Please ensure Javascript is enabled for purposes of website accessibility

Why Centennial Resource Development Shot Higher Early on June 16

By Reuben Gregg Brewer – Jun 16, 2020 at 11:43AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Hints of positive economic news had investors feeling upbeat about the oil and gas driller's prospects, but it didn't take long for the market's enthusiasm to cool.

What happened

Shares of onshore U.S. exploration and production company Centennial Resource Development (CDEV 10.00%) shot higher at the open Tuesday, gaining nearly 20% in the first few minutes of the trading day. What's interesting is that the story was almost exactly the opposite just one day earlier, when the oil and gas driller's stock fell nearly 15% within 15 minutes of the open.

So what

The headwind at the start of trading Monday was the falling price of oil. Tuesday morning, the tailwind was the rising price of oil, and if you feel a bit whipsawed by the shifts here, you aren't alone. Trading in the energy space has been highly volatile lately. The list of positives factors driving it higher Tuesday included strong retail sales reports (suggesting a solid economic recovery from the impacts of COVID-19), hints that the U.S. government might announce a large infrastructure spending plan, and upbeat news about a coronavirus treatment.   

Fingers flipping a die that says short and long with dice spelling term next to it

Image source: Getty Images

The problem, of course, is that any of that news could just as easily be overshadowed by updates that investors think have negative implications. In which case, investors' optimism that oil's supply/demand imbalance is on track to resolve could rapidly shift back to pessimism. Crude oil prices would fall anew, likely taking Centennial Development's shares down along with them. Since the exploration and production company's revenues and earnings are pretty much dictated by energy prices, that makes sense even if the market's incredibly swift and energetic mood shifts don't. The problem here is that the dramatic supply/demand dislocation that arose as COVID-19 spread is unlikely to be remedied easily or quickly. Investors focusing too much on the near term are probably making a mistake.

On that front, Centennial presented at an online conference Tuesday. However, its update doesn't change the big picture. The exploration and production company remains heavily in debt as it muddles along in an extremely difficult near-term energy market. And long term, there are real reasons to be worried about the driller's future.  

Now what

Tuesday's sharp gain, like the decline on Monday, didn't hold. By 11:20 a.m. EDT, Centennial Resource Development's stock was only up by 4.5% -- still a healthy price advance, but well below the nearly 20% uptick it took earlier. With the market's traders alternating frequently between risk-on and risk-off sentiments, investors should really double down on the long term, and act based on timelines of a year or more rather than focusing on the market's minute-to-minute mood swings. When you look at Centennial through a long-term lens, the risks largely involve how management will deal with its weak balance sheet. That said, all investors should anticipate continued price volatility in the near term, even if that doesn't have much of an impact on the company's long-term viability. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
$7.48 (10.00%) $0.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.