Statement of Financial Position, Classified

9 Months Ended

Sep. 30, 2022

Statement of Financial Position [Abstract]

Income Tax Disclosure

NOTE 13 - INCOME TAXES

We compute our quarterly tax provision using the effective tax rate method by applying the anticipated annual effective rate to our year-to-date income or loss, except for discrete items. Income tax on discrete items is computed and recorded in the period in which the specific transaction occurs.

We consider whether a portion, or all, of our deferred tax assets (“DTAs”) will be realized based on a more likely than not standard of judgment. The ultimate realization of DTAs is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, management considers the available taxes in carryback periods, the future reversals of existing taxable temporary differences, tax planning strategies and

projected future taxable income in making this assessment. Our oil and gas property impairments and cumulative pre-tax losses were key considerations that led us to provide a valuation allowance against our DTAs beginning January 1, 2020 since we previously could not conclude that it is more likely than not that our DTAs will be fully realized in future periods.

As we previously disclosed in our 2021 Form 10-K, we maintained a valuation allowance on our net federal deferred tax assets and continued to do so until sufficient positive evidence existed to support a reversal of the allowance. In the second quarter of 2022, continued higher commodity prices increased our income, resulting in the reversal of objective negative evidence of cumulative loss in recent years, and we determined that we have sufficient positive evidence to release the valuation allowance. As a result, we released $22.5 million and $45.0 million of the valuation allowance against our deferred income tax assets and recognized a corresponding decrease to income tax expense in the three and nine months ended September 30, 2022, respectively. The remainder of the valuation allowance of $11.6 million will be recognized as a decrease to income tax expense in the fourth quarter of 2022.

Excluding the discrete gain on bargain purchase, the effective income tax rates for the three and nine months ended September 30, 2022 were 22.2 percent and 21.2 percent, respectively, and 0.1 percent and 0.2 percent provision on the respective pre-tax income for the three and nine months ended September 30, 2021, respectively. The effective tax rates differ from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21 percent to the pre-tax income due to state income taxes offset by the effect of the valuation allowance or changes in the valuation allowance against our deferred income tax asset.

As of September 30, 2022, there is no liability for unrecognized income tax benefits. As of the date of this report, we are current with our income tax filings in all applicable state jurisdictions and are not currently under any state income tax examinations. The IRS has accepted our 2020 federal income tax return with no tax adjustments. We continue to voluntarily participate in the IRS CAP program for the review of our 2021 tax year. Participation in the IRS CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.

In August 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA includes implementation of a new alternative minimum tax, an excise tax on stock buybacks, and significant tax incentives for energy and climate initiatives, among other provisions. The alternative minimum tax and excise tax on stock buyback provisions are effective for tax years beginning after December 31, 2022. We continue to monitor updates to the IRA and the impact to our financial position, results of operations and liquidity, however, we do not believe it will have a material impact on our stock buyback program or our financial position.