Except as otherwise indicated or required by the context, all references in this
Quarterly Report to the "Company," "Cactus," "we," "us" and "our" refer to
Cactus, Inc. ("Cactus Inc.") and its consolidated subsidiaries, unless we state
otherwise or the context otherwise requires. The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and related notes. The following discussion contains "forward-looking
statements" that reflect our plans, estimates, beliefs and expected performance.
Our actual results may differ materially from those anticipated as discussed in
these forward-looking statements as a result of a variety of risks and
uncertainties, including those described above in "Cautionary Note Regarding
Forward-Looking Statements" and included elsewhere in this Quarterly Report, all
of which are difficult to predict. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed may not occur. We assume no
obligation to update any of these forward-looking statements except as otherwise
required by law.
Executive Summary
We design, manufacture, sell and rent a range of highly engineered wellhead and
pressure control equipment. Our products are sold and rented principally for
onshore unconventional oil and gas wells and are utilized during the drilling,
completion and production phases of our customers' wells. In addition, we
provide field services for all of our products and rental items to assist with
the installation, maintenance and handling of the wellhead and pressure control
equipment.
We operate through service centers in the United States, which are strategically
located in the key oil and gas producing regions, including the Permian,
SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken, among other active oil and
gas regions in the United States, and in Eastern Australia. These service
centers support our field services and provide equipment assembly and repair
services. Our manufacturing and production facilities are located in Bossier
City, Louisiana and Suzhou, China.
We operate in one business segment. Our revenues are derived from three sources:
products, rentals, and field service and other. Product revenues are primarily
derived from the sale of wellhead systems and production trees. Rental revenues
are primarily derived from the rental and associated repair of equipment used
for well control during the completion process as well as the rental of drilling
tools. Field service and other revenues are primarily earned when we provide
installation and other field services for both product sales and equipment
rental. Additionally, other revenues are derived from providing repair and
reconditioning services to customers that have previously installed our products
on their wellsite. Items sold or rented generally have an associated service
component. As a result, there is some level of correlation between field service
and other revenues and revenues from product sales and rentals.
In the three months ended March 31, 2020, we derived 57% of total revenues from
the sale of our products, 23% of total revenues from rental and 20% of total
revenues from field service and other. In the three months ended March 31, 2019,
we derived 55% of total revenues from the sale of our products, 24% of total
revenues from rental and 21% of total revenues from field service and other. We
have predominantly U.S. operations, with a small amount of sales being generated
in Australia.
Market Factors
Demand for our products and services depends primarily upon the general level of
activity in the oil and gas industry, including the number of drilling rigs in
operation, the number of oil and gas wells being drilled, the depth and drilling
conditions of these wells, the number of well completions, the level of well
remediation activity, the volume of production and the corresponding capital
spending by oil and natural gas companies. Oil and gas activity is in turn
heavily influenced by, among other factors, oil and gas prices locally and
worldwide, which have historically been volatile.
The key market factors impacting our product sales are the number of wells
drilled and placed on production, as each well requires an individual wellhead
assembly and, at some time after completion, the installation of an associated
production tree. We measure our product sales activity levels against our
competitors by the number of rigs that we are supporting on a monthly basis, as
it is correlated to wells drilled. Each active drilling rig produces different
levels of revenue based on the customer's drilling plan, which includes factors
such as the number of wells drilled per pad, the time taken to drill each well,
the number and size of casing strings, the working pressure, material selection
and the
13
Table of Contents
complexity of the wellhead system chosen by the customer and the rate at which
production trees are eventually deployed. All of these factors may be influenced
by the oil and gas region in which our customer is operating. While these
factors may lead to differing revenues per rig, we have historically been able
to broadly forecast our product needs and anticipated revenue levels based on
general trends in a given region and with a specific customer. Increases in
horizontal wells drilled as a percentage of total wells drilled, the shift
towards pad drilling, and an increase in the number of wells drilled per rig are
all favorable trends that we believe enhance the demand for our products
relative to the active rig count.
Our rental revenues are primarily dependent on the number of wells completed
(i.e., hydraulically fractured), the number of wells on a well pad and the
number of fracture stages per well. Well completion activity generally follows
the level of drilling activity but can be delayed due to such factors as
takeaway capacity, storage capacity and budget constraints.
Field service and other revenues are closely correlated to revenues from product
sales and rentals, as items sold or rented almost always have an associated
service component. Therefore, the market factors and trends of product sales and
rental revenues similarly impact the associated levels of service and other
revenues generated.
