What happened
Shares of oil and natural gas company Centennial Resource Development (PR 0.06%) fell roughly 9% in the first hour of trading on July 7. That adds to a series of slow and steady declines following a big price advance between mid-May and June. The use of the word "big" is not hyperbole, the stock was up nearly 600% at one point over that span, but is now down more than 60% from its peak.
So what
The big picture here is important. Centennial is an onshore U.S. energy company with a notable debt load (financial debt-to-equity was a frightening 13.5 times or so at the end of the first quarter). With oil prices stuck at low levels because of a massive supply/demand imbalance, thanks to the economic hard stop used to slow the spread of COVID-19, there are very real questions surrounding Centennial's ability to survive the highly cyclical industry's current downturn.
Image source: Getty Images.
In June, the economic reopening of key U.S. states gave investors hope that the worst was over. Indeed, the expectation was that energy demand would increase rapidly and oil prices would rise accordingly. That, however, hasn't panned out as expected, with many states reporting a worrisome uptick in COVID-19 cases. At best the economic recovery is going to be slow and drawn out. At worst it could actually go into reverse. Neither is good news for oil prices. It's even worse news for a heavily leveraged oil driller. Today's drop is just another sign that investors are facing the reality of what appears to be a very difficult situation.
Now what
Expect the volatility here to continue for the foreseeable future, with news flow pushing investor sentiment up and down in often dramatic fashion. Only risk-tolerant investors should be looking at Centennial Development today. And even then, there are probably other ways to gain exposure to U.S. onshore drilling that aren't nearly as risky (like industry giant Chevron, for example).
