What happened
Shares of U.S. exploration and production company Centennial Resource Development (CDEV 5.45%) rose about 2.5% out of the gate on July 7. But that quickly turned around, with the stock down more than 5% by around 10:30 a.m. EDT. At roughly 3 p.m. EDT the stock was still down, but only about 2.5%. The ups and downs here make sense when you dig in a little bit.
So what
Early in the day Centennial Resource Development shares benefited from the news that Wells Fargo had upgraded the energy company's target price to $7 per share. The shares closed July 6 at $6.67, so this kind of looks like a move by the analyst to catch up to the market action. Still, the implied upside was around 5%. So the 2.5% price rise in early trading does make a little sense.
Image source: Getty Images.
However, there's a lot going on in the energy space lately. The biggest story is a spat between OPEC members about production quotas. The big question is whether or not OPEC and its partners stick to a slow and steady pace of production increase or if their current discipline falls apart and members open the taps without regard to previous production targets. In the first scenario oil prices likely remain relatively stable and strong, in the second there's a good chance that oil prices drop, perhaps materially. The OPEC meetings started last week and have continued into this week, with seemingly no easy solution. And, thus, investors have been pushing oil prices around a bit. Today's move was basically to the downside. Centennial's share price, despite the price target increase, has fallen along with oil.
Now what
As an oil company, Centennial's top and bottom lines are tied to the price of oil. So the fact that the stock would fall along with oil prices isn't that shocking. That said, most investors would probably be better off looking at larger and more diversified energy companies, like Chevron, for exposure to this inherently volatile sector. That would be true in most markets, given that a company like Centennial is really only appropriate for aggressive investors seeking a somewhat leveraged bet on oil prices.
