Except as otherwise indicated or required by the context, all references in this Quarterly Report to the "Company," "Cactus," "we," "us" and "our" refer toCactus, 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 inthe 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 inthe United States , and inEastern Australia . These service centers support our field services and provide equipment assembly and repair services. Our manufacturing and production facilities are located inBossier City, Louisiana andSuzhou, 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 endedJune 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 endedJune 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 inAustralia . 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 inJanuary 2021 and the remainder inApril 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 theCOVID-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 theOrganization 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 inApril 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 inJuly 2021 . In an effort to keep up with this significant increase in oil demand worldwide, OPEC+ announced onJuly 18, 2021 that its members will raise overall oil production by 400,000 barrels per day on a monthly basis starting inAugust 2021 , with plans to assess the market and performance inDecember 2021 . The agreement to raise production could result in the eventual return to pre-pandemic production levels by the group's members bySeptember 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 ofU.S. onshore drilling activity. During the three months endedJune 30, 2021 , the weekly averageU.S. onshore rig count as reported byBaker Hughes was 436 rigs compared to 377 rigs for the three months endedMarch 31, 2021 and 378 rigs for the three months endedJune 30, 2020 . As ofJuly 23, 2021 , theU.S. onshore rig count was 473. As of July, the number ofU.S. onshore drilling rigs in operation had roughly doubled from the low of 230 reported byBaker 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 theU.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 sinceDecember 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 EndedJune 30, 2021 Compared to Three Months EndedMarch 31, 2021
The following table presents summary consolidated operating results for the periods indicated:
© Edgar Online, source