11. Income Taxes

The Company's income tax expense consists of the following:

		September 30,		September 30,
	Year Ended December 31,
	2011		2010
	(In thousands)
Current:
Federal	$	—	$	—
State		—		—

		—		—
Deferred:
Federal	$	42,809	$	38,153
State		3,980		4,809

		46,789		42,962

Total income tax expense	$	46,789	$	42,962

Prior to its corporate reorganization in connection with the IPO (see Note 1), the Company was a limited liability company and not subject to federal or state income tax (in most states). Accordingly, no provision for federal or state income taxes was recorded prior to the corporate reorganization as the Company's equity holders were responsible for income tax on the Company's profits. In connection with the closing of the Company's IPO, the Company merged into a corporation and became subject to federal and state income taxes. The Company's book and tax basis in assets and liabilities differed at the time of the corporate reorganization due primarily to different cost recovery periods utilized for book and tax purposes for the Company's oil and natural gas properties.

In 2011, the Company's effective tax rate differs from the federal statutory rate of 35% primarily due to state income taxes. In 2010, the Company recorded an estimated net deferred tax expense of $35.6 million to recognize a deferred tax liability for the initial book and tax basis differences. The Company's 2010 effective tax rate differs from the federal statutory rate of 35% due to the initial deferred tax expense and certain non-deductible IPO-related costs that occurred in 2010 coupled with state income taxes and non-deductible stock-based compensation expenses.

The reconciliation of income taxes calculated at the U.S. federal tax statutory rate to the Company's effective tax rate for the years ended December 31, 2011 and 2010, respectively, is set forth below:

		September 30,			September 30,			September 30,			September 30,
	Year Ended December 31,
	2011						2010
	(%)			(In thousands)			(%)			(In thousands)
U.S. federal tax statutory rate		35.00	%	$	44,163			35.00	%	$	4,644
State income taxes, net of federal income tax benefit		2.38	%		3,004			2.75	%		364
Pass-through loss prior to IPO not subject to federal tax		—			—			3.85	%		511
Initial deferred tax expense		—			—			268.43	%		35,612
Non-deductible stock-based compensation		—			—			10.08	%		1,338
Non-deductible IPO costs and other		(0.30	%)		(378	)		3.72	%		493

Annual effective tax expense		37.08	%	$	46,789			323.83	%	$	42,962

Significant components of the Company's deferred tax assets and liabilities as of December 31, 2011 and 2010, respectively, were as follows:

		September 30,		September 30,
	Year Ended December 31,
	2011		2010
	(In thousands)
Deferred tax assets
Derivatives instruments	$	1,888	$	3,958
Net operating loss carryforward		13,110		43,455
Bonus and stock compensation		2,321		—

Total deferred tax assets		17,319		47,413
Deferred tax liabilities
Oil and natural gas properties		107,069		90,375

Total deferred tax liabilities		107,069		90,375

Total net deferred tax liability	$	89,750	$	42,962

The Company generated a federal net operating tax loss of $15.9 million for the year ended December 31, 2011, and no current income taxes are anticipated to be paid. The net operating loss carryforwards consist of $35.9 million of federal net operating loss carryforwards, which expire in 2030 and 2031 and $23.9 million of state net operating loss carryforwards, which expire between 2017 and 2031. The tax benefits of carryforwards are recorded as an asset to the extent that management assesses the utilization of such carryforwards to be "more likely than not." When the future utilization of some portion of the carryforwards is determined not to be "more likely than not," a valuation allowance is provided to reduce the recorded tax benefits from such assets. Management believes that the Company's taxable temporary differences and future taxable income will more likely than not be sufficient to utilize substantially all its tax carryforwards prior to their expiration.

Pursuant to authoritative guidance, the Company's $13.1 million deferred tax asset related to net operating loss carryforwards is net of $0.3 million of unrealized excess tax benefits related to $0.8 million of stock-based compensation that has not yet been realized.

Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2011, the Company had no unrecognized tax benefits. With respect to income taxes, the Company's policy is to account for interest charges as interest expense and any penalties as tax expense in the Consolidated Statement of Operations. The Company files income tax returns in the U.S. federal jurisdiction and in North Dakota, Montana and Texas. The Company has not been audited by the IRS or any state jurisdiction. Its statute of limitation for the year ended December 31, 2011 will expire in 2015. The Company's earliest open years in its key jurisdictions is 2010 for both the U.S. federal jurisdiction and various U.S. states.

The current portion of the Company's net deferred tax liability was an asset of $3.2 million and $2.5 million at December 31, 2011 and 2010, respectively.