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Income Taxes
 12 Months Ended
Dec. 31, 2022
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,

 

 

 

2022

 

 

2021

 

 

2020

 

Current income tax expense (benefit):

 

 

 

 

 

 

 

 

 

U.S. federal

 

$

501

 

 

$

10

 

 

$

(219

)

Various states

 

 

65

 

 

 

9

 

 

 

—

 

Canada

 

 

(7

)

 

 

(3

)

 

 

—

 

Total current income tax expense (benefit)

 

 

559

 

 

 

16

 

 

 

(219

)

Deferred income tax expense (benefit):

 

 

 

 

 

 

 

 

 

U.S. federal

 

 

1,090

 

 

 

18

 

 

 

(304

)

Various states

 

 

82

 

 

 

22

 

 

 

(24

)

Canada

 

 

7

 

 

 

9

 

 

 

—

 

Total deferred income tax expense (benefit)

 

 

1,179

 

 

 

49

 

 

 

(328

)

Total income tax expense (benefit)

 

$

1,738

 

 

$

65

 

 

$

(547

)

 

 

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,

 

 

 

2022

 

 

2021

 

 

2020

 

Earnings (loss) from continuing operations before income taxes

 

$

7,775

 

 

$

2,898

 

 

$

(3,090

)

 

 

 

 

 

 

 

 

 

 

U.S. statutory income tax rate

 

 

21

%

 

 

21

%

 

 

21

%

Change in tax legislation

 

 

0

%

 

 

0

%

 

 

4

%

State income taxes

 

 

1

%

 

 

1

%

 

 

1

%

Other

 

 

0

%

 

 

2

%

 

 

(1

%)

Deferred tax asset valuation allowance

 

 

0

%

 

 

(22

%)

 

 

(7

%)

Effective income tax rate

 

 

22

%

 

 

2

%

 

 

18

%

 

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.

 

2022

On August 16, 2022, the IRA was signed into law and included various income tax related provisions with effective dates generally beginning in 2023. Among the enacted provisions are a 15% corporate alternative minimum tax (“CAMT”) and several new and expanded clean energy credits and incentives. The CAMT will be assessed on applicable corporations with an average annual adjusted financial statement income that exceeds $1 billion for the preceding three consecutive years. Devon has made an accounting policy election to not consider the effects of the CAMT on the realizability of its deferred tax assets, carryforwards and other tax credits and will instead account for any such effects as a period cost when they arise.

 

2021

Prior to 2021, Devon maintained a valuation allowance against all U.S. federal deferred tax assets. Devon recognized approximately $250 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.

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,

 

 

 

2022

 

 

2021

 

Deferred tax assets:

 

 

 

 

 

 

Net operating loss carryforwards

 

$

526

 

 

$

1,075

 

Capital loss carryforwards

 

 

523

 

 

 

559

 

Accrued liabilities

 

 

209

 

 

 

262

 

Fair value of derivative financial instruments

 

 

—

 

 

 

129

 

Asset retirement obligation

 

 

119

 

 

 

109

 

Other, including tax credits

 

 

14

 

 

 

138

 

Total deferred tax assets before valuation allowance

 

 

1,391

 

 

 

2,272

 

Less: valuation allowance

 

 

(814

)

 

 

(893

)

Net deferred tax assets

 

 

577

 

 

 

1,379

 

Deferred tax liabilities:

 

 

 

 

 

 

Property and equipment

 

 

(1,969

)

 

 

(1,630

)

Fair value of derivative financial instruments

 

 

(33

)

 

 

—

 

Other

 

 

(38

)

 

 

(29

)

Total deferred tax liabilities

 

 

(2,040

)

 

 

(1,659

)

Net deferred tax asset (liability)

 

$

(1,463

)

 

$

(280

)

 

At December 31, 2022, Devon has recognized $526 million of deferred tax assets related to various net operating loss carryforwards available to offset future taxable income. Devon has $221 million of U.S. federal net operating loss carryforwards, of which $199 million expires between 2030 and 2037, and $22 million does not expire. Devon also has $305 million of state net operating loss carryforwards primarily expiring between 2023 and 2041, $268 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.

 

Devon's 2022 capital loss carryforward deferred tax assets, primarily related to Canada, are fully covered by a valuation allowance.

Unrecognized Tax Benefits

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

 

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(Millions)

 

Balance at beginning of year

 

$

36

 

 

$

23

 

Tax positions taken in prior periods

 

 

51

 

 

 

5

 

Assumed WPX tax positions taken in prior periods

 

 

—

 

 

 

8

 

Settlements

 

 

(14

)

 

 

—

 

Balance at end of year

 

$

73

 

 

$

36

 

 

Devon's 2022 unrecognized tax benefit balance included no interest. At December 31, 2022 and December 31, 2021, there were $73 million and $36 million, respectively, of current unrecognized tax benefits that if recognized would affect the annual effective tax rate. Deferred unrecognized tax benefits of $42 million at December 31, 2021 are not included in the table above but are accounted for in Devon’s deferred tax disclosure above. Due to utilization of tax attributes in 2022, $42 million of Devon’s deferred unrecognized tax benefits were reclassified as current unrecognized tax benefits.

 

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

 

2015-2022

Various U.S. states

 

2018-2022

Canada

 

2006-2022

 

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.