Cactus, Inc.: Form 10-Q for the period ended Jun 30, 2018

Except as otherwise indicated or required by the context, all references in this Quarterly Report to the “Company,” “Cactus,” “we,” “us” and “our” refer to (i) Cactus, Inc. (“Cactus Inc.”) and its consolidated subsidiaries (including Cactus LLC) following the completion of our initial public offering on February 12, 2018 (our “IPO”), unless we state otherwise or the context otherwise requires and (ii) Cactus Wellhead, LLC (“Cactus LLC”) and its consolidated subsidiaries prior to the completion of our IPO. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited 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 Statement 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 (including fracturing) 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.

Our principal products include our Cactus SafeDrill™ wellhead systems, as well as frac stacks, zipper manifolds and production trees that we design and manufacture. Every oil and gas well requires a wellhead, which is installed at the onset of the drilling process and which remains with the well through its entire productive life. The Cactus SafeDrill™ wellhead systems employ technology which allows technicians to land and secure casing strings more safely from the rig floor reducing the need to descend into the cellar. We believe we are a market leader in the application of such technology, with thousands of our products sold and installed across the United States since 2011. During the completion phase of a well, we rent frac stacks, zipper manifolds and other high‑pressure equipment that are used for well control and for managing the transmission of frac fluids and proppants during the hydraulic fracturing process. These severe service applications require robust and reliable equipment. For the subsequent production phase of a well, we sell production trees that regulate hydrocarbon production, which are installed on the wellhead after the frac stack has been removed. In addition, we provide mission‑critical field services for all of our products and rental items, including 24‑hour service crews to assist with the installation, maintenance and safe handling of the wellhead and pressure control equipment. Finally, we provide repair services for all of the equipment that we sell or rent.

Our innovative wellhead products and pressure control equipment are developed internally. We believe our close relationship with our customers provides us with insight into the specific issues encountered in the drilling and completion processes, allowing us to provide them with highly tailored product and service solutions. We have achieved significant market share, as measured by the percentage of total active U.S. onshore rigs that we follow (which we define as the number of active U.S. onshore drilling rigs to which we are the primary provider of wellhead products and corresponding services during drilling), and brand name recognition with respect to our engineered products, which we believe is due to our focus on safety, reliability, cost effectiveness and time saving features. We optimize our products for pad drilling (i.e., the process of drilling multiple wellbores from a single surface location) to reduce rig time and provide operators with significant efficiencies that translate to cost savings at the wellsite.

Our manufacturing and production facilities are located in Bossier City, Louisiana and Suzhou, China. While both facilities can produce our full range of products, our Bossier City facility has advanced capabilities and is designed to support time‑sensitive and rapid turnaround orders, while our facility in China is optimized for longer lead time orders and outsources its machining requirements. Both our United States and China facilities are licensed to the latest API 6A specification for both wellheads and valves and API Q1 and ISO9001:2015 quality management systems.

We operate 15 service centers in the United States, which are strategically located in the key oil and gas producing regions, including the Permian, SCOOP/STACK, Marcellus, Utica, Eagle Ford, Bakken and other active oil and gas regions in the United States. We also have one service center in Eastern Australia. These service centers support our field services and provide equipment assembly and repair services.

Market Factors and Trends

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 and 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 worldwide, which have historically been volatile.

Through June 30, 2018, the year-to-date weekly average U.S. onshore rig count as reported by Baker Hughes was 983 rigs. The weekly average U.S. onshore rig count for the full year 2017 was 853 rigs. These rig counts are a material increase relative to the full year 2016 weekly average of 483 rigs.

The key market factor impacting our product sales is the number of wells drilled, as each well requires an individual wellhead assembly, and after completion, the installation of an associated production tree. We measure our product sales activity levels versus our competitors’ by the number of rigs that we are supporting on a monthly basis as a proxy for 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 our customer is operating. While these factors may lead to differing revenues per rig, they allow us to forecast our product needs and anticipated revenue levels based on general trends in a given region and with a specific customer.

Our rental revenues are primarily dependent on the number of wells completed (i.e., hydraulically fractured) and the number of fracture stages per well. Rental revenues and prices are more dependent on overall industry activity levels in the short‑term than product sales. This is due to the more competitive and price‑sensitive nature of the rental market with more participants having access to completions‑focused rental equipment. We believe that as the market increases in activity levels and as capacity becomes more constrained due to cannibalization of both rental and hydraulic fracturing service equipment, the pricing of completions‑focused pressure control rental equipment will be less of a factor due to a renewed focus on availability, reliability and quality. Furthermore, we believe that the current number of drilled but uncompleted wells (“DUCs”) and any increases thereto, particularly resulting from near-term takeaway issues, could ultimately provide additional opportunities although we recognize that not all DUCs may be completed.

