Shares of U.S. onshore exploration and production company Centennial Resource Development (NASDAQ:CDEV) were higher by 14% at 11 a.m. EDT on Sept. 28. There wasn't any material news out about the driller, but there was some other industry news that might have gotten a few investors excited here.
One of the big headlines in the energy industry today is that WPX Energy and Devon Energy are merging. Both are onshore U.S. drillers, like Centennial. And the fact that the pair has agreed to combine suggests that consolidation in the U.S. oil patch is still a very real trend. It's not unrealistic that investors might be thinking that Centennial could end up a target at some point as well.
Centennial is relatively small, sporting a market cap of around $180 million. That wouldn't be too hard for a larger company to swallow. Moreover, with a financial debt-to-equity ratio of roughly 4.5 times, it's carrying a lot of leverage. So management might be willing to make a deal, particularly if oil prices remain moribund. And Centennial has been able to cut costs to the point where it expects to be able to cover its capital expenses out of cash flow in the second half of 2020. That might make it an interesting proposition for an acquirer looking to expand in the company's core Delaware Basin region. Of course this is just speculation, since Centennial is a penny stock and it doesn't take much of a price move to create a sizable percentage point move. So today could also just be normal volatility, too.
Investors shouldn't buy Centennial Resource Development based on a single day's price move. The stock is highly volatile, with company news, energy prices, and sometimes nothing specific at all leading to big price gains -- and losses. In fact, heightened volatility is probably the only certainty investors can count on right now with regard to Centennial. Most investors looking at the energy space would probably be better off sticking with a larger, more established name, like Chevron, than betting on an industry small fry during a deep energy sector downturn.