Cactus：OFS Core Holding, but Waiting for Better Entry Point Amid NAM Activity Pullback

Cactus Wellhead (WHD) designs and manufactures onshore pressure control equipment, specializing in consumable wellheads, frac valves (or “stacks”), zipper manifolds, and production gate valves. Historically, the company derived its revenue almost exclusively from the U.S. land market, selling and renting equipment and providing related field services to E&Ps primarily during the drilling and completion phases of well development. Recently, however, Cactus’ international footprint has begun to grow, with initial sales in MENA, EMEA, and LATAM occurring in 2022 and 2023. The company services customers active across all major U.S. basins, including the Permian Basin.

Cactus Wellhead is an industry leader in U.S. surface equipment, including their proprietary wellhead systems that have driven significant market shale gains domestically. The company key products include the Cactus SafeDrill wellhead systems, frac stacks, zipper manifolds, and production trees. The company has developed one of the most successful OFS franchises in NAM given a differentiated IP product portfolio as well as a more nimble service delivery platform relative to its larger cap peers that includes a bespoke manufacturing approach. Since 2013, the company has grown its share of global surface equipment to 13% from 4%, including to 46% from 7% in the U.S. Given the company’s leading market share, the company’s future growth prospects in its legacy segments in the U.S. would appear relatively saturated and generally dependant on fluctuations in the U.S. rig count. Outside The company’s future growth potential looks to be more pegged to the recent FlexSteel acquisition and international expansion underway.

On January 3, 2023, WHD announced the $621mm acquisition of FlexSteel, which is a manufacturer of onshore spoolable pipe technologies primarily utilized in the production phase of the oil and gas life cycle. We view FlexSteel as an excellent strategic fit given the strength of its IP portfolio that provides products that combine the durability of steel with the speed and efficiency of spoolables. Consistent with WHD’s pressure control segment, FlexSteel’s segment has delivered significant growth at strong through-cycle margins with a low capital intensity business model. We think the acquisition should provide solid growth prospects over time given an expanding TAM opportunity from upstream and midstream customers. Management is focused on an international expansion including entry into the Saudi Arabian wellhead market, which could provide support $100+mm in annualized revenue over time. The company is working through the qualification process and expects to be an approved service provider for wellheads and other pressure control equipment by 2024.

Cactus has historically delivered some of the highest margins in OFS sector at low capital intensity. Over the past 4 years, the company has delivered average EBITDA margins of 33% vs its peers at ~15%. The company has also generated best-in-class +30% ROCE through the downturn compared to next-best OEM peers at <20% (SLB, HAL, BKR, FTI). Though conventional surface wellheads are generally viewed as commoditized, WHD’s proprietary, high-end systems enable faster, weld-less connections and reduced labor on-site, potentially saving as much as a day of drilling time (particularly on larger pad programs). In addition, localized manufacturing capabilities offering ~48-hour lead times are differentiated from the large caps’ U.S. capacity suited for large, bulk order production lines (characteristic of international demand). Considering wellheads only account for ~1-2% of total well costs, WHD’s value proposition to operators is material, in our view, and supports healthy margins and a competitive market position going forward.