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. Nearly all service sales are offered in connection with a product sale or rental. Therefore, the market factors and trends of product sales and rental revenues similarly impact the associated levels of service and other revenues generated.

How We Generate Our Revenues

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 our products on their wellsite. Items sold or rented generally have an associated service component. As a result, there is some level of correlation between field service and other revenues and revenues from product sales and rentals.

In the six months ended June 30, 2018, we derived 52% of our total revenues from the sale of our products, 25% of our total revenues from rental and 23% of our total revenues from field service and other. In the six months ended June 30, 2017, we derived 56% of our total revenues from the sale of our products, 23% of our total revenues from rental and 21% of our total revenues from field service and other. We have predominantly domestic operations, with 99% of our total sales for the six months ended June 30, 2018 and 2017, respectively, earned from U.S. operations.

Substantially all of our sales are made on a call‑out basis, wherein our clients issue requests for goods and/or services as their operations require. Such goods and/or services are most often priced in accordance with a preapproved price list.

Generally, we attempt to raise prices as our costs increase or additional features are provided. However, the actual pricing of our products and services is impacted by a number of factors, including competitive pricing pressure, the level of utilized capacity in the oil service sector, capital discipline within our client base, maintenance of market share and general market conditions.

Costs of Conducting Our Business

The principal elements of cost of sales for products are the direct and indirect costs to manufacture and supply the product, including labor, materials, machine time, lease expense related to our facilities and freight. The principal elements of cost of sales for rentals are the direct and indirect costs of supplying rental equipment, including depreciation, repairs specifically performed on such rental equipment and freight. The principal elements of cost of sales for field service and other are labor, equipment depreciation and repair, equipment lease expense, fuel and supplies.

Selling, general and administrative expense is comprised of costs such as sales and marketing, engineering expenses, general corporate overhead, business development expenses, compensation expense, stock-based compensation expense, IT expenses, safety and environmental expenses, legal and professional expenses and other related administrative functions.

Interest expense, net is currently comprised primarily of interest expense associated with our revolving credit facility and capital leases and on a historical basis included interest expense associated with our term loan facility. A portion of the net proceeds of our IPO were used to repay the borrowings outstanding under our term loan facility in February 2018.

Factors Affecting the Comparability of Our Financial Condition and Results of Operations

Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons:

• Selling, General and Administrative Expenses. We expect to incur additional selling, general and administrative expenses as a result of being a publicly traded company. These costs include expenses associated with our annual and quarterly reporting, tax return preparation expenses, Sarbanes‑Oxley compliance expenses, audit fees, legal fees, directors and officers insurance, investor relations expenses, TRA administration expenses and registrar and transfer agent fees. We also expect to incur greater stock-based compensation expense related to equity awards granted by Cactus Inc. These increases in selling, general and administrative expenses are not reflected in our historical financial statements prior to our IPO, other than a portion of these costs incurred in 2017 in preparation of becoming a public company and historical compensation expense related to equity awards granted as a private company.
• Corporate Reorganization. The historical consolidated financial statements are based on the financial statements of our accounting predecessor, Cactus LLC and its subsidiaries, prior to our reorganization in connection with our IPO. As a result, the historical consolidated financial data may not provide an accurate indication of what our actual results would have been if such transactions had been completed at the beginning of the periods presented or of what our future results of operations are likely to be. In addition, we entered into a TRA with the TRA Holders. This agreement generally provides for the payment by us to the TRA Holders of 85% of the net cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we actually realize or are deemed to realize in certain circumstances in periods after our IPO as a result of certain increases in tax basis and imputed interest. We will retain the benefit of the remaining 15% of such net cash savings. See Note 2 of the Notes to Consolidated Financial Statements
• Income Taxes. Cactus Inc. is a corporation under Internal Revenue Code (the “Code”) and is subject to U.S. federal and state income taxes (currently at a statutory rate of 21% of pretax earnings, as adjusted by the Code), as well as state, local and franchise income taxes, on its share of income of Cactus LLC. Consequently, we will report income tax expense or benefit attributable to U.S. federal income taxes for

periods following our IPO. Our accounting predecessor is a limited liability company that is treated as a partnership for U.S. federal income tax purposes, and therefore is not subject to U.S. federal income taxes. Accordingly, no provision for U.S. federal income taxes has been provided for in our historical results of operations prior to our IPO because taxable income was passed through to Cactus LLC’s members.

