Please ensure Javascript is enabled for purposes of website accessibility

Why Centennial Resource Development Stock Dropped 13% at the Open Today

By Reuben Gregg Brewer - Mar 16, 2021 at 10:41AM

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

Shares of the U.S. energy company drooped as it looked to shore up its finances a little. Here's why.

What happened

Shares of relatively small U.S. exploration and production company Centennial Resource Development (CDEV 2.82%) fell roughly 13% in early trading on March 16. Oil (down) and natural gas (up) prices were mixed, so the price drop was most likely precipitated by an after-the-close financing announcement made on March 15.  

So what

Centennial Resource Development is a modestly sized energy company, sporting a market cap of about $1.5 billion. It also has a notable amount of leverage, with a financial debt-to-equity ratio of 2.6 times or so. Investors were keenly focused on its balance sheet throughout much of 2020, as oil prices plunged. Small and leveraged is not a great combination in an industry downturn.   

A man with his head on table and a graph behind him heading down.

Image source: Getty Images.

With energy prices on the rise in 2021, and the company's stock price as well, Centennial has chosen to issue $150 million worth of exchangeable senior notes due in 2028. A portion of the cash raised will be used to repay a note coming due in 2025, extending the company's maturity profile, and to repay portions of a revolving credit line. So, in some ways, this is a good move for the balance sheet. That said, investors are likely fearful that Centennial will issue stock in "exchange" for the notes, as it is allowed to do in certain circumstances, thus diluting current shareholders. That's not an unreasonable concern.    

Now what

Centennial is not the type of energy stock that most investors should be buying. It is small and prone to swift and dramatic price swings. Today is an example of that, as investor sentiment can shift quickly here. Long-term investors looking at energy stocks today should probably stick to larger, more financially stable companies, like Chevron

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.
$7.65 (2.82%) $0.21
Chevron Corporation Stock Quote
Chevron Corporation
$173.01 (3.06%) $5.14

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

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.