Shares of U.S. energy company Centennial Resource Development (NASDAQ:CDEV) rose over 10% at the open on Sept. 16. After quickly losing around half that advance, the stock started on another upswing, rising to a gain of 15% by around 2 p.m. EDT.
Rising oil prices is what moved this exploration and production name today. However, it's important to note that even after a 15% price advance, the stock remains 85% lower so far in 2020. It has not been a very good year for oil or the companies that drill for it, thanks in large part to demand declines related to COVID-19. Complicating things for Centennial Resource Development is a heavy debt load, with the driller's financial debt-to-equity ratio at a worryingly high 4.5 times or so. Since higher oil prices would make it much easier for the company to shoulder its debt obligations, it makes sense that the shares advanced along with oil.
That said, investors need to understand the often volatile nature of oil prices. It wasn't too long ago that the price of black gold actually fell below zero, meaning that drillers were paying customers to take their oil. While oil prices have risen from those lows, it remains at a level that is problematic for oil drillers. And, equally important, news can have a very big impact on investor sentiment today. A storm in the Gulf of Mexico, an increase or decrease in the amount of oil sitting in storage, or OPEC production changes can all lead to swift and dramatic price swings. That, in turn, can result in big stock moves for heavily indebted drillers like Centennial Resource Development. You simply can't read too much into these often temporary swings.
Centennial Resource Development is not an appropriate stock for conservative investors. In fact, most investors looking at the energy sector would probably be better off with a larger name with a stronger balance sheet, like Chevron. In the end, today's stock price advance is exciting, but it is hard to suggest that it will be a durable gain.