Income Taxes

9 Months Ended

Sep. 30, 2021

Income Tax Disclosure [Abstract]

Income Taxes

7.Income Taxes

The following table presents Devon’s total income tax expense (benefit) and a reconciliation of its effective income tax rate to the U.S. statutory income tax rate.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2021		2020			2021			2020
Earnings (loss) from continuing     operations before income taxes	$	964	$	(193	)	$	1,236		$	(2,980	)
Current income tax expense (benefit)	$	1	$	(90	)	$	15		$	(199	)
Deferred income tax expense (benefit)		119		—			(100	)		(311	)
Total income tax expense (benefit)	$	120	$	(90	)	$	(85	)	$	(510	)

U.S. statutory income tax rate	21	%	21	%	21	%	21	%
State income taxes	0	%	0	%	0	%	1	%
Unrecognized tax benefits	0	%	18	%	0	%	0	%
Deferred tax asset valuation allowance	(9	%)	4	%	(33	%)	(7	%)
Other	0	%	4	%	5	%	2	%
Effective income tax rate	12	%	47	%	(7	%)	17	%

The deferred income tax benefit recognized in the first nine months of 2021 primarily relates to the Merger and a reduced valuation allowance due to increased earnings. As shown in Note 2, Devon recognized $249 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon has recognized on its U.S. Federal deferred tax assets. Additionally, improved commodity prices and post-merger operating performance are causing reductions to Devon’s net operating losses, which also cause corresponding decreases to the associated deferred tax assets and valuation allowance.

As of September 30, 2021, Devon continued to maintain a valuation allowance against certain U.S. deferred tax assets. Devon continues to assess its valuation allowance position every quarter. Subject to any additional objective negative evidence or the addition of subjective evidence such as forecasted income, Devon may continue to adjust the valuation allowance on its deferred tax assets in future periods.

In the fourth quarter of 2020, Devon recorded a deferred tax asset representing the deductible outside basis difference in its investment in a consolidated subsidiary. In the second quarter of 2021, Devon realized this deferred tax asset, increasing its U.S. federal net operating loss carryforwards by $1.8 billion.