Recent Developments and Trends
In early 2020, a novel strain of coronavirus (also referred to as COVID-19)
began spreading in the Hubei province in China. Although located in a separate
province, our factory in Suzhou, China was closed for 10 days beginning in late
January 2020 as a result of travel restrictions and other measures taken by the
Chinese government in response to the outbreak of the coronavirus. Our Suzhou
facility reopened on February 10, 2020 and returned to full capacity by the end
of the first quarter of 2020. We are currently experiencing no issues with
workforce or supply chain disruptions in China. In March 2020, as a result of
the continued spread of the virus, the World Health Organization declared
COVID-19 a pandemic resulting in countries taking urgent and aggressive action
to stop the spread of the disease. These actions have included restrictions on
travel (foreign or domestic) and stay-at-home orders. The combination of travel
restrictions, school and business closures and stay-at-home orders worldwide has
resulted in a severe decline in the demand for oil.
In early March 2020, as a result of the ongoing decrease in global oil demand
resulting from the coronavirus pandemic, members of the Organization of
Petroleum Exporting Countries (OPEC) and Russia considered extending their oil
production cuts and agreeing to additional cuts. Negotiations were unsuccessful.
Saudi Arabia then announced an immediate reduction in its oil export prices and
a substantial increase in production over prior levels. Further, it was
announced that previously agreed upon oil production cuts between Russia and
OPEC members would expire on April 1, 2020. Oil prices declined sharply
following the outcome of these failed negotiations. In mid-April 2020, an
agreement was reached with oil-producing nations to make production cuts in an
effort to stabilize oil prices. However, the growing concern regarding the
limited availability of crude oil storage capacity and continued weakness in
demand has placed extreme pressure on oil prices with West Texas Intermediate
(WTI) prices trading at negative levels for a brief period in the month of
April. Current WTI prices for June deliveries closed at $12.34 per barrel on
April 28, 2020.
Overall, the significant decline in oil demand due to COVID-19 coupled with the
instability of oil prices caused by geopolitical issues and production levels
have resulted in our customers announcing significant reductions to their
capital expenditure budgets for 2020. This is evidenced by the significant
decline in U.S. onshore rig counts from the beginning of the year. At the end of
2019, the U.S. onshore rig count as reported by Baker Hughes was 781 rigs. For
the three months ended March 31, 2020, the weekly average U.S. onshore rig count
was 763 rigs compared to 1,021 rigs for the three months ended March 31, 2019.
As of April 24, 2020, the U.S. onshore rig count was 448 and is expected to
continue declining over the next several months.
While visibility regarding customer activity levels is low, we believe that the
impact of lower oil prices and limited availability of storage capacity will
result in severely reduced demand for our products and services. The duration
and extent of the downturn in oil and gas activity is unknown at this time, and
while management anticipates that the economic impact of lower oil prices will
have a significantly negative effect on its results of operations, the degree to
which these factors will impact our business remains uncertain.
We believe we are well positioned to successfully navigate the industry
downturn. We are actively reviewing all opportunities to reduce costs and
believe we will be able to manage our expenses and capital expenditures relative
to market conditions. As a result, we implemented certain workforce, wage, and
capital expenditure reductions beginning
14
Table of Contents
in March 2020 which included the reduction of our total U.S. associate headcount
by 277 associates (or approximately 30%). We continued to implement reductions
in our workforce during April affecting 212 additional U.S. associates. The
April headcount reductions are estimated to result in approximately $23 million
of incremental annualized cost savings. The estimated cost savings include base
salaries and wages, overtime, payroll taxes and benefits, but exclude estimated
reductions in annual incentive bonuses associated with the Company's financial
performance. Our required capital expenditures have historically tended to be
lower than most other oilfield service providers due to the asset-lite nature of
our business model. As of March 31, 2020 we had no long-term debt and over $230
million of cash. We also believe that the operating environment following the
industry downturn may prove more favorable for companies that are financially
well positioned.
Tariffs
On March 26, 2020, the U.S. Trade Representative (''USTR'') announced their
determination to grant certain exclusion requests related to tariffs on Chinese
imports under Section 301 of the Trade Act of 1974 ("Section 301"). Not all of
our products with Section 301 tariffs fall under this exclusion. The product
exclusions apply retroactively as of September 24, 2018 until August 7, 2020 on
covered products that were exported from China to the United States. The tariff
rate on covered products was 10% beginning in September 2018 and raised to 25%
in May 2019. Going forward, we will not be required to pay a tariff on covered
products until at least August 7, 2020. We will continue to monitor the
situation for an extension of this tariff suspension beyond the August 2020
deadline. Substantially all of the products that we import through our Chinese
supply chain have been subject to Section 301 tariffs.
© Edgar Online, source Glimpses