• Long‑term Incentive Plan. To incentivize individuals providing services to us or our affiliates, our board adopted a long‑term incentive plan prior to the completion of our IPO. The LTIP provides for the grant, from time to time, at the discretion of our board of directors or a committee thereof, of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents, other stock‑based awards, cash awards, substitute awards and performance awards. Any individual who is our officer or employee or an officer or employee of any of our affiliates, and any other person who provides services to us or our affiliates, including members of our board of directors, will be eligible to receive awards under the LTIP at the discretion of our board of directors. In connection with our IPO, we issued 0.7 million restricted stock unit awards, which will vest over one to three years, to certain of our directors, officers and employees. In May 2018, we issued awards of less than 0.1 million restricted stock units that will vest over seven years. We will recognize stock-based compensation expense, starting in 2018, over the vesting terms related to the respective issuance.
• Non-controlling Interest. As a result of our IPO and Reorganization, Cactus Inc. is the sole managing member of Cactus LLC and consolidates entities in which it has a controlling financial interest. The Reorganization was considered a transaction between entities under common control. As a result, the financial statements for periods prior to our IPO and the Reorganization have been adjusted to combine the previously separate entities for presentation purposes. However, Cactus Inc. had no operations or assets and liabilities prior to our IPO. As such, for periods prior to the completion of our IPO, the consolidated financial statements represent the historical financial position and results of operations of Cactus LLC and its subsidiaries. For periods after the completion of our IPO, the financial position and results of operations include those of Cactus and report the non-controlling interest related to the portion of CW Units not owned by Cactus Inc. All Class B common stock is held by non-controlling interest owners.

Consolidated Results of Operations

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

The following table presents summary consolidated operating results for the periods indicated:

(in thousands)

23

Revenues

Product revenue for the three months ended June 30, 2018 was $73.3 million, an increase of $28.0 million, or 62%, from $45.2 million for the three months ended June 30, 2017. The increase was primarily attributable to an increase in U.S. onshore activity as measured in wells compared to the same period in 2017. The quarterly average U.S. onshore rig count increased 17% to 1,017 rigs for the three months ended June 30, 2018 compared to 870 rigs for the same period in 2017. Additionally, the number of rigs followed by Cactus increased 25% to 264 rigs during the second quarter 2018 compared to 211 rigs for the second quarter 2017. The term “rigs followed” represents the approximate number of active U.S. onshore drilling rigs to which we were the primary provider of wellhead products and corresponding services during drilling. Product revenue has historically tracked the rig count and has increased significantly due to the greater number of rigs and drilling activity conducted onshore in the U.S. including the increase in the number of wells being drilled. We have also seen an increase in the sale of production trees as more wells are put on production.

Rental revenue for the three months ended June 30, 2018 was $34.9 million, an increase of $16.1 million, or 86%, from $18.8 million for the three months ended June 30, 2017. The increase was primarily attributable to higher utilization related to increased demand placed on our rental fleet and the significant increase in the capacity of our rental fleet.

Field service and other revenue for the three months ended June 30, 2018 was $30.3 million, an increase of $12.5 million, or 70%, from $17.8 million for the three months ended June 30, 2017. The increase was primarily attributable to higher demand for these services following the increase in our product and rental revenue, as field service is closely correlated with both of these activities.

Costs and expenses

Cost of product revenue for the three months ended June 30, 2018 was $45.0 million, an increase of $15.5 million, or 53%, from $29.5 million for the three months ended June 30, 2017. The increase was largely attributable to an increase in product sales volume as a result of the higher demand for our products. Gross profit improved period over period due to the increased sourcing of product from our Suzhou facility as well as better operating efficiencies.

Cost of rental revenue for the three months ended June 30, 2018 was $14.0 million, an increase of $4.7 million, or 51%, from $9.2 million for the three months ended June 30, 2017. The increase was primarily due to higher depreciation expense and repair costs associated with a larger, more active rental fleet. Gross profit improved period over period due to better utilization of our fleet as a result of increased completions activity.

Cost of field service and other revenue for the three months ended June 30, 2018 was $23.2 million, an increase of $9.5 million, or 69%, from $13.8 million for the three months ended June 30, 2017. The increase was primarily attributable to higher payroll costs due to additional field personnel and higher operating costs due to activity increases.

