Income Taxes

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2022 was (0.1)% and (0.3)% of pre-tax income from continuing operations, respectively, as compared to an effective tax rate of 0.0% of pre-tax income from continuing operations for the three and nine months ended September 30, 2021.

The effective tax rates from continuing operations for the three and nine months ended September 30, 2022 and 2021 were lower than the statutory federal rate of 21% primarily as a result of the Company’s valuation allowance, a majority of which was released as of September 30, 2022. This benefit was partially offset by the impacts of state income taxes.

The Company initially recorded a valuation allowance against substantially all of its net deferred tax assets as of March 31, 2020. As of each reporting date, the Company assesses the available positive and negative evidence, including future reversals of temporary differences, tax-planning strategies and future taxable income, to estimate whether sufficient future taxable income will be generated to realize its deferred tax assets. A significant piece of objective positive evidence that the Company has evaluated is the cumulative income earned during the periods since the Company and Whiting each emerged from voluntary restructuring under Chapter 11 of the Bankruptcy Code in 2020. This source of objective positive evidence, combined with the indefinite lives for many of the Company’s deferred tax assets and projections of future taxable income led the Company to determine that there is sufficient positive evidence to conclude that it is more likely than not that the Company will realize the majority of its net deferred tax assets and release a portion of the valuation allowance previously recorded. The Company applied the intraperiod tax allocation rules in accordance with ASC 740-20 and allocated a portion of the income tax benefit associated with the release of the valuation allowance to continuing operations.

On July 1, 2022, the Company completed the Merger (see Note 2—Summary of Significant Accounting Policies for additional information), which qualified as a tax-free reorganization for U.S. federal income tax purposes. The Company recognized a net deferred tax asset of $250.2 million in its purchase price allocation as of the acquisition date to reflect the difference between the tax basis and the fair value of Whiting’s assets acquired and liabilities assumed. The net deferred tax asset includes the tax effected benefit of federal net operating loss carryforwards of $1.1 billion that were acquired in the Merger and are subject to an annual limitation of $7.0 million under Section 382 of the Internal Revenue Code of 1986 (the “Code”). Upon completion of the Merger, both the Company and Whiting experienced an “ownership change” as defined by the Code; however, the limitations anticipated as a result of these ownership changes are not expected to have a material impact on the realizability of the Company’s deferred tax assets. Determining the limitations under Section 382 of the Code is technical and highly complex, and upon future analysis the Company may determine that its ability to take advantage of its net operating loss carryforwards or other tax benefits may be limited to a greater extent than currently anticipated.

The Company’s estimated valuation allowance as of September 30, 2022 was $133.3 million, which decreased $266.5 million from $399.8 million as of December 31, 2021. The Company expects to release the majority of the remaining valuation allowance through the annualized effective tax rate in the fourth quarter of 2022 and anticipates maintaining a valuation allowance of approximately $9 million against state net operating losses acquired in the Merger.