Provision (Benefit) for Income Taxes

9 Months Ended

Sep. 30, 2020

The following table presents the provision (benefit) for income taxes from continuing operations.


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(Millions)
Current:
Federal	$	1	$	—	$	(19)	$	—
State	—		1		—		2

	1		1		(19)		2
Deferred:
Federal	(29)		33		(149)		96
State	(4)		5		(26)		11

	(33)		38		(175)		107
Total provision (benefit)	$	(32)	$	39	$	(194)	$	109

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act, H.R. 748 (“CARES Act”). The CARES Act includes modifications to the Internal Revenue Code (“IRC”) intended to provide economic relief to those impacted by the COVID-19 pandemic such as allowing taxpayers to accelerate the remaining balance of alternative minimum tax (“AMT”) credit carryforwards. The income tax effects of changes in tax laws are recognized in the period enacted. As a result, the Company has a current receivable of $38 million as of September 30, 2020 for all our remaining AMT credit refunds. However, our AMT credits are subject to change based on the results of the 2011 Williams audit as discussed below and may impact our refunds already received.

The effective income tax rate for the three months ended September 30, 2020, differs from the federal statutory rate of 21 percent due to the effect of equity-based compensation and valuation allowances placed on estimated federal and state net operating loss (“NOL”) carryovers, partially offset by state income taxes.

The effective income tax rate for the three months ended September 30, 2019, differs from the federal statutory rate of 21 percent due to the effect of state income taxes.

The effective income tax rate for the nine months ended September 30, 2020, differs from the federal statutory rate of 21 percent due to the effect of equity-based compensation and valuation allowances placed on estimated federal and state NOL carryovers, partially offset by state income taxes.

The effective income tax rate for the nine months ended September 30, 2019, differs from the federal statutory rate of 21 percent due to the effect of state income taxes and equity-based compensation, partially offset by the reversal of the valuation allowance on capital loss carryovers resulting from the capital gains from the 2019 transactions involving equity interests in partnerships.

We have recorded valuation allowances against deferred tax assets attributable to federal and state NOL carryovers. When assessing the need for a valuation allowance, we primarily consider future reversals of existing taxable temporary differences.

To a lesser extent we may also consider future taxable income exclusive of reversing temporary differences and carryovers, and tax-planning strategies that would, if necessary, be implemented to accelerate taxable amounts to utilize expiring carryovers. The ultimate amount of deferred tax assets realized could be materially different from those recorded, as influenced by future operational performance, potential changes in jurisdictional income tax laws and other circumstances surrounding the actual realization of related tax assets. Valuation allowances that we have recorded are due to our expectation that we will not have sufficient income (based on reversals of temporary differences), or income of a sufficient character, in those jurisdictions to which the associated deferred tax asset applies. Additional valuation allowances against our NOL carryovers may be required in future periods if additional losses are incurred or other circumstances change.

The ability of WPX to utilize NOL carryovers to reduce future federal taxable income could be subject to limitations under the IRC. The utilization of such carryovers may be limited upon the occurrence of certain ownership changes during any three-year period resulting in an aggregate change of more than 50 percent in beneficial ownership (an “Ownership Change”). As of September 30, 2020, we do not believe that an Ownership Change has occurred for WPX, but an Ownership Change did occur for the company we acquired in 2015 (“RKI”). Therefore, there is an annual limitation on the benefit that WPX can claim from RKI carryovers that arose prior to the acquisition. Upon closing of the proposed merger with Devon and the resulting Ownership Change of WPX, the usage of WPX NOL carryovers would also be limited.

Pursuant to our tax sharing agreement with The Williams Companies, Inc. (“Williams”), we remain responsible for the tax from audit adjustments related to our business for periods prior to our spin-off from Williams on December 31, 2011. The 2011 consolidated tax filing by Williams is currently being audited by the IRS and is the only pre-spin-off period for which we continue to have exposure to audit adjustments as part of Williams. The IRS has proposed an adjustment related to our business for which a payment to Williams could be required. We have evaluated the issue and are in the process of protesting the adjustment within the normal appeals process of the IRS. In addition, the AMT credit carryforward deferred tax asset that was allocated to us by Williams at the time of the spin-off could change due to audit adjustments unrelated to our business. Any such adjustments to this allocated deferred tax asset 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 September 30, 2020, we have received $50 million related to these AMT credit carryforwards.

As of September 30, 2020, the Company has approximately $9 million of unrecognized tax benefits which is offset by an increase in deferred tax assets of approximately $5 million. Currently, we do not expect ultimate resolution of our uncertain tax position during the next 12 months.

WPX ENERGY, INC. 10-Q