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Why Centennial Resource Development Jumped 6% in Early Trading Today

By Reuben Gregg Brewer – Updated Oct 5, 2020 at 10:37AM

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The U.S. onshore driller got a boost from exactly what you'd expect. But that doesn't change the big picture.

What happened

Shares of U.S. oil and natural gas exploration and production (E&P) company Centennial Resource Development (CDEV -0.39%) rose a quick 6% in the first half hour of trading on Oct. 5. That gain didn't hold, however, with the stock sitting at a roughly 3.5% gain by around 10:30 a.m. EDT. 

So what

Centennial's top and bottom lines depend heavily on the price of the commodities it produces. Oil and natural gas, however, have a tendency to be volatile and, at the moment, are hovering at relatively low levels. In fact, it's hard for many E&P names to turn a profit right now. The quick advance in the stock price was likely driven by a sizable jump in the price of oil and natural gas, which makes complete sense. But that isn't the whole picture.

A man standing in front of an oil rig with tablet in his hand

Image source: Getty Images

Even after today's sizable price gain, West Texas Intermediate Crude, a key U.S. oil benchmark, is still trading below $40 per barrel, and natural gas also remains historically low. This is not a great environment for drillers, particularly small ones with a lot of leverage. Centennial's market cap is just $170 million and its financial debt-to-equity ratio is a weighty 4.5 times or so. Rising energy prices are good to see, particularly since the sector ended last week on a weak note. But the headwinds facing Centennial haven't changed one bit, which Wall Street seems to have quickly recognized following a brief burst of excitement.   

Now what

Centennial Resource Development is operating in a difficult environment and from a position of relative weakness (it's small and leveraged). Most investors looking at the energy sector would likely be better off with a larger company that has a stronger financial foundation. A good starting point on that score would be Chevron, which is one of the largest, most diversified, and most fiscally prudent integrated oil majors you can find right now.

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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