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.
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.
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.
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.