What happened
Shares of Centennial Resource Development (PR -2.05%) rose by as much as 6% in the first hour or so of trading on Oct. 4. Doing even better were Gran Tierra Energy (GTE), Antero Resources (AT), and Range Resources (RRC 0.17%), up as much as 10.5%, 10.2%, and 10.1%, respectively in early trading.
The one thing all four of the companies have in common is that they are exploration and production names operating within the broader energy space. There has been a lot going on in the energy patch lately, including rising oil and natural gas prices.
Image source: Getty Images.
So what
The big story this morning was a sharp increase in the price of oil, up as much as about 2.5% as of 10:30 a.m. EDT, and natural gas, up just over 6%. It's not exactly shocking, with that background, that Centennial, Gran Tierra, Antero, and Range all witnessed swift price increases, too. The top and bottom lines of each of these drillers are directly tied to energy prices. And there were no news releases out of any of the companies, so the drastic share moves are largely related to the broader trends in the energy space.
From a big picture perspective, demand for energy has picked up as the world has learned to live, as best it can, with the coronavirus. However, when demand plummeted in the early days of the pandemic, many drillers pulled back on spending and capital investment has yet to materially increase in many cases. For example, Centennial's drilling and development spending was down roughly 50% year over year in the second quarter, Range's spending was down around 40%,and Antero's drilling and completion costs were lower by about a third. Only Gran Tierra's capital spending was higher, noting that this driller operates in South America and not the United States, like the other three names here.
So supply has lagged behind demand. That's put upward pressure on oil and gas prices, with Bank of America suggesting that oil could reach $100 per barrel this winter. Brent crude prices are in the $80 range today. This supply/demand dynamic, meanwhile, has increased the importance of OPEC, since it has been slowly increasing production and has ample room to ease the current market imbalance if it wanted to do so.
That said, the group is starting a meeting today to look at production quotas again. Because of internal conflict, and uncertainty around the results of any specific meeting, investors often get antsy around OPEC meetings. That said, even if OPEC does agree to an increase in production, it won't take effect until November, since October quotas have already been set.
AR Market Cap data by YCharts
Meanwhile, demand remains high and prices elevated. And it's a very big deal, with natural gas prices in Europe and Asia suggesting an equivalent oil price of more than $190 per barrel according to Bloomberg. That's a shocking number that comes with material implications, because it suggests that U.S. drillers, like Centennial, Antero, and Range, can earn more money by sending their production overseas. And that, in turn, could mean shortages at home, leading to higher prices. Oil and natural gas are global commodities that generally get sold where they get the highest bids, so this isn't unusual, even though it could be troublesome for major consumers, like electric power companies, refiners, and anyone who drives a car.
Now what
Energy markets are highly volatile in the best of times and even more so when industry tensions are high, like today. So one day's move probably isn't something that investors should attempt to trade around, as that gets very close to market timing. And, notably, Centennial, Gran Tierra, Antero, and Range all have fairly modest market caps relative to industry giants like Chevron and ExxonMobil.
In fact, while the massive price moves that smaller energy names can experience are exciting, most investors will probably be better off sticking with the largest, financially strongest, and most diversified names in the energy sector today. Centennial, Gran Tierra, Antero, and Range could just as easily see their prices tank sharply on news that OPEC ups production more than expected. Unless you have a crystal ball that will tell you which way OPEC is going, erring on the side of caution is probably the best bet.
