Income Taxes

12 Months Ended

Dec. 31, 2020

The income tax provision is as follows:


	Successor		Predecessor
In thousands	Month Ended December 31, 2020		Eleven Months Ended November 30, 2020		Year Ended December 31, 2019
Current income tax benefit
Federal	$	—	$	(3,748)	$	(591)
State	—		—		(464)
Total current income tax benefit	—		(3,748)		(1,055)
Deferred tax expense (benefit)
Federal	$	—	882		(20,989)
State	—		(1,813)		673
Valuation allowance	—		—		8,876
Total deferred income tax benefit	—		(931)		(11,440)
Total income tax benefit	$	—	$	(4,679)	$	(12,495)

The following table provides a reconciliation of Lonestar's actual income tax provision amounts from the expected income tax provision amount by applying the U.S. federal statutory corporate income tax rate of 21% for the period from December 1, 2020 through December 31, 2020 (Successor), the period from January 1, 2020 through November 30, 2020 (Predecessor) and the year ended December 31, 2019 (Predecessor), as follows:


	Successor		Predecessor
In thousands	Month Ended December 31, 2020		Eleven Months Ended November 30, 2020		Year Ended December 31, 2019
Expected income tax benefit at statutory rate	$	(150)	$	(25,791)	$	(24,258)
Permanent differences	2		4,895		(48)
State taxes, net of Federal benefit	16		(2,514)		307
Fresh start valuation adjustments	—		19,589		—
Gain on settlement of liabilities subject to compromise	—		(38,187)		—
Reduction in deferred tax assets	—		12,537		—
Return to provision adjustment	—		—		2,567
Change in valuation allowance	132		28,541		8,876
Net operating loss carryback	—		(3,749)
Other	—		—		61
Actual income tax benefit	$	—	$	(4,679)	$	(12,495)

Significant components of the Company's deferred tax assets and liabilities as of December 31, 2020 (Successor) and 2019 (Predecessor) are as follows:


	Successor		Predecessor
In thousands	December 31, 2020		December 31, 2019
Deferred tax assets
Net operating loss carryforward	$	5,196	$	27,025
Oil and gas properties, and other property and equipment	17,828		—
Stock-based compensation	—		922
Intangibles	183		257
Derivative instruments	2,036		606
Interest expense limitation	11,753		19,243
Organizational expenses and other	553		3,306
Total deferred tax assets	$	37,549	$	51,359
Deferred tax liabilities
Oil and gas properties, and other property and equipment, principally due to intangible drilling assets	$	—	$	(43,414)

Net deferred tax assets	37,549		7,945
Valuation allowance for deferred tax assets	(37,549)		(8,876)
Net deferred tax liability, net of valuation allowance	$	—	$	(931)

We have evaluated the income tax impact of the Plan, including the change in control, resulting from our emergence from Chapter 11 Bankruptcy on November, 30, 2020. Under the Plan, a substantial portion of the Company’s pre-petition debt securities were extinguished. When the debt was extinguished, the Company realized CODI for U.S. federal income tax purposes of approximately $181.9 million, which is excludable from taxable income. The CODI exclusion resulted in a partial elimination of or our federal net operating loss carryforwards, as well as a partial reduction in tax basis in assets, in accordance with the attribute reduction and ordering rules of Section 108 of the Code. The deferred tax balances disclosed above for the Successor period ended December 31, 2020 reflect the estimated impact of the reduction of these attributes.

Section 382 of the Code provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company's emergence from chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of Section 382. The limitation under Section 382 is based on the value of the corporation as of the emergence date. The ownership change and resulting annual limitation resulted in the expiration of approximately $46.6 million of net operating losses generated prior to the emergence date. The expiration of these tax attributes was fully offset by a corresponding decrease in the Company's U.S. valuation allowance, which results in no net tax provision.

The amount of U.S.consolidated net operating losses available as of December 31, 2020 (Successor), after attribute reduction and expiration due to Section 382, is estimated to be approximately $24.7 million. Of this amount, $10.0 million is subject to a 20 year carry forward period and will start to expire in 2034. The remaining $14.7 million may be carried forward indefinitely but is subject to a Section 382 limitation.

The Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers all available evidence (both positive and negative) in determining whether a valuation allowance is required. The Company evaluated possible sources of taxable income that may be available to realize the benefit of deferred tax assets, including income projections, the reversal of existing taxable temporary differences, taxable income in carryback years and available tax planning strategies in making this assessment. We also considered other available evidence as of the balance sheet date, including the tax impacts of the Chapter 11 Proceedings and the partial reduction of tax attributes. Given our cumulative loss position and the continued low oil price environment, management concluded that as of December 31, 2020 (Successor), a valuation allowance should to be applied against the Company’s net deferred tax asset. The Company recorded a valuation allowance as of December 31, 2020 (Successor) of $37.5 million, an increase of $28.7 million from December 31, 2019 (Predecessor). The Company will continue to monitor facts and circumstances surrounding the likelihood that NOL carryforwards and other deferred tax assets will be utilized.

We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company has no unrecognized tax benefits for the years ended December 31, 2020 (Successor) and December 31, 2019 (Predecessor). Likewise, the Company has not recorded any interest or penalties associated with uncertain tax positions.

As of December 31, 2020, there are no examinations of federal or state jurisdictions in progress. The Company’s income tax returns related to fiscal years ended December 31, 2010 through December 31, 2020 remain open to possible examination by the tax authorities.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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