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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes

8.

Income Taxes

Income Tax Expense (Benefit)

 

The following table presents Devon’s income tax components.

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

Current income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

10

 

 

$

(219

)

 

$

(3

)

Various states

 

 

9

 

 

 

—

 

 

 

(2

)

Canada

 

 

(3

)

 

 

—

 

 

 

—

 

Total current income tax expense (benefit)

 

 

16

 

 

 

(219

)

 

 

(5

)

Deferred income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

18

 

 

 

(304

)

 

 

8

 

Various states

 

 

22

 

 

 

(24

)

 

 

(33

)

Canada

 

 

9

 

 

 

—

 

 

 

—

 

Total deferred income tax expense (benefit)

 

 

49

 

 

 

(328

)

 

 

(25

)

Total income tax expense (benefit)

 

$

65

 

 

$

(547

)

 

$

(30

)

 

 

Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate to earnings (loss) from continuing operations before income taxes as a result of the following:

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

Earnings (loss) from continuing operations before income taxes

 

$

2,898

 

 

$

(3,090

)

 

$

(109

)

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

21

%

 

 

21

%

 

 

21

%

Change in tax legislation

 

 

0

%

 

 

4

%

 

 

0

%

State income taxes

 

 

1

%

 

 

1

%

 

 

24

%

Change in unrecognized tax benefits

 

 

0

%

 

 

0

%

 

 

(13

%)

Audit settlements

 

 

0

%

 

 

0

%

 

 

15

%

Other

 

 

2

%

 

 

(1

%)

 

 

(19

%)

Deferred tax asset valuation allowance

 

 

(22

%)

 

 

(7

%)

 

 

0

%

Effective income tax rate

 

 

2

%

 

 

18

%

 

 

28

%

 

Devon and its subsidiaries are subject to U.S. federal income tax as well as income or capital taxes in various state and foreign jurisdictions. Devon’s tax reserves are related to tax years that may be subject to examinations by the relevant taxing authority. Devon is under audit in the U.S. and various foreign jurisdictions as part of its normal course of business.

 

Devon assesses the realizability of its deferred tax assets. If Devon concludes that it is more likely than not that some portion or all of the deferred tax assets will not be realized, the asset is reduced by a valuation allowance. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil and gas prices) and changing tax laws.

 

2021

 

Prior to 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized $249 million of deferred tax liabilities to account for the Merger. The recognition of these deferred tax liabilities caused a decrease to Devon’s net deferred tax assets and a corresponding decrease to the valuation allowance Devon had recognized on its U.S. federal deferred tax assets.

Due to significant increases in commodity pricing and projections of future income, in the fourth quarter of 2021, Devon reassessed its evaluation of the realizability of deferred tax assets in future years and determined that a U.S. federal valuation allowance was no longer necessary. As such, Devon removed its remaining $84 million U.S. federal valuation allowance.

 

2020

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law on March 27, 2020. The CARES Act allows net operating losses generated in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back five years to offset taxable income and recoup previously paid taxes. As a result, Devon carried net operating losses generated in 2019 and 2020 back to 2014 and 2015, respectively, and recorded a $220 million current income tax benefit, partially offset by a $107 million deferred income tax expense. The net $113 million income tax benefit recorded in 2020 is the result of the higher U.S. federal income tax rate in the carry back periods.

 

 

Throughout 2019, Devon maintained a valuation allowance against certain deferred tax assets, including certain tax credits and state net operating losses. Reduced demand from the COVID-19 pandemic caused an unprecedented downturn in the commodity price environment in 2020. As a result, Devon recorded significant impairments during the first quarter of 2020. Devon reassessed its position and recorded a 100% valuation allowance against all U.S. federal and state net deferred tax assets and maintained a full valuation allowance position throughout 2020.

 

2019

 

On June 27, 2019, Devon completed the sale of substantially all of its oil and gas assets and operations in Canada. Devon’s foreign earnings have not been considered indefinitely reinvested since the announcement of the plan to separate the assets in the first quarter of 2019. As the separation took the form of an asset sale and Devon retained certain non-operating obligations to be settled over time, Devon did not record a deferred tax asset or corresponding valuation allowance related to its Canadian investment in 2019.

Devon recorded tax impacts related to the Barnett Shale and Canadian assets in discontinued operations.

During 2019, Devon recorded a tax expense of $14 million related to unrecognized tax benefits, due to a change in tax positions taken in prior periods.

 

In the fourth quarter of 2019, Devon entered into an audit agreement with the Canada Revenue Agency. The Canadian income tax expense resulting from this agreement is reflected in discontinued operations. However, the agreement also resulted in a $16 million tax benefit to Devon’s U.S. continuing operations.

 

The “other” effect is composed of permanent differences, including stock compensation, for which the dollar amounts do not increase or decrease in relation to the change in pre-tax earnings. Generally, permanent adjustments, as well as the state income tax, have an insignificant impact on Devon’s effective income tax rate. However, these items had a more noticeable impact to the rate in 2019 due to the low relative net loss in the period.

