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 2011 and 2012, 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 of $45.5 million as of December 31, 2013.

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



	December 31,
	2013			2012			2011
Net operating loss carryforwards	$	21,810		$	16,641		$	2,409
Percentage depletion carryforward	8,645			7,317			6,103
Alternative minimum tax credits	784			784			784
Contributions carryforward and other	189			156			130
Temporary differences:
Oil and gas properties	(7,248		)	12,575			(21,860		)
Asset retirement obligation	18,056			10,141			11,319
Derivatives	408			(222		)	(2,388		)
Share-based compensation	2,887			3,474			2,952
Valuation allowance	(45,531		)	(50,866		)	—
Deferred tax liability	$	—		$	—		$	(551	)

At December 31, 2013, the Company had approximately $70.7 million of operating loss carryforwards, of which $12.1 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 2033. The Company has available for tax reporting purposes $24.7 million in statutory depletion deductions that may be carried forward indefinitely.

Income tax expense (benefit) for each of the years ended December 31, 2013, 2012 and 2011 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,
	2013			2012			2011
Amount computed using the statutory rate	$	5,041		$	(45,655	)	$	3,058
Increase (reduction) in taxes resulting from:
State & local taxes	317			(2,870		)	192
Percentage depletion carryforward	(1,323		)	(1,309		)	(2,507		)
Allowance for alternative minimum tax	—			—			8
Non-deductible stock option expense (1)	115			292			183
Share-based compensation (2)	780			9			346
Other	1,132			303			(300		)
Change in valuation allowance	(5,742		)	50,866			(2,790		)
Income tax expense (benefit)	$	320		$	1,636		$	(1,810	)


(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.