Selling, general and administrative expense for the three months ended June 30, 2018 was $9.9 million, an increase of $2.5 million, or 34%, from $7.3 million for the three months ended June 30, 2017. The increase was primarily due to higher payroll and incentive compensation costs associated with our overall growth, as well as higher stock-based compensation expense related to equity awards and other costs associated with being a public company.

Interest expense, net. Interest expense, net for the three months ended June 30, 2018 was $0.2 million, a decrease of $4.9 million, or 95%, from $5.2 million for the three months ended June 30, 2017. The decrease is due to the repayment of our term loan in mid-February 2018 in connection with our IPO.

Income tax expense. Cactus Inc. is subject to federal as well as state income tax on its share of income of Cactus LLC. Our operations prior to our IPO were not subject to U.S. federal income tax at an entity level. Income tax expense for the three months ended June 30, 2018 was $4.7 million (10.2% effective tax rate) compared to $0.3 million (1.8% effective tax rate) for the three months ended June 30, 2017. The change was primarily attributable to Cactus Inc. incurring U.S. federal income tax on its share of income of Cactus LLC during the quarter. The effective tax rate is lower than the federal statutory rate of 21% as Cactus Inc. is only subject to federal and state income tax on its share of income of Cactus LLC. As of June 30, 2018, Cactus Inc. owned 35.3% of Cactus LLC.

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

The following table presents summary consolidated operating results for the periods indicated:

(in thousands)

Revenues

Product revenue for the six months ended June 30, 2018 was $132.2 million, an increase of $53.9 million, or 69%, from $78.3 million for the six months ended June 30, 2017. The increase was primarily attributable to a significant increase in U.S. onshore activity compared to the same period in 2017. Overall, the number of drilling rigs operating has increased significantly as well as the number of wells drilled, which has increased the volume of our wellhead sales. We have also seen an increase in the sale of production trees as more wells are put on production.

Rental revenue for the six months ended June 30, 2018 was $64.1 million, an increase of $32.3 million, or 102%, from $31.8 million for the six months ended June 30, 2017. The increase was primarily attributable to higher utilization related to increased demand for our growing rental fleet and higher pricing.

Field service and other revenue for the six months ended June 30, 2018 was $57.4 million, an increase of $27.0 million, or 89%, from $30.3 million for the six months ended June 30, 2017. The increase was primarily attributable to higher demand for these services following the increase in our product and rental revenue, as field service is closely correlated with both of these activities.

Costs and expenses

Cost of product revenue for the six months ended June 30, 2018 was $82.1 million, an increase of $29.4 million, or 56%, from $52.7 million for the six months ended June 30, 2017. The increase was largely attributable to an increase in product sales volume as a result of higher demand for our products.

Cost of rental revenue for the six months ended June 30, 2018 was $26.1 million, an increase of $8.6 million, or 49%, from $17.5 million for the six months ended June 30, 2017. The increase was primarily due to higher depreciation expense and repair costs associated with a larger, more active fleet.

Cost of field service and other revenue for the six months ended June 30, 2018 was $44.8 million, an increase of $20.1 million, or 81%, from $24.7 million for the six months ended June 30, 2017. The increase was primarily attributable to higher payroll costs due to additional field personnel and higher operating costs due to activity increases.

Selling, general and administrative expense for the six months ended June 30, 2018 was $19.0 million, an increase of $5.5 million, or 41%, from $13.4 million for the six months ended June 30, 2017. The increase was primarily due to higher payroll and incentive compensation costs associated with our overall growth, as well as higher stock-based compensation expense related to equity awards issued in conjunction with our IPO.

Interest expense, net. Interest expense, net for the six months ended June 30, 2018 was $3.1 million, a decrease of $7.1 million, or 70%, from $10.2 million for the six months ended June 30, 2017. The decrease is due to the repayment of our term loan in mid-February 2018 in connection with our IPO.

Other income (expense), net. Other income (expense), net for the six months ended June 30, 2018 relates to a $4.3 million loss on debt extinguishment related to the write off of the unamortized balance of debt discount and deferred loan costs in connection with the repayment of our term loan with a portion of the net proceeds of our IPO.

Income tax expense. Income tax expense for the six months ended June 30, 2018 was $6.3 million (8.5% effective tax rate) compared to $0.5 million (2.1% effective tax rate) for the six months ended June 30, 2017. The change was primarily attributable to Cactus Inc. incurring U.S. federal income tax on its share of income of Cactus LLC during the period subsequent to our IPO in 2018.

