GULFPORT ENERGY CORP

10. LEASES

Nature of Leases

The Company has operating leases on certain equipment with remaining lease durations in excess of one year. The Company recognizes a right-of-use asset and lease liability on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized.

The Company has entered into contracts for drilling rigs with varying terms with third parties to ensure operational continuity, cost control and rig availability in its operations. The Company has concluded its drilling rig contracts are operating leases as the assets are identifiable and the Company has the right to control the identified assets. The Company's drilling rig commitments are typically structured with an initial term of less thanone year. At December 31, 2023, the Company hadone active long-term drilling rig contract. These agreements typically include renewal options at the end of the initial term. Due to the nature of the Company's drilling schedules and potential volatility in commodity prices, the Company is unable to determine at contract commencement with reasonable certainty if the renewal options will be exercised; therefore, renewal options are not considered in the lease term for drilling contracts. The operating lease liabilities associated with these rig commitments, when applicable, are based on the minimum contractual obligations, primarily standby rates, and do not include variable amounts based on actual activity in a given period. Pursuant to the full cost method of accounting, these costs are capitalized as part of oil and natural gas properties on the accompanying consolidated balance sheets. A portion of drilling costs are borne by other interest owners in our wells.

The Company rents office space for its corporate headquarters, field locations and certain other equipment from third parties, which expire at various dates through 2027. These agreements are typically structured with non-cancelable terms ofone year tofive years. The Company has determined these agreements represent operating leases with a lease term that equals the primary non-cancelable contract term. The Company has included any renewal options that it has determined are reasonably certain of exercise in the determination of the lease terms.

Discount Rate

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company's incremental borrowing rate reflects the estimated rate of interest that it would pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

Future amounts due under operating lease liabilities as of December 31, 2023, were as follows (in thousands):

Lease costs incurred for the years ended December 31, 2023 and December 31, 2022 consisted of the following (in thousands):

(1) The majority of the Company's total lease cost was capitalized to the full cost pool, and the remainder was included in either lease operating expenses or general and administrative expenses in the accompanying consolidated statements of operations.

Supplemental cash flow information related to leases was as follows (in thousands):

The weighted-average remaining lease term as of December 31, 2023, was 1.23 years. The weighted-average discount rate used to determine the operating lease liability as of December 31, 2023, was 6.70%.

11. INCOME TAXES

Details of income tax provisions and deferred income taxes from continuing operations are provided in the following tables.

The components of income tax benefits were as follows (in thousands):

A reconciliation of the statutory federal income tax amount to the recorded benefit follows (in thousands):

For the year ended December 31, 2023, the Company's effective tax rate was (56)% and an income tax benefit of $525.2 million. For the year ended December 31, 2022, the Company's effective tax rate was 0%. For the Prior Successor Period, the Company had an effective tax rate of 0.03% and an income tax benefit of $39 thousand. For the Prior Predecessor Period, the Company had an effective tax rate of (3.3)% and an income tax benefit of $8.0 million. The lower effective income tax rate for the year ended December 31, 2023, is driven by the release of the valuation allowance on the Company's deferred tax assets, which is also the driver behind the effective tax rate and the Company's statutory tax rate.

The tax effects of temporary differences and net operating loss carryforwards, which give rise to deferred tax assets and liabilities at December 31, 2023 and December 31, 2022 are estimated as follows (in thousands):

As discussed in Note 2, elements of the Plan provided that the Company’s indebtedness related to Predecessor Senior Notes and certain general unsecured claims were exchanged for Common Stock in settlement of those claims. Absent an exception, a debtor recognizes CODI upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The IRC provides that a debtor in a Chapter 11 bankruptcy case may exclude CODI from taxable income, but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is determined based on the fair market value of the consideration received by the creditors in settlement of outstanding indebtedness. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI and historical interest expense haircut is approximately $655 million, which will reduce the value of the Company’s net operating losses. The actual reduction in tax attributes does not occur until the first day of the Company’s tax year subsequent to the date of emergence, or January 1, 2022.

At each reporting period, the Company weighs all available positive and negative evidence to determine whether its deferred tax assets are more likely than not to be realized. A valuation allowance for deferred tax assets, including net operating losses, is recognized when it is more likely than not that some or all of the benefit from the deferred tax assets will not be realized. To assess the likelihood, the Company uses estimates and judgment regarding future taxable income and considers the tax laws in the jurisdiction where such taxable income is generated, to determine whether a valuation allowance is required. Such evidence can include current financial position, results of operations, both actual and forecasted, the reversal of deferred tax liabilities and tax planning strategies as well as the current and forecasted business economics of the oil and gas industry. Based upon the Company’s analysis, the Company believes it is more-likely-than-not that a portion of the Company's federal and state deferred tax assets will be utilized. The Company recorded a reduction in the related valuation allowance associated with federal and state deferred tax assets of $699.7 million and $23.4 million respectively.

The Company will continue to evaluate both the positive and negative evidence on a quarterly basis in determining the need for a valuation allowance with respect to the deferred tax assets. Changes in positive and negative evidence, including differences between estimated and actual results, could result in changes in the valuation of the deferred tax assets that could have a material impact on the consolidated financial statements. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

The Company has an available federal tax net operating loss carryforward estimated at approximately $1.8 billion as of December 31, 2023. These federal net operating loss carryforwards of approximately $349 million generated in tax years prior to 2018 will begin to expire in 2036. As a result of the Tax Cuts and Jobs Act, the 2018 through 2023 federal NOL carryforwards of $1.4 billion have no expiration. The Company also has state net operating loss carryovers of approximately $702 million that will begin to expire in 2024.

As of December 31, 2023, we hadno liability for uncertain tax positions.