Note 12 - Income Taxes

6 Months Ended

Jun. 30, 2025

Notes to Financial Statements

Income Tax Disclosure [Text Block]

NOTE 12. 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.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2025		2024			2025		2024
Current income tax expense:
Federal	$	—	$	(110	)	$	—	$	276
State		—		78			—		301
Total current income tax expense		—		(32	)		—		577
Deferred income tax expense:
Federal		7,262		13,848			16,834		15,313
State		401		434			768		657
Deferred income tax expense		7,663		14,282			17,602		15,970
Total provision for income taxes	$	7,663	$	14,250		$	17,602	$	16,547

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 June 30,						Six Months Ended June 30,
	2025			2024			2025			2024
Provision for income taxes at U.S. federal statutory rate	$	7,106		$	9,233		$	16,824		$	11,067
State deferred income taxes		401			496			768			895
Limited tax benefit due to stock-based compensation		108			4,059			(4	)		4,436
Other, net		48			462			14			149
Provision for income taxes	$	7,663		$	14,250		$	17,602		$	16,547
Effective income tax rate		22.6	%		32.4	%		22.0	%		31.4	%

The effective income tax rate differs from the U.S. statutory rate of 21 percent primarily due to certain stock-based compensation which exceeds the federal limits, deferred state income taxes and other permanent differences between GAAP income and taxable income.  The effective tax rates for the three and six months ended June 30, 2024 were also affected by a $3.0 million adjustment further discussed below.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows as of June 30, 2025 and December 31, 2024 (in thousands):

	June 30, 2025			December 31, 2024
Deferred tax assets:
Interest expense limitations	$	82,796		$	73,013
Net operating loss carryforwards		18,873			13,089
Stock-based compensation		3,248			3,351
Other		27			35
Less: Valuation allowance		—			—
Deferred tax assets		104,944			89,488
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		(351,407	)		(321,411	)
Unrecognized derivative gains, net		(3,537	)		(475	)
Deferred tax liabilities		(354,944	)		(321,886	)
Net deferred tax liabilities	$	(250,000	)	$	(232,398	)

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 June 30, 2025 and December 31, 2024, 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 restricted stock vests. IRC Section 162(m) limits compensation deductions to $1.0 million per year for certain Company executives. This resulted in a $3.0 million reduction in the deferred tax asset and increased the amount of income tax expense realized during the six months ended June 30, 2024.

On July 4, 2025, the “One Big Beautiful Bill” (“OBBB”) was enacted. The OBBB is a significant piece of legislation that includes significant changes to federal tax policy, environmental funding, and energy development regulations. Key provisions relevant to the crude oil and natural gas industry include (i) tax policy changes that extend and expand components of the 2017 Tax Cuts and Jobs Act, (ii) the introduction of fee and royalty-related provisions aimed at reducing financial and administrative burdens on domestic energy producers, and (iii) the recission of environmental funding which rescinds unobligated balances from several programs originally authorized under the Inflation Reduction Act of 2022 (“IRA 2022”), including the Greenhouse Gas Reduction Fund and climate justice block grants. The Company is currently evaluating the full impact of the OBBB on the Company’s condensed consolidated balance sheets, condensed consolidated statements of operations and condensed consolidated statements of cash flows in its condensed consolidated financial statements.

The Company is also subject to Texas margin tax. The Company realized zero and $301,000 in current Texas margin tax in the accompanying condensed consolidated financial statements for the six months ended June 30, 2025 and 2024, respectively. In addition, the Company has recognized a net deferred Texas margin tax liability of $9.4 million and $8.6 million as of June 30, 2025 and December 31, 2024, respectively, in the accompanying condensed consolidated balance sheets.

In addition to the provision for income taxes, the Company recognized and paid an excise tax of 1% on its stock repurchases during the six months ended June 30, 2025 and the year ended December 31, 2024 of zero and $351,000, respectively, recognized as part of the cost basis of the stock repurchased in the condensed consolidated statements of changes in stockholders’ equity.