NOTE

12.

Income Taxes

March 27, 2020,

the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law. 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.

The Company's income tax expense attributable to income from operations consisted of the following (in thousands):

	Three Months Ended March 31, 2021
Current tax expense	$	-
Deferred tax expense		1,115
Income tax expense	$	1,115

The reconciliation between the income tax expense computed by multiplying pre-tax income by the U.S. federal statutory rate and the reported amounts of income tax expense is as follows (in thousands, except rate):

	Three Months Ended March 31, 2021
Income tax expense at U.S. federal statutory rate	$	1,230
Limited tax benefit due to stock-based compensation		(109	)
Other		(6	)
Income tax expense	$	1,115
Effective income tax rate	19.0		%

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

March 31, 2021

and

December 31, 2020 (

in thousands):

	March 31, 2021			December 31, 2020
Deferred tax assets:
Net operating loss carryforwards	$	15,300		$	9,725
Stock-based compensation		3,234			3,124
Other		31			31
Less: Valuation allowance		-			-
Net deferred tax assets		18,565			12,880
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		(58,578	)		(51,778	)
Net deferred tax liabilities	$	(40,013	)	$	(38,898	)

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

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

2020

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 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 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

March 31, 2021

and

December 31, 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

$18.6

million and

$12.9

million in deferred tax assets it has as of

March 31, 2021

and

December 31, 2020,

respectively, 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.

December 27, 2020,

the Consolidated Appropriations Act was signed into law, an omnibus spending bill to fund the federal government that also includes an array of COVID-related tax relief for individuals and businesses. The tax-related measures contained in the Consolidated Appropriations Act revise and expand provisions enacted earlier in the year by the Families First Coronavirus Response Act and the CARES Act. The Consolidated Appropriations Act also extends a number of expiring tax provisions. Additionally, the Act provides for a

100%

deduction for certain business meals incurred in calendar years

2021

and

2022,

which were deductible at

50%

for the year ending

December 31, 2020.

In addition, on

March 11, 2021,

the American Rescue Plan Act was signed into law, which includes additional COVID-related tax relief for individuals and businesses. The Company determined that income tax effects related to the passage of the Consolidated Appropriations Act and the American Rescue Plan Act were

not

material to the financial statements for the

three

months ended

March 31, 2021.

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

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.