Income Taxes

12 Months Ended

Dec. 31, 2020

INCOME TAXES

As previously stated, we filed for Chapter 11 Bankruptcy protection during the second quarter of 2020 and emerged from the cases in the third quarter of 2020. This event had a significant impact on income taxes during 2020. Under the Plan, the Company's pre-petition debt securities were extinguished and holders of those securities received their pro-rata share of New Common Stock. Holders of Old Common Stock that did not opt out of the release under the Plan received its pro-rata share of Warrants. Please refer to Note 2 – Emergence From Voluntary Reorganization Under Chapter 11 for more information.

As a result of the Plan, the company experienced an ownership change under Sec. 382 of the Internal Revenue Code (IRC). Under IRC Sec. 382, the company’s tax attributes, most notably its net operating loss carryovers, are potentially subject to various limitations going forward. The company believes it has satisfied the requirements of Sec. 382(l)(5) whereby our tax attributes are generally not subject to limitations under Sec. 382(a) and have reflected that result in our financials accordingly. While cancellation of debt income (CODI) is generally considered taxable income under IRC Sec. 108, it provides an exception to that rule for CODI realized under a Title 11 case of the United States Code. In exchange for this exception, the taxpayer must reduce certain tax attributes including its net operating loss carryovers, credit carryovers, and tax basis in its assets in the amount of the CODI not recognized under the IRC Sec. 108 exception. The amount of CODI not recognized as a result of the IRC Sec. 108 exception was $506.3 million. As a result, our net operating loss carryovers were reduced by $457.5 million and the tax basis of our assets were reduced by $48.8 million. Even though these tax attribute reductions are not effective until January 1, 2021, the first day of the tax year after emergence, they have been recognized and reflected as such in the tables below.

A reconciliation of income tax expense (benefit), computed by applying the federal statutory rate to pre-tax income (loss) to our effective income tax expense (benefit) is as follows:


	Successor		Predecessor
	Period September 1, 2020 through December 31, 2020		Period January 1, 2020 through August 31, 2020		For the Year Ended December 31, 2019

	(In thousands)
Income tax benefit computed by applying the statutory rate	$	(3,001)	$	(190,103)	$	(144,092)
State income tax benefit, net of federal benefit	(500)		(31,684)		(21,733)
Deferred tax liability revaluation	—		—		—
Restricted stock shortfall	—		7,404		347
Non-controlling interest in Superior	(1,017)		7,504		(11)
Goodwill impairment	—		—		12,346
Valuation allowance	4,047		177,284		19,654
Reorganization adjustments	—		14,152		—
Statutory depletion and other	169		813		1,163
Income tax benefit	$	(302)	$	(14,630)	$	(132,326)

For the periods indicated, the total provision for income taxes consisted of the following:


	Successor		Predecessor
	Period September 1, 2020 through December 31, 2020		Period January 1, 2020 through August 31, 2020		For the Year Ended December 31, 2019

	(In thousands)
Current taxes:
Federal	$	—	$	(917)	$	(918)
State	(302)		—		(363)
	(302)		(917)		(1,281)
Deferred taxes:
Federal	—		(16,663)		(108,440)
State	—		2,950		(22,605)
	—		(13,713)		(131,045)
Total provision	$	(302)	$	(14,630)	$	(132,326)

Deferred tax assets and liabilities are comprised of the following at December 31:


	Successor		Predecessor
	2020		2019
	(In thousands)
Deferred tax assets:
Allowance for losses and nondeductible accruals	$	22,051	$	31,822
Net operating loss carryforward	100,236		246,927
Depreciation, depletion, amortization, and impairment	80,947		—
Alternative minimum tax and research and development tax credit carryforward	1,738		2,656
	204,972		281,405
Deferred tax liability:
Depreciation, depletion, amortization, and impairment	—		(226,034)
Investment in Superior	(3,987)		(49,430)
Net deferred tax asset (liability)	200,985		5,941
Valuation allowance	(200,985)		(19,654)
Non-current—deferred tax liability	$	—	$	(13,713)

A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary. To the extent a valuation allowance is established or is increased or decreased during a period, there is a corresponding expense or reduction of expense within the tax provision in the Consolidated Statements of Operations.

During the year ended December 31, 2019, in evaluating whether it was more likely than not that the company's deferred tax assets were realizable through future net income, we considered all available positive and negative evidence, including (i) our earnings history exclusive of the loss that created the future deductible amount coupled with evidence indicating that the loss is an aberration rather than a continuing condition, (ii) our ability to recover net operating loss carryforward deferred tax assets in future years, (iii) the existence of significant proved oil, NGL and natural gas reserves, (iv) future revenue and operating cost projections that indicate the company will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures and (vii) current market prices for oil, NGL and natural gas. Based on all the evidence available, we determined it was more likely than not that the deferred tax asset for net operating loss carryforwards were not fully realizable. As of December 31, 2019, a total valuation allowance of $19.7 million has been recorded. As of December 31, 2020, the valuation allowance had increased to $201.0 million to reflect a full valuation allowance against our net deferred tax assets due to the impacts of the Plan from our bankruptcy proceedings, fresh start accounting, and tax attribute reductions as prescribed by IRC Section 108.

We file income tax returns in the U.S. federal jurisdiction and various states. We are no longer subject to U.S. federal tax examinations for years before 2016 or state income tax examinations by state taxing authorities for years before 2015. At December 31, 2020, we had expected federal net operating loss carryforwards of approximately $409.1 million of which $223.0 million would expire from 2021 to 2037.