Note 4 – Income Taxes

The provision for income taxes consists of the following:



	For the Years Ended December 31,
	2013			2012			2011
	(in thousands)
Current portion of income tax expense (benefit)
Federal	$	—		$	—		$	(1,757	)
State	2,121			370			1,553
Deferred portion of income tax expense (benefit)	105,555			(29,638		)	123,789
Total income tax expense (benefit)	$	107,676		$	(29,268	)	$	123,585
Effective tax rate	38.6		%	35.0		%	36.5		%

The Company reduces its income tax payable to reflect employee stock option exercises. There was no excess income tax benefit associated with stock awards in 2013, 2012, or 2011.

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



	As of December 31,
	2013			2012
	(in thousands)
Deferred tax liabilities:
Oil and gas properties	$	768,463		$	678,624
Derivative asset	9,529			15,942
Other	1,245			6,443
Total deferred tax liabilities	779,237			701,009
Deferred tax assets:
Federal and state tax net operating loss carryovers	91,788			113,522
Net Profits Plan liability	20,913			29,233
Stock compensation	18,820			18,026
Other long-term liabilities	13,341			16,739
Total deferred tax assets	144,862			177,520
Valuation allowance	(5,001		)	(5,315		)
Net deferred tax assets	139,861			172,205
Total net deferred tax liabilities	639,376			528,804
Less: current deferred income tax liabilities	(172		)	(5,442		)
Add: current deferred income tax assets	10,921			14,021
Non-current net deferred tax liabilities	$	650,125		$	537,383
Current federal income tax refundable	$	4,630		$	2,511
Current state income tax refundable	$	—		$	853
Current state income tax payable	$	1,460		$	—

At December 31, 2013, the Company estimated its federal net operating loss carryforward at $376.1 million, which includes unrecognized excess income tax benefits associated with stock awards of $126.7 million. The Company expects future excess benefit utilization to be recognized using the with-and-without method. The federal net operating loss carryforward begins to expire in 2031. The Company has estimated state net operating loss carryforwards of $147.5 million that expire between 2014 and 2034. The Company has federal research and development (“R&D”) credit carryforwards of $5.0 million that expire between 2028 and 2031. 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. The change in the valuation allowance from 2012 to 2013 primarily reflects utilization of Oklahoma net operating losses resulting from the 2013 Anadarko Basin asset divestiture gain offset in part by a change in the Company’s position regarding anticipated utilization of cumulative net operating losses attributed to other states.

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, changes in valuation allowances, percentage depletion, R&D credits, and other permanent differences, as follows:



	For the Years Ended December 31,
	2013			2012			2011
	(in thousands)
Federal statutory tax expense (benefit)	$	97,514		$	(29,231	)	$	118,652
Increase (decrease) in tax resulting from:
State tax expense (benefit) (net of federal benefit)	9,400			(992		)	6,458
Research and development credit	—			(970		)	(4,516		)
Change in valuation allowance	(314		)	1,524			1,627
Statutory depletion	(154		)	(210		)	(341		)
Other	1,230			611			1,705
Income tax expense (benefit)	$	107,676		$	(29,268	)	$	123,585

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. Significant divestiture activity impacting the Company’s blended state rate occurred during the fourth quarter of 2013.

The Company and its subsidiaries file federal income tax returns and various state income tax returns. 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 2007. Federal tax law allowing for the calculation of an R&D credit was enacted in 2013, but the Company has not yet commissioned a study to calculate the credit for the 2012 or 2013 tax years. The table above excludes the impact for any credit that would be allowed under the new law in either period. The Internal Revenue Service (“IRS”) initiated an audit in the first quarter of 2012 related to R&D tax credits claimed by the Company for the 2007 through 2010 tax years. On April 23, 2013, the IRS issued a Notice of Proposed Adjustment disallowing $4.6 million of R&D tax credits claimed for open tax years during the audit period. The Company maintains it is entitled to the claimed credits and was notified during December 2013 the case has been received by the IRS Appeals office, but a conference had not been scheduled as of the filing date of this report. In the fourth quarter of 2013, the Company filed a federal net operating loss carryback claim along with other audit adjustments not processed during the 2013 audit, amounting to a $4.0 million refund.

On September 13, 2013 the United States Department of the Treasury and IRS issued final and re-proposed tangible property regulations effective for tax years beginning January 1, 2014. The Company has determined it is materially compliant with the requirements of these regulations as of December 31, 2013.

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. At December 31, 2013, the Company estimates the range of reasonably possible change in 2014 to the table below could be from zero to $1.4 million.

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



	For the Years Ended December 31,
	2013		2012		2011
	(in thousands)
Beginning balance	$	2,278	$	1,961	$	807
Additions based on tax positions related to current year	—		—		1,172
Additions for tax positions of prior years	80		317		183
Reductions for lapse of statute of limitations	—		—		(201		)
Ending balance	$	2,358	$	2,278	$	1,961