Cactus, Inc. (WHD)

Executive Summary / Key Takeaways

• Margin Inflection in Progress: Cactus is executing a deliberate supply chain transformation to neutralize 70% tariffs on Chinese imports, with Vietnam production ramping through 2025 and expected to restore Pressure Control EBITDA margins to 31-33% by mid-2026, marking what management believes is the trough of the current cycle.

• Geographic Diversification as Counter-Cyclical Engine: While U.S. onshore activity faces headwinds from $55-60 oil, the company is aggressively pivoting internationally through its Baker Hughes (BKR) acquisition (65% stake, $344.5M, closing early 2026) and new sour service products, targeting Middle East unconventional drilling that could drive meaningful revenue contributions by Q4 2026 and significant growth in 2027.

• Variable Cost Model Resilience: The company's asset-light rental model and variable cost structure provide downside protection, with operating margins compressing less severely than peers during downturns and enabling rapid flexing of service capacity, though the FlexSteel acquisition adds fixed manufacturing complexity.

• Patent Litigation Overhang: An ongoing patent infringement dispute with Cameron International since 2021 presents a material but unquantifiable risk, with legal expenses spiking in Q2 2025 before moderating in Q3, and a jury trial delayed indefinitely.

• Valuation Balances Strength and Uncertainty: At $45.90, WHD trades at 8.49x EV/EBITDA with a net cash position and 16.2% ROE, pricing in successful execution of the tariff mitigation strategy and Middle East expansion while offering downside protection from minimal leverage and strong cash generation.

Setting the Scene

Cactus, Inc. was founded in 2011 in Houston, Texas, by a management team that previously operated two of the largest wellhead providers in the industry. This founding DNA explains the company's obsessive focus on supply chain reliability and customer transparency, traits that have become critical differentiators during the current tariff crisis. The company went public in February 2018 and has since evolved from a pure-play U.S. onshore wellhead provider into a two-segment equipment solutions company serving drilling, completion, production, and midstream markets globally.

The business model generates revenue through three streams: equipment sales, rentals, and field services. Pressure Control designs, manufactures, and services wellhead and pressure control equipment for onshore unconventional wells, with demand driven by drilling activity and rental demand tied to completions. Spoolable Technologies, added through the February 2023 FlexSteel acquisition, manufactures spoolable pipe for production gathering and takeaway, with demand linked to wells placed into production. This segment mix creates a natural hedge: Pressure Control captures upstream activity, while Spoolable benefits from production infrastructure buildout.

Cactus operates 15 service centers across the United States and Australia, with manufacturing in Bossier City, Louisiana; Suzhou, China; Baytown, Texas; and now Vietnam. The industry structure is dominated by large diversified players like National Oilwell Varco (NOV), TechnipFMC (FTI), and Weatherford (WFRD), who compete across the entire oilfield equipment spectrum. Cactus has carved out a niche leadership position in pressure control for high-intensity frac operations, where its SafeLink and SafeDrill systems command premium pricing through superior reliability and faster installation times.

The company sits at a critical inflection point. Domestic activity is softening as CEO Scott Bender sees oil prices settling between $55-60, prompting customers to become "far less transparent" in their planning. Simultaneously, the company faces a tariff crisis that doubled Section 232 rates to 50% in June 2025, creating a 70% incremental tariff on Chinese imports. The strategic response—ramping Vietnam production and acquiring Baker Hughes's Middle East-focused surface pressure control business—will define the next three years.

Technology, Products, and Strategic Differentiation

Cactus's core technological moat centers on its proprietary wellhead systems designed for the extreme pressures of modern unconventional drilling. The SafeLink frac flow system and SafeDrill wellhead equipment utilize metal-to-metal sealing technology that delivers qualitatively higher reliability in 15,000+ psi operations, reducing failure rates and non-productive time. This translates into tangible economic benefits for operators: faster rig moves, fewer workover costs, and lower insurance premiums. The company's Bossier City facility, the industry's largest U.S. manufacturer of API 6A equipment, produces approximately half the company's equipment in what management describes as a "fast turnaround, robust manufacturing environment" that prioritizes delivery guarantee over lowest cost.

The Spoolable Technologies segment brings differentiated FlexSteel pipe technology, a spoolable composite pipe system that offers faster installation and lower total cost of ownership than traditional steel pipe for production gathering. In April 2025, the company shipped its first commercial sour service pipe for high-H2S applications, a product that significantly expands the addressable market in the Middle East where much of the oil production contains high hydrogen sulfide content. This technology opens doors to national oil companies (NOCs) that previously relied on more expensive alloy steel solutions.

