such as the limitation on executive compensation for subsequent events and additional guidance provided within the one year measurement period.

Deferred Tax Assets Valuation Allowance

Primarily as a result of the impairments of proved oil and gas properties recognized beginning in the third quarter of 2015 and continuing through the third quarter of 2016, the Company had a cumulative historical three year pre-tax loss and a net deferred tax asset position at June 30, 2018. The Company then assessed the realizability of its deferred tax assets and, beginning in the third quarter of 2015 and continuing through the second quarter of 2018, the Company concluded that it was more likely than not the deferred tax assets will not be realized and that a valuation allowance was required to reduce the net deferred tax assets to zero. As of June 30, 2018 and December 31, 2017, the valuation allowance was $316.5 million and $333.0 million, respectively. See the table above for changes in the valuation allowance for the three and six months ended June 30, 2018 and 2017, which primarily related to activity during each respective period and, for the three and six months ended June 30, 2017, the effect of adopting ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.