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Centennial (CDEV) Rises 311.4% YTD: What's Behind the Rally?

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·4 min read
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Centennial Resource Development, Inc. CDEV shares have jumped 311.4% year to date (YTD) compared with 105.1% growth of the composite stocks belonging to the industry.

The Zacks Rank #3 (Hold) stock, with a market cap of $1.8 billion, has witnessed a rise in the Zacks Consensus Estimate for 2021 and 2022 earnings per share in the past 60 days.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let's delve deeper into the factors behind the stock's price appreciation.

What's Favoring the Stock?

The West Texas Intermediate crude price is currently trading above $70, highlighting a substantial improvement from its slump into negative territory in April 2020. Improving fuel demand on the massive rollout of coronavirus vaccines is aiding the rally in crude price.

Rising oil prices are undoubtedly a boon for Centennial's upstream operations. Being a pure-play Permian Basin hydrