- 9 -
conflict relationship was also the subject of part of the legal
opinion rendered by the law firm of Meserve, Mumper & Hughes,
which was included as an exhibit in the Memorandum. See infra
p. 14.
Under the turnkey contract, Stonehurst was obligated to pay
R.H. Energy $12,000 per dry well and $35,000 per well put into
production. An initial payment of $12,000 per well was due to
R.H. Energy upon notice that drilling would commence within 5
days. No such notice was given in 1979. In March 1980, R.H.
Energy gave notice to Stonehurst that drilling of wells on the
property was about to commence.
d. Economic Analysis and Predicted Tax Benefits of
Stonehurst
The Memorandum presented two economic projections that
purported to show significant tax losses in the early years of
Stonehurst’s operations and distributions of profits in the later
years. Because no production or revenue was projected for the
initial year, 1979, the tax loss shown for that year was
identical under both projections, amounting to $2,788,000.3 The
3 The components of this figure are:
Item Amount
Accrued minimum annual royalty $2,278,000
Accrued intangible drilling costs500,000
Operating costs 10,000
Total 2,788,000
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