Session Gas Company owns a 33.3% working interest in a lease in West Texas. Roger Williams, a local farmer, owns a 1/8 royalty interest in the lease. Session is the operator, and its partners, Rocky Energy and Asteroid Petroleum, each own 33.3% of the working interest. Session analyzed the prospects for the lease and proposed drilling a gas well. Asteroid agreed, but Rocky decided to go nonconsent. Session and Asteroid 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 the well.

On July 1, 2014, 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: Session and Asteroid 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 Session Sold by Asteroid 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