INCOME TAXES

12 Months Ended

Dec. 31, 2019

INCOME TAXESIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry-forwards. Under this method, deferred tax

assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date.

The income tax provision (benefit) for the years ended December 31, 2019, 2018, and 2017 consists of the following:


(In thousands)	2019		2018		2017
Current
Federal	$	(210)	$	(420)	$	(785)
State	—		—		—
Deferred
Federal	(16,676)		91,958		126,501
State	(3,578)		11,636		(12,983)
Valuation Allowance	20,464		(103,229)		(114,303)
Total Tax Benefit	$	—	$	(55)	$	(1,570)

The following is a reconciliation of the reported amount of income tax benefit for the years ended December 31, 2019, 2018, and 2017 to the amount of income tax expenses that would result from applying the statutory rate to pretax income (loss).


(In thousands)	2019			2018			2017
Income (Loss) Before Taxes and NOL	$	(76,318)		$	143,634		$	(10,764)
Federal Statutory Rate	21.00		%	21.00		%	35.00		%
Taxes Computed at Federal Statutory Rates	(16,027)			30,163			(3,767)
State Taxes, Net of Federal Taxes	(2,630)			9,143			(8,476)
Deferred Tax Adjustment	(1,891)			—			—
Share Based Compensation Tax Deficiency	33			316			—
Federal Rate Reduction	—			—			124,493
Section 382 Limitation	—			63,573			—
Other	51			(21)			483
Valuation Allowance	20,464			(103,229)			(114,303)
Reported Tax Benefit	$	—		$	(55)		$	(1,570)

The Company’s May 15, 2018 closing under the Exchange Agreement and related transactions triggered an ownership change within the meaning of Section 382 of the Internal Revenue Code (“IRC”) due to the share issuances that resulted from the Exchange Agreement and related transactions. In general, an ownership change, as defined in IRC Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Since the Company has experienced an ownership change, utilization of net operating losses (“NOL”) and other tax carryforward attributes are subject to an annual limitation. Accordingly, the Company reduced its deferred tax assets and related valuation allowance by $63.6 million during 2018.

A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. During 2019, in evaluating whether it was more likely than not that the Company’s net deferred tax assets were realized through future net income, management considered all available positive and negative evidence, including (i) its earnings history, (ii) its ability to recover net operating loss carry-forwards, (iii) the projected future income and results of operations, and (iv) its ability to use tax planning strategies. Based on all the evidence available, management determined it was more likely than not that the net deferred tax assets, other than the deferred tax asset related to the Company’s alternative minimum tax credit, were not realizable. The Company’s valuation allowance at December 31, 2019 was $144.2 million.

At December 31, 2019, the Company had a net operating loss carryforward for federal income tax purposes of $341.7 million, which is net of the IRC Section 382 limitation, and state NOL carryforwards of $524.6 million. The determination of the state NOL carryforwards is dependent upon apportionment percentages and state laws that can change from year to year and that can thereby impact the amount of such carryforwards. If unutilized, the federal net operating losses will expire from 2031 to 2037 and the state net operating losses will expire from 2020 to 2037.

The significant components of the Company’s deferred tax assets (liabilities) were as follows:


	Year Ended December 31,
(in thousands)	2019		2018
Net Operating Loss (NOLs) and Tax Credit Carryforwards	$	91,392	$	96,700
Share Based Compensation	190		146
Accrued Interest	1,061		637
Allowance for Doubtful Accounts	1,117		1,279
Crude Oil and Natural Gas Properties and Other Properties	(11,447)		16,904
Interest Carryforwards	49,011		40,614
Derivative Instruments	13,196		(31,981)
Other	(112)		(145)
Total Net Deferred Tax Assets (Liabilities) Before Valuation Allowance	144,408		124,154

Valuation Allowance	(144,198)		(123,734)

Total Net Deferred Tax Assets	$	210	$	420

Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company has no liabilities for unrecognized tax benefits.

The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the years ended December 31, 2019, 2018 and 2017, the Company did not recognize any interest or penalties in its statements of operations, nor did it have any interest or penalties accrued in its balance sheet at December 31, 2019 and 2018 relating to unrecognized benefits.

The tax years 2019, 2018, 2017, and 2016 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject. Additionally, NOLs from 2011-2015 could be adjusted in the future when such NOLs are utilized.

On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Act”) which made significant changes that affect the Company, resulting in significant modifications to existing law. The Tax Act, among other things, (i) reduced the U.S. corporate income tax rate, (ii) repealed the corporate alternative minimum tax, (iii) imposed new limitations on the utilization of net operating losses and (iv) provided for more general changes to the taxation of corporations, including changes to cost recovery rules and to the deductibility of interest expense. The Company recognizes the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The enactment date in the U.S. is the date the bill becomes law, which is when the President signs the bill.

As a result of the Act, the Company is also subject to certain statutory restrictions on its current interest and debt loss deductions under IRC Section 163(j) which limits interest deductions to business interest income plus 30% of adjusted taxable income. Deferred interest expense carryforwards do not expire, but can only be utilized in future years when adjusted taxable income provides excess limitation. For the year ended December 31, 2019, the company generated a $8.4 million interest expense carryforward attribute, which has a full valuation allowance. The Act also repeals the corporate alternative minimum tax for tax years beginning after December 31, 2017 and provides that prior alternative minimum tax credits will be refundable. The Company has credits that are expected to be refunded between 2019 and 2021 as a result of the Act and monetization opportunities under current tax laws. In 2019, the Company utilized $0.2 million of its alternative minimum tax credit. The Company has an additional $0.2 million of alternative minimum tax credits that will be refunded in future years.