Shares of U.S. oil and gas exploration and production company Centennial Resource Development (NASDAQ:CDEV) rose more than 6% out of the gate on Tuesday. They quickly lost around half of that gain, trading with a more modest 3% or so advance at roughly 11 a.m. EDT today. The easy answer for this up and down was the price of oil.
News that trade relations between the United States and China weren't as bad as feared sent oil prices higher in early trading. It would indeed be good news for the global economy if its two largest players found a way to get along at least a little bit better right now. But the early excitement faded and energy prices pulled back. Thus, the rise and fall of Centennial's stock price.
But the bigger issue is why Centennial is so sensitive to emotional shifts in the oil space. Essentially, the energy company has a heavy debt load that it has been struggling to carry amid low energy prices.
A perfect example of the issue is the company's decision earlier in the year to exchange debt carrying interest rates of roughly 5.4% and 6.9% for new debt that would cost it 8%. Interest rates are historically low, so the market's demand for higher rates here is a sign of company-specific financial risk. Clearly, there are problems on the balance sheet. Energy prices moving sustainably higher could be the difference between Centennial muddling through this industry rough patch or not.
Investors willing to invest here should expect volatility to continue. In fact, by recent standards, today's price move was pretty tame. Over the past month, the stock nearly doubled at one point, only to lose most of the gain. It's now up just 6% or so over that span. Such wild swings, while exciting, suggest that long-term investors should probably stay on the sidelines.