Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 9 — Income Taxes

Income Tax Expense (Benefit)

The components of income tax expense (benefit) were as follows (in thousands):

	Year Ended December 31,
	2022		2021			2020
Current income tax expense (benefit):
United States	$	1,375	$	(5	)	$	(499	)
Mexico		432		(993	)		185
Total current income tax expense (benefit)	$	1,807	$	(998	)	$	(314	)
Deferred income tax expense (benefit):
United States	$	659	$	(1,067	)	$	35,923
Mexico		71		430			(26	)
Total deferred income tax expense (benefit)	$	730	$	(637	)	$	35,897
Total income tax expense (benefit)	$	2,537	$	(1,635	)	$	35,583

A reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to the Company’s income tax expense (benefit) is as follows (in thousands, except percentages):

	Year Ended December 31,
	2022			2021			2020
Income tax expense (benefit) at the federal statutory tax rate	$	80,735		$	(38,763	)	$	(90,304	)
State income taxes		1,591			(674	)		(14,215	)
Impact of foreign operations		15,657			(11,920	)		(1,030	)
Effect of change in state rate		—			2,008			—
Prior year taxes		(2,920	)		486			(4,237	)
Legal entity reorganization		—			—			(17,566	)
Change in valuation allowance		(96,537	)		45,547			162,213
Other permanent differences		4,011			1,681			722
Total income tax expense (benefit)	$	2,537		$	(1,635	)	$	35,583
Effective tax rate		0.66	%		0.89	%		(8.27	)%

The Company’s effective tax rate for the years ended December 31, 2022 and 2021 differed from the federal statutory rate of 21.0% primarily due to recording a full valuation allowance against its federal, state and foreign deferred tax assets.

The Company’s effective tax rate for the year ending December 31, 2020 differed from the federal statutory rate of 21.0% primarily due to a non-cash tax expense of $162.2 million related to the recognition of a valuation allowance for its excess federal and state deferred tax assets. This expense was partially offset by a tax benefit of $17.6 million from adopting the final Treasury Regulations under Section 163(j) of the Internal Revenue Code (the “IRC”) for tax years ended December 31, 2018 and December 31, 2019. The adoption of the final Treasury Regulations reduced the non-cash tax expense recognized in the year ending December 31, 2019 from the legal entity conversion of a partnership to a corporation.

Deferred Tax Assets and Liabilities

Net deferred tax assets (liabilities) reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities were as follows (in thousands):

	Year Ended December 31,
	2022			2021
Deferred tax assets:
Federal net operating loss	$	159,257		$	153,849
Foreign tax loss carryforward		44,462			49,932
State net operating loss		24,787			24,265
Tax credits		107			303
Interest expense carryforward		23,262			—
Asset retirement obligations		115,848			92,823
Derivatives		9,273			42,075
Other well equipment inventory		1,891			5,680
Accrued bonus		5,863			5,087
Share-based compensation		5,296			3,833
Operating lease liabilities		3,669			4,081
Finance lease liabilities		32,559			—
Other		7,142			5,424
Total deferred tax assets		433,416			387,352
Valuation allowance		(129,105	)		(224,266	)
Total deferred tax assets, net	$	304,311		$	163,086
Deferred tax liabilities:
Oil and gas properties	$	302,602		$	160,002
Operating lease assets		1,323			1,423
Prepaid		2,530			3,075
Total deferred tax liabilities		306,455			164,500
Net deferred tax liability	$	(2,144	)	$	(1,414	)

Net Operating Loss

The table below presents the details of the Company’s net operating loss carryovers as of December 31, 2022 (in thousands):

	Amount		Expiration Year
Federal net operating losses	$	525,745	2035 - 2037
Federal net operating losses	$	232,620	Unlimited
Foreign tax loss carryforward	$	148,206	2025 - 2032
State net operating losses	$	125,958	2025 - 2037
State net operating losses	$	277,031	Unlimited

As of December 31, 2022, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $758.4 million, all of which is subject to limitation under Section 382 of the IRC. IRC Section 382 provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, against future U.S. taxable income in the event of a change in ownership. If not utilized, such carryforwards would begin to expire at the end of 2035.

Valuation Allowance

The Company recorded a valuation allowance of $129.1 million and $224.3 million as of December 31, 2022 and 2021, respectively. Deferred income tax assets and liabilities are recorded related to NOLs and temporary differences between the book and tax basis of assets and liabilities expected to produce tax deductions and income in the future. The realization of these assets depends on recognition of sufficient future taxable income in specific tax jurisdictions in which those temporary differences or NOLs relate.

In assessing the need for a valuation allowance, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized using available positive and negative evidence, including future reversals of temporary differences, tax-planning strategies and future taxable income, to estimate whether sufficient future taxable income will be generated to permit use of deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative loss incurred over recent years. Such objective negative evidence limits our ability to consider other subjective positive evidence.

The Company intends to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, if positive earnings continue to be realized and future earnings are anticipated, the Company believes that there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that the Company achieves and anticipates realizing in future years.

Uncertain Tax Positions

The table below sets forth the beginning and ending balance of the total amount of unrecognized tax benefits. None of the unrecognized benefits would impact the effective tax rate if recognized. While amounts could change during the next 12 months, the Company does not anticipate having a material impact on its financial statements.

Balances in the uncertain tax positions are as follows (in thousands):

	Year Ended December 31,
	2022		2021
Total unrecognized tax benefits, beginning balance	$	696	$	648
Increases in unrecognized tax benefits as a result of:
Tax positions taken during a prior period		100		21
Tax positions taken during the current period		39		27
Total unrecognized tax benefits, ending balance	$	835	$	696

The Company recognizes interest and penalties related to uncertain tax positions as “Interest Expense” and “General and administrative expense” on the Consolidated Statements of Operations, respectively.

Years Open to Examination

The 2019 through 2021 tax years remain open to examination by the tax jurisdictions in which the Company is subject to tax. The statute of limitations with respect to the U.S. federal income tax returns of the Company for years ending on or before December 31, 2018 are closed, except to the extent of any NOL carryover balance.