The Vietnam manufacturing facility represents a strategic technological and cost advantage. With an initial $6 million investment in January 2025, this facility is designed to provide vertical manufacturing capabilities and eventually replace 100% of U.S. market supply previously sourced from China. The key differentiator is tariff arbitrage: Vietnamese imports face a 50% tariff rate versus 70% on Chinese goods, and management believes Vietnam will provide an advantage over competitors who rely primarily on Chinese imports and lack material U.S. manufacturing. The facility began modest shipments in Q2 2025 and awaits API 6A accreditation, which will trigger a substantial ramp in the second half of 2025 and full displacement of Chinese shipments by mid-2026.

Research and development efforts focus on a new wellhead system planned for Q1 2026 introduction and continuous improvement of the sour service product line. Success in these initiatives would expand margins by 2-3 percentage points through higher pricing and broaden the addressable market by an estimated 30% in international markets. Failure would leave the company vulnerable to competitors like NOV and FTI, who are investing heavily in automated frac systems and could erode Cactus's premium pricing.

Financial Performance & Segment Dynamics

Third quarter 2025 results provide clear evidence that the margin trough thesis is materializing. Pressure Control revenue declined 8.8% year-over-year to $168.7 million, driven by a 6% drop in U.S. land drilling activity and reduced frac rental utilization. Yet operating income fell only 15.3% to $44.5 million, with margins compressing 200 basis points year-over-year but improving 290 basis points sequentially to 26.4%. This sequential margin recovery, despite flat revenue, demonstrates the power of cost reduction initiatives and early tariff mitigation efforts. Management expects Q4 margins of 31-33%, confirming that the second and third quarters represented the cyclical bottom.

The Spoolable Technologies segment tells a similar story of domestic headwinds offset by international strength. Revenue declined 11.9% year-over-year to $95.2 million, yet achieved its highest international revenue since the FlexSteel acquisition. Operating margins compressed 210 basis points sequentially to 27.1% due to lower volume and higher steel input costs, but the segment's 70% revenue exposure to majors, large E&Ps, and NOCs provides resilience. The sour service order book for first-half 2026 shipment and a major Middle East NOC gas service order signal that international growth will offset U.S. softness by mid-2026.

Cash flow dynamics reveal the tariff impact's working capital intensity. Year-to-date inventory build created a headwind as the company stocked Vietnamese-sourced components to avoid Chinese tariffs, with most of the carrying value increase attributed to tariffs rather than volume. This temporarily slowed free cash flow conversion, but the strategy should release cash as Vietnam ramps and tariff-neutral production begins. The balance sheet remains fortress-like with $445.6 million in cash, $223.2 million in undrawn ABL capacity, and minimal debt, providing flexibility to fund the $344.5 million Baker Hughes acquisition without equity dilution.

Competitor comparison highlights Cactus's superior profitability and efficiency. WHD's 32.9% EBITDA margin and 15.86% net margin compare favorably to NOV's 11.9% and 4.36%, FTI's 20.1% and 9.92%, and WFRD's 21.8% and 8.15%. The company's asset-light model generates 16.2% ROE with only 0.03 debt-to-equity, while peers carry 0.36-1.11 leverage. However, Cactus lags in revenue scale ($1.13B vs. NOV's $8.7B and FTI's $10.6B) and growth rate, making margin defense critical for sustaining valuation.

Outlook, Management Guidance, and Execution Risk

Management's Q4 2025 guidance reveals a company at an inflection point. Pressure Control revenue is expected to be "relatively flat" at $169 million, with EBITDA margins of 31-33%—a sequential improvement that validates the trough thesis. The commentary explicitly states that "most industry activity declines for 2025 are behind us," with the U.S. land rig count expected to drift only modestly lower through year-end. This suggests the company has successfully right-sized its cost structure to maintain profitability at a lower activity baseline.

The Spoolable Technologies outlook appears conservative, with revenue "down low double digits" sequentially due to typical seasonal patterns and margins moderating to 34-36%. However, the qualitative commentary is more optimistic: the segment achieved its highest international revenue since acquisition in Q3, and the first commercial sour service order in a major Middle East market is booked for first-half 2026 shipment. Management's "gut feeling" is that unconventional drilling in the Middle East will drive "meaningful shipments" by Q4 2026 and become a "significant contributor" in 2027.

The Baker Hughes acquisition, expected to close early 2026, transforms the geographic risk profile. The $344.5 million purchase of a 65% stake in a business heavily focused on the Middle East diversifies Cactus away from U.S. shale dependence and provides immediate access to NOC relationships and local manufacturing. Execution risks include integration complexity, cultural alignment, and the potential for international activity to lag U.S. cycles by 12 months, as management noted. The transaction will be funded from existing cash and the new $100 million delayed-draw term loan, maintaining the company's low-leverage philosophy.