Liquidity and Capital Resources

In February 2018, we completed our IPO. We received net proceeds of $469.6 million from the sale of 26,450,000 shares of Class A common stock in our IPO (including the sale of 3,450,000 additional shares of Class A common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares of Class A common stock (the “Option”)). We contributed all of the net proceeds of our IPO and the Option to Cactus LLC in exchange for CW Units. Cactus LLC used (i) $251.0 million of the net proceeds to repay all of the borrowings outstanding, plus accrued interest, under our term loan facility and (ii) $216.4 million to redeem CW Units from certain direct and indirect owners of Cactus LLC. The remaining $2.2 million was held by Cactus LLC to cover previously paid offering expenses.

In July 2018, we closed a public follow-on offering of 11,196,562 shares (including 10,000,000 base shares and 1,196,562 shares pursuant to the underwriters’ option to purchase additional shares) of Class A common stock and received $359.3 million of net proceeds. Cactus Inc. contributed the net proceeds to Cactus LLC in exchange for CW Units. Cactus LLC then used the net proceeds to redeem 11,196,562 CW Units from certain of the other owners of Cactus LLC and canceled corresponding shares of Class B common stock. No proceeds from this follow-on offering were retained by Cactus.

We expect that our primary sources of liquidity and capital resources will be cash flows generated by operating activities and borrowings under our revolving credit facility. Depending upon market conditions and other factors, we may also have the ability to issue additional equity and debt if needed.

Our ability to satisfy our liquidity requirements, including cash distributions to the holders of CW Units to fund their share of taxes of the partnership and liabilities related to the TRA, depends on our future operating performance, which is affected by prevailing economic conditions, market conditions in the E&P industry, availability and cost of raw materials, and financial, business and other factors, many of which are beyond our control.

We currently estimate that our net capital expenditures for the year ending December 31, 2018 will range from $50 million to $60 million, excluding acquisitions. We accelerated and expanded our investments in frac equipment in response to increasing opportunities and client demands, and we are expanding certain facilities. We continuously evaluate our capital expenditures, and the amount we ultimately spend will depend on a number of factors, including, among other things, demand for rental assets, market opportunities, prevailing economic conditions, the condition of our existing assets, market conditions in the E&P industry, customers’ forecasts, demand volatility, available capacity and company initiatives. We believe that our existing cash on hand, cash generated from operations and available borrowings under our revolving credit facility will be sufficient to meet working capital requirements, anticipated capital expenditures, expected cash distributions to the holders of CW Units and anticipated tax liabilities for at least the next 12 months.

At June 30, 2018 and December 31, 2017, we had $28.4 million and $7.6 million, respectively, of cash and cash equivalents and $50.0 million and $50.0 million, respectively, of available borrowing capacity under our revolving credit facility. As of June 30, 2018, there were no borrowings outstanding under the revolving credit facility.

Prior to our IPO, on January 25, 2018, Cactus LLC paid a cash distribution of $26.0 million to its pre-IPO owners. This distribution was funded by borrowing under the revolving credit facility. The purpose of the distribution was to provide funds to these owners to pay their federal and state tax liabilities associated with taxable income recognized by them in the period prior to the completion of our IPO as a result of their ownership interests in Cactus LLC. The borrowings under the revolving credit facility were repaid during the first quarter of 2018. During the second quarter of 2018, Cactus LLC paid a pro rata distribution of $4.2 million to its other members, which was funded by cash flow generated from operating activities.

Cash Flows

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

The following table summarizes our cash flows for the periods indicated:

(in thousands)

Net cash provided by operating activities was $80.7 million and $6.4 million for the six months ended June 30, 2018 and 2017, respectively. The primary reasons for the increase were a $46.5 million increase in net income and a $13.5 million period over period improvement in net working capital due to improved collections during the six months ended June 30, 2018. We also had an increase of $14.3 million in non-cash items primarily related to the $4.3 million loss on debt extinguishment recorded in conjunction with the repayment of our term loan, $3.1 million of additional depreciation, $2.1 million related to stock-based compensation expense and $4.0 million difference in deferred income taxes.

Net cash used in investing activities was $31.3 million and $15.9 million for the six months ended June 30, 2018 and 2017, respectively. The primary reason for the increase was higher capital expenditures during 2018 related to our rental fleet to meet the increased customer demand for our frac equipment.

