Income Taxes

6 Months Ended

Jun. 30, 2022

Income Tax Disclosure [Abstract]

Income Tax Disclosure

NOTE 13 - 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.

We consider whether a portion, or all, of our deferred tax assets (“DTAs”) will be realized based on a more likely than not standard of judgment. The ultimate realization of DTAs 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 available taxes in carryback periods, the future reversals of existing taxable temporary differences, tax planning strategies and

projected future taxable income in making this assessment. Our oil and gas property impairments and cumulative pre-tax losses were key considerations that led us to provide a valuation allowance against our DTAs beginning January 1, 2020 since we previously could not conclude that it is more likely than not that our DTAs will be fully realized in future periods.

During the period ended June 30, 2022, sufficient positive evidence became available that allowed us to reach a conclusion that it is more likely than not that our DTAs will be realized and the valuation allowance is no longer be needed. As we previously disclosed in our 2021 Form 10-K, we maintained a valuation allowance on our net federal deferred tax assets and would continue to do so until sufficient positive evidence exists to support a reversal of the allowance. In the second quarter, continued higher commodity prices have increased our income, resulting in the reversal of objective negative evidence of cumulative loss in recent years, and we determined that we have sufficient positive evidence to release the valuation allowance. As a result, we released $22.4 million of the valuation allowance against our deferred income tax assets and recognized a corresponding decrease to income tax expense in the period ended June 30, 2022. The remainder of the valuation allowance of $34.2 million will be recognized as a decrease to income tax expense over the second half of 2022.

The effective income tax rates for the three and six months ended June 30, 2022, excluding our discrete gain on bargain purchase of $100.3 million, were 18.5 percent and 19.6 percent, respectively, and 0.2 percent and 0.1 percent provision on the respective pre-tax losses for the three and six months ended June 30, 2021, respectively. The effective tax rates differ from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21 percent to the pre-tax loss due to the valuation allowance or changes in the valuation allowance against our deferred income tax assets.

As of June 30, 2022, 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 2020 federal income tax return with no tax adjustments. We continue to voluntarily participate in the IRS CAP program for the review of our 2021 tax year. Participation in the IRS CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.