Gulfport Energy Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Income Taxes

Income Taxes

12 Months Ended

Dec. 31, 2018

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The income tax provision consists of the following:



	2018			2017			2016
	(In thousands)
Current:
State	$	(1,530	)	$	2,167		$	(1,330	)
Federal	253			3,362			(19,771		)
Deferred:
State	1,530			(118		)	(386		)
Federal	(322		)	(3,602		)	18,574
Total income tax (benefit) expense provision	$	(69	)	$	1,809		$	(2,913	)

A reconciliation of the statutory federal income tax amount to the recorded expense follows:



	2018			2017			2016
	(In thousands)
Income (loss) before federal income taxes	$	430,491		$	436,961		$	(982,622	)
Expected income tax at statutory rate	90,403			152,936			(343,918		)
State income taxes	(511		)	2,299			(5,883		)
Other differences	1,078			5,731			4,293
Intraperiod tax allocation	—			—			(1,349		)
Remeasurement due to Tax Cut and Jobs Act	—			190,034			—
Change in valuation allowance due to current year activity	(91,039		)	(158,704		)	343,944
Change in valuation allowance due to Tax Cuts and Jobs Act	—			(190,487		)	—
Income tax (benefit) expense recorded	$	(69	)	$	1,809		$	(2,913	)

The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2018, 2017 and 2016 are estimated as follows:



	2018			2017			2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforward	$	164,363		$	120,626		$	162,073
Oil and gas property basis difference	3,595			151,260			386,302
Investment in pass through entities	8,620			12,343			27,469
Stock-based compensation expense	616			813			2,084
Business energy investment tax credit	369			369			369
AMT credit	—			—			3,842
Charitable contributions carryover	269			255			303
Change in fair value of derivative instruments	2,761			—			48,317
Foreign tax credit carryforwards	2,009			2,074			2,074
Accrued liabilities	834			285			397
ARO liability	16,923			15,897			12,107
Non-oil and gas property basis difference	104			171			—
State net operating loss carryover	11,526			6,954			5,351
Total deferred tax assets	211,989			311,047			650,688
Valuation allowance for deferred tax assets	(211,987		)	(298,830		)	(645,841		)
Deferred tax assets, net of valuation allowance	2			12,217			4,847
Deferred tax liabilities:
Non-oil and gas property basis difference	—			—			155
Change in fair value of derivative instruments	2			11,009			—
Total deferred tax liabilities	2			11,009			155
Net deferred tax asset	$	—		$	1,208		$	4,692

There was a decrease to the valuation allowance of $86.8 million and $347.0 million during 2018 and 2017, respectively, and an increase to the valuation allowance of $342.6 million during 2016. The decrease in the valuation allowance in 2018 was primarily due to decreases in net deferred tax assets due to pretax income. The decrease in the valuation allowance in 2017 was primarily due to decreases in net deferred tax assets due to pretax income and remeasurement of deferred tax assets due to the Tax Cuts and Jobs Act. The increase in the valuation allowance in 2016 was primarily due to increases in deferred tax assets from pre-tax losses resulting from impairments to the full cost pool.,

As December 31, 2018, the Company maintains full valuation allowances related to the total net deferred tax assets, as they cannot objectively assert that these deferred tax assets are more likely than not to be realized. It is reasonably possible that a portion of this valuation allowance could be reversed within the next year due to increased book profitability levels. Future provisions for income taxes will include no tax benefits with respect to losses incurred and tax expense only to the extent of current taxes payable until the valuation allowances are eliminated.

All available positive and negative evidence is weighed to determine whether a valuation allowance should be recorded. The more significant evidential matter relates to the Company’s recent cumulative losses resulting from impairments to the full cost pool in 2016. Management currently estimates that pretax income in 2019 will result in the Company emerging from a cumulative loss position in the first quarter of 2019, at which point there may no longer be any significant negative evidence regarding the realizability of deferred tax assets and the determination around the need for a valuation allowance will primarily depend on management’s ability to objectively project sufficient future taxable income exclusive of reversing temporary differences to ensure realization of deferred tax assets. As such, it is reasonably possible that a material change in valuation allowance may be recorded during an interim period for the year ending December 31, 2019.

The Company has an available federal tax net operating loss carryforward estimated at approximately $782.7 million as of December 31, 2018. This carryforward will begin to expire in the year 2023. Based upon the December 31, 2018 net deferred tax asset position and a recent history of cumulative losses, management believes that there is sufficient negative evidence to place a valuation allowance on the net deferred tax asset that may not be utilized based upon a more likely than not basis. The Company also has state net operating loss carryovers of $205.7 million that began to expire in 2017 and federal foreign tax credit carryovers of $1.8 million which began to expire in 2017. The Company believes that it can utilize an Oklahoma state NOL through carrybacks. Therefore, the Company has recorded a total valuation allowance of $212.0 million related to the remaining net deferred tax asset.

The Company’s ability to utilize NOL carryforwards and other tax attributes to reduce future federal taxable income is subject to potential limitations under Internal Revenue Code Section 382 (“Section 382”) and its related tax regulations. The utilization of these attributes may be limited if certain ownership changes by 5% stockholders (as defined in Treasury regulations pursuant to Section 382) and the effects of stock issuances by the Company during any three-year period result in a cumulative change or more than 50% in the beneficial ownership of Gulfport. The Company is currently conducting Section 382 analysis to determine if an ownership change has occurred. If it is determined that an ownership change has occurred under these rules, the Company would generally be subject to an annual limitation on the use of pre-ownership change NOL carryforwards and certain other losses and/or credits. In addition, certain future transactions regarding the Company's equity, including the cumulative effects of small transactions as well as transactions beyond the Company’s control, could cause an ownership change and therefore a potential limitation on the annual utilization of their deferred tax assets.

The Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21% effective January 1, 2018. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. As a result of the reduction in the statutory rate, the Company has remeasured its deferred tax balances, the effects of which are reflected in the rate reconciliation shown in the table above. The Company has applied the provisions of SEC Staff Accounting Bulletin No. 118 ("SAB 118"). SAB 118 allows for a measurement period in which companies can either use provisional estimates for changes resulting from the Tax Act or apply the tax laws that were in effect immediately prior to the Tax Act being enacted if estimates cannot be determined at the time of the preparation of the financial statements until the actual impacts can be determined. The Company finalized its accounting for the impact of the Tax Act within its December 31, 2018 financial statements. The net impact of the finalization was immaterial.

The Company's income tax benefit in 2016 was primarily attributable to the Company recording a full cost ceiling impairment of $715.5 million against the oil and gas assets. The Company's income tax expense in 2017 is primarily the result of a change in state income tax positions.

As of December 31, 2018, the amount of unrecognized tax benefits related to federal and state tax liabilities associated with uncertain tax positions was immaterial.