Cactus, Inc. Is Too Spiny

seekingalpha07-02 22:08

Cactus, Inc. is a $3.4 billion market oilfield service company supplying wellhead equipment. Its dividend is small at 0.9%.Energy sector consolidation has reduced the demand for oilfield service ...

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Its dividend is small at 0.9%.Energy sector consolidation has reduced the demand for oilfield service ...</p>\n\n<a href=\"https://seekingalpha.com/article/4702040-cactus-inc-is-too-spiny\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Cactus, Inc. 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Is Too Spiny\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-02 22:08 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4702040-cactus-inc-is-too-spiny><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Cactus, Inc. is a $3.4 billion market oilfield service company supplying wellhead equipment. Its dividend is small at 0.9%.Energy sector consolidation has reduced the demand for oilfield service ...</p>\n\n<a href=\"https://seekingalpha.com/article/4702040-cactus-inc-is-too-spiny\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0070302665.USD","symbol_name":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4702040-cactus-inc-is-too-spiny","article_id":"2448166321","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1124964960/image_1124964960.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2448166321","pubTimestamp":1719929296,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Cactus, Inc. is a $3.4 billion market oilfield service company supplying wellhead equipment. 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Its dividend is small at 0.9%.Energy sector consolidation has reduced the demand for oilfield service companies like Cactus. For shale, this is somewhat offset by the need for constant drilling to replenish quick-decline reserves.82% of Cactus’ equity is in publicly traded Class A shares; 18% is non-public Class B shares. The three top executives are family members, so related to one another.   Evgenii Mitroshin/iStock via Getty Images  cactuswhd.comCactus, Inc. (NYSE:WHD) is a profitable oilfield services company that designs, manufactures, sells, and rents engineered wellheads, pressure control equipment, and spoolable pipe technologies. It divides its business into two parts: pressure control and spoolable technologies. However, I recommend it as a hold (or not-buy) because it is near the top of its 52-week range, pays a minimal dividend, and the entire oilfield service sector has been and will be squeezed due to lower activity in the US, particularly as newly combined companies in the current mergers and acquisitions wave seek more efficiencies. The company has no long-term debt, a positive. About 82% of its equity is Class A publicly traded shares; private Class B shares comprise 18% of the equity. Voting power is split proportionately. The family relationships in Cactus’ executive suite could challenge standard corporate governance approaches, as the three top executives are related to one another. 1Q24 Results and Guidance For the first quarter of 2024, the company announced revenues of $274.1 million and net income of $49.8 million, giving diluted earnings per Class A share of $0.59. This compares to 1Q23 revenues of $228.4 million, net income of $52.3 million, and diluted earnings per share of $0.63. In 1Q24, the net income margin was 18.2%. Adjusted EBITDA was $95.3 million and adjusted EBITDA margin was 34.8%. For 1Q23, the net income margin was 22.9%. Adjusted EBITDA was $79.4 million and adjusted EBITDA margin was 34.8%. Cash flow from operations for 1Q24 was $86.3 million, compared to $60.5 million for 1Q23. In the first quarter of 2024, pressure control represented 64% of annualized revenues and spoolable technologies represented 36%. According to CEO and Cactus board chairman Scott Bender, “Looking ahead to the second quarter of 2024, we anticipate that U.S. land activity levels will drift lower from the first quarter average given continued gas commodity weakness and global geopolitical uncertainty. In Pressure Control, we expect relatively flat revenue in the second quarter, outperforming the anticipated activity softness given particularly strong April production equipment sales. In Spoolable Technologies, we anticipate revenues to be up slightly.” The diagram below from the most recent investor presentation reflects the variety of spoolable pipe applications.   cactuswhd.comOil and Gas Prices The July 1, 2024, West Texas Intermediate (WTI) futures oil price (August NYMEX contract) was $83.38/barrel. The Henry Hub natural gas futures price (August NYMEX contract) was $2.48/MMBTU. Graph units are $/bbl for oil and $/MMBTU for natural gas. Data by YChartsData by YChartsNYMEX strip prices and the STEO forecast for future months are backwardated (lower in the future) for oil. Natural gas prices vary seasonally but are in contango (futures prices are higher).   EIA STEO  EIA STEOCompetitors Cactus is headquartered in Houston, Texas. As noted above, it designs, manufactures, sells, and rents wellheads and pressure control equipment in the US used for horizontal (unconventional) oil and gas wells and is active in all onshore US basins and Australia. Products include wellhead systems, frac stacks, zipper manifolds, and production trees. Competitors include SLB (formerly Schlumberger) (SLB), Halliburton (HAL), TechnipFMC (FTI), Baker Hughes (BKR), Patterson-UTI (PTEN), and National Oilwell Varco (NOV).   