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Why Oasis Petroleum, Callon Petroleum, and Centennial Development All Jumped on July 10

By Reuben Gregg Brewer – Jul 10, 2020 at 6:46PM

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This trio of energy names got a big daily boost from oil prices, but that's just part of a much larger story here.

What happened

At their highs, shares of Callon Petroleum (CPE 0.76%) rose as much as 12% on July 10. Oasis Petroleum (OAS) peaked just shy of 11%. And Centennial Development (CDEV 1.63%) jumped nearly 10%. Although all three of the U.S.-focused oil and natural gas drillers were off of their highs by the end of the day, they still held on to much of their respective advances. At the close of trading, Callon was up nearly 10.5%, Oasis 6.5%, and Centennial 8%.

So what

The easy reason for the respective gains here is that West Texas Intermediate (WTI) crude oil was up notably for the day (roughly 2.2%). That's the key metric for these drillers, which all operate in the onshore U.S. space. And since their top and bottom lines are dependent on the price of the commodities they sell, it's hardly surprising that investors would bid their stocks up on a strong day for WTI crude prices.   

A woman in front of oil wells

Image source: Getty Images.

But there's more to the picture here than meets the eye. All three of these exploration and production companies are relatively small. Callon is the largest, with a market cap of $450 million or so. Centennial and Oasis both sit near the $230 million space. Their stock prices range between $0.70 a share (Oasis) and roughly $1.15 (Callon). Penny stocks are prone to big price moves, since a relatively modest absolute change can translate into a large percentage move. 

In fact, volatility has been the norm for these stocks lately. At one point in the last three months, Oasis, Centennial, and Callon were each up several hundred percent. Since peaking in early June, however, the stocks have now lost 50% or more of those gains. Clearly, investors are pushing the stocks up and down in dramatic fashion. Which brings up another key factor that investors need to watch: Oasis, Centennial, and Callon all have heavily leveraged balance sheets.   

Callon's financial debt-to-equity ratio is roughly 9.7 times today. That's a troubling number, especially for a company that sells a commodity that's prone to swift and dramatic price swings. The things is, Centennial and Oasis have financial debt-to-equity ratios that are even higher, at roughly 13.5 times and 15 times, respectively. There are legitimate concerns that the leverage these companies are carrying could push them to follow companies like Chesapeake Energy into bankruptcy court. That would likely wipe stock investors out, even if the companies continue to operate over the long term. 

CPE Financial Debt to Equity (Quarterly) Chart

CPE Financial Debt to Equity (Quarterly) data by YCharts.

So a part of the stock advance is related to oil. But another part is related to the fact that higher oil prices will make it easier for this trio to deal with the elevated leverage they are carrying. 

Now what

Oasis Petroleum, Callon Petroleum, and Centennial Development are not the kinds of stocks that conservative investors should be looking at today. That said, if you are a value-oriented investor considering energy names because the industry is deeply out of favor right now, there are other names you might want to consider. One of the best options is likely $160 billion market cap integrated energy giant Chevron, which has a modest financial debt-to-equity ratio of 0.25 times (dramatically lower than this trio) and also has a sizable position in the U.S. onshore space. It's not exactly an apples to apples comparison, since Chevron has exposure from the upstream (drilling) arena to the downstream (chemicals and refining) space, but that broad diversification is actually part of the allure, if you like to sleep well at night. 

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.

Stocks Mentioned

Oasis Petroleum Stock Quote
Oasis Petroleum
Callon Petroleum Stock Quote
Callon Petroleum
$41.23 (0.76%) $0.31
Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
$9.95 (1.63%) $0.16

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

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