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, Haynesville, 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.
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. During the nine months ended
September 30, 2019, we derived 56% of total revenues from the sale of our
products, 23% 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 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.
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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 field service and
other revenues generated.
Recent Developments and Trends
In March 2020, amid the initial worldwide spread of COVID-19, many countries
instituted lockdowns to slow the rapid spread of the virus resulting in a severe
decline in the demand for fossil fuels. Throughout 2020, the inability to
control the spread of the virus has resulted in continued travel restrictions,
school and business closures and stay-at-home orders worldwide. Although the
United States and other countries have since reopened businesses and schools at
limited capacity, until vehicle and airline travel returns to activity levels
closer to those prior to the pandemic, demand for oil will continue to be
depressed. Although oil prices have recovered from the lows experienced in April
2020, they have remained in the $35 to $45 per barrel range for the last several
months. In an attempt to better match supply and demand, OPEC+ members have
taken actions to curtail production. U.S. operators have also significantly
reduced drilling and completion activity. As a result, our customers' activity
continues to be significantly lower than 2019 and early 2020 levels, which
translates into reduced demand for our products and services. A resurgence of
COVID-19 cases in the United States and other countries may limit improvements
in the demand for oil and natural gas products and could lead to
government-mandated lockdowns and other restrictions, which would likely have a
negative impact on global energy demand.
During 2020, there has been a significant decline in the level of onshore
drilling activity in the U.S. At the end of 2019, the U.S. onshore rig count as
reported by Baker Hughes was 781 rigs. The weekly average U.S. onshore rig count
declined to 240 rigs for the three months ended September 30, 2020. This is
compared to 894 rigs for the comparable period in 2019. The increase in
commodity prices and their relative stability has led to modest rebounds in the
level of U.S. drilling activity since bottoming in August of 2020. As of October
30, 2020, the U.S. onshore rig count was 282.
In recent months, there has been an increase in large-scale merger and
acquisition activity among exploration and production ("E&P") companies that
operate in the United States. These transactions may be driven in part by an
effort to reduce the cost of hydrocarbon production per barrel equivalent and
increase overall company efficiencies. These transactions generally increase the
size and scale of the counterparties involved, which may provide better access
to capital and lead to a healthier overall industry. Consolidation among our
potential customer base presents both risks and opportunities as we have
historically focused on providing our products and services to large and well
capitalized customers.
We believe our company is well positioned to successfully navigate the current
market environment, although the pace and extent of a potential activity
recovery remains unknown at this time. We continue to actively review all
opportunities to manage costs and efficiently deploy capital relative to market
conditions. We have implemented certain workforce, wage and capital expenditure
reductions beginning as early as March 2020. As of September 30, 2020, we have
reduced our worldwide workforce by almost 50%, had no long-term debt and had
approximately $274 million of cash. 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. 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 certain
exclusion requests related to tariffs on our Chinese imports under Section 301
of the Trade Act of 1974 ("Section 301"). Not all of our products with Section
301 tariffs were included under this exclusion. The tariff exemption applied to
covered products exported from China to the United States from September 24,
2018 until August 7, 2020. The tariff rate on the covered products was 10%
beginning in September 2018 and was raised to 25% in June 2019. In April 2020,
we completed filing post summary corrections and protests in order to request
refunds back to 2018 for tariffs paid on the now excluded products. To date, we
have recognized $14.0 million in refunds, inclusive of $0.5 million in interest,
and applied those amounts against inventory and cost of goods sold based on
whether the
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costs had been recognized in our statements of income or remained in inventory
pending sale. As of September 30, 2020, $0.1 million in refunds remain to be
recognized as credits to cost of sales when received. The tariff suspension
expired on August 7, 2020 and was not extended; therefore, we have resumed
paying tariffs at 25% on the aforementioned previously excluded parts imported
from China. Substantially all of the products that we import through our Chinese
supply chain are subject to the tariffs. In the nine months ended September 30,
2020, we estimate that approximately 40% of the items received were sourced
through our Chinese supply chain.
Consolidated Results of Operations
Three Months Ended September 30, 2020 Compared to Three Months Ended September
30, 2019

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

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