Note 13 - Income Taxes

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 13. Income Taxes

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

	Year Ended December 31, 2021		August 22, 2020 through December 31, 2020
Current tax expense	$	—	$	(3,176	)
Deferred tax expense		16,904		(1,047	)
Income tax expense (benefit)	$	16,904	$	(4,223	)

The reconciliation between the income tax expense (benefit) 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):

	Year Ended December 31, 2021			August 22, 2020 through December 31, 2020
Income tax expense at U.S. federal statutory rate	$	15,217		$	(4,337	)
State deferred income taxes		1,730			—
Limited tax benefit due to stock-based compensation		(51	)		127
Other		8			(13	)
Income tax expense (benefit)	$	16,904		$	(4,223	)
Effective income tax rate		23.3	%		20.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows as of December 31, 2021 and 2020 (in thousands):

	December 31,
	2021			2020
Deferred tax assets:
Stock-based compensation	$	4,373		$	3,124
Unrecognized derivative losses		3,248			—
Net operating loss carryforwards		2,870			9,725
Other		31			31
Less: Valuation allowance		—			—
Net deferred tax assets		10,522			12,880
Deferred tax liabilities:
Crude oil and natural gas properties, principally due to differences in basis and depreciation and the deduction of intangible drilling costs for tax purposes		(66,324	)		(51,778	)
Net deferred tax liabilities	$	(55,802	)	$	(38,898	)

The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to deferred state income taxes and permanent differences between GAAP income and taxable income. Periods prior to August 22, 2020 are not shown because the Predecessor was treated as a partnership for U.S. federal income tax purposes and therefore does not record a provision for U.S. federal income tax because the partners of the Predecessor report their share of the Predecessor's income or loss on their respective income tax returns. The Predecessor is required to file tax returns on Form 1065 with the IRS. The 2018 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 December 31, 2021 and 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. 

The Company is also subject to Texas Margin Tax. The Company realized no current Texas Margin Tax in the accompanying consolidated financial statements as we do not anticipate owing any Texas Margin Tax for 2021. However, the Company has recognized a deferred Texas Margin Tax liability of $1.8 million in the accompanying consolidated financial statements.