Please ensure Javascript is enabled for purposes of website accessibility

Why This Small-Cap Oil Stock Plunged Today, Despite a Solid Outlook

By Neha Chamaria – Aug 4, 2021 at 3:37PM

Key Points

  • Centennial released second-quarter numbers on Aug. 3.
  • Headlines screamed how the oil producer incurred a big loss.
  • The company, however, is generating huge cash flows, which should matter to oil investors.

Motley Fool Issues Rare “All In” Buy Alert

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

Look beyond the headlines: Centennial Resource Development is doing better than you think.

What happened

Oil stock Centennial Resource Development (CDEV 0.19%) went on a choppy ride on Wednesday, plunging and bouncing through the day. As of 2:30 p.m. EDT, the stock was down 9.2%.

The market was reacting to the oil producer's second-quarter numbers, which were released after market close on Aug. 3. Centennial incurred a big loss during the quarter despite significantly higher oil prices, and that didn't sit well with investors. However, there's more to this than meets the eye.

So what

Centennial's net oil production was substantially lower in Q2, but revenue more than doubled to $232.6 million, thanks to higher average realized prices for oil. While its top-line growth handily beat consensus estimates, Centennial ended up incurring a net loss of $0.09 per share, versus a profit of $0.02 in the year-ago period.

This, however, doesn't present the true picture.

Workers on an oil field at sunset.

Image source: Getty Images.

Centennial generated strong income from operations, but a loss on debt extinguishment this quarter, versus a big profit in Q2, drove its net income lower. In April, Centennial redeemed part of its debt that was soon due, and now doesn't have any material debt maturing until 2026.

Most importantly, Centennial generated record free cash flow (FCF) worth $34.2 million in the second quarter, which it used to pare debt.

"Centennial's second-quarter results prove our ability to generate substantial free cash flow through our two-rig drilling program," said CEO Sean R. Smith on the earnings press release. He further elaborated: "For the remainder of the year, our primary focus is free cash flow generation and organic de-leveraging, both of which are occurring at a more rapid pace than originally anticipated."

Now what

With two strong quarters behind it, Centennial now expects to generate FCF worth $140 million to $170 million in 2021, versus only $65 million at the midpoint that it earlier projected.

In February, Centennial announced plans to operate two rigs through 2021 and focus on reducing costs, paring debt, and generating higher FCF. Its second-quarter numbers suggest the company's efforts are paying off, and as long as oil prices remain firm, this upstream Permian Basin pure play should be able to build an even stronger balance sheet, which could go a long way in helping it ride out the industry's cyclicality.

Neha Chamaria 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.

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
$10.51 (0.19%) $0.02

*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 analyst team.

Stock Advisor Returns
360%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

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.