Note 13 - Income Taxes

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 13. Income Taxes

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

	Three Months Ended March 31,
	2022			2021
Current income tax expense (benefit):
Federal	$	—		$	—
State		—			—
Total current income tax expense (benefit)		—			—
Deferred income tax expense (benefit):
Federal		(188	)		1,115
State		(124	)		—
Deferred income tax expense (benefit)		(312	)		1,115
Total income tax expense (benefit)	$	(312	)	$	1,115

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):

	Three Months Ended March 31,
	2022			2021
Income tax expense (benefit) at U.S. federal statutory rate	$	(3,533	)	$	1,230
Limited tax benefit due to stock-based compensation		3,606			(109	)
State deferred income taxes		(124	)		—
Other, net		(261	)		(6	)
Income tax expense (benefit)	$	(312	)	$	1,115
Effective income tax rate		1.9	%		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, 2022 and December 31, 2021 (in thousands):

	March 31, 2022			December 31, 2021
Deferred tax assets:
Unrecognized derivative losses	$	12,329		$	3,248
Net operating loss carryforwards		3,681			2,870
Stock-based compensation		1,357			4,373
Interest expense limitations		968			—
Other		293			31
Deferred tax assets		18,628			10,522
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		(74,118	)		(66,324	)
Net deferred tax liabilities	$	(55,490	)	$	(55,802	)

The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to establishing a valuation allowance primarily related to stock-based compensation, deferred state income taxes and permanent differences between GAAP income and taxable income.

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, 2022 and December 31, 2021, the Company had not recorded a valuation allowance for deferred tax assets arising from its operations because the Company believed they met the “more likely than not” criteria as defined by the recognition and measurement provisions of ASC 740.  The Company reversed a portion of its deferred tax asset related to stock-based compensation based on the assumption that the tax deduction will be subject to IRC Section 162(m) limits when the stock options are exercised and the restricted stock vests.  IRC Section 162(m) limits compensation deductions to $1.0 million per year for certain Company executives.  This resulted in a $3.4 million reduction in the deferred tax asset and reduced the amount of income tax benefit realized during the three months ended March 31, 2022.   

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 2022 or 2021. However, the Company has recognized a deferred Texas Margin Tax liability of $1.7 million and $1.8 million as of March 31, 2022 and December 31, 2021, respectively, in the accompanying consolidated financial statements.