Key execution variables to monitor include: (1) API 6A certification timing for Vietnam, which gates the tariff-neutralization timeline; (2) customer acceptance of cost recovery efforts, which paused in Q2 due to crude price declines but must resume to offset higher input costs; and (3) the Cameron litigation outcome, which could impact the SafeLink product line that represents an estimated 15-20% of Pressure Control revenue.

Risks and Asymmetries

The Cameron International patent infringement dispute, active since August 2021, represents the most direct threat to the investment thesis. The SafeLink frac flow system is allegedly infringing, and while the jury trial scheduled for June 2025 was delayed, legal expenses spiked in Q2 before moderating in Q3. An adverse ruling could require product redesign, royalty payments, or even a sales injunction, directly impacting Pressure Control's competitive position. The lack of a new trial date creates uncertainty that could weigh on valuation multiples until resolved.

Tariff policy remains a binary risk factor. While management has skillfully diversified sourcing, the Trump administration's implementation of 50% Section 232 tariffs and potential for further escalation creates unpredictability. If Vietnam tariffs rise above the current 50% rate or if Chinese tariffs increase beyond the current 70% incremental rate, the mid-2026 neutralization timeline could extend, compressing margins for longer than anticipated. Conversely, tariff relief would provide immediate margin expansion upside.

Customer concentration in U.S. shale markets creates vulnerability to regional downturns. While management notes that larger customers maintain significant core basin inventories and are "sticking by us," the company's revenue is still levered to a relatively small group of large E&Ps and pressure pumping companies. If these customers consolidate or shift to integrated competitors like NOV or WFRD for bundled procurement, Cactus could lose market share. The company's defense is its guarantee of delivery and sustainability, which management claims makes it "really the only supplier who can guarantee delivery" in the current environment.

Execution risk on the Vietnam ramp is material. The facility must achieve API 6A accreditation, scale production to displace Chinese sourcing, and maintain quality standards at competitive costs. Any delays would extend the period of elevated tariff exposure. However, success would create a durable cost advantage over competitors who remain reliant on Chinese imports, potentially enabling market share gains.

Valuation Context

At $45.90 per share, Cactus trades at an enterprise value of $2.75 billion, or 8.49 times trailing EBITDA. This multiple represents a discount to the 11.17x EV/EBITDA of TechnipFMC and a premium to National Oilwell Varco's 6.55x, reflecting Cactus's superior margins (32.9% vs. 11.9% and 20.1%) offset by smaller scale and growth challenges.

The company's price-to-free-cash-flow ratio of 15.17x and price-to-operating-cash-flow of 12.50x compare favorably to peers, particularly given the minimal leverage (0.03 debt-to-equity) and strong returns (16.2% ROE). The 1.22% dividend yield, supported by a 21.1% payout ratio, demonstrates capital discipline while preserving cash for strategic investments like the Baker Hughes acquisition.

Key valuation drivers include: (1) successful Vietnam ramp restoring margins to historical 30-35% EBITDA levels by mid-2026; (2) Baker Hughes acquisition contributing $150-200 million in incremental revenue with 25%+ margins by 2027; and (3) resolution of the Cameron litigation without material financial impact. Failure on any of these fronts could compress the multiple toward peer averages, implying 15-20% downside. Conversely, execution could justify expansion toward 10-11x EV/EBITDA as international growth accelerates and tariff risk dissipates.

Conclusion

Cactus stands at the intersection of margin repair and geographic transformation. The company's deliberate supply chain shift to Vietnam, combined with aggressive cost reduction, has likely marked the trough of profitability in the current cycle, with Q2 and Q3 2025 representing the nadir. Simultaneously, the Baker Hughes acquisition and sour service product line position Cactus to capture a disproportionate share of Middle East unconventional drilling growth, which management believes will become a significant contributor by 2027.

The investment thesis hinges on two variables: the pace of Vietnam production ramp and API certification, which determines when tariff-neutral margins normalize; and the successful integration of the Baker Hughes business to diversify away from U.S. shale dependence. The company's variable cost model and net cash balance sheet provide downside protection, while the patent litigation represents the primary unquantified risk.

Trading at 8.49x EV/EBITDA with 16.2% ROE and minimal debt, the market prices in successful execution but not perfection. For investors willing to underwrite management's supply chain transformation and Middle East pivot, Cactus offers a rare combination of near-term margin recovery and long-term geographic diversification in an industry starved for both.