Obtaining the watch
Asking Cornelius about the watch, he will mention that Farrel has a safe. However, Farrel is a bit touchy about it and won't let you open it. If you do, the watch isn't there and Modoc will turn hostile.
Anyway, go outside and into the outhouse. You can open the "toilet" and climb down. A huge cavern filled with goo (yuck) is there, with a pile of rocks blocking the passage to the north. Your character will remark that the cavern is full of methane gas, so the smallest spark would blow it sky-high.
Leave your NPCs outside and get an explosive. Put it near the blockade then RUN! As soon as you climb back up, it will go off, turning the outhouse into a crater and covering half of Modoc with goo (extra yuck). It is possible to die in the explosion, so save first. It is also possible to survive the explosion in the cavern if you hide in the farthest corner, but you will have to leave and come back for the rocks to be cleared, so doing this is not beneficial in any way. Setting off the explosion earns you 500 XP.
Now, go into the cleared blockade. You will find a mole rat defending it's lair. Kill it, then scour the lair for the watch and a Bag.
Returning the watch
Give the watch to Farrel, or give the watch to Cornelius and say the rat had it for a reward of 1500 XP and +10 Karma.
You may also return the watch to Cornelius and claim that Farrel stole it for a reward of 500 XP and -5 Karma instead.
Finishing the quest without returning the watch
If you attempt to open the safe in Farrel's house once, so that Farrel yells at you, you may then tell Cornelius that Farrel is keeping the watch in his safe. Doing so will earn you negative Karma and no XP.
- If the watch is below a Bag in your inventory when you give it away it won't be removed from the inventory, so you can give it to both Cornelius and Farrel for additional XP.
- Solving this quest eliminates the quest "Cornelius has lost his gold pocket watch. Find it and return it to him", as both quests are essentially the same.
- Killing Farrel will make this quest unsolvable.
- Blowing the cave and escaping will damage one of the companions severely.