Income Taxes
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
($ millions) | | 2023 | | 2022 | | 2023 | | 2022 |
Current tax expense | | $ | 3.5 | | $ | 12.0 | | $ | 14.5 | | $ | 17.0 |
Deferred tax expense | | | 21.1 | | | 71.7 | | | 45.0 | | | 81.5 |
Total tax expense | | $ | 24.6 | | $ | 83.7 | | $ | 59.5 | | $ | 98.5 |
For the three and six months ended June 30, 2023, we recorded a current tax expense of $3.5 million and $14.5 million, respectively, compared to $12.0 million and $17.0 million for the same periods in 2022. Current tax expense in 2023 was lower compared to 2022 primarily due to lower income. Many factors influence taxable income, including future commodity prices, production levels, development activities, capital spending, and overall profitability. We are revising our cash tax guidance for 2023 to 3.0% - 4.0% from 5.0% - 6.0% of adjusted funds flow before tax based on guidance pricing.
For the three and six months ended June 30, 2023, we recorded a deferred income tax expense of $21.1 million and $45.0 million, respectively, compared to an expense of $71.7 million and $81.5 million for the same periods in 2022. Deferred tax expense was lower in 2023 compared to 2022 due to lower income.
We assess the recoverability of our deferred income tax assets each period to determine whether it is more likely than not all or a portion of our deferred income tax assets will not be realized. We have considered available positive and negative evidence including future taxable income and reversing existing temporary differences in making this assessment. This assessment is primarily the result of projecting future taxable income using total proved and probable forecast average prices and costs. There is risk of a valuation allowance in future periods if commodity prices weaken or other evidence indicates that some of our deferred income tax assets will not be realized. See “Risk Factors and Risk Management – Risk of Impairment of Oil and Gas Properties and Deferred Tax Assets” in the Annual MD&A. For the six months ended June 30, 2023, no valuation allowance was recorded against our Canadian income related deferred tax asset; however, a full valuation allowance has been recorded against our deferred income tax assets related to capital items. Our deferred income tax asset recorded in Canada was $143.9 million, offset by a deferred income tax liability in the U.S. of $89.3 million as at June 30, 2023. (December 31, 2022 - $155.0 million deferred income tax asset in Canada offset by $55.4 million deferred income tax liability in the U.S.).
LIQUIDITY AND CAPITAL RESOURCES
There are numerous factors that influence how we assess liquidity and leverage, including commodity price cycles, capital spending levels, acquisition and divestment plans, commodity derivative contracts, share repurchases and dividend levels. We also assess our leverage relative to our most restrictive debt covenant, which is a maximum senior debt to earnings before interest, taxes, depreciation, amortization, impairment and other non-cash charges (“adjusted EBITDA”) ratio of 3.5x for a period of up to six months, after which it drops to 3.0x. At June 30, 2023, our senior debt to adjusted EBITDA ratio was 0.2x and our net debt to adjusted funds flow ratio was 0.2x. Although a capital management measure that is not included in our debt covenants, the net debt to adjusted funds flow ratio is often used by investors and analysts to evaluate liquidity.
Net debt at June 30, 2023 decreased to $199.6 million, compared to $221.5 million at December 31, 2022. Net debt was comprised of our senior notes and Bank Credit Facilities totaling $237.1 million, less cash on hand of $37.5 million.
At June 30, 2023, through our Bank Credit Facilities, we had total credit capacity of $1.3 billion, of which $93.5 million was drawn. We expect to finance our working capital requirements through cash, adjusted funds flow and our credit capacity. We have sufficient liquidity to meet our financial commitments for the near term.
Our reinvestment rate1 was 92% and 70% for the three and six months ended June 30, 2023, respectively, compared to 45% and 41% for the same periods in 2022.
During the six months ended June 30, 2023, a total of $133.1 million was returned to shareholders through share repurchases and dividends, compared to $147.9 million for the same period in 2022. During the six months ended June 30, 2023, a total of 7.3 million common shares were repurchased and cancelled under the NCIB at an average price of $14.89 per share, for total consideration of $109.3 million. During the six months ended June 30, 2022, a total of 10.2 million common shares were repurchased and cancelled under the NCIB at an average price of $12.74 per share, for total consideration of $130.1 million.
1 This financial measure is a supplementary financial measure. See “Non-GAAP Measures – Supplementary Financial Measures” in this MD&A.