Income Taxes

12 Months Ended

Dec. 31, 2012

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 10– Income Taxes

The income (loss) before income taxes and the components of the income tax expense (benefit) recognized on the Consolidated Statement of Income are as follows:

(Amounts in thousands)				U.K.		U.S.		Other		Total
Year Ended December 31, 2012:
	Net income (loss) before taxes		$	(22,959)	$	(91,383)	$	2,344	$	(111,998)
	Current tax expense			31,796		-		26		31,822
	Deferred tax expense related
		to U.K. tax rate change		8,587		-		-		8,587
	Deferred tax benefit			(26,181)		-		-		(26,181)
	Total tax expense			14,202		-		26		14,228
	Net income (loss) after taxes		$	(37,161)	$	(91,383)	$	2,318	$	(126,226)
Year Ended December 31, 2011:
	Net income (loss) before taxes		$	(9,806)	$	(99,409)	$	5,281	$	(103,934)
	Current tax expense			5,926		4		15		5,945
	Deferred tax expense related
		to U.K. tax rate change		25,424		-		-		25,424
	Deferred tax benefit			(4,308)		-		-		(4,308)
	Total tax expense			27,042		4		15		27,061
	Net income (loss) after taxes		$	(36,848)	$	(99,413)	$	5,266	$	(130,995)
Year Ended December 31, 2010:
	Net income (loss) before taxes		$	90,160	$	(30,978)	$	(3,439)	$	55,743
	Current tax (benefit) expense			2,734				(154)		2,580
	Deferred tax (benefit) expense			(2,388)				(929)		(3,317)
	Foreign currency losses on
		deferred tax liabilities		-		-		(51)		(51)
	Total tax (benefit) expense			346		-		(1,134)		(788)
	Net income (loss) after taxes		$	89,814	$	(30,978)	$	(2,305)	$	56,531

Effective Tax Rate Reconciliation

The following table presents the principal reasons for the difference between our effective tax rates and the United States federal statutory income tax rate of 35%.

		Year Ended December 31,
		2012		2011		2010
Federal income tax expense (benefit) at statutory rate	$	(39,199)	$	(36,378)	$	19,500
Taxation of foreign operations		5,859		3,254		(579)
Effect of out-of-period adjustment		6,997		-		-
Tax-free gain on sale of reserves in place		-		-		(30,510)
Change in valuation allowance – U.S.		30,329		24,604		(2,252)
U.K. Tax increase from tax law and rate changes		8,587		25,424		-
Foreign currency (gain) loss on deferred taxes		-		-		(50)
Deemed foreign dividend of wholly owned subsidiaries		-		8,572		11,466
Disallowed executive compensation		1,655		1,585		765
Other		-		-		872
Total Income Tax Expense	$	14,228	$	27,061	$	(788)
Effective Income Tax Rate		-13%		-26%		-1%

During 2012,2011 and 2010, we incurred taxes primarily related to our operations in the U.K.In 2012, 2011 and 2010, we had a loss before taxes of $91.4 million, $99.4million and $31.0 million, respectively, in the U.S. and we did not record any income tax benefits on these losses as there was no assurance that we could generate any future U.S. taxable earnings. As a result, we recorded a valuation allowance on the full amount of all deferred tax assets generated in the U.S.

Deferred Tax Assets and Liabilities

Deferred income taxes result from the net tax effects of temporary timing differences between the carrying amounts of assets and liabilities reflected on the financial statements and the amounts recognized for income tax purposes. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows at December 31:

		2012		2011
Deferred tax asset:
Deferred compensation	$	2,268	$	5,859
Unrealized loss on commodity derivative instruments		-		1,260
Asset retirement obligation		87,787		29,122
Net operating loss and capital loss carryforward		334,121		157,570
Unrealized loss on embedded derivative instruments		1,084		4,005
Property, plant and equipment		19,596		12,427
Inventory / other		8,089		-
Total deferred tax assets		452,945		210,243
Less valuation allowance		(84,691)		(58,532)
Total deferred tax assets after valuation allowance		368,254		151,711
Deferred tax liability:
Property, plant and equipment		(478,719)		(258,779)
Petroleum revenue tax, net of tax benefit		(22,703)		(229)
Debt discount		(630)		(752)
Other		-		(7,710)
Total deferred tax liabilities		(502,052)		(267,470)
Net deferred tax liability	$	(133,798)	$	(115,759)

