What happened
Shares of onshore U.S. exploration and production company Centennial Resource Development (PR 0.06%) 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.
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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.
