Independent oil producer Centennial Resource Development, Inc. (CDEV) in Denver, Colo., develops unconventional oil and natural gas reserves in the United States. The company has approximately 81,700 net acres in the liquid-rich Delaware Basin, which is in Reeves County, Tex., and Lea County, N. Mex. So far this year, the stock’s price has surged 270%, driven primarily by surging oil prices, with growing demand and reduced supply by the major oil-producing countries. CDEV’s strong foothold in the prolific, oil-producing Delaware Basin area, should position it to capitalize on the growing demand.

However, its stock is down 16.3% over the past month. This can be attributed primarily to a recent decline in oil prices because of an unexpected rise in U.S. crude oil inventories. 

Although investors’ increasing risk-tolerance in the energy space bodes well for the stock, concerns related to the spread of the COVID-19 Delta variant potentially threatening global demand, and OPEC’s and its allies’ plans to increase production, could cause CDEV’s stock to retreat in the near term.

So, here is what we think could influence CDEV’s performance in the coming months:

Issuing Convertible Senior Notes to Repay Borrowings

In March, CDEV  issued $170 million exchangeable senior notes, due 2028. The company used the offering’s $163.7 million in net proceeds  to repay borrowings under its revolving credit facility and to redeem the $127.1 million senior secured notes, due 2025. The redemption helped the company eliminate a $31.8 million credit facility availability blocker and improve its liquidity position.

Volatility in Oil Prices

The price of Brent crude oil declined  0.4%, to $71.91 per barrel, on July 22, after rising 4.6% the previous day due to an unexpected 2.1 million barrel increase in crude inventories in the United States last week. Furthermore, increasing infections from the COVID-19 Delta variant, which could threaten the global demand for oil and the pace of economic recovery, might further elevate  volatility in the energy sector. Also, OPEC+’s deal to boost supply by 400,000 barrels per day from August has added to investors’ concerns.

Favorable Analyst Estimates

Analysts expect CDEV’s revenues to increase 123.7% in the current quarter (ended June 2021), 35% in 2021, and 11.8% next year. The company’s EPS is expected to rise 106.9% year-over-year to $0.17 in the current year and 229.4% from its year-ago value to $0.56 in 2022. The Street expects CDEV’s EPS to rise 163.2% year-over-year to $0.12 in the next quarter (ending September 2021).

Unstable Financials

CDEV’s oil sales declined 21.6% year-over-year to $133.73 million in the first quarter, ended March 31, 2021. The company’s lease operating expense (LOE) for the quarter totaled $25.86 million, while its general and administrative expenses rose 33.8% from their year-ago value to $25.26 million. Also, its net loss came in at $34.65 million, while its loss per share stood at $0.12 over this period. In addition, as of March 2021, CDEV’s cash in hand stood at approximately $11 million, while it had $160 million of borrowings outstanding under its revolving credit facility.

Consensus Price Target Indicates Potential Upside

Of the 14 Wall Street analysts that provided ratings for the stock, one rated it Buy, and 10 rated it Hold. The $6.02 consensus price target represents an 8.5% potential upside from yesterday’s $5.55 closing price.

POWR Ratings Reflect Uncertainty

CDEV has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. CDEV has a C grade for Quality. The stock’s negative 6.4% and 4.4% respective  ROE and ROA are in sync with this grade.

The  company has a D Stability grade, which is in sync with a relatively high 6.59 beta. And In terms of Momentum Grade, CDEV has an A. The stock’s price return year-to-date is consistent with the grade.

In addition to the grades we’ve highlighted, one can check out additional CDEV ratings for Growth, Value, and Sentiment here. CDEV is ranked #74 of 93 stocks in the C-rated Energy – Oil & Gas industry.

Click here to view the top-rated stocks in the Energy – Oil & Gas industry.

Bottom Line

While CDEV’s stock price surged 270% year-to-date on the back of a massive improvement in oil price, fears surrounding the resurgence of COVID-19 cases in several countries, which could lead to less energy demand and a fall in oil prices, might cause its stock to suffer further declines in the coming months. So, we think investors should wait for the situation to stabilize before investing in the stock.

CDEV shares were trading at $5.56 per share on Friday morning, up $0.01 (+0.18%). Year-to-date, CDEV has gained 270.67%, versus a 17.69% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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