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. The Company and its subsidiaries, other than the Partnership and the Operating Company, file a federal corporate income tax return on a consolidated basis. As discussed further below, the Partnership is a taxable entity for federal income tax purposes effective May 10, 2018, and as such files a federal corporate income tax return including the activity of its investment in the Operating Company. The Partnership’s provision for income taxes is included in the Company’s consolidated income tax provision and, to the extent applicable, in net income attributable to the non-controlling interest.

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 the year ended December 31, 2017, the Company had substantially completed its accounting for the effects of the enactment of the Tax Cuts and Jobs Act and with respect to those items for which the Company’s accounting was not complete, the Company made reasonable estimates of the effects on its deferred tax balances.

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. At December 31, 2018, the Company completed its accounting for all of the enactment-date income tax effects of the Tax Cuts and Jobs Act and has not made any adjustments to the provisional amounts recorded December 31, 2017.

The components of the Company’s consolidated provision for income taxes for the years ended December 31, 2018, 2017 and 2016 are as follows:



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Current income tax provision (benefit):
Federal	$	4		$	—		$	—
State	(999		)	999			192
Total current income tax provision	(995		)	999			192
Deferred income tax provision (benefit):
Federal	161,354			(21,720		)	(579		)
State	8,003			1,153			579
Total deferred income tax provision (benefit)	169,357			(20,567		)	—
Total provision for (benefit from) income taxes	$	168,362		$	(19,568	)	$	192

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



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Income tax expense (benefit) at the federal statutory rate⁽¹⁾	$	233,784		$	174,016		$	(57,694	)
Impact of nontaxable noncontrolling interest	(5,107		)	(12,073		)	—
Income tax benefit relating to change in statutory tax rate	—			(67,938		)	—
State income tax expense (benefit), net of federal tax effect	7,769			3,413			770
Non-deductible compensation	4,887			13,492			3,990
Change in valuation allowance	150			(127,485		)	53,336
Deferred taxes related to change in the Partnership's tax status	(72,787		)	—			—
Other, net	(334		)	(2,993		)	(210		)
Provision for (benefit from) income taxes	$	168,362		$	(19,568	)	$	192


(1)	The federal statutory rates for the years ended December 31, 2018, 2017 and 2016 were 21%, 35% and 35%, respectively.

The components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:



	December 31,
	2018			2017
	(In thousands)
Deferred tax assets
Net operating loss and other carryforwards	154,408			74,997
Derivative instruments	—			22,918
Stock based compensation	7,021			942
The Partnership's investment in the Operating Company	94,468			—
Other	8,634			2,464
Deferred tax assets	264,531			101,321
Valuation allowance	(13,932		)	(104		)
Deferred tax assets, net of valuation allowance	250,599			101,217
Deferred tax liabilities
Oil and natural gas properties and equipment	1,825,237			202,997
Midstream assets	66,728			6,268
Derivative instruments	46,496			—
Total deferred tax liabilities	1,938,461			209,265
Net deferred tax liabilities	$	1,687,862		$	108,048

The Company had net deferred tax liabilities of approximately $1,687.9 million and $108.0 million at December 31, 2018 and 2017, respectively. On November 29, 2018, the Company completed its acquisition of Energen. For federal income tax purposes, the acquisition was a tax-free merger whereby the Company’s tax basis in Energen assets and liabilities was unaffected by the acquisition. As of December 31, 2018, the Company recorded a deferred tax liability of $1,402.8 million associated with the acquired assets, which includes deferred tax assets related to tax attributes acquired from Energen. The acquired tax attributes include federal net operating loss and credit carryforwards of approximately $13.5 million which are subject to an annual limitation under Internal Revenue Code Section 382. The Company expects that these tax attributes will be fully utilized prior to expiration. In addition, acquired tax attributes include state net operating loss carryforwards of approximately $13.6 million for which a valuation allowance has been provided as discussed further below, and $75.7 million of minimum tax credit carryforward which the Company anticipates will be fully refundable over the 2018 through 2021 tax years. The Company’s minimum tax credits, including those acquired from Energen, are classified as $38.2 million current and $38.2 million noncurrent income tax receivables on the balance sheet.

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, 2018, the Company had approximately $395.1 million of federal NOLs expiring in 2032 through 2037 and $172.7 million of federal NOLs with an indefinite carryforward life, including NOLs acquired from Energen. 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, 2018, the Company has a valuation allowance of $13.9 million for certain state NOL carryforwards, including $13.6 million acquired from Energen, which the Company does not believe are realizable as it does not anticipate future operations in those states. Management’s assessment at each balance sheet date 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 had 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. As of December 31, 2018, management determined that it is more likely than not that the Company will realize its remaining deferred tax assets.

As discussed further in Note 4—Viper Energy Partners LP, on March 29, 2018, the Partnership announced that the Board of Directors of its General Partner had unanimously approved a change of the Partnership’s federal income tax status from that of a pass-through partnership to that of a taxable entity, which change became effective on May 10, 2018. The transactions undertaken in connection with the change in the Partnership’s tax status were not taxable to the Company. Subsequent to the Partnership’s change in tax status, the Partnership’s provision for income taxes for the period ended December 31, 2018 is based on its estimated annual effective tax rate plus discrete items. As such, the Partnership’s provision for income taxes is included in the Company’s consolidated financial statements and to the extent applicable, in net income attributable to the non-controlling interest.

At December 31, 2018, the Company’s net deferred tax liabilities include a deferred tax asset of approximately $94.5 million related to the Partnership’s investment in the Operating Company, approximately $72.8 million of which was recorded as a result of the Partnership’s change in tax status. Under federal income tax provisions applicable to the Partnership’s change in tax status, the Partnership’s basis for federal income tax purposes in its interest in the Operating Company consists primarily of the sum of the Partnership’s unitholders’ tax bases in their interests in the Partnership on the date of the tax status change. Under federal income tax reporting rules applicable to publicly traded partnerships (“PTPs”), partner information, including partner tax basis information, is required to be provided to the Partnership, but not in sufficient time for the Partnership to finalize its determination of the resultant tax basis in the Operating Company. The deferred tax asset reflected above represents the Partnership’s best estimate of the difference between its tax basis and its basis for financial accounting purposes in the Operating Company. The estimate is subject to revision when the Partnership finalizes its federal income tax computations for 2018. The Partnership has federal net operating loss carryforwards of approximately $8.3 million which may be carried forward indefinitely to offset future taxable income.

The following table sets forth changes in the Company’s unrecognized tax benefits:



	December 31, 2018
	(in thousands)
Balance at beginning of year	—
Increase resulting from tax positions acquired	7,111
Increase resulting from prior period tax positions	4
Increase resulting from current period tax positions	—
Balance at end of year	7,115
Less: Effects of temporary items	(4,666	)
Total that, if recognized, would impact the effective income tax rate as of the end of the year	2,449

The Company’s federal and state income tax returns for 2012 through the current tax year remain open and subject to examination by the IRS and major state taxing jurisdictions. Energen is currently under IRS examination of its federal consolidated income tax returns for 2014 and 2016. Accordingly, it is reasonably possible that significant changes to the reserve for uncertain tax positions may occur as a result of various audits and the expiration of the statute of limitations. Although the timing and outcome of tax examinations is highly uncertain, the Company does not expect the change in unrecognized tax benefit within the next 12 months would have a material impact to the financial statements.