What happened
Shares of U.S. onshore energy producer Centennial Resource Development (CDEV +1.84%) fell roughly 5% in the first hour of trading on Monday. Although there was no material news out of the company and oil prices were relatively tame, there was one thing that might have tipped the scales of investor sentiment to the negative side.
So what
Centennial Resource Development is an exploration and production company with a fairly balanced mix of oil and natural gas. Black gold made up around 55% of production in the second quarter, with natural gas basically chipping in the rest. That said, 45% is a pretty big number. So, with natural gas prices off by around 5% in early trading today, it was not exactly surprising to see Centennial's shares fall as well.
Image source: Getty Images.
But the bigger-picture issue here is equally relevant. Centennial Resource Development's balance sheet is debt heavy, with the company showing a financial-debt-to-equity ratio of about 4.5 times. Notably, the oil and gas driller's earnings aren't covering its trailing-12-month interest costs because of the lingering coronavirus-related downturn in energy prices. In a highly leveraged situation like this, a drawn-out period of weak energy prices could become a notable problem, with investors perhaps justifiably worried about the company's long-term viability. Thus, moves in oil and natural gas prices can have a dramatic effect on investor sentiment.
Now what
Centennial Resource Development is facing a pair of major headwinds in low commodity prices, which it can't do much about, and a debt-heavy balance sheet, which is a bit of a self-inflicted wound. At this point, only aggressive investors should be looking at this name, with volatility like Monday's highly likely to continue for the foreseeable future.
