Income Taxes

Effective Tax Rate

The effective income tax rate is influenced by a variety of factors including the geographic and functional sources of income and the relative magnitude of these sources of income. The difference between the total provision and the sum of the amounts allocated to segments is reported in the “Not Allocated to Segments” column of the tables in Note 7. For the second quarter and first six months of 2017 and 2016, our effective income tax rates on continuing operations were as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2017			2016			2017			2016
Total pre-tax income (loss) from continuing operations	$	(112	)	$	(192	)	$	(128	)	$	(805	)
Total income tax expense (benefit)	$	41		$	(54	)	$	75		$	(307	)
Effective income tax expense (benefit) rate on continuing operations	37		%	(28		)%	59		%	(38		)%

Income taxes at the statutory tax rate of 35%	$	(39	)	$	(67	)	$	(45	)	$	(282	)
Effects of foreign operations	2			5			(2		)	(30		)
Adjustments to valuation allowances	76			5			133			5
State income taxes	—			3			(13		)	(3		)
Other federal tax effects	2			—			2			3
Income tax expense (benefit) on continuing operations	$	41		$	(54	)	$	75		$	(307	)

Income tax expense for the second quarter and first six months of 2017 was impacted by a full valuation allowance on our federal deferred tax assets generated in 2017 and increased sales volumes in our Libyan operations where the statutory income tax rate is in excess of 90%. Our Libya income tax expense was $32 million in the second quarter and $77 million in the first six months of 2017 compared to a benefit of $10 million and $21 million for the same periods last year.

In the first six months of 2017 we settled our 2011-2013 Alaska income tax audit, which resulted in the recognition of a tax benefit totaling $13 million. As of June 30, 2017 there are no uncertain tax positions for which it is reasonably possible that the amount would significantly increase or decrease in the next twelve months. However, as discussed in Note 20, we may be required to adjust the timing of our tax deduction for decommissioning costs and make a payment to the U.K. tax authorities of approximately $130 million in the next twelve months, which would be recovered as future decommissioning activities are performed and deductions claimed. We estimate that any revisions to current and deferred tax liabilities, if we do not prevail, would have no cumulative adverse earnings impact in our consolidated results of operations. While we believe that it is more likely than not that we will prevail in the Tribunal, if we do not, we have the option to seek appeal.

The effective tax rate change between years for the second quarter and first six months of 2017 and 2016, was driven by the full valuation allowance on our federal deferred tax assets generated in 2017, and the impacts of foreign operations which includes the tax effects associated with increased sales volumes in Libya.

The impact of foreign operations for the second quarter and first six months of 2017 totaled tax expense of $2 million for three months ended June 30, 2017 and a tax benefit of $2 million for the first six months of 2017 due to income tax rate differentials from the U.S. statutory rate of 35% associated with foreign operations in Libya, E.G. and the U.K. This was offset by deferred tax benefits being generated in the U.K. related to future tax refunds associated with abandonment costs.

In Libya, reliable estimates of 2017 and 2016 annual ordinary income from our Libyan operations could not be made, and the range of possible scenarios in the worldwide annual effective tax rate calculation demonstrates significant variability. Thus, the tax impacts applicable to Libyan ordinary income (loss) were recorded as a discrete item in the second quarter and the first six months of 2017 and 2016. For the second quarter and the first six months of 2017 and 2016, estimated annual effective tax rates were calculated excluding Libya and applied to consolidated ordinary income (loss). Excluding Libya, the effective income tax expense and benefit rates would be an expense of 7% and a benefit of 25% for the second quarter of 2017 and 2016. Excluding Libya, the effective income tax expense and benefit rates would be a benefit of 1% and 36% for the first six months of 2017 and 2016.

We expect to be in a cumulative loss position in 2017, and as a result we have placed a full valuation allowance on our federal deferred tax assets. In the second quarter and first six months of 2017 this valuation allowance was $76 million and$133 million. During 2017 we expect to realize no tax benefit on any federal deferred tax assets generated. See Deferred Tax Assets section below for further detail.

Deferred Tax Assets

In connection with our assessment of the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. In the event it is more likely than not that some portion or all of our deferred taxes will not be realized, such assets are reduced by a valuation allowance. The estimated realizability of the benefit of our deferred tax asset is assessed considering a preponderance of evidence. This assessment requires analysis of all available positive and negative evidence. Positive evidence includes reversals of temporary differences, forecasts of future taxable income, assessment of future business assumptions and applicable tax planning strategies. Negative evidence includes losses in recent years as well as the forecasts of future income (loss) in the realizable period. As of the fourth quarter of 2016, we expected to be in a cumulative loss position in 2017, which constitutes significant objective negative evidence as to the future realizability of the value of our federal deferred tax assets. Due to this negative evidence, we placed a full valuation allowance on our federal deferred tax assets in the fourth quarter of 2016 and expect to realize no tax benefit on any federal deferred tax assets generated in 2017.