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Bull of the Day: Centennial Resource Development (CDEV)

Centennial Resource Development (CDEV) is a Zacks Rank #1 (Strong Buy) that is an independent oil and natural gas company. The company focus is on the development of crude oil and related liquids-rich natural gas reserves in the United States.

The stock has struggled for the last few years as natural gas and oil prices hung around historical lows. However, the recent rise of the energy commodity prices has helped Centennial’s financial position and investors are starting to notice.

More about CDEV

The company was founded in 2015 and is headquartered in Denver, Colorado. It employs about 150 people and has a market cap of almost $2.5 billion.

Centennial is an exploration and production company that is focused in the Permian Basin. The company's properties consist of acreage blocks primarily in Reeves County, West Texas and Lea County, New Mexico.

CDEV has a Zacks Style Score of “B” in both Momentum and Growth, but a “C” in Value. The stock has a Forward PE of 6 and pays no dividend.

Earnings Beat

In late February, Centennial reported a 30% EPS beat for Q4. This was the second straight beat and the fourth out of the last sixth quarters.

Revenues came in above expectations, with the company seeing $316.4M v the $288M expected. The company also announced a $350 million stock repurchase program.

The current environment has allowed Centennial to generate cash flow to repurchase shares and reduce its debt. Here are some comments from CEO Sean Smith:

“I am pleased to announce our first step in returning capital to shareholders through a disciplined share buyback program, which we believe will drive value creation in today’s environment,” said Smith. “The program is supported by a robust two-year outlook, during which we expect to generate over $775 million in free cash flow at current strip prices and deliver average crude oil production growth of over 10%.”

The news helped the stock move over 20% higher in just a couple weeks, topping out at the $9.30 level. While the bulls have stopped pushing the stock, analysts are raising estimates and lifting their price targets.

Estimates Rising

Over the last 7 days, estimates are ticking higher across all time frames. For the current quarter, numbers have gone up 9%, from $0.32 to $0.35. For the current year, estimates have ticked up 7%, from $1.37 to $1.47.

Centennial Resource Development Price and Consensus

Centennial Resource Development Price and Consensus
Centennial Resource Development Price and Consensus

Centennial Resource Development price-consensus-chart | Centennial Resource Development Quote

In addition to raising estimates, multiple analysts are hiking their price targets for CDEV.

Upgrades

Since earnings, we have seen a handful of upgrades. The bullishness stems from Centennial’s ability to provide free cash flow with energy prices at current levels. This then results in improvements to the balance sheet and stock buybacks

Stifel recently upgraded the stock to Buy and raised its target to $11.20. They cited free cash flow and the Centennial’s ability to increase its well count, which will lead to production growth that will outshine its peers.

Stifel isn’t the only bull. as the following firms have all raised targets since earnings:

RBC Reiterated CDEV with Sector Perform, price target: $11 from $10

Wells Fargo Raised CDEV to Equal Weight from Underweight, price target: $12 from $8

JPMorgan Chase and Co Reiterated CDEV with Neutral, price target: $13 from $10

Piper/Sandler Raised CDEV to Overweight from Neutral, price target: $13

Those higher end price targets are over 40% from current levels.

The Technical Take

The stock has had a healthy bull run since the beginning of 2021. Trading under $2 to start that year, it has channeled up, holding the 200-day moving average every time it tested.

While that 200-day is way down at $6.76, the 50-day MA is now looking like strong support. This level is at $8.20 and has only cracked once in 2022.

If the bulls takeout recent highs, look for a quick move to $10.60. This is the 161.8% Fib extension drawn from March highs to lows.

In Summary

Centennial has positioned itself well for a bullish energy market and sees a robust next couple years. Look for the company to build shareholder value thanks to high oil and gas prices. This will help the stock continue its momentum that started early last year.

Investors looking to enter the stock can lean on the 50-day moving average at $8.20. This area will likely hold support as the bulls try to take out the $10 level.


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