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,
Marcellus, Utica, Haynesville, Eagle Ford, Bakken and SCOOP/STACK, 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. We also provide rental and service operations in the Kingdom of
Saudi Arabia. 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 wellheads or
production trees on their wellsite. Items sold or rented generally have an
associated service component. As a result, there is a close correlation between
field service and other revenues and revenues from product sales and rentals.
During the nine months ended September 30, 2021, we derived 64% of total
revenues from the sale of our products, 14% of total revenues from rental and
22% of total revenues from field service and other. During the nine months ended
September 30, 2020, we derived 58% of total revenues from the sale of our
products, 21% of total revenues from rental and 21% of total revenues from field
service and other. We have predominantly domestic operations with a small amount
of sales in Australia, and beginning in the third quarter of 2021, in the
Kingdom of Saudi Arabia.
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, availability of capital and 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 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 the customer is operating. While
these factors may lead to differing revenues per rig, we have generally been
able to forecast our product needs and anticipated revenue levels based on
historic trends in a given region and with a specific customer. Increases in
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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. However, such favorable trends might be
adversely affected by overall supply chain-related disruptions.
Our rental revenues are primarily dependent on the number of wells completed
(i.e., hydraulically fractured), the number of wells on a well pad, the number
of fracture stages per well and the number of fracture stages completed per day.
Well completion activity generally follows the level of drilling activity over
time, but can be delayed or accelerated due to such factors as takeaway
capacity, storage capacity, spot prices, overall service cost inflation and
budget considerations.
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 field service and
other revenues generated.
Recent Developments and Trends
As economies have reopened in 2021, there has been a resurgence in demand for
fossil fuels and oil prices have increased, with West Texas Intermediate prices
exceeding $80 per barrel in October 2021. Natural gas prices have also increased
significantly this year and have more than doubled since September 2020 and are
expected to remain elevated this winter. The higher commodity prices have
resulted in increased drilling and completion activity by customers and improved
demand for our products and services. This has translated into higher activity
and revenues for our business. In response to the increased activity levels, we
have added over 300 associates during the first nine months of 2021, reinstated
wages and salaries to their full amounts and restored the 401(k) match, among
other programs that were suspended or reduced in response to the industry
downturn last year. We have also added fleet vehicles in line with additions to
our headcount and invested capital in our rental fleet primarily to use a more
environmentally friendly method of powering certain equipment. Barring
significant adverse impacts to fossil fuel demand, including that caused by the
COVID-19 Delta variant, other variants, or the perception thereof, we anticipate
continued activity growth in the fourth quarter of 2021 taking into account
typical seasonal trends. As overall revenues and activity have grown this year,
we have also seen a substantial increase in ocean freight, salaries and wages
and raw material prices resulting from COVID-related pressures on the supply
chain and significantly increased demand for goods and services worldwide. In
addition to dealing with unprecedented cost increases, we are also impacted by
the global supply chain issues which have, in some cases, resulted in increased
costs when we are required to use other more expensive methods of transportation
or substitute more costly products in order to meet customer demand. These cost
increases have already had, and could continue to have, a negative impact on our
margins and results of operations absent further cost recovery efforts.
The significant increase in commodity prices in 2021 has led to meaningful
increases in the level of U.S. onshore drilling activity, particularly among
private operators. During the three months ended September 30, 2021, the weekly
average U.S. onshore rig count as reported by Baker Hughes was 483 rigs compared
to 436 rigs for the three months ended June 30, 2021 and 240 rigs for the three
months ended September 30, 2020. Although these gains are encouraging, current
rig activity is still significantly reduced from the levels in 2019 when the
weekly average rig count for the three months ended September 30, 2019 was 894.
During this period, however, improved rig efficiencies have partially offset the
impact of this reduction. As of October 29, 2021, the U.S. onshore rig count was
529.
Private exploration and production ("E&P") companies have been responsible for
the majority of the rig additions in the U.S. onshore market in 2021. We have
significantly increased our revenues and rigs followed since the third quarter
of 2020 despite a greater portion of Cactus' revenues having historically
resulted from publicly traded E&P companies. During this time, Cactus has
meaningfully increased its business with private E&P companies. Disproportionate
changes in activity from private or publicly traded E&P companies present both
risks and opportunities for Cactus, depending on a number of factors, such as
which customers add or drop rigs.
Increased Raw Material and Freight Costs
Our ability to source low cost raw materials and components, such as steel
plate, tube and bar stock, forgings and machined components is critical to our
ability to successfully compete. Due to a shortage of steel caused primarily by
production disruptions during the pandemic, steel and assembled component prices
are elevated. Additionally, freight costs, specifically ocean freight costs,
have risen significantly due to a number of factors including, but not limited
to, a scarcity of shipping containers, congested seaports, a shortage of
commercial drivers, capacity constraints on vessels and lockdowns in certain
markets. We have seen our international freight costs increase from
approximately $2,800 per container before the pandemic to over $17,000 per
container and expect prices to continue to increase through the end of the year.
Although we believe that these cost increases are temporary and as supply
equalizes with demand, prices should normalize, we do not believe this will
occur until mid-to-late 2022.
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Additionally, we cannot be confident that prices will return to the lower levels
experienced in prior years. As such, our results of operations may be adversely
affected by these rising costs to the extent we are unable to recoup them from
our customers.
Critical Accounting Policies and Estimates
A discussion of our critical accounting policies and estimates is contained in
our 2020 Annual Report on Form 10-K. There have not been any changes in our
critical accounting policies since December 31, 2020.
Consolidated Results of Operations
The following discussions relating to significant line items from our condensed
consolidated statements of income are based on available information and
represent our analysis of significant changes or events that impact the
comparability of reported amounts. Where appropriate, we have identified
specific events and changes that affect comparability or trends and, where
reasonably practicable, have quantified the impact of such items.
Three Months Ended September 30, 2021 Compared to Three Months Ended June 30,
2021

The following table presents summary consolidated operating results for the periods indicated:

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