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. 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 six months ended June 30, 2021, we derived 63% of total revenues from
the sale of our products, 14% of total revenues from rental and 23% of total
revenues from field service and other. During the six months ended June 30,
2020, we derived 58% of total revenues from the sale of our products, 22% of
total revenues from rental and 20% of total revenues from field service and
other. We have predominantly domestic operations, with a small amount of sales
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 the 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
                                       13
--------------------------------------------------------------------------------

  Table of Contents
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, 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 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
As vaccines continue to be administered worldwide and government lockdowns have
eased over the last several months, the demand for natural gas and oil products
has strengthened, leading to improved oil and natural gas prices. The higher
commodity prices have resulted in increased drilling and completion activity by
our 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 200 associates during the
first six months of 2021. Additionally, we have reinstated wages and salaries to
their full amounts, with the first half restored in January 2021 and the
remainder in April 2021. We have also added fleet vehicles in line with
additions to our headcount and invested capital in our rental fleet related to
upgrades associated with our innovative technologies. 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, albeit slower, revenue growth in the second half of 2021.
In May and June of 2020, members of the Organization of Petroleum Exporting
Countries Plus (OPEC+) made aggressive production cuts of 9.7 million barrels
per day in response to the significant decreases in demand and the abrupt drop
in oil prices at the start of pandemic. West Texas Intermediate (WTI) prices
traded at negative levels for a brief period in April 2020. As economies have
reopened, there has been a rapid resurgence in demand and oil prices have
increased, with WTI reaching a high of $75.25 in July 2021. In an effort to keep
up with this significant increase in oil demand worldwide, OPEC+ announced on
July 18, 2021 that its members will raise overall oil production by 400,000
barrels per day on a monthly basis starting in August 2021, with plans to assess
the market and performance in December 2021. The agreement to raise production
could result in the eventual return to pre-pandemic production levels by the
group's members by September 2022. The OPEC+ announcement of increased
production immediately resulted in WTI prices dropping below $70 per barrel.
Additional announcements or actual increases in supply from OPEC+ could result
in further reductions in oil prices which could negatively impact our business.
The significant increase in commodity prices in 2021 has led to meaningful
increases in the level of U.S. onshore drilling activity. During the three
months ended June 30, 2021, the weekly average U.S. onshore rig count as
reported by Baker Hughes was 436 rigs compared to 377 rigs for the three months
ended March 31, 2021 and 378 rigs for the three months ended June 30, 2020. As
of July 23, 2021, the U.S. onshore rig count was 473.
As of July, the number of U.S. onshore drilling rigs in operation had roughly
doubled from the low of 230 reported by Baker Hughes in August of 2020. During
that time, private exploration and production ("E&P") companies have been
responsible for the majority of the rig additions in the U.S. onshore market. We
have significantly increased our revenues and rigs followed since the third
quarter of 2020 despite a greater portion of Cactus' revenues having
historically come 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 prices are elevated.
Additionally, freight costs, specifically ocean freight costs, have risen due to
a number of factors including, but not limited to, a shortage of shipping
containers, congested seaports, capacity constraints on vessels and lockdowns in
certain markets. We believe that these cost increases are temporary and as
supply equalizes with demand, prices should normalize. However, we cannot be
certain if this will occur before the end of the year or at all, nor can we be
confident that prices will return to their historic lows. 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.
                                       14
--------------------------------------------------------------------------------

  Table of Contents
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 June 30, 2021 Compared to Three Months Ended March 31, 2021

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

© Edgar Online, source Glimpses