Tax Attributes

At December 31, 2012, we had the following tax attributes available to reduce future income taxes:

			As of December 31,
			2012			2011
		Types of Tax Attributes	Years of Expiration		Carry-forward Amount	Years of Expiration		Carry-forward Amount
U.K.
	Corporate tax	NOL	Indefinite	$	500,789	Indefinite	$	228,701
	Supplemental Corporate tax	NOL	Indefinite		378,602	Indefinite		159,316
U.S.
	Corporate Income tax	NOL	2023 - 2032		177,206	2023 - 2031		106,535
	Capital gains tax	Capital loss	2015		1,848	2015		1,848

As of December 31, 2012, the U.K. tax attributes shown above have been recognized for financial statement reporting purposes to reduce deferred tax liability.

Valuation Allowances and Unrecognized Tax Benefits

Recognition of the benefits of the deferred tax assets requires that we generate future taxable income. In the U.S., there can be no assurance that we will generate any earnings or any specific level of earnings in future years. Therefore, we have established a valuation allowance for deferred tax assets of approximately $84.7million and $58.5 million as of December 31, 2012 and 2011, respectively, primarily related to our U.S. operations. During 2012, the valuation allowance in the U.S. increased $29.1 million due to net operating losses and decreased $3.0 million in other jurisdictions. During 2011, the valuation allowance in the U.S. increased $24.6 million due to net operating losses and decreased $3.9 million in other jurisdictions. During 2010, the valuation allowance in the U.S. decreased $2.2 million due to net revisions of the net operating loss and increased $1.3 million for net operating losses in other jurisdictions.

For U.S. federal income tax purposes, certain limitations are imposed on an entity's ability to utilize its net operating losses (“NOLs”) in future periods if a change of control, as defined for federal income tax purposes, has taken place. In general terms, the limitation on utilization of NOLs and other tax attributes during any one year is determined by the value of an acquired entity at the date of the change of control multiplied by the then-existing long-term, tax-exempt interest rate. We have determined that, for federal income tax purposes, a change of control occurred during 2004 and 2007, however, we do not believe such limitations will significantly impact our ability to utilize the NOL. The timing of NOL utilization will be determined by our future net income.

Uncertain Tax Positions

At December 31, 2012, we have anunrecognized tax benefit of $6.8 million relating to various U.K. tax matters. Any interest and penalties that may be incurred as part of this liability would be recognized as a component of interest expense and other expense, respectively. As of December 31, 2012, no interest or penalty expense had been incurred.

The following represents a reconciliation of the change in our unrecognized tax benefits, for the year ended December 31, 2012.

		Year Ended
		December 31,
		2012		2011		2010
Balance at the beginning of the year	$	-	$	-	$	-
Increase in unrecognized tax benefits from current period tax position		6,820		-		-
Balance at the end of the year	$	6,820	$	-	$	-

As of December 31, 2012, we believe that no current tax positions that have resulted in unrecognized tax benefits will significantly increase or decrease within the next year. If recognized, none of the unrecognized tax benefits would have an impact on our effective tax rate.

The following tax years remain subject to examination:

Tax Jurisdiction
U.K.	2011
All others	2009 - 2011

Foreign Earnings and Credits

As of December 31, 2012, we had de minimus unremitted earnings in our foreign subsidiaries. If these unremitted earnings had been dividend to the U.S., the U.S. NOLs not subject to the limitations mentioned above would be fully available to offset any incremental U.S. federal income tax. Further, the foreign tax credits associated with the unremitted earnings would be sufficient to offset any incremental U.S. tax liabilities associated with the dividend.