Note 4 – Income Taxes

The provision for income taxes consists of the following:



	For the Years Ended December 31,
	2012			2011			2010
	(in thousands)
Current portion of income tax benefit (expense)
Federal	$	—		$	1,757		$	(2,903	)
State	(370		)	(1,553		)	(639		)
Deferred portion of income tax benefit (expense)	29,638			(123,789		)	(114,517		)
Total income tax benefit (expense)	$	29,268		$	(123,585	)	$	(118,059	)
Effective tax rate	35.0		%	36.5		%	37.5		%

The Company reduces its income tax payable to reflect employee stock option exercises. In 2010, the excess income tax benefit to the Company associated with stock awards was $854,000. There was no excess income tax benefit associated with stock awards in 2012 or 2011.

The components of the net deferred income tax liabilities are as follows:



	As of December 31,
	2012			2011
	(in thousands)
Deferred tax liabilities:
Oil and gas properties	$	678,624		$	639,485
Unrealized derivative asset	15,942			13,274
Other	6,443			4,129
Total deferred tax liabilities	701,009			656,888
Deferred tax assets:
Federal and state tax net operating loss carryovers	113,522			23,651
Net Profits Plan liability	29,233			40,148
Stock compensation	18,026			17,728
Pension liability	6,849			5,902
Federal and state tax credit carryovers	5,271			4,301
Other long-term liabilities	4,619			4,908
Total deferred tax assets	177,520			96,638
Valuation allowance	(5,315		)	(3,791		)
Net deferred tax assets	172,205			92,847
Total net deferred tax liabilities	528,804			564,041
Less: current deferred income tax liabilities	(5,442		)	(3,307		)
Add: current deferred income tax assets	14,021			7,529
Non-current net deferred tax liabilities	$	537,383		$	568,263
Current federal income tax refundable	$	2,511		$	5,581
Current state income tax refundable	$	853		$	—
Current state income tax payable	$	—		$	774

At December 31, 2012, the Company estimated its federal net operating loss carryforward at $376.6 million, which includes unrecognized excess income tax benefits associated with stock awards of $93.4 million. The federal net operating loss carryforward begins to expire in 2031. The Company has estimated state net operating loss carryforwards of $361.2 million that expire between 2013 and 2032. The Company has claimed federal research and development (“R&D”) credit carryforwards of $5.0 million that expire between 2028 and 2031 and other state tax credits of $252,000 that expire between 2013 and 2022. The Company’s valuation allowance relates to charitable contribution carryfowards, state net operating loss carryforwards, state tax credits, and state and federal income tax benefit amounts, which the Company anticipates will expire before they can be utilized. Permanent items included in the calculation of income tax for certain states are anticipated to impact the Company’s ability to deduct operating losses and realize federal income tax deduction benefits in those states, and the Company adjusts its valuation allowances accordingly. The change in the valuation allowance from 2011 to 2012, indicated below, primarily reflects a change in the Company’s position regarding anticipated utilization of charitable contribution carryforward amounts and cumulative net operating losses attributed to Oklahoma.

Federal income tax expense differs from the amount that would be provided by applying the statutory United States federal income tax rate to income before income taxes primarily due to the effect of state income taxes, R&D credits, percentage depletion, changes in valuation allowances, and other permanent differences, as follows:



	For the Years Ended December 31,
	2012			2011			2010
	(in thousands)
Federal statutory tax benefit (expense)	$	29,231		$	(118,652	)	$	(110,214	)
(Increase) decrease in tax resulting from:
State tax benefit (expense) (net of federal benefit)	992			(6,458		)	(7,750		)
Research and development credit	970			4,516			—
Change in valuation allowance	(1,524		)	(1,627		)	1,039
Statutory depletion	210			341			266
Other	(611		)	(1,705		)	(1,400		)
Income tax benefit (expense)	$	29,268		$	(123,585	)	$	(118,059	)

Acquisitions, divestitures, drilling activity, and basis differentials impacting the prices received for oil, gas, and NGLs affect apportionment of taxable income to the states where the Company owns oil and gas properties. As its apportionment factors change, the Company’s blended state income tax rate changes. This change, when applied to the Company’s total temporary differences, impacts the total income tax reported in the current year and is reflected in state taxes in the table above. Items affecting state apportionment factors are evaluated at the beginning of each year, after completion of the prior year income tax return, and when significant acquisition, divestiture or changes in drilling activity occurs during the year.

The Company and its subsidiaries file income tax returns in the United States federal jurisdiction and in various states. With certain exceptions, the Company is no longer subject to United States federal or state income tax examinations by these tax authorities for years before 2008. In the third quarter of 2011, the Company completed a multi-year R&D credit study and filed amended federal returns to claim a credit for all open years. Federal tax law allowing for the calculation of an R&D credit for 2012 was not enacted until after December 31, therefore, no 2012 research activities are reflected in the table above.

In the first quarter of 2011, the Company received a $5.5 million refund from its 2006 tax year as a result of a net operating loss carryback claim from the 2008 tax year. In the fourth quarter of 2010, the Internal Revenue Service initiated an audit of the Company for the 2009 tax year. The audit was concluded in the second quarter of 2011 with a nominal decrease to the Company’s total 2005 refund claim of $25.0 million. A quick refund claim of $22.9 million from 2005 was received in the third quarter of 2010. The balance was received in the fourth quarter of 2011. The Internal Revenue Service initiated an audit in the first quarter of 2012 for the 2007 and 2010 tax years. This audit was still ongoing at year-end.

The Company complies with authoritative accounting guidance regarding uncertain tax provisions. The entire amount of unrecognized tax benefit reported by the Company would affect its effective tax rate if recognized. Interest expense in the accompanying statements of operations includes a negligible amount associated with income taxes. In 2011, the Company also recorded a negligible amount of penalty expense associated with income taxes as a general and administrative expense. There were no penalties for 2012 and 2010.

The total amount recorded for unrecognized tax benefits is presented below:



	For the Years Ended December 31,
	2012		2011			2010
	(in thousands)
Beginning balance	$	1,961	$	807		$	884
Additions based on tax positions related to current year	—		1,172			—
Additions for tax positions of prior years	317		183			244
Reductions for lapse of statute of limitations	—		(201		)	(321		)
Ending balance	$	2,278	$	1,961		$	807