INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company is subject to corporate income taxes and the Texas margin tax.

For certain reporting periods prior to the quarter ended December 31, 2017, the Company’s deferred tax assets exceeded its deferred tax liabilities. The resulting net deferred tax asset was subject to a full valuation allowance. The Company continually assesses its deferred tax assets for realizability and, as a result of such reassessment, in the quarter ended December 31, 2017 the Company determined that sufficient evidence existed to indicate that it is probable that its deferred tax assets will be realized primarily through the unfavorable reversal of deferred tax liabilities, which currently exceed the Company’s deferred tax assets. In the quarter ended December 31, 2017, the valuation allowance historically applied against the Company’s gross deferred tax assets was removed. The Company’s gross deferred tax assets were recorded based upon the 35% federal income tax rate that was in effect prior to the enactment of the Tax Cut and Jobs Act. Subsequently, but also in the quarter ended December 31, 2017, the Company’s deferred tax assets and deferred tax liabilities were revalued to reflect the federal income tax rate enacted by the Tax Cut and Jobs Act. The effects of the removal of the valuation allowance and the reduction to the federal income tax rate may both be seen in the reconciliation of our effective tax rate to the statutory rate below.

The Tax Cuts and Jobs Act, a historic reform of the U.S. federal income tax statutes, was enacted on December 22, 2017. Among other significant features, the Tax Cut and Jobs Act reduces the maximum US federal corporate income tax rate from 35% to 21%, preserves long-standing upstream oil and gas tax provisions such as immediate deduction of intangible drilling costs, allows for immediate expensing of capital expenditures for tangible personal property for a period of time, modifies the provisions related to the limitations on deductions for executive compensation of publicly traded corporations, and enacts new limitations regarding the deductibility of interest expense.

As of the completion of the Company’s financial statements for its year ended December 31, 2017, the Company has substantially completed its accounting for the effects of the enactment of the Tax Cut and Jobs Act. With respect to those items for which the Company’s accounting is not complete, as described below, the Company has made reasonable estimates of the effects on its existing deferred tax balances. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed.

To account for the effects of the Tax Cut and Jobs Act, the Company remeasured its deferred tax assets and liabilities based on the federal income and state income tax rates at which they are now expected to reverse, which is generally a federal income tax rate of 21%. The enacted rate change resulted in a non-cash decrease of approximately $67.9 million to the Company’s income tax provision for the period ended December 31, 2017 and a corresponding reduction to the Company’s net noncurrent deferred tax liability balance as of December 31, 2017.

The Company is still analyzing certain aspects of the Tax Cuts and Jobs Act, specifically the provisions related to limitations on the deductibility of certain executive compensation, including equity based compensation. The Company is refining its calculations, which could potentially affect the measurement of related deferred tax balances or potentially give rise to new deferred tax amounts. The Company does not expect that a material adjustment to its deferred tax position will result from the completion of its computations, which the Company expects to finalize by the fourth quarter of 2018.

At December 31, 2017, the Company did not have any significant uncertain tax positions requiring recognition in the financial statements. The tax years 2014 through 2017 remain subject to examination by the major tax jurisdictions.

The components of the provision for income taxes for the years ended December 31, 2017, 2016 and 2015 are as follows:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Current income tax provision (benefit):
Federal	$	—		$	—		$	(33	)
State	999			192			268
Total current income tax provision	999			192			235
Deferred income tax provision (benefit):
Federal	(21,720		)	(579		)	(198,729		)
State	1,153			579			(2,816		)
Total deferred income tax provision (benefit)	(20,567		)	—			(201,545		)
Total provision for (benefit from) income taxes	$	(19,568	)	$	192		$	(201,310	)

A reconciliation of the statutory federal income tax amount to the recorded expense is as follows:



	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Income tax expense (benefit) at the federal statutory rate (35%)	$	174,016		$	(57,694	)	$	(263,179	)
Impact of nontaxable noncontrolling interest	(12,073		)	—			—
Income tax benefit relating to change in statutory tax rate	(67,938		)	—			(1,145		)
State income tax expense (benefit), net of federal tax effect	3,413			770			(2,548		)
Non-deductible compensation	13,492			3,990			1,354
Change in valuation allowance	(127,485		)	53,336			61,056
Other, net	(2,993		)	(210		)	3,152
Provision for (benefit from) income taxes	$	(19,568	)	$	192		$	(201,310	)

The components of the Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 are as follows:



	December 31,
	2017			2016
	(In thousands)
Current:
Deferred tax assets
Derivative instruments	$	—		$	7,771
Other	—			3,518
Current deferred tax assets	—			11,289
Valuation allowance	—			(11,289		)
Current deferred tax assets, net of valuation allowance	—			—
Deferred tax liabilities
Derivative instruments	—			—
Total current deferred tax liabilities	—			—
Net current deferred tax assets	—			—
Noncurrent:
Deferred tax assets
Net operating loss carryforwards (subject to 20 year expiration)	74,997			139,065
Derivative instruments	22,918			—
Stock based compensation	942			6,234
Other	2,464			—
Noncurrent deferred tax assets	101,321			145,299
Valuation allowance	(104		)	(103,112		)
Noncurrent deferred tax assets, net of valuation allowance	101,217			42,187
Deferred tax liabilities
Oil and natural gas properties and equipment	202,997			42,187
Midstream assets	6,268			—
Total noncurrent deferred tax liabilities	209,265			42,187
Net noncurrent deferred tax liabilities	108,048			—
Net deferred tax liabilities	$	108,048		$	—

The Company incurred a tax net operating loss ("NOL") in the current year due principally to the ability to expense certain intangible drilling and development costs under current law. There is no tax refund available to the Company, nor is there any current income tax payable. At December 31, 2017, the Company had approximately $357.0 million of federal NOLs expiring in 2032 through 2037. The Company principally operates in the state of Texas and is subject to Texas Margin Tax, which currently does not include an NOL carryover provision. The Company believes that Section 382 of the Internal Revenue Code of 1986, as amended, which relates to tax attribute limitations upon the 50% or greater change of ownership of an entity during any three-year look back period, will not have an adverse effect on future NOL usage.

As of December 31, 2017, the Company has a remaining valuation allowance of $0.1 million for certain state NOL carryforwards which the Company does not believe are realizable as it does not anticipate future operations in those states. In the fourth quarter of 2017, the Company removed its valuation allowance against deferred tax assets for U.S. NOL carryforwards resulting in income tax benefit of $127.5 million. As discussed above, management’s assessment included consideration of all available positive and negative evidence including the anticipated timing of reversal of deferred tax liabilities. Management believes that the balance of the Company’s NOLs are realizable to the extent of future taxable income primarily related to the excess of book carrying value of properties over their respective tax bases. As a result of management’s assessment, in the quarter ended December 31, 2017, the Company has removed its valuation allowance against its federal NOLs and other federal deferred tax assets in order to state its deferred assets and liabilities at the amount more likely than not to be realized.