Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The Company is a corporation and is subject to U.S. federal income tax and the Texas Margins Tax. On December 22, 2017, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted by the U.S. government. The Tax Act made broad and complex changes to the U.S. corporate income tax code. Among other changes, the Tax Act: (i) reduced the U.S. federal corporate income tax rate from 35% to 21%; (ii) repealed the corporate alternative minimum tax and provides for a refund of previously accrued alternative minimum tax credits; (iii) modified the provisions relating to the limitations on deductions for executive compensation of publicly traded corporations; (iv) enacted new limitations regarding the deductibility of interest expense; and (v) imposed new limitations on the utilization of net operating losses arising in taxable years beginning after December 31, 2017.

GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Act, the Company remeasured its deferred tax assets and liabilities based on the federal income and state income tax rates at which they are now expected to reverse, and they now generally reflect a federal income tax rate of 21%. The enacted rate change resulted in a non-cash increase of approximately $23.9 million to the Company’s income tax provision, a corresponding reduction of $23.9 million to the Company’s net noncurrent deferred tax asset balance, and a reduction in valuation allowance of $24.3 million at December 31, 2017. There were no adjustments recorded to these estimates during the years ended December 31, 2019 or 2018.

The Company’s effective combined U.S. federal and state income tax rate as of December 31, 2019, 2018 and 2017 was 22.6%, 19.1% and 4.4% respectively.

During the years ended December 31, 2019, 2018 and 2017, the Company recognized income tax expenses of $61.4 million, $105.5 million and $5.7 million, respectively. Total income tax differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to the change in the valuation allowance, the change in the TRA liability, state taxes and the impact of income (loss) attributable to noncontrolling ownership interests.

At December 31, 2019, the Company did not have any accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. The Company’s policy is to record interest and penalties relating to uncertain tax positions in income tax expense.

The components of the income tax expense were as follows for the periods indicated (in thousands):



	Year Ended December 31,
	2019		2018		2017
Federal:
Current	$	—	$	—	$	(44	)
Deferred	58,310		101,023		(423		)
Total federal	58,310		101,023		(467		)
State, net of federal benefit:
Deferred	3,127		4,452		6,175
Total state	3,127		4,452		6,175
Income tax expense	$	61,437	$	105,475	$	5,708

The following table reconciles the income tax expense with income tax expense at the federal statutory rate for the periods indicated (in thousands):



	Year Ended December 31,
	2019			2018			2017
Income before income taxes	$	271,855		$	551,444		$	129,628
Less: net income before income taxes attributable to noncontrolling interest	(35,710		)	(77,446		)	(18,725		)
Income attributable to Parsley Energy, Inc. Stockholders before income taxes	236,145			473,998			110,903

Income taxes at the federal statutory rate	49,591			99,539			38,816
State income taxes, net of federal benefit	3,127			4,452			6,175
Provision to return adjustment	2,352			(1,018		)	178
Permanent and other	(140		)	(2,285		)	166
TRA liability change	—			92			(12,547		)
Valuation allowance	6,507			4,695			(26,657		)
Valuation allowance due to the reduction in federal statutory rate	—			—			(24,356		)
Income tax provision due to change in federal statutory rate	—			—			23,933
Income tax expense	$	61,437		$	105,475		$	5,708

Net income attributable to Parsley Energy, Inc. Stockholders	$	175,212		$	369,127		$	106,774
Net income attributable to noncontrolling interest	$	35,206		$	76,842		$	17,146

As of December 31, 2019, the Company had approximately $0.4 million of alternative minimum tax credits available that are expected to be refunded between 2020 and 2021. In addition, the Company had approximately $587.1 million of federal net operating loss carryovers that expire during the years 2034 through 2037. The tax benefits of carryforwards are recorded as an asset to the extent that management assesses the utilization of such carryforwards to be more likely than not. When the future utilization of some portion of the carryforwards is determined to not be more likely than not, a valuation allowance is provided to

reduce the recorded tax benefits from such assets. As of December 31, 2019, the Company had a valuation allowance of $20.4 million as a result of management’s assessment of the realizability of deferred tax assets.

