Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The Company’s corporate structure requires the filing of two separate consolidated U.S. Federal income tax returns and one Canadian income tax return which include Lynden US, Earthstone, and Lynden Corp. As such, taxable income of Earthstone cannot be offset by tax attributes, including net operating losses, of Lynden US, nor can taxable income of Lynden US be offset by tax attributes of Earthstone. Earthstone and Lynden US record a tax provision, respectively, for their share of the book income or loss of EEH, net of the non-controlling interest. As EEH is treated as a partnership for U.S. Federal income tax purposes, it is not subject to income tax at the federal level and only recognizes the Texas Margin Tax.

The following table shows the components of the Company’s income tax provision for the years ended December 31, 2022, 2021 and 2020 (in thousands):

	Years Ended December 31,
	2022		2021		2020
Current:
Federal	$	—	$	—	$	—
State	1,811		625		545
Total current	$	1,811	$	625	$	545
Deferred:
Federal	$	114,876	$	901	$	(147)
State	7,729		333		(510)
Total deferred	$	122,605	$	1,234	$	(657)
Total income tax expense (benefit)	$	124,416	$	1,859	$	(112)

Effective Tax Rate

A reconciliation of the effective tax rate to the federal statutory rate for the years ended December 31, 2022, 2021 and 2020 is as follows (in thousands, except percentages):

	Years Ended December 31,
	2022			2021			2020
Net income (loss) before income taxes	$	775,033		$	63,365		$	(29,546)
Statutory rate	21		%	21		%	21		%
Tax expense (benefit) computed at statutory rate	$	162,757		$	13,307		$	(6,204)
Noncontrolling interest	(41,743)			(5,613)			3,349
Non-deductible general and administrative expenses	1,360			(455)			1,943
Return to accrual and other true-up	(73)			—			157
State income taxes, net of Federal benefit	9,187			958			35
Valuation allowance	(7,072)			(6,338)			608
Total income tax expense (benefit)	$	124,416		$	1,859		$	(112)
Effective tax rate	16.1		%	2.9		%	0.4		%

During the year ended December 31, 2022, the Company recorded total income tax expense of $124.4 million which included (1) deferred income tax expense for Lynden US of $7.1 million as a result of its share of the distributable income from EEH, (2)

deferred income tax expense for Earthstone of $107.8 million, which included a deferred income tax expense of $114.9 million, resulting from its share of the distributable income from EEH, offset by a $7.1 million release of valuation allowance, (3) current income tax expense of $1.8 million solely related to the Texas Margin Tax and (4) state deferred income tax expense of $0.8 million related to the Texas Margin Tax and $6.9 million related to New Mexico corporate income tax expense. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the year ended December 31, 2022.

During the year ended December 31, 2021, the Company recorded total income tax expense of $1.9 million which included (1) deferred income tax expense for Lynden US of $0.9 million as a result of its share of the distributable income from EEH, (2) deferred income tax expense for Earthstone of $6.3 million as a result of its share of the distributable income from EEH, which was offset by a valuation allowance as future realization of the net deferred tax asset cannot be assured and (3) current income tax expense of $0.63 million, offset by deferred income tax expense of $0.33 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the year ended December 31, 2021.

During the year ended December 31, 2020, the Company recorded total income tax benefit of $0.11 million which included (1) deferred income tax benefit for Lynden US of $0.15 million as a result of its share of the distributable income from EEH, (2) deferred income tax benefit for Earthstone of $0.61 million as a result of its share of the distributable income from EEH, which was used to reduce the valuation allowance recorded against its deferred tax asset cannot be assured and (3) current income tax expense of $0.55 million, offset by deferred income tax benefit of $0.51 million related to the Texas Margin Tax. Lynden Corp incurred no material income or loss, or related income tax expense or benefit, for the year ended December 31, 2020.

