INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

As a result of the Plan in 2020, 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 financial statements 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 $456.3 million and the tax basis of our assets were reduced by $50.0 million.

The following table presents a reconciliation between income tax expense computed by applying the federal statutory rate to income before income taxes and our effective income tax expense during the periods indicated:

	Year Ended December 31,
	2022		2021
	(In thousands)
Income tax expense computed by applying the statutory rate	$	31,228	$	12,772
State income tax expense, net of federal benefit	5,538		2,129
Restricted stock shortfall	(723)		—
Non-controlling interest in Superior	(1,428)		(3,046)
Valuation allowance	(43,008)		(16,612)
Warrant liability revaluation	7,184		4,640
Statutory depletion and other	1,542		290
Income tax expense	$	333	$	173

The following table presents the Company's total provision for income taxes during the periods indicated:

	Year Ended December 31,
	2022		2021
	(In thousands)
Current taxes:
Federal	$	—	$	—
State	333		173
	333		173
Deferred taxes:
Federal	—		—
State	—		—
	—		—
Total provision for income taxes	$	333	$	173

The following table presents the components of net deferred tax assets and liabilities:

	As of December 31,
	2022		2021
	(In thousands)
Deferred tax assets:
Allowance for losses and nondeductible accruals	$	15,662	$	23,819
Net operating loss carryforward	81,199		94,441
Depreciation, depletion, amortization, and impairment	43,172		68,001
Alternative minimum tax and research and development tax credit carryforward	1,738		1,738
	141,771		187,999
Deferred tax liability:
Investment in Superior	(406)		(3,626)
Net deferred tax asset	141,365		184,373
Valuation allowance	(141,365)		(184,373)
Non-current—deferred tax liability	$	—	$	—

We concluded that it is more likely than not that the net deferred tax asset will not be realized and have recorded a full valuation allowance as of December 31, 2022 and 2021, reducing the net deferred tax asset to zero. The Company's pre-tax earnings since the Emergence Date remained in a three-year net cumulative loss position as of December 31, 2022, however, we will continue to evaluate whether the valuation allowance is appropriate in future reporting periods. Future events or new evidence which may lead the Company to conclude that it is more likely than not its net deferred tax assets will be realized include, but are not limited to, cumulative historical pre-tax earnings since the Emergence Date, sustained strength or improvements in commodity prices, sustained or improved rig utilization or rates, a material and sizable asset acquisition or disposition, and taxable events that could result from one or more future potential transactions. The valuation allowance does not prohibit the Company from utilizing the tax attributes if the Company recognizes taxable income. As long as the Company has deferred tax assets available and continues to conclude that the valuation allowance against its net deferred tax assets is necessary, the Company will not have significant deferred income tax expense or benefit.

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 2019 or state income tax examinations by state taxing authorities for years before 2018. As of December 31, 2022, the Company has an expected federal net operating loss carryforward of $331.4 million of which $136.4 million is subject to expiration between 2036 and 2037. As of December 31, 2022, our tax basis in UPC's properties was approximately $333.8 million.