What happened
Shares of U.S. exploration and production (E&P) company Centennial Resource Development (CDEV +0.54%) rose 10.5% in the first few minutes of trading on Nov. 4. About a half hour into the market day the stock was sitting at a roughly 8% gain. The big news was the energy company's earnings, which were released after the close on Nov. 3.
So what
From a big-picture perspective, Centennial Resource Development, like most oil and gas drillers, has been benefiting from rising energy prices. So it isn't exactly shocking that it had a solid quarter. On the top line, third-quarter 2021 sales totaled $288.5 million, up from $149.1 million in the same quarter last year. At the bottom line of the earnings statement, Centennial Resource Development posted a $0.12-per-share profit compared to a loss of $0.19 in the third quarter of 2020. Higher commodity prices were a big piece of the equation.
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However, this wasn't the only good news out of the relatively small E&P company. It also increased total oil equivalent production by 6% year over year, suggesting it is executing well. And management upped the company's full-year production guidance, inching it around 3% higher. That's a modest increase, for sure, but shows that the business is moving in the right direction and that, at the same time, management is not overextending itself. Which brings up the other big positive: Free cash flow generation increased 126% year over year, allowing the company to pay down debt and fund its growth initiatives. Now add in the fact that energy prices were modestly higher in early trading, and the stock's quick jump makes total sense.
Now what
Centennial Resource Development is a pretty small energy company, with a market cap of just $2.2 billion or so even after a 1,100% stock price advance over the past 12 months. That said, the company is executing well and remaining disciplined, which is good. However, given its small size and E&P focus, it is basically leveraged to oil and gas prices. This is not a great fit for conservative types given the inherent volatility in the energy space. And even more aggressive investors should probably pause a moment. A lot of good news has already been priced in here if you don't have a particularly constructive view for commodity prices in the near-term future.
