INCOME TAXES

9 Months Ended

Sep. 30, 2022

Income Tax Expense (Benefit), Continuing Operations [Abstract]

INCOME TAXES

INCOME TAXES

The Company’s effective tax rate was approximately 2% and (4)% for the three and nine months ended September 30, 2022. The effective tax rate for the three and nine months ended September 30, 2022 related to the effects of a valuation allowance against the Company’s U.S. deferred tax assets. 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.

As of the third quarter of 2022, 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.

The Company intends to continue a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowance. However, if current commodity prices are sustained and absent any additional objective negative evidence, it is reasonably possible that sufficient positive evidence will exist within the next 12 months to adjust the current valuation allowance position. Exact timing and amount of the adjustment to the valuation allowance is unknown at this time.

The Company’s effective tax rate was approximately 0% for the three and nine months ended September 30, 2021 which related to the effects of the valuation allowance against the Company’s U.S. deferred tax assets.

Due to the issuance of common stock associated with the Indigo Merger, as discussed in Note 2, 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 September 30, 2022, the Company had approximately $4 billion of federal NOL carryovers, of which approximately $3 billion expire 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.

For the nine months ended September 30, 2022, the Company recorded current income tax expense of approximately $41 million, as it expects to pay cash income taxes for the year ended December 31, 2022.

The Inflation Reduction Act of 2022 (the “IRA”) was enacted on August 16, 2022 and may impact how the U.S. taxes certain large corporations. The IRA imposes a 15% alternative minimum tax on the “adjusted financial statement income” of certain large corporations (generally, corporations reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements) for tax years beginning after December 31, 2022. The Company will continue to monitor updates to the IRA and the impact it will have on the Company’s consolidated financial statements.