   

 

Deferred Tax Assets and Liabilities

The following table presents the tax effects of temporary differences that gave rise to Devon’s deferred tax assets and liabilities.

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Net operating loss carryforwards

 

$

1,075

 

 

$

238

 

Capital loss carryforwards

 

 

559

 

 

 

547

 

Accrued liabilities

 

 

262

 

 

 

125

 

Fair value of derivative financial instruments

 

 

129

 

 

 

33

 

Asset retirement obligation

 

 

109

 

 

 

94

 

Investment in subsidiary

 

 

—

 

 

 

441

 

Other, including tax credits

 

 

138

 

 

 

106

 

Total deferred tax assets before valuation allowance

 

 

2,272

 

 

 

1,584

 

Less: valuation allowance

 

 

(893

)

 

 

(1,355

)

Net deferred tax assets

 

 

1,379

 

 

 

229

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Property and equipment

 

 

(1,630

)

 

 

(213

)

Other

 

 

(29

)

 

 

-

 

Total deferred tax liabilities

 

 

(1,659

)

 

 

(213

)

Net deferred tax asset (liability)

 

$

(280

)

 

$

16

 

 

At December 31, 2021, Devon has recognized $1.1 billion of deferred tax assets related to various net operating loss carryforwards available to offset future taxable income. Devon has $711 million of U.S. federal net operating loss carryforwards, of which $654 million expires between 2030 and 2037, and $57 million does not expire. Devon also has $364 million of state net operating loss carryforwards primarily expiring between 2022 and 2040, $303 million of which are covered by a valuation allowance.

 

Devon’s net operating losses acquired from WPX as a result of the Merger are subject to limitation pursuant to Section 382 of the Internal Revenue Code of 1986, which relates to limitations upon the 50% or greater change of ownership of an entity during any three-year period. The Company anticipates utilizing these net operating losses prior to their expiration.

 

Included in Devon’s capital loss carryforwards of $559 million are $552 million of Canadian capital losses fully covered by a valuation allowance. The remaining $7 million of Canadian deferred tax assets are included within other long-term assets in the December 31, 2021 consolidated balance sheet.

 

In the fourth quarter of 2020, Devon recorded a deferred tax asset representing the deductible outside basis difference in its investment in a consolidated subsidiary. In the second quarter of 2021, Devon realized this benefit, increasing its U.S. federal and state net operating loss deferred tax assets.   

       

 

Unrecognized Tax Benefits

The following table presents changes in Devon’s unrecognized tax benefits.

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(Millions)

 

Balance at beginning of year

 

$

23

 

 

$

65

 

Tax positions taken in prior periods

 

 

5

 

 

 

(42

)

Assumed WPX tax positions taken in prior periods

 

 

8

 

 

 

—

 

Balance at end of year

 

$

36

 

 

$

23

 

 

Devon recognized $1 million of net interest and no penalties in 2021 and its unrecognized tax benefit balance included $1 million interest. At December 31, 2021 and December 31, 2020, there were $36 million and $23 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate. Due to regulatory changes during 2020, $42 million of Devon’s current unrecognized tax benefits were reclassified as deferred unrecognized tax benefits. Deferred unrecognized tax benefits of $42 million and $50 million, at December 31, 2021 and December 31, 2020, respectively, are not included in the table above but are accounted for in Devon’s deferred tax disclosure above.

 

Pursuant to the tax sharing agreement with The Williams Companies ("Williams") assumed in the Merger, Devon remains responsible for the tax from audit adjustments related to the WPX business for periods prior to WPX’s spin-off from Williams on December 31, 2011. The 2011 consolidated tax filing by Williams is currently being audited by the Internal Revenue Service (“IRS”) and is the only pre spin-off period for which the Company continues to have exposure to audit adjustments as part of Williams. The IRS has proposed an adjustment related to the WPX business for which a payment to Williams could be required. Devon has evaluated the issue and is in the process of protesting the adjustment within the normal appeals process of the IRS. In addition, the alternative minimum tax (“AMT”) credit carryforward that was allocated to WPX by Williams at the time of the spin-off could change due to audit adjustments unrelated to company business. Any such adjustments to this allocated AMT credit carryforward will not be known until the IRS examination is completed but is not expected to result in a cash settlement with Williams. However, if the Company has to amend filed returns whereby refunds of AMT credit carryforwards have been received, the Company may have to remit cash to the IRS. Through December 31, 2021, the Company has received approximately $83 million related to these AMT credit carryforwards.

 

Included below is a summary of the tax years, by jurisdiction, that remain subject to examination by taxing authorities.

 

Jurisdiction

 

Tax Years Open

U.S. Federal

 

2015-2021

Various U.S. states

 

2014-2021

Canada

 

2006-2021

 

Certain statute of limitation expirations are scheduled to occur in the next twelve months. However, Devon is currently in various stages of the administrative review process for certain open tax years. In addition, Devon is currently subject to various income tax audits that have not reached the administrative review process.