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Why Centennial Resource Development Dropped Nearly 7% in Early Trading Today

By Reuben Gregg Brewer – Sep 29, 2020 at 11:18AM

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Although it was a material price move, the truth is that Centennial's drop today is just par for the course lately. Here's why.

What happened

Shares of U.S. exploration and production (E&P) company Centennial Resource Development (CDEV 7.09%) fell nearly 7% in the first hour of trading on Sept. 29. There was no particular news out of the company, so investors were likely reacting to commodity prices. But there's a bit more to the story than just that. 

So what

Centennial is a relative small fry in the energy sector, with a market cap of only $170 million or so. It also has a material amount of debt, leaving it with a financial debt-to-equity ratio of roughly 4.5 times. That's not a particularly comforting number for any company, let alone a tiny one, so investors tend to react a bit more dramatically to the ups and downs of oil and natural gas. And in early trading today, oil is down and natural gas is down even more. Thus, it's not surprising that investors were a bit negative here today.  

A pair of hands stained with oil

Image source: Getty Images.

That said, the penny stock was up materially yesterday on the news of a merger of equals between fellow E&Ps Devon Energy and WPX Energy. A key piece of that deal is that it allows Devon to gain scale in the Delaware Basin, which happens to be where Centennial operates. Investors likely bid the shares of Centennial up thinking that, perhaps, it might get bought out if the U.S. energy sector continues to consolidate. So the drop today was likely driven in part by weak energy prices and maybe a bit of a giveback on the previous day's speculative gains.

Now what

The price of Centennial Resource Development bounces around a fair amount these days. A bit of industry news or a shift in oil and gas prices is all it takes to push the stock materially higher or lower. It's not a great call for conservative investors looking to sleep through the night. In the end, today's drop is really no more telling of the future here than yesterday's gain. The only thing you can really count on is that there will be more price swings.

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.

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Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
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