Income taxes

12 Months Ended

Dec. 31, 2019



Note 12	Income taxes

The Company is subject to federal and state income taxes and the Texas franchise tax. The following table presents the federal and state income taxes included in "Current" and "Deferred" income tax benefit (expense) in the consolidated statements of operations for the periods presented:



	Years ended December 31,
(in thousands)	2019		2018			2017
Current income tax benefit (expense):
Federal	$	—	$	—		$	—
State	—		807			(1,800		)
Deferred income tax benefit (expense):
Federal	—		—			—
State	2,588		(5,056		)	—
Total income tax benefit (expense)	$	2,588	$	(4,249	)	$	(1,800	)

Texas net deferred tax liabilities of $2.5 million and $5.1 million were recorded as of December 31, 2019 and 2018, respectively, which are included in "Other noncurrent liabilities" on the consolidated balance sheets, along with the corresponding deferred income tax benefit (expense) for the years ended December 31, 2019 and 2018.

A current tax refund of $0.8 million of Texas franchise tax was received as a result of differences in estimated versus actual taxable income from the gain on the Medallion Sale and was recorded as a current income tax benefit for the year ended December 31, 2018.

On December 22, 2017, the President signed into law Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among other things, (i) reduced the U.S. corporate income tax rate, (ii) repealed the corporate alternative minimum tax, (iii) imposed new limitations on the utilization of net operating losses and (iv) provided for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. The Company recognizes the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The enactment date in the U.S. is the date the bill becomes law, which is when the President signs the bill.

For the year ended December 31, 2017, current tax expense recorded of $1.8 million is comprised of Texas franchise tax, mainly as a result of the Medallion Sale in 2017. Additionally, the Company paid Alternative Minimum Tax ("AMT") related to the Medallion Sale. The payment of AMT creates an AMT credit carryforward. Due to changes in the Tax Act, AMT credit carryforwards do not expire and are now refundable over a five-year period.

The following table presents the expected years in which the Company's AMT credit carryforward will be refunded as of the date presented:



(in thousands)	December 31, 2019
2020⁽¹⁾	1,031
2021⁽²⁾	516
2022⁽²⁾	515
AMT credit carryforward	$	2,062

_____________________________________________________________________________


(1)	Included in "Accounts receivable, net" as of December 31, 2019.


(2)	Included in "Other noncurrent assets, net" as of December 31, 2019.

Total income tax benefit (expense) differed from amounts computed by applying the applicable federal income tax rate of 21% for the years ended December 31, 2019 and December 31, 2018 and 35% for the year ended December 31, 2017 to pre-tax earnings as a result of the following:



	Years ended December 31,
(in thousands)	2019			2018			2017
Income tax benefit (expense) computed by applying the statutory rate	$	72,460		$	(69,057	)	$	(192,141	)
(Increase) decrease in deferred tax valuation allowance	(69,316		)	74,289			417,518
State income tax and change in valuation allowance	1,863			(9,070		)	696
Change in tax rate applicable to net deferred tax assets	—			—			(226,263		)
Stock-based compensation tax deficiency	—			—			(64		)
Other items	(2,419		)	(411		)	(1,546		)
Total income tax benefit (expense)	$	2,588		$	(4,249	)	$	(1,800	)

The effective tax rates for the Company's operations were 1% for the years ended December 31, 2019 and 2018 and 0% for the year ended December 31, 2017. The Company's effective tax rate is affected by changes in tax rates, valuation allowances, recurring permanent differences and by discrete items that may occur in any given year, but are not consistent from year to year. The Company's effective tax rate is expected to remain at 1%, due to the full valuation allowance against the Company's federal and Oklahoma net deferred tax assets.

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective approach of adoption with the cumulative effect recognized as an adjustment to the 2018 beginning balance of accumulated deficit, presented in the consolidated statements of stockholders' equity. As the effect on income taxes of adoption and transition to ASC 606 are direct effects of the change, the beginning balances of the federal and state deferred tax assets and the offsetting valuation allowances relating to the reclassification of the $141.1 million deferred gain on Medallion Sale were reduced by $30.7 million during the year ended December 31, 2018. See Note 13.a for further discussion of the impact of ASC 606 adoption.

The Company is required to estimate the federal and state income taxes in each of the jurisdictions it operates in. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial accounting purposes. These differences and the Company's net operating loss carryforwards result in deferred tax assets and liabilities.

The following table presents significant components of the Company's net deferred tax liability as of the dates presented:



(in thousands)	December 31, 2019			December 31, 2018
Net operating loss carryforward	$	410,697		$	392,276
Oil and natural gas properties, midstream service assets and other fixed assets	(109,931		)	(168,031		)
Stock-based compensation	20,448			19,845
Derivatives	(14,543		)	(8,188		)
Loss on sale of assets	(7,773		)	(7,693		)
Other	5,186			3,997
Net deferred tax asset before valuation allowance	304,084			232,206
Valuation allowance	(306,552		)	(237,262		)
Net deferred tax liability	$	(2,468	)	$	(5,056	)

The following presents the Company's federal net operating loss carryforwards and their applicable expiration dates as of the date presented:



(in thousands)	December 31, 2019
2026	$	2,741
2027	38,651
2028	228,661
2029	101,932
2030	80,963
Thereafter	1,284,150
Total expiring federal net operating loss carryforwards	1,737,098
Non-expiring federal net operating loss carryforwards	210,541
Total federal net operating loss carryforwards	$	1,947,639

The Company had federal net operating loss carryforwards totaling $1.9 billion and state of Oklahoma net operating loss carryforwards totaling $35.7 million as of December 31, 2019, which begin expiring in 2026 and 2032, respectively. Due to the passing of the Tax Act, $210.5 million of the federal net operating loss carryforwards will not expire but may be limited in future periods.

A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. To the extent a valuation allowance is established or is increased or decreased during a period, there is a corresponding expense or reduction of expense within the tax provision in the consolidated statement of operations.

During the years ended December 31, 2019 and 2018, in evaluating whether it was more likely than not that the Company's net deferred tax assets were realizable through future net income, the Company considered all available positive and negative evidence, including (i) its earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition, (ii) its ability to recover net operating loss carryforward deferred tax assets in future years, (iii) the existence of significant proved oil, NGL and natural gas reserves, (iv) its ability to use tax planning strategies, such as electing to capitalize intangible drilling costs as opposed to expensing such costs in order to prevent an operating loss carryforward from expiring unused and future projections of Oklahoma sourced income, (v) its current price protection utilizing oil, NGL and natural gas hedges, (vi) future revenue and operating cost projections that indicate it will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures and (vii) current market prices for oil, NGL and natural gas. Based on all the evidence available, the Company determined it was more likely than not that the net deferred tax assets were not realizable. As of December 31, 2019, a total valuation allowance of $306.6 million has been recorded to offset the Company's federal and Oklahoma net deferred tax assets resulting in a Texas net deferred tax liability of $2.5 million that is included in "Other noncurrent liabilities" on the consolidated balance sheets.

The Company files a single return. The Company's income tax returns for the years 2016 through 2019 remain open and subject to examination by federal tax authorities and/or the tax authorities in Oklahoma and Texas, which are the jurisdictions where the Company has operations. Additionally, the statute of limitations for examination of federal net operating loss carryforwards typically does not begin to run until the year the attribute is utilized in a tax return. See Note 2.r for the Company's significant accounting policies for income taxes.