INCOME TAXES

12 Months Ended

Dec. 31, 2012

INCOME TAXES

INCOME TAXES

NOTE E—INCOME TAXES

        The Company and its subsidiaries file a consolidated federal income tax return.

        The Company's effective income tax rate differed from the federal statutory rate as follows:

	2012			2011			2010
	(in thousands)
Income taxes at federal statutory rate(a)	$	5,274		$	7,331		$	6,920
Change in valuation allowance		(6,537	)		(9,675	)		(8,267	)
Nondeductible expenses		694			574			91
State income taxes net of federal benefit		931			1,294			1,221
Other		(369	)		398			6
	$	(7	)	$	(78	)	$	(29	)

(a)

34% for 2012, 2011 and 2010.

        Deferred tax assets and liabilities are as follows as of December 31:

	2012		2011
	(in thousands)
Deferred tax assets relating to:
Net operating loss carryforward	$	101,393	$	99,183
Oil and gas properties and tangible equipment		25,111		34,655
Stock option expense		3,682		2,956
Unrealized loss on derivatives		558		480
Other		324		324
		131,068		137,598
Less valuation allowance		130,879		137,416
Total deferred tax asset		189		182
Deferred tax liabilities relating to:
Net unrealized gain on investments		189		182
Total deferred tax liability		189		182
Net deferred tax asset (liability)	$	—	$	—

        A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of this deferred tax asset depends on the Company's ability to generate sufficient taxable income in the future. Management believes it is more likely than not that the net deferred tax asset will not be realized by future operating results. The valuation allowance decreased by approximately $7 million, $10 million and $8 million for the years ended December 31, 2012, 2011 and 2010, respectively.

        At December 31, 2012, the Company had net operating loss carryforwards for federal income tax purposes of approximately $253 million, which will expire in years 2018 through 2031.

        Tax years beginning in 2008 are subject to examination by taxing authorities, although net operating loss and credit carryforwards from all years are subject to examination and adjustments for at least three years following the year in which the attributes are used.

        The Company routinely assesses potential uncertain tax positions and, if required, establishes accruals for such amounts. Only tax positions that meet the more-likely-than-not recognition threshold are recorded.