Income Taxes

12 Months Ended

Dec. 31, 2020

The Company’s income tax benefit consists of the following (in thousands):


	Successor		Predecessor
	Period from November 20, 2020 through December 31, 2020		Period from January 1, 2020 through November 19, 2020		Year Ended December 31,
					2019		2018


Current:
Federal	$	—	$	(36)	$	(43)	$	(70)
State	—		—		27		93
	—		(36)		(16)		23
Deferred:
Federal	(2,918)		(221,277)		(28,148)		(3,553)
State	(529)		(41,649)		(4,551)		(2,313)
	(3,447)		(262,926)		(32,699)		(5,866)
Total income tax benefit	$	(3,447)	$	(262,962)	$	(32,715)	$	(5,843)

The reconciliation of income taxes calculated at the U.S. federal tax statutory rate to the Company’s effective tax rate is set forth below:


	Successor				Predecessor
	Period from November 20, 2020 through December 31, 2020				Period from January 1, 2020 through November 19, 2020				Year Ended December 31,
									2019				2018

	(%)		(In thousands)		(%)		(In thousands)		(%)		(In thousands)		(%)		(In thousands)
U.S. federal tax statutory rate	21.00	%	$	(10,376)	21.00	%	$	(837,391)	21.00	%	$	(25,906)	21.00	%	$	(5,322)
State income taxes, net of federal income tax benefit	2.78	%	(1,373)		2.33	%	(93,063)		2.90	%	(3,573)		2.08	%	(527)
Effects of non-controlling interest	1.68	%	(830)		(0.44)	%	17,699		6.40	%	(7,895)		13.09	%	(3,317)
Non-deductible executive compensation	—	%	—		(0.03)	%	1,372		(1.70)	%	2,094		(9.50)	%	2,408
Equity-based compensation windfall (shortfall)	—	%	—		(0.22)	%	8,687		(1.75)	%	2,163		(3.68)	%	932
State deferred tax rate change	—	%	—		—	%	—		—	%	—		13.73	%	(3,479)
Change in valuation allowance	(18.09)	%	8,936		(13.88)	%	553,580		—	%	—		(6.74)	%	1,707
Impact of U.S. tax reform	—	%	—		—	%	—		—	%	—		(7.34)	%	1,859
Discharge of debt and other reorganization items	(0.47)	%	232		(2.14)	%	85,149		—	%	—		—	%	—
Other	0.07	%	(36)		(0.03)	%	1,005		(0.33)	%	402		0.41	%	(104)
Annual effective tax benefit	6.97	%	$	(3,447)	6.59	%	$	(262,962)	26.52	%	$	(32,715)	23.05	%	$	(5,843)

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2020 and 2019, were as follows (in thousands):


	Successor		Predecessor
	December 31, 2020		December 31, 2019


Deferred tax assets
Net operating loss carryforward	$	34,691	$	191,022
Oil and natural gas properties	566,856		—
Bonus and equity-based compensation	1,732		8,799
Derivative instruments	22,248		3,946
Other tax attribute carryovers	1,663		1,643
Other deferred tax assets	5,761		—
Total deferred tax assets	632,951		205,410
Less: Valuation allowance	(565,409)		(2,915)
Total deferred tax assets, net	$	67,542	$	202,495
Deferred tax liabilities
Oil and gas properties	$	—	$	426,130
Derivative instruments	—		—
Investment in partnerships	67,210		38,015
Other deferred tax liabilities	1,316		5,707
Total deferred tax liabilities	$	68,526	$	469,852
Total deferred tax liabilities, net	$	984	$	267,357

As of December 31, 2020 (Successor), the Company had federal net operating loss carryforwards of $141.8 million, after attribute reduction related to cancellation of indebtedness, which will not expire, and $148.1 million of state net operating loss carryforwards, after attribute reduction related to cancellation of indebtedness, which expire between 2023 and 2039. Our net operating losses will be subject to limitation under Section 382.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, and 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. As of December 31, 2020 (Successor) and 2019 (Predecessor), the Company’s valuation allowance balance was $565.4 million and $2.9 million, respectively. Based on the material write-down of the carrying value of the Company’s oil and gas properties recognized in 2020 and the Company’s operating results for 2020, the Company is in a net deferred tax asset position at December 31, 2020. The Company concluded it is more likely than not that some or all of the benefits from its deferred tax assets will not be realized, and as such, recorded a valuation allowance on these assets. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize the benefit of deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative loss incurred over recent years. Such objective negative evidence limits the ability to consider other subjective positive evidence. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as future growth. The Company will continue to assess the valuation allowance on an ongoing basis.

Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”) addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. As discussed in Note 2—Emergence from Voluntary Reorganization under Chapter 11, the Company’s common stock outstanding immediately prior to the Emergence Date was cancelled and new common stock was issued resulting in the Company experiencing an ownership change under Section 382. Further, certain of the transactions that occurred upon the Company’s emergence from bankruptcy on November 19, 2020 materially impacted the Company’s tax attributes. Cancellation of indebtedness income resulting from these transactions reduced the Company’s tax attributes, including but not limited to federal net operating loss carryforwards, in the amount of $1.4 billion. The ownership change did not result in a current federal tax liability at December 31, 2020.

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, 2020 and 2019, 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 its Consolidated Statements of Operations. The

Company files income tax returns in the U.S. federal jurisdiction and in North Dakota, Montana and Texas. The statute of limitation for the year ended December 31, 2020 will expire in 2024. The Company’s earliest open year in its key jurisdictions is 2017 for both the U.S. federal jurisdiction and various U.S. states. The Company has carried forward NOLs from previous years to utilize in 2020, which will allow the IRS to examine the closed loss years, the earliest of which is 2010.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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