Income Taxes

The Company typically provides for income taxes at a statutory rate of 35% adjusted for permanent differences expected to be realized, primarily statutory depletion, non-deductible stock compensation expenses and state income taxes. As a result of the ceiling test write-downs recognized during 2008 and 2009, the Company incurred a cumulative three-year loss. Because of the impact the cumulative loss had on the determination of the recoverability of deferred tax assets through future earnings, the Company assessed the realizability of its deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, the Company established a valuation allowance for a portion of the deferred tax asset. During 2011, the Company reversed the remaining valuation allowance as future reversals of existing deferred tax liabilities were sufficient to realize the entire deferred tax asset. However, as a result of the deferred tax benefit related to the ceiling test write-down in 2012, future reversals of existing deferred tax liabilities are no longer sufficient to realize the entire deferred tax asset. Thus, the Company re-established a valuation allowance for a portion of the deferred tax asset. The valuation allowance was $50.9 million as of December 31, 2012.

An analysis of the Company’s deferred taxes follows (amounts in thousands):



	December 31,
	2012			2011			2010
Net operating loss carryforwards	$	16,641		$	2,409		$	4,737
Percentage depletion carryforward	7,317			6,103			3,596
Alternative minimum tax credits	784			784			776
Contributions carryforward and other	156			130			90
Temporary differences:
Oil and gas properties—full cost	22,716			(10,541		)	(10,141		)
Derivatives	(222		)	(2,388		)	405
Share-based compensation	3,474			2,952			3,732
Valuation allowance	(50,866		)	—			(3,195		)
Deferred tax liability	$	—		$	(551	)	$	—

At December 31, 2012, the Company had approximately $56.4 million of operating loss carryforwards, of which $11.7 million relates to excess tax benefits with respect to share-based compensation that have not been recognized in the financial statements. If not utilized, approximately $8.7 million of such carryforwards would expire in 2025 and the remainder would expire by the year 2032. The Company has available for tax reporting purposes $20.9 million in statutory depletion deductions that may be carried forward indefinitely.

Income tax expense (benefit) for each of the years ended December 31, 2012, 2011 and 2010 was different than the amount computed using the Federal statutory rate (35%) for the following reasons (amounts in thousands):



	For the Year Ended December 31,
	2012			2011			2010
Amount computed using the statutory rate	$	(45,655	)	$	3,058		$	17,065
Increase (reduction) in taxes resulting from:
State & local taxes	(2,870		)	192			1,073
Percentage depletion carryforward	(1,309		)	(2,507		)	(252		)
Allowance for alternative minimum tax	—			8			575
Non-deductible stock option expense (1)	292			183			295
Share-based compensation (2)	9			346			3,041
Other	303			(300		)	321
Change in valuation allowance	50,866			(2,790		)	(20,488		)
Income tax expense (benefit)	$	1,636		$	(1,810	)	$	1,630


(1)	Relates to compensation expense recognized on the vesting of Incentive Stock Options.


(2)	Relates to the write-off of deferred tax assets associated with share based compensation that will not be recognized for tax purposes.