Cactus, Inc. WHD is well poised for growth on the back of highly-engineered product sales. However, conservative spending by clients continues to be a concern.
Headquartered in Houston, TX, Cactus is involved in manufacturing, designing and selling wellhead as well as pressure control equipment. The products are utilized by clients for drilling and completing onshore oil and natural gas wells. With a market cap of $3.1 billion, the company is engaged in creating long-term value for shareholders.
The Zacks Consensus Estimate for the partnership’s bottom line for second-quarter 2021 is 18 cents per share, indicating 80% year-over-year growth. The bottom-line estimate has witnessed two upward estimate revisions and one downward movement in the past 60 days. Moreover, the consensus mark for the top line for the second quarter is pegged at $102 million, suggesting a rise of 53.3% year over year. Importantly, the company beat earnings estimates in all the last four quarters, with an average of 191.4%.
Cactus, Inc. Price and EPS Surprise
Cactus, Inc. price-eps-surprise | Cactus, Inc. Quote
Let’s take a closer look at the factors that substantiate its Zacks Rank #3 (Hold).
What’s Favoring the Stock?
Cactus generates significant cash flow from selling and renting the wellhead and pressure control equipment. Its products like Cactus SafeDrill wellhead systems, SafeClamp, Safe Inject systems and others helped the company to keep generating positive free cash flows even when the market was struggling due to the coronavirus pandemic. In the trailing 12-month period, Cactus reported free cash flow (before dividends) of $102 million.
It is ahead of most peers since its highly-engineered products can yield improved pad drilling and completion efficiencies. Along with the enhancement of safety measures, the most advanced wellhead and frac solutions offered by Cactus can deliver significant time savings. The company added that advanced wellhead and frac solutions can save more than 30 hours of rig time per well. It shipped equipment in the Middle East this January, which is expected to have provided the company with growth momentum starting from the beginning of the year.
Cactus generates revenues from business activities that comprise field services including handling, maintaining, and installing wellhead and pressure control equipment. The business activities also involve services like repairing and refurbishment. A fleet of frac valves and ancillary equipment is also being maintained by the company that creates short-term rental income.
The company has a strong balance sheet and revealed that it has no bank debt outstanding as of Mar 31, 2021. At first quarter-end, Cactus had cash and cash equivalents of $291.9 million. This can provide it with immense financial flexibility.
Hurdles in Growth Path
However, there are certain factors that are worrisome.
Upstream companies are facing constant pressure from investors for higher returns instead of rapid production growth. These headwinds are keeping investments from explorers and producers low in the domestic market. Hence, conservative spending by clients and weak North American drilling are likely to hurt demand for the company’s oilfield services. As such, for 2021, it anticipates net capital expenditure in the $10-$15 million range, signaling a decrease from the 2020 level of $18.1 million.
With decreased demand for equipment and services amid ample supply, product pricing has become highly competitive. As a result, there is limited room for equipment providers to charge premium prices. Even though oil prices have significantly recovered from last year’s historic lows, upstream companies are not expected to rampantly boost production. As such, demand for equipment and services are not expected to rise rapidly.
To Sum Up
Despite significant prospects, conservative spending by clients and weak North American drilling are concerning. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include Earthstone Energy, Inc. ESTE, Pembina Pipeline Corporation PBA and PHX Minerals Inc. PHX, each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Earthstone’s sales for 2021 are expected to jump 87.7% year over year.
Pembina Pipeline’s bottom line for 2021 is expected to rise 37.4% year over year.
PHX Minerals’ bottom line for 2021 is expected to surge 140% year over year.
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