Net cash used in financing activities was $28.4 million for the six months ended June 30, 2018 compared to net cash provided by financing activities of $2.9 million for the same period in 2017. The primary reason for the change was the receipt of $469.6 million of net proceeds from our IPO and the Option, offset by (i) a $248.5 million repayment of the borrowings outstanding under our term loan and (ii) $216.4 million in redemptions of CW Units from certain direct and indirect owners of Cactus LLC in connection with our IPO. Additionally, we made $30.3 million in distributions to Cactus LLC members to provide funds to pay their federal and state liabilities associated with taxable income recognized by them as a result of their ownership in Cactus LLC.

Credit Agreement

On July 31, 2014, Cactus LLC entered into a credit agreement collateralized by substantially all of its assets, consisting of a $275.0 million Tranche B term loan and $50.0 million revolving credit facility with a $10.0 million sublimit for letters of credit. In conjunction with the completion of our IPO in February 2018, we repaid the term loan in full. There was $248.5 million outstanding on the term loan as of December 31, 2017. As of June 30, 2018 and December 31, 2017, no amounts were outstanding on the revolving loans and no letters of credit were outstanding. We may borrow and repay the revolving loans in accordance with the terms of the credit agreement. A commitment fee is payable quarterly on the unused portion of the revolving credit facility. Interest on the revolving loans is payable in arrears for each draw fixed at an adjusted base rate plus an applicable margin, as defined in the credit agreement. The revolving loans portion of the credit agreement matures on July 31, 2019. Amounts outstanding under the credit agreement may be voluntarily prepaid, in whole or in part, without premium or penalty, in accordance with the terms of the credit agreement and subject to breakage and similar costs.

The credit agreement contains various restrictive covenants that may limit our ability to incur additional indebtedness and liens, make or declare dividends, or enter into certain transactions, and contains a total leverage financial covenant related only to the revolving loans once a total of $15.0 million or more has been drawn on the revolving loans. Based on this total leverage financial covenant, availability under the revolving credit facility can be limited to $15.0 million. At June 30, 2018, we had access to the full $50.0 million revolving credit facility capacity. At June 30, 2018 and December 31, 2017, we were in compliance with the covenants in the credit agreement.

Contractual Obligations

A summary of our contractual obligations as of June 30, 2018 is provided in the following table:

(in thousands)

(1) Operating lease obligations relate to real estate, vehicles and equipment.

(2) Capital lease obligations relate to vehicles used in our business.

(3) Represents obligations by Cactus to make payments under the TRA. The amount and timing of payments is subject to change. In connection with the follow-on offering of Class A common stock in July 2018, this liability will increase significantly.

Off-Balance Sheet Arrangements

Currently, we do not have off-balance sheet arrangements.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A., “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Annual Report”). Our exposure to market risk has not changed materially since December 31, 2017.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2018 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the second quarter of 2018 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other risk factors and information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our 2017 Annual Report and the risk factors and other cautionary statements contained in our other filings with the Securities and Exchange Commission, which could materially affect our business, results of operations, financial condition or cash flows. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, results of operations, financial condition or cash flows. There have been no material changes in our risk factors from those described in our 2017 Annual Report or our other Securities and Exchange Commission filings other than as set forth below:

The outcome of final actions under Section 301 of the Trade Act of 1974 may adversely affect our business.

On March 22, 2018 the President of the United States announced his decisions on the actions that the U.S. government will take based on the findings of an investigation under Section 301 of the Trade Act of 1974. These actions include a proposed 25 percent tariff on approximately $50 billion worth of imports from China, pursuit of dispute settlement in the World Trade Organization and restrictions on investment in the United States directed or facilitated by China. On June 20, 2018 the U.S. Trade Representative (“USTR”) released the list of products imported from China to be subject to these additional tariffs. The initial U.S. tariffs were implemented on July 6, 2018 covering $34 billion worth of Chinese goods, with another $16 billion of goods facing tariffs by late this summer, following a notice and comment period. In response to the initial U.S. action, the government of China specified that it would impose an additional 25 percent tariff on U.S. goods with a value of $50 billion. In response to China’s announcement, the President issued a statement directing the USTR to identify another $200 billion worth of Chinese goods for additional tariffs at a rate of 10 percent. The USTR issued a proposed list of products to be subject to an additional 10 percent tariff on July 17, 2018 and has invited public comment on this supplemental action. The outcome of final actions under Section 301 and related developments is uncertain. To the extent these actions result in a decrease in demand for our products, our business may be adversely impacted. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of these trade actions on our operations or results remains uncertain.