Note 13 - Income Taxes

3 Months Ended

Mar. 31, 2024

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 13. Income Taxes

Deferred income taxes 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. The Company is subject to corporate income taxes and Texas margin tax. The Company and its subsidiaries file a U.S. federal corporate income tax return on a consolidated basis.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA 2022”), which among other tax provisions, created a 15 percent corporate alternative minimum tax (“CAMT”) on the “adjusted financial statement income” of certain large corporations (generally, corporations reporting at least $1.0 billion of average adjusted pre-tax net income on their consolidated financial statements) as well as an excise tax of 1% on the fair market value of certain public company stock repurchases for tax years beginning after December 31, 2022. Based on application of currently available guidance, the Company’s income tax expense for the three months ended March 31, 2024 and 2023 was not impacted by the CAMT. The Company’s excise tax during the three months ended March 31, 2024 was immaterial and was recognized as part of the cost basis of the stock repurchased.

The Company’s provision for income taxes attributable to income before income taxes consisted of the following (in thousands):

	Three Months Ended March 31,
	2024		2023
Provision for current income taxes:
Federal	$	386	$	—
State		223		—
Total provision for current income taxes		609		—
Provision for deferred income taxes:
Federal		1,465		13,920
State		223		587
Total provision for deferred income taxes		1,688		14,507
Total provision for income taxes	$	2,297	$	14,507

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

	Three Months Ended March 31,
	2024			2023
Provision for income taxes at U.S. federal statutory rate	$	1,834		$	13,600
Limited tax benefit due to stock-based compensation		377			289
State deferred income taxes		399			587
Other, net		(313	)		31
Provision for income taxes	$	2,297		$	14,507
Effective income tax rate		26.3	%		22.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows as of March 31, 2024 and December 31, 2023 (in thousands):

	March 31, 2024			December 31, 2023
Deferred tax assets:
Interest expense limitations	$	48,716		$	41,352
Net operating loss carryforwards		11,960			13,503
Stock-based compensation		6,753			6,332
Unrecognized derivative losses, net		2,909			—
Other		237			36
Less: Valuation allowance		—			—
Deferred tax assets		70,575			61,223
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		(269,332	)		(250,859	)
Unrecognized derivative gains, net		—			(7,432	)
Deferred tax liabilities		(269,332	)		(258,291	)
Net deferred tax liabilities	$	(198,757	)	$	(197,068	)

The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to deferred state income taxes and other 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, 2024 and December 31, 2023, 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.

The Company is also subject to Texas margin tax. The Company realized $223,000 and zero in current Texas margin tax in the accompanying condensed consolidated financial statements for the three months ended March 31, 2024 and 2023, respectively. In addition, the Company has recognized a net deferred Texas margin tax liability of $7.3 million and $7.1 million as of March 31, 2024 and December 31, 2023, respectively, in the accompanying condensed consolidated balance sheets.