Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

INCOME TAXES

NOTE 7 — INCOME TAXES

Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. The Company’s net deferred tax position as of December 31, 2012 and 2011, respectively, is as follows (in thousands).

	December 31,
	2012			2011
Current deferred tax assets
Property and equipment	$	233		$	113
Other		869
Net operating loss carryforwards		–			13
Total current deferred tax assets		1,102			126
Valuation allowance on current deferred tax assets		(202	)		–
Total current deferred tax assets, net of valuation allowance		900			126
Current deferred tax liabilities
Unrealized gain on derivatives		(1,311	)		(2,998	)
Other		–			(152	)
Total current deferred tax liabilities		(1,311	)		(3,150	)
Net current deferred tax liability	$	(411	)	$	(3,024	)
Non-current deferred tax assets
Net operating loss carryforwards	$	44,654		$	24,034
Alternative minimum tax carryforward		6,660			6,660
Total non-current deferred tax assets		51,314			30,694
Valuation allowance on non-current deferred tax assets		(10,058	)		–
Total non-current deferred tax assets, net of valuation allowance		41,256			30,694
Non-current deferred tax liabilities
Unrealized gain on derivatives		(262	)		(324	)
Property and equipment		(36,363	)		(27,070	)
Other		(4,220	)		(1,706	)
Total non-current deferred tax liabilities		(40,845	)		(29,100	)
Net non-current deferred tax asset	$	411		$	1,594

At December 31, 2012, the Company had net operating loss carryforwards of $123.3 million for federal income tax purposes and $30.3 million for state income tax purposes available to offset future taxable income, as limited by the applicable provisions, and which expire at various dates beginning December 31, 2027 for the federal net operating loss carryforwards. The state net operating loss carryforwards began expiring at various dates beginning December 31, 2013 for the state of New Mexico; however, the significant portion of the Company’s state net operating loss carryforwards expire beginning in 2027.

At June 30, 2012, the net capitalized costs of the Company’s oil and natural gas properties less related deferred income taxes exceeded the full-cost ceiling by $21.3 million. As a result, the Company recorded an impairment charge of $33.2 million to the net capitalized costs of its oil and natural gas properties and a deferred income tax credit of $11.9 million. At September 30, 2012, the net capitalized costs of the Company’s oil and natural gas properties less related deferred income taxes exceeded the full-cost ceiling by $2.3 million. As a result, the Company recorded an impairment charge of $3.6 million to the net capitalized costs of its oil and natural gas properties and a deferred income tax credit of $1.3 million. This deferred income tax credit exceeded the Company’s deferred tax liabilities at September 30, 2012. As a result, the Company established a valuation allowance of $2.4 million at September 30, 2012 due to uncertainties regarding the future realization of its deferred tax assets. At December 31, 2012, the net capitalized costs of the Company’s oil and natural gas properties less related deferred income taxes exceeded the full-cost ceiling by $17.3 million. As a result, the Company recorded an impairment charge of $26.7 million to the net capitalized costs of its oil and natural gas properties and a deferred income tax credit of $9.4 million. This deferred income tax credit exceeded the Company’s deferred tax liabilities at December 31, 2012. As a result, the Company increased the previously established valuation allowance by $7.9 million to maintain a full valuation allowance of $10.3 million against the Company’s net deferred tax assets.

The Company also recorded an impairment charge of $23.0 million to its net capitalized costs, net of a deferred income tax credit of $12.7 million related to the full-cost ceiling limitation during the first quarter ended March 31, 2011. This deferred income tax credit exceeded the Company’s deferred tax liabilities at March 31, 2011. As a result, the Company established a valuation allowance at March 31, 2011 and retained a valuation allowance until the fourth quarter of the year ended December 31, 2011 due to uncertainties regarding the future realization of its deferred tax assets. At December 31, 2011, the Company assessed the valuation allowance and determined that the allowance was no longer required.

The income tax expense reconciled to the tax computed at the statutory federal rate for the years ended December 31, 2012, 2011 and 2010, respectively, is as follows (in thousands).

	Year ended December 31,
	2012			2011			2010
Current income tax (benefit) provision
State income tax	$	–		$	(46	)	$	–
Federal alternative minimum tax		–			–			(1,411	)
Net current income tax benefit		–			(46	)		(1,411	)
Deferred income tax provision (benefit)
Federal tax expense at statutory rate (34%)		(11,767	)		(5,319	)		3,365
Statutory depletion carryforward		–			231			(157	)
State income tax		(819	)		(435	)		–
Change in state rate applied		–			–			275
Nondeductible expense		(122	)		48			38
Permanent differences (1)		1,018			–			–
Federal alternative minimum tax		–			–			1,411
Change in valuation allowance		10,260			–			–
Net deferred income tax (benefit) provision		(1,430	)		(5,475	)		4,932
Total income tax (benefit) provision	$	(1,430	)	$	(5,521	)	$	3,521

⁽¹⁾  Amount is primarily attributable to stock-based compensation.

The Company files a United States federal income tax return and several state tax returns, a number of which remain open for examination. The tax years open for examination for the federal tax return are 2009, 2010, 2011 and 2012. The tax years open for examination by the state of Texas are 2008, 2009, 2010, 2011 and 2012. The tax years open for examination by the state of New Mexico are 2009, 2010, 2011 and 2012. The tax years open for examination by the state of Louisiana are 2009, 2010, 2011 and 2012.