cactuswhd.comGovernance On June 1, 2024, Institutional Shareholder Services ranked Cactus’ overall governance as 6, with sub-scores of audit (8), board (8), shareholder rights (7), and compensation (2). In this ranking, a 1 indicates lower governance risk and a 10 indicates higher governance risk. Relationships: potential investors should be aware that Scott Bender, CEO and board chairman of Cactus, is the father of Steven Bender, chief operating officer, and the brother of Joel Bender, president and director.  The company has just appointed Jay Nutt as chief financial officer. Per Cactus’ most recent 10-K, “The following diagram indicates our simplified ownership structure as of December 31, 2023.”   Cactus Inc. 10-KAccording to the company’s 1Q24 report, “as of March 31, 2024, Cactus had 65,518,468 shares of Class A common stock outstanding (representing 82.4% of the total voting power) and 14,033,979 shares of Class B common stock outstanding (representing 17.6% of the total voting power).” Class A and Class B shareholders have approximately equal voting rights, so class B shareholders have a 17.6% vote. Shorts were 9.0% of float on June 14, 2024. Insider ownership was 0.7%. The company’s beta is 1.95, more volatile than the overall market. Like Patterson-UTI and many other companies, Cactus is on the front lines of the turbulent energy environment as an oilfield services supplier. At March 31, 2024, the six largest institutional stockholders, some of which represent index fund investments that match the overall market, were FMR/Fidelity (14.4%), Vanguard (10.0%), BlackRock (7.5%), American Century (4.6%), T. Rowe Price and JPMorgan Chase, both (3.9%). BlackRock, T. Rowe Price, and JPMorgan Chase are signatories to the Net Zero Asset Managers initiative, a group that manages $57 trillion in assets worldwide and which advocates limiting hydrocarbon investment. Financial and Stock Highlights for Cactus, Inc. With a July 1, 2024, closing stock price of $51.82/share, market capitalization is $3.4 billion. The 52-week price range is $37.58-$57.00 per share, so the closing price is 91% of the one-year high and 95% of the one-year target of $54.44/share. Cactus’ trailing twelve months’ (TTM) earnings per share (EPS) is $2.53 for a current price-earnings ratio of 20. The average of analysts’ 2024 and 2025 earnings per share estimates are $2.96 and $3.38 respectively, giving a forward P/E ratio range of 15.3-17.5. TTM return on assets and equity were a good 12.8% and 21.0%, respectively. Trailing twelve months’ operating cash flow was $366 MM and levered free cash flow was $320 million. On March 31, 2024, the company had $475.3 million in liabilities and $1.58 billion in assets for a liability-to-asset ratio on the low side at 30%. The company’s biggest liability is $250 million related to a tax receivable agreement. Its balance sheet shows no long-term debt. The absence of long-term debt and the low liability-to-asset ratio reinforces the company’s position of financial flexibility. Data by YChartsThe ratio of enterprise value to EBITDA is 8.6 so within bargain/investor-friendly territory of less than 10.0. Book value of $13.64/share is about a fourth of the market value, indicating very positive investor sentiment. Cactus pays a $0.48/share dividend for a 0.9% yield. It also has a share repurchase program. The mean analyst rating is 1.8, or “buy,” leaning toward “strong buy” from eight analysts. Positive and Negative Risks Like other companies in the oilfield service sector, risks are volatile oil prices (and to a lesser extent natural gas), inflation (materials, labor, financing), supply chain hiccups, smaller oil company capital budgets, and political risks in the US due to the current administration’s no-hydrocarbon policies. A risk that has increased in the last year is that due to widespread energy sector mergers and acquisitions, combined companies are likely to seek efficiencies by further cutting capital spending. Offsetting this, as always, is that the very quick decline rates in unconventional shale production mean companies need to keep drilling to keep their (shale) asset base from going away. Recommendations for Cactus, Inc. While Cactus has a solid financial structure with no debt, its 0.9% dividend is not attractive to public dividend-seeking investors. With 18% of the equity, and proportionate voting rights private, public stockholders contend with a sizable group that may have different interests. The group of three family members (father, son, brother) in the executive suite gives a slightly non-professional aspect, despite the company’s good, affordable technology. This is reflected in the company’s poor governance scores. The company’s price/earnings ratio is on the expensive side. Its stock price is near the 52-week high and one-year target. Mergers and acquisitions among Cactus’ customers are likely to cause them to seek efficiencies (lower activity, lower costs) from oilfield service companies like Cactus.  Given these considerations, I recommend Cactus, Inc. as no more than a hold.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2448166321"}