Please ensure Javascript is enabled for purposes of website accessibility

Why Centennial Resource Development, Antero Resources, and Contango Oil & Gas Rallied at the Open Today

By Reuben Gregg Brewer - Feb 16, 2021 at 11:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The big story was Texas and the impact it had on the energy sector, which was, indeed, sizable.

What happened

Shares of Centennial Resource Development (CDEV -4.95%) rose a quick 10% at the open on Feb. 16. Antero Resources (AR -4.05%) rose a bit more, gaining 11% in the first half hour of trading. Contango Oil & Gas (MCF) did even better than that, with an 18% jump. And trouncing them all was Torchlight Energy Resources (TRCH), up an incredible 58%. That, however, is a notable outlier and Torchlight was the only company here that issued material news.

So what

Texas has had a rough few days, with cold weather sending the state into something of a tailspin. One of the biggest problems has been on the electricity front, where rolling blackouts have been used to help ease the strain of increasing demand for electricity. There are numerous reasons for this, and the individual importance of each factor could be debated at length, but the end result is that the supply of natural gas has not been able to keep up with the demand for the fuel.   

Blocks spelling out calm and panic.

Image source: Getty Images.

Adding to the problem, many wells in the region have been forced to stop production. Thus, supply is being constrained at exactly the moment when supply is most needed. As a result natural gas prices have risen dramatically. This morning natural gas prices were up 14% at one point, though by 10 a.m. EST they had fallen back to a gain of roughly half that level.  

With that backdrop it isn't surprising to see smaller energy drillers rise on all the excitement around Texas' cold spell. The largest name here, Antero, has a market cap of around $2.5 billion, but is heavily weighted toward natural gas, which made up 65% of its third-quarter output by volume. The rest of the names here are even smaller, sporting market caps between $600 million or so and roughly $1 billion. Industry news can have a big impact on their stock prices, which have tended to be volatile over the past year or so, and that was on clear display today.  

The outsize gain at Torchlight Energy Resources, meanwhile, was likely partly related to the news that a lender holding $1.5 billion of the company's debt converted that loan into 1 billion shares of common stock. That translates to a price of $1.50 per share and, given the current price of around $4.50, suggests the conversion was well worth the effort. However, for Torchlight it means that the driller now has "no term debt remaining on its books." Liens on two projects backing the loan will be released, as well. All in, Torchlight's balance sheet is in much better shape thanks to the conversion and investors were clearly pleased with that outcome, despite the dilution it inherently causes.   

Now what

The thing about the spike in natural gas prices is that it's likely to be short lived. The weather event causing the jump will eventually pass and prices will go back to more normal levels. In other words, don't read too much into the early day price increases at Centennial Resource Development, Antero Resources, and Contango Oil & Gas. In fact, by 11 a.m. EST all three had pulled back from their early highs to some degree. Torchlight, which did have some material news, is a bit different, but with such a big price gain, it's likely that most of the positives from the debt conversion are priced in at this point. 

That said, there is a big-picture takeaway. This is the second big spike in natural gas prices that has taken shape in recent months. The first was driven by a cold spell in Asia that pushed liquified natural gas prices in the region sharply higher. Although these are one-off events and regional in nature, they hint of changes taking shape in the energy sector that could have a lasting impact on the market. Namely, supply and demand may not be as out of sync as feared. If that is true, energy markets may be closer to a sustainable recovery than some on Wall Street believe. And if higher oil and natural gas prices linger, the outlook for energy companies across the industry will improve materially. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Centennial Resource Development, Inc. Stock Quote
Centennial Resource Development, Inc.
CDEV
$7.49 (-4.95%) $0.39
Contango Oil & Gas Company Stock Quote
Contango Oil & Gas Company
MCF
Antero Resources Corporation Stock Quote
Antero Resources Corporation
AR
$34.80 (-4.05%) $-1.47
Torchlight Energy Resources, Inc. Stock Quote
Torchlight Energy Resources, Inc.
TRCH

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
349%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.