Wildcat Gas Company owns a 33.3% working interest in a lease in West Texas.

Cecil Jones, a local farmer, owns a 1/8 royalty interest in the lease. Wildcat is the operator, and its partners, Rocky Energy and Bush Petroleum, each own 33.3% of the working interest. Wildcat analyzed the prospects for the lease and proposed drilling a gas well. Bush agreed, but Rocky decided to go nonconsent. Wildcat and Bush both agreed to proportionately carry Rocky’s working interest. The joint operating agreement stipulates that a 150% drilling and completion cost penalty will be assessed on any partner choosing not to participate in drilling a well.

On July 1, 2020, the Gusher No. 2 was drilled and completed at a total cost of

$300,000. The following information is available concerning production and sales. Assume each company contracts to sell its gas for $6.00/Mcf.

REQUIRED: Ignoring severance tax:

a. Determine when Rocky will reach payout if payout is calculated based on the quantity actually sold. Hint: Wildcat and Bush would have to compute payout separately.

b. Determine when Rocky will reach payout if payout is calculated using the amount to which each partner is entitled.

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Month Sales Volume Total Operating Expenses Sold by Wildcat Sold by Bush August 60,000 Mcf $45,000 55,000 Mcf 5,000 Mcf September 62,000 Mcf 45,000 50,000 Mcf 12,000 Mcf October 68,000 Mcf 45,000 58,000 Mcf 10,000 Mcf November 60,000 Mcf 45,000 40,000 Mcf 20,000 Mcf