Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The provision (benefit) for income taxes included the following components:

(in millions)	2021		2020		2019
Current:
Federal	$	—	$	(2)	$	(1)
State	—		—		(1)
	—		(2)		(2)
Deferred:
Federal	—		371		(431)
State	—		38		22
	—		409		(409)
Provision (benefit) for income taxes	$	—	$	407	$	(411)

The provision for income taxes was an effective rate of 0% in 2021, (15)% in 2020 and (86)% in 2019.  The Company’s effective tax rate increased in 2021, as compared with 2020, primarily due to the changes in the valuation allowance and refunds

received in 2020.  The following reconciles the provision for income taxes included in the consolidated statements of operations with the provision which would result from application of the statutory federal tax rate to pre-tax financial income:

(in millions)	2021		2020		2019
Expected provision (benefit) at federal statutory rate	$	(5)	$	(568)	$	101
Increase (decrease) resulting from:
State income taxes, net of federal income tax effect	—		(55)		11
Change in valuation allowance	2		1,034		(522)
Other	3		(4)		(1)
Provision (benefit) for income taxes	$	—	$	407	$	(411)

The components of the Company’s deferred tax balances as of December 31, 2021 and 2020 were as follows:

(in millions)	2021		2020
Deferred tax liabilities:
Right of use lease asset	$	45	$	38
Other	3		2
	48		40
Deferred tax assets:
Differences between book and tax basis of property	—		295
Accrued compensation	44		38
Accrued pension costs	6		11
Asset retirement obligations	25		20
Net operating loss carryforward	585		1,117
Future lease payments	46		38
Derivative activity	362		9
Capital loss carryover	28		27
Other	31		24
	1,127		1,579
Valuation allowance	(1,079)		(1,539)
Net deferred tax asset	$	—	$	—

As the Tax Cuts and Jobs Act repealed the corporate alternative minimum tax for tax years beginning on or after January 1, 2018 and provided for existing alternative minimum tax credit carryovers to be refunded beginning in 2018, the Company has approximately $30 million in refundable credits.  Accordingly, in 2017 the valuation allowance in place prior to the Tax Cuts and Jobs Act related to these credits was released, and any credits remaining were reclassed to a receivable. Additionally, in January 2020 the IRS announced that any previously sequestered amounts relating to these alternative minimum tax refunds would also be refunded. The Company had approximately $2 million in sequestered amounts relating to alternative minimum tax refunds. All of those refunds have been received as of December 2020 after the CARES Act (enacted in March 2020) accelerated alternative minimum tax refunds. In 2020, the Company received refunds related to federal income tax of $32 million.  The Company received a refund of $1 million in state income tax in 2019.

Due to the issuance of common stock associated with the Indigo Merger, as discussed in Note 2 to the consolidated financial statements to this Annual Report, the Company incurred a cumulative ownership change and as such, the Company’s net operating losses (“NOLs”) prior to the acquisition are subject to an annual limitation under Internal Revenue Code Section 382 of approximately $48 million. The ownership changes and resulting annual limitation will result in the expiration of NOLs or other tax attributes otherwise available, with a corresponding decrease in the Company’s valuation allowance. At December 31, 2021, the Company had approximately $4 billion of federal NOL carryovers, of which approximately $3 billion have an expiration date between 2035 and 2037 and $1 billion have an indefinite carryforward life. The Company currently estimates that approximately $2 billion of these federal NOLs will expire before they are able to be used. The non-expiring NOLs remain subject to a full valuation allowance. If a subsequent ownership change were to occur as a result of future transactions in the Company’s common stock, the Company’s use of remaining U.S. tax attributes may be further limited. Included in the Company’s net operating loss carryforward are the net operating loss carryforwards acquired in the Montage acquisition of $858 million. A portion of the Montage-related net operating loss carryovers is subject to an annual section 382 limitation of $1.7 million, and the Company has appropriately accounted for this limitation in purchase accounting in 2020. Additionally, the Company has an income tax net operating loss carryforward related to its Canadian operations of $29 million, with expiration dates of 2030 through 2039.  The

Company also had a statutory depletion carryforward of $13 million and $46 million related to interest deduction carryforward as of December 31, 2021.

A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized.  To assess that likelihood, the Company uses estimates and judgment regarding future taxable income, and considers the tax consequences in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required.  Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities, and tax planning strategies as well as current and forecasted business economics of the oil and gas industry.

For the years ended December 31, 2018 and 2017, the Company maintained a full valuation allowance against its deferred tax assets based on its conclusion, considering all available evidence (both positive and negative), that it was more likely than not that the deferred tax assets would not be realized. A significant item of objective negative evidence considered was the cumulative pre-tax loss incurred over the three-year period ended December 31, 2018, primarily due to non-cash impairments of proved natural gas and oil properties recognized in 2015 and 2016. As of the first quarter of 2019, the Company had sustained a three-year cumulative level of profitability. Based on this factor and other positive evidence including forecasted taxable income, the Company concluded that it was more likely than not that the deferred tax assets would be realized and determined that $522 million of the valuation allowance would be released during 2019. Accordingly, a tax benefit of $522 million was recorded.

In 2020, due to significant pricing declines and the material write-down of the carrying value of the Company’s natural gas and oil properties in addition to other negative evidence, the Company concluded that it was more likely than not that its deferred tax assets would not be realized and recorded a valuation allowance. As of December 31, 2021, the Company still maintains a full valuation allowance. The Company also retained a valuation allowance of $59 million related to net operating losses in jurisdictions in which it no longer operates. Management will continue to assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of deferred tax assets. The amount of the deferred tax asset considered realizable, however, could be adjusted based on changes in subjective estimates of future taxable income or if objective negative evidence is no longer present.

A reconciliation of the changes to the valuation allowance is as follows:

(in millions)	2021		2020
Valuation allowance at beginning of year	$	1,539	$	87
Establishment of valuation allowance on opening deferred balance	—		408
Return to accrual adjustments	(31)		6
Current period deferred activity	(1)		626
Reduction due to 382 limitations on NOLs	(428)		(120)
Purchase accounting	—		532
Valuation allowance at end of year	$	1,079	$	1,539

A tax position must meet certain thresholds for any of the benefit of the uncertain tax position to be recognized in the financial statements. As of December 31, 2021, there were no unrecognized tax positions identified that would have a material effect on the effective tax rate.  All $7 million in uncertain tax positions booked as of December 31, 2018 were released in 2019 due to audit completion and statute expirations.

The Internal Revenue Service closed the 2016 and 2017 audits of the Company’s federal returns in 2021 with no change. The income tax years 2018 to 2021 remain open to examination by the major taxing jurisdictions to which the Company is subject.

The Company adopted Accounting Standards Update No. 2019-12 (“ASU 2019-12”) in the current period. ASU 2019-12 addressed simplification to income tax accounting rules, such as removing a few exceptions to intraperiod allocation. There was no material impact to the financial statements as a result of this adoption.