What happened

Oil stock Centennial Resource Development (NASDAQ:CDEV) 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.

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