Internal Revenue Code of 1986, as amended (“Section 382”), addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company does not believe it experienced an ownership change within the meaning of IRC Section 382 during 2019. Even if the Company did experience an ownership change in 2019, any resulting limitation on the use of the Company’s net operating loss carryforwards under Section 382 would not result in a current federal tax liability at December 31, 2019, and the Company does not believe that the resulting Section 382 annual limitation would prevent its utilization of net operating losses prior to their expiration.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows (in thousands):



	December 31,
	2019			2018
Assets:
Asset retirement obligations	$	4,923		$	4,723
Deferred stock-based compensation	7,196			6,718
Derivative fair value loss	5,985			—
Accrued compensation	5,642			4,650
Lease liabilities	27,089			—
Earnings in investment in subsidiary	182			—
Other	1,910			—
Net operating loss carryforward	170,520			299,250
Total deferred tax assets	223,447			315,341
Less: Valuation allowance	(20,382		)	(13,862		)
Net deferred tax assets	203,065			301,479
Liabilities:
Book basis of oil and natural gas properties in excess of tax basis	(369,474		)	(423,102		)
Derivative fair value gain	—			(9,450		)
Earnings in investment in subsidiary	—			(156		)
Lease right-of-use assets	(27,000		)	—
Other	—			(294		)
Total deferred tax liabilities	(396,474		)	(433,002		)
Net deferred tax liability	$	(193,409	)	$	(131,523	)

With respect to income taxes, the Company’s policy is to account for interest charges as Interest expense, net and any penalties as Other income (expenses) in the Company’s consolidated statements of operations. The Company files income tax returns at the federal level and at the state level (Texas), and a number of such returns remain open for examination. The Company’s earliest open years in its key jurisdictions are as follows:



U.S. Federal	2016
State of Texas	2015

The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained by examination. Therefore, at December 31, 2019, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions.

Tax Receivable Agreement

In connection with the IPO, on May 29, 2014, the Company entered into a Tax Receivable Agreement (the “TRA”) with Parsley LLC and certain PE Unitholders (each such person and any permitted transferee, a “TRA Holder”), including certain executive officers. The TRA generally provides for the payment by the Company of 85% of the net cash savings, if any, in U.S. federal, state, and local income tax or franchise tax that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the IPO as a result of (i) any tax basis increases resulting from the contribution in connection with the IPO by such TRA Holder of all or a portion of its PE Units to the Company in exchange for shares of Class A common stock, (ii) the tax basis increases resulting from the exchange by such TRA Holder of PE Units for shares of Class A common stock or, if either the Company or Parsley LLC so elects, cash, and (iii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. The term of the TRA commenced on May 29, 2014, and continues until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA. If the Company elects to terminate the TRA early, it would be required to make an immediate payment equal to the present value of the hypothetical future tax benefits that could be paid under the TRA (based upon certain assumptions and deemed events set forth in the TRA). In addition, payments due under the TRA will be similarly accelerated following certain mergers or other changes of control.

The actual amount and timing of payments to be made under the TRA will depend on a number of factors, including the amount and timing of taxable income generated in the future, changes in future tax rates, the use of loss carryovers and the portion of the Company’s payments under the TRA constituting imputed interest. As of December 31, 2019, there have been no payments associated with the TRA.

As a result of the Tax Act’s reduction in the corporate tax rate from 35% to 21% and the reduction in the valuation allowance the Company recorded in 2016, during the year ended December 31, 2017, the Company recorded a net decrease to the TRA liability of $35.8 million, which is comprised of a decrease of $55.9 million associated with the corporate rate reduction and an increase of $20.1 million related to the change in valuation allowance.

As of December 31, 2019 and December 31, 2018, the Company had recorded a TRA liability of $70.5 million and $68.1 million, respectively, for the estimated payments that will be made to the PE Unitholders who have exchanged shares, along with corresponding deferred tax assets, of $83.0 million and $80.1 million, respectively, as a result of the increase in tax basis arising from such exchanges and the decrease in tax basis as a result of the decrease in the future statutory tax rate.