Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

Income tax expense is summarized as follows:

	Year Ended December 31,
(In millions)	2021		2020		2019
Current
Federal	$	207	$	(32)	$	(29)
State	11		1		4
	218		(31)		(25)
Deferred
Federal	119		68		233
State	7		4		11
	126		72		244
Income tax expense	$	344	$	41	$	219

Income tax expense was different than the amounts computed by applying the statutory federal income tax rate as follows:

	Year Ended December 31,
	2021				2020				2019
(In millions, except rates)	Amount		Rate		Amount		Rate		Amount		Rate
Computed “expected” federal income tax	$	315	21.00	%	$	51	21.00	%	$	189	21.00	%
State income tax, net of federal income tax benefit	24		1.59	%	5		1.86	%	15		1.64	%
Deferred tax adjustment related to change in overall state tax rate	(7)		(0.46)	%	1		0.50	%	(1)		(0.07)	%
Valuation allowance	3		0.22	%	(4)		(1.58)	%	18		1.96	%
Excess executive compensation	15		1.03	%	5		2.18	%	2		0.21	%
Reserve on uncertain tax positions	1		0.05	%	6		2.47	%	—		—	%
Tax credits generated	(6)		(0.39)	%	(23)		(9.63)	%	—		—	%
Other, net	(1)		(0.14)	%	—		0.04	%	(4)		(0.40)	%
Income tax expense	$	344	22.90	%	$	41	16.84	%	$	219	24.34	%

In 2021, the Company's overall effective tax rate increased compared to 2020, primarily due to lower research and development tax credit benefits recorded in 2021 compared to 2020. The overall effective tax rate decreased in 2020 compared to 2019, primarily due to research and development tax credit benefits recorded in 2020 related to amended prior-year returns.

The composition of net deferred tax liabilities is as follows:

	December 31,
(In millions)	2021		2020
Deferred Tax Assets
Net operating losses	$	388	$	22
Incentive compensation	23		16
Deferred compensation	22		6
Post-retirement benefits	8		7
Capital loss carryforward	30		17
Other credit carryforwards	10		—
Leases	11		8
Derivative instruments	35		—
Other	18		3
Less: valuation allowance	(177)		(28)
Total	368		51
Deferred Tax Liabilities
Properties and equipment	3,459		810
Equity method investments	1		1
Leases	9		8
Derivative instruments	—		6
Total	3,469		825
Net deferred tax liabilities	$	3,101	$	774

On October 1, 2021, Coterra and Cimarex completed the Merger. For U.S. federal income tax purposes, Coterra and Cimarex intended for the Merger to qualify as a tax-free reorganization, whereby Coterra acquired the common stock of Cimarex and Cimarex retained a carryover tax basis in Cimarex’s assets and liabilities. As of December 31, 2021, the Company recorded a net deferred tax liability of $2.2 billion to reflect the difference between the fair value of Cimarex’s assets and liabilities recorded in the acquisition and the income tax basis of the assets and liabilities assumed. See Note 2 “Acquisitions” for more information regarding the preliminary purchase price allocation. The deferred tax liability includes certain deferred tax assets net of valuation allowances.

Because the Merger resulted in an “ownership change” with respect to Cimarex, the Company’s ability to utilize Cimarex’s federal tax attributes will be limited pursuant to Section 382 of the Internal Revenue Code. In particular, the Company’s ability to use the Cimarex net operating losses (“NOLs”) and credits is limited to an annual amount (determined by multiplying (1) the fair market value of Cimarex’s stock at the effective time of the Merger by (2) the long-term tax exempt rate published by the Internal Revenue Service for the month in which the Merger occurred) plus any built-in gains recognized within five years after the ownership change (but only to the extent of the net unrealized built-in gain that existed at the time of the ownership change). The annual limitation amount is $130 million and the net unrealized built-in gain is projected to be $2.8 billion. The Cimarex federal NOLs were approximately $1.3 billion at the date of the Merger and do not begin to expire until 2034. Even with the Section 382 limitation, the Company expects to be able to fully utilize the Cimarex NOLs prior to their expiration. Accordingly, no additional valuation allowance has been recorded on these acquired tax attributes.

At December 31, 2021, the Company had federal NOL carryforwards of approximately $1.1 billion, $875 million of which is subject to expiration in years 2034 through 2037, and $224 million of which is not subject to expiration. The Company believes that the carryforward, net of valuation allowance, will be utilized before it expires. The Company had gross state NOL carryforwards of $3.0 billion at December 31, 2021, primarily expiring between 2022 and 2041, with all but $69 million covered by a valuation allowance. The Company had capital loss carryforwards of $135 million, which can only be used to offset future capital gains, of which $64 million expires in 2022 and $71 million expires in 2025. The Company also had enhanced oil recovery and marginal well credits of $10 million at December 31, 2021.

As of December 31, 2021, the Company had $136 million of valuation allowances on the deferred tax benefits related to state NOLs, $29 million of valuation allowances on the deferred tax benefits related to the capital loss carryforwards, and $4 million of valuation allowances on the deferred tax benefits related to enhanced oil recovery credits. The Company believes it is more likely than not that the remainder of its deferred tax benefits will be utilized prior to their expiration.

Unrecognized Tax Benefits

A reconciliation of unrecognized tax benefits is as follows:

	Year Ended December 31,
(In millions)	2021		2020		2019
Balance at beginning of period	$	6	$	1	$	17
Additions for tax positions of current period	1		—		—
Additions for tax positions of prior periods	—		5		—
Reductions for tax positions of prior periods	—		—		(16)
Balance at end of period	$	7	$	6	$	1

During 2021, the Company recorded a $1 million reserve for unrecognized tax benefits related to estimated current year research and development tax credits. As of December 31, 2021, the Company's overall net reserve for unrecognized tax positions was $7 million, with a $1 million liability for accrued interest on the uncertain tax positions. If recognized, the net tax benefit of $7 million would not have a material effect on the Company's effective tax rate.

The Company files income tax returns in the U.S. federal, various states and other jurisdictions. The Company is no longer subject to examinations by state authorities before 2012 or by federal authorities before 2017. The Company believes that appropriate provisions have been made for all jurisdictions and all open years, and that any assessment on these filings will not have a material impact on the Company's financial position, results of operations or cash flows.