Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Note 9 — Income Taxes

Income Tax Expense (Benefit)

The components of income tax expense (benefit) were as follows (in thousands):

	Year Ended December 31,
	2021			2020			2019
Current income tax expense (benefit):
United States	$	(5	)	$	(499	)	$	437
Mexico		(993	)		185			1,183
Total current income tax expense (benefit)	$	(998	)	$	(314	)	$	1,620
Deferred income tax expense (benefit):
United States	$	(1,067	)	$	35,923		$	(37,131	)
Mexico		430			(26	)		(630	)
Total deferred income tax expense (benefit)	$	(637	)	$	35,897		$	(37,761	)
Total income tax expense (benefit)	$	(1,635	)	$	35,583		$	(36,141	)

A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to the Company’s income tax expense (benefit) is as follows (in thousands, except percentages):

	Year Ended December 31,
	2021			2020			2019
Income tax expense (benefit) at the federal statutory tax rate	$	(38,763	)	$	(90,304	)	$	4,744
State income taxes		(674	)		(14,215	)		1,396
Impact of foreign operations		(11,920	)		(1,030	)		(4,948	)
Effect of change in state rate		2,008			—			—
Prior year taxes		486			(4,237	)		(1,950	)
Other adjustments		—			—			137
Legal entity reorganization		—			(17,566	)		39,336
Change in valuation allowance		45,547			162,213			(75,196	)
Other permanent differences		1,681			722			340
Total income tax expense (benefit)	$	(1,635	)	$	35,583		$	(36,141	)
Effective tax rate		0.89	%		(8.27	)%		(159.99	)%

The Company’s effective tax rate for the year ending December 31, 2021 differed from the federal statutory rate of 21.0% primarily due to recording a full valuation allowance against its federal, state and foreign deferred tax assets.

The Company’s effective tax rate for the year ending December 31, 2020 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax expense of $162.2 million related to the recognition of a valuation allowance for its excess federal and state deferred tax assets. This expense was partially offset by a tax benefit of $17.6 million from adopting the final Treasury Regulations under Section 163(j) of the Internal Revenue Code (the “IRC”) for tax years ended December 31, 2018 and December 31, 2019. The adoption of the final Treasury Regulations reduced the non-cash tax expense recognized in the year ending December 31, 2019 from the legal entity conversion of a partnership to a corporation.

The Company’s effective tax rate for the year ending December 31, 2019 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax benefit of $75.2 million related to the full release of the valuation allowance for its federal and a significant portion of its state deferred tax assets. The federal and state portion of the release equals $80.2 million, partially offset by a $5.0 million increase in valuation allowance recorded against foreign deferred tax assets. Additionally, the Company recorded a tax expense of $39.3 million related to the reorganization of our subsidiaries, of which $38.9 million represents the non-cash impact from the legal entity conversion of a partnership to a corporation.

Deferred Tax Assets and Liabilities

Net deferred tax assets (liabilities) 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. Significant components of deferred tax assets and liabilities were as follows (in thousands):

	Year Ended December 31,
	2021			2020
Deferred tax assets:
Federal net operating loss	$	153,849		$	133,804
Foreign tax loss carryforward		49,932			45,980
State net operating loss		24,265			25,740
Asset retirement obligations		92,823			106,604
Tax credits		303			522
Derivatives		42,075			16,346
Other well equipment inventory		5,680			9,470
Accrued bonus		5,087			3,069
Operating lease liabilities		4,081			4,904
Other		9,257			7,727
Total deferred tax assets		387,352			354,166
Valuation allowance		(224,266	)		(178,998	)
Total deferred tax assets, net	$	163,086		$	175,168
Deferred tax liabilities:
Oil and gas properties	$	160,002		$	170,596
Deferred financing		—			1,765
Operating lease assets		1,423			1,652
Prepaid		3,075			3,216
Total deferred tax liabilities		164,500			177,229
Net deferred tax liability	$	(1,414	)	$	(2,061	)

Net Operating Loss

The table below presents the details of the Company’s net operating loss carryovers as of December 31, 2021 (in thousands):

	Amount		Expiration Year
Federal net operating losses	$	534,964	2035 - 2037
Federal net operating losses	$	197,651	Unlimited
Foreign tax loss carryforward	$	166,440	2025 - 2031
State net operating losses	$	125,958	2025 - 2037
State net operating losses	$	268,221	Unlimited

As of December 31, 2021, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $732.6 million, of which $546.5 million is subject to limitation under Section 382 of the IRC. IRC Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, against future U.S. taxable income in the event of a change in ownership. If not utilized, such carryforwards would begin to expire in 2035.

Valuation Allowance

The Company recorded a valuation allowance of $224.3 million and $179.0 million as of December 31, 2021 and 2020, respectively. Deferred income tax assets and liabilities are recorded related to NOLs and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions and income in the future. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or NOLs relate. In assessing the need for a valuation allowance, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Uncertain Tax Positions

The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits. None of the unrecognized benefits would impact the effective tax rate if recognized. While amounts could change during the next 12 months, the Company does not anticipate having a material impact on its financial statements.

Balances in the uncertain tax positions are as follows (in thousands):

	Year Ended December 31,
	2021		2020
Total unrecognized tax benefits, beginning balance	$	648	$	791
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior period		21		(208	)
Tax positions taken during the current period		27		65
Total unrecognized tax benefits, ending balance	$	696	$	648

The Company recognizes interest and penalties related to uncertain tax positions as “Interest Expense” and “General and administrative expense” on the Consolidated Statements of Operations, respectively.

Years Open to Examination

The 2018 through 2020 tax years remain open to examination by the tax jurisdictions in which the Company is subject to tax. The statute of limitations with respect to the U.S. federal income tax returns of the Company for years ending on or before December 31, 2017 are closed, except to the extent of any NOL carryover balance.