Trinidad Drilling made more from cancelled rig contracts than actual drilling work in Q2

In an odd twist linked to the energy industry downturn, one of Canada's largest drilling companies says it earned more revenue in the second quarter from clients who didn't want it to go to work than from those who paid to have wells drilled.

Trinidad Drilling said customers who didn't want to produce oil and gas in a depressed price market paid almost $50 million in the three months ended June 30 to either terminate take-or-pay drilling contracts or in standby fees for rigs they did not employ.

That's more than half of the Calgary-based company's second-quarter overall revenue of $95 million.

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During a conference call on Wednesday, Trinidad CEO Lyle Whitmarsh defended accepting the contract buyouts, a practice that has been criticized by some analysts as short-sighted.

"We appreciate the impact early termination may have on future activity levels. However, we believe early termination payments should be seen as positive," he said. "They provide immediate cash flow without any associated costs, rather than earning it over a long period of term without knowing credit or foreign exchange risk."

The cancellation and standby fees were about $10 million higher than analysts expected. Similar fees contributed about $15 million to Trinidad in the second quarter of last year.

Analyst Jeff Fetterly of Peters and Co. said Trinidad's number of contract terminations is unusual for a Canadian firm but many U.S. drillers have been employing the same strategy.

He said Tulsa, Okla.-based Helmerich & Payne, for instance, is expected to raise nearly $300 million in termination and standby fees this year. Calgary-based Precision Drilling (TSX-PD), Canada's largest driller, is expected to take in about $30 million this year.

Trinidad said there were signs in July that drilling activity will gradually improve but oil and gas price volatility remains a concern. It said only one in five of its 139 rigs, 72 of which are in Canada, are currently working.

Whitmarsh said the company is preparing for scenarios ranging "from a full-scale recovery to a protracted downturn" by paying down about $131 million in long-term debt in the first half of this year.

Trinidad's earnings came as the western Canadian active drilling rig count fell by two rigs to 125 this week, 94 fewer than last year at this time and 254 rigs fewer than the five-year average, according to a report from RBC Dominion Securities.

In the U.S., the active rig count rose by seven this week to 447 but that's still 410 fewer rigs than 12 months ago, according to a count published by Baker Hughes.