Deferred Tax Assets and Liabilities

The Company’s deferred tax position reflects the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Significant components of the deferred tax assets and liabilities at December 31, 2022 and 2021 are as follows (in thousands):

	Years Ended December 31,
	2022		2021
Deferred noncurrent income tax assets (liabilities):
Oil & gas properties	$	11,437	$	20,909
Basis difference in subsidiary obligation	(2,364)		(2,211)
Investment in Partnerships	(186,925)		(40,141)
Federal net operating loss carryforward	40,695		16,544
Interest limitation	2,581		—
Net deferred noncurrent tax (liability) asset	$	(134,576)	$	(4,899)
Valuation allowance	(3,760)		(10,832)
Net deferred tax liability	$	(138,336)	$	(15,731)

As of December 31, 2022, the Company had a valuation allowance recorded against its deferred tax asset of $3.8 million which is in excess of its net deferred noncurrent tax liabilities of $134.6 million, as presented above. The Company’s corporate organizational structure requires the filing of two separate consolidated U.S. Federal corporate income tax returns, one separate U.S. Federal partnership income tax return and one Canadian income tax return. As a result, tax attributes of one group cannot be offset by the tax attributes of another. At December 31, 2022, the deferred tax assets and liabilities related to the two U.S. Federal corporate income tax returns, one Canadian income tax return and one related to the Texas Margin Tax are a $113.7 million deferred tax liability, a $18.5 million deferred tax liability, a $3.8 million deferred tax asset and a $6.1 million deferred tax liability, respectively, before considering the valuation allowance of $3.8 million.

As of December 31, 2021, the Company had a valuation allowance recorded against its deferred tax assets of $10.8 million which is in excess of its Net deferred noncurrent tax assets of $7.8 million, as presented above. The Company’s corporate organizational structure requires the filing of two separate consolidated U.S. Federal income tax returns, one separate U.S. Federal partnership income tax return and one Canadian income tax return. As a result, tax attributes of one group cannot be offset by the tax attributes of another. At December 31, 2021, the deferred tax assets and liabilities related to the two U.S. Federal income tax returns, one Canadian income tax and one related to the Texas Margin Tax were a $19.7 million deferred tax asset, a $10.4 million deferred tax liability, a $3.8 million deferred tax asset and a $5.3 million deferred tax liability, respectively, before considering the valuation allowance of $10.8 million.

As of December 31, 2022, (1) Earthstone had estimated U.S. net operating loss carryforwards of $29.1 million, expiring in 2036 and 2037 and $120.1 million with an indefinite carryforward life (“ICL”), (2) Lynden US had estimated U.S. net operating loss carryforwards available for use of $3.7 million, expiring from 2036 through 2037 and $22.4 million with an indefinite

carryforward life, and, (3) Lynden Corp had Canadian net operating loss carryforwards of $10.0 million, the first expiring in 2024 and the last in 2037. ICL loss deductions are limited to 80% of the excess of taxable income in the year utilized.

Additionally, the ability to utilize net operating losses and other tax attributes could be subject to a significant limitation if the Company were to undergo an ownership change for the purposes of Section 382 (“Sec 382”) of the Internal Revenue Code of 1986, as amended (the “Code”). On February 15, 2022, the Company completed the Chisholm Acquisition which included the issuance of 19,417,476 shares of Class A Common Stock, which resulted in an ownership change within the meaning of Sec 382. As a result of the ownership change, the Company’s annual usage of net operating losses (“NOLs”) and credits generated prior to the ownership change date may be limited, however, at this time, we do not expect any of the losses to expire unused as a result of this ownership change. Earthstone generated approximately $97.6 million in NOL carryforward assets in 2022, of which, $85.3 million relates to the time period post ownership change within the meaning of Section 382 and is not subject to limitation. Lynden US generated approximately $14.3 million in NOL carryforward assets in 2022, of which, $12.5 million relates to the time period post ownership change within the meaning of Section 382 and is not subject to limitation. Lynden US previously experienced an ownership change on May 17, 2016 and at that time certain NOLs were identified as being expected to expire unusable. The Company continues to evaluate the impact, if any, of potential Sec 382 limitations.

Uncertain Tax Positions

FASB ASC Topic 740, Income Taxes (“ASC 740”) prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. For those benefits to be recognized, an income tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. As of December 31, 2022, the Company had no material uncertain tax positions. The Company’s uncertain tax positions may change in the next twelve months; however, the Company does not expect any possible change to have a significant impact on its results of operations or financial position.

The Company files two Federal income tax returns, one Canadian income tax return and various combined and separate filings in several state and local jurisdictions. The Company’s practice is to recognize estimated interest and penalties, if any, related to potential underpayment of income taxes as a component of income tax expense in its Consolidated Statement of Operations. As of December 31, 2022, the Company did not have any accrued interest or penalties associated with any uncertain tax liabilities.