Note 12 - Income Taxes

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE

1

2

. Income Taxes

On

March 27, 2020,

President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to examine how the CARES Act

may

impact its business, results of operations, financial condition and liquidity.

Income tax benefit and effective tax rate are as follows (in thousands, except rates):

	August 22, 2020 through September 30, 2020
Current tax benefit	$	(2,306	)
Deferred tax benefit		(3	)
Income tax benefit	$	(2,309	)
Effective income tax rate		16.7	%

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

September 30, 2020 (

in thousands):

	September 30, 2020
Deferred tax assets:
Stock-based compensation	$	2,951
Less: Valuation allowance		-
Net deferred tax assets		2,951
Deferred tax liabilities:
Oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes		(43,447	)
Net deferred tax liabilities	$	(40,496	)

The effective income tax rate differs from the U.S. statutory rate of

21

percent primarily due to permanent differences between GAAP income and taxable income. Periods prior to

August 22, 2020

are

not

shown because the Predecessors were treated as partnerships for U.S. federal income tax purposes and therefore do

not

record a provision for U.S. federal income tax because the partners of the Predecessors report their share of the Predecessors' income or loss on their respective income tax returns. The Predecessors are required to file tax returns on Form

1065

with the IRS. The

2017

through

2019

tax years remain open to examination.

As required by ASC Topic

740,

“Income Taxes,” (“ASC

740”

) the Company uses reasonable judgments and makes estimates and assumptions related to evaluating the probability of uncertain tax positions. The Company bases its estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than

not”

be sustained in an income tax audit. Based on that analysis, the Company believes the Company has

not

taken any material uncertain tax positions, and therefore has

not

recorded an income tax liability related to uncertain tax positions. However, if actual results materially differ, the Company's effective income tax rate and cash flows could be affected in the period of discovery or resolution. The Company also reviews the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company's deferred tax assets and records a valuation allowance when the Company believes that a portion or all of the deferred tax assets

may

not

be realized. If the Company is unable to realize the expected future benefits of its deferred tax assets, the Company is required to provide a valuation allowance. The Company uses its past history and experience, overall profitability, future management plans, tax planning strategies, and current economic information to evaluate the amount of valuation allowance to record. As of

September 30, 2020,

the Company has

not

recorded a valuation allowance for deferred tax assets arising from its operations because the Company believes they meet the “more likely than

not”

criteria as defined by the recognition and measurement provisions of ASC

740.

However, the Company

may

not

realize the

$3.0

million in deferred tax assets it has as of

September 30, 2020

if the estimates and assumptions used in evaluating the probability of realizing the future benefits of the Company's deferred tax assets change, which would affect the Company's effective income tax rate and cash flows in the period of discovery or resolution.

The Company is also subject to Texas Margin Tax. The Company realized

no

Texas Margin Tax in the accompanying condensed consolidated and combined financial statements as we do

not

anticipate owing any Texas Margin Tax for any periods.