Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Tax Disclosure

INCOME TAXES

We compute our quarterly tax provision using the effective tax rate method by applying the anticipated annual effective rate to our year-to-date income or loss, except for discrete items. Income tax on discrete items is computed and recorded in the period in which the specific transaction occurs.

As previously noted, we recorded impairments totaling $882.3 million for the nine months ended September 30, 2020. These impairments resulted in three years of cumulative historical pre-tax losses and a net deferred tax asset position. We also have estimated net operating loss carryovers (“NOLs”) for federal income tax purposes of $470.0 million. These losses were a key consideration that led us to continue to provide a valuation allowance against our net deferred tax assets as of September 30, 2020 since we cannot conclude that it is more likely than not that our net deferred tax asset will be fully realized in future periods.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At each reporting period, management considers the scheduled reversal of deferred tax liabilities, available taxes in carryback periods, tax planning strategies and projected future taxable income in making this assessment. Future events or new evidence which may lead us to conclude that it is more likely than not that our net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings,

sustained or continued improvements in oil prices, and taxable events that could result from one or more transactions. We will continue to evaluate whether the valuation allowance is needed in future reporting periods.

As noted in the footnote Business Combinations, the accounting for the SRC Acquisition is still in the measurement period. Additional adjustments during the measurement period for the SRC Acquisition may have an impact on the income tax provision in future periods, although such adjustments are not expected to be material. Other than business combination accounting adjustments during the measurement period, we will likely not have any additional income tax expense or benefit other than for state income taxes as long as we continue to conclude that it is appropriate to maintain a full valuation allowance against our net deferred tax assets.

The effective income tax rate for the three and nine months ended September 30, 2020 was a 0.6 percent provision on loss and a 0.5 percent benefit on loss, respectively, compared to a 40.1 percent provision on income for the three months ended September 30, 2019 and a 10.4 percent benefit on loss for the nine months ended September 30, 2019. The effective tax rate for the three and nine months ended September 30, 2020 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income due to the effect of a full valuation allowance in effect at September 30, 2020. The effective tax rate for the three and nine months ended September 30, 2019 differs from the statutory U.S. federal income tax rate of 21% due to state income taxes, non-deductible lobbying expenses, stock-based compensation and non-deductible officers’ compensation.

As of September 30, 2020, there is no liability for unrecognized income tax benefits. As of the date of this report, we are current with our income tax filings in all applicable state jurisdictions and are not currently under any state income tax examinations. The IRS has accepted our 2018 federal income tax return with no tax adjustments. We continue to voluntarily participate in the IRS CAP Program for the review of our 2019 and 2020 tax year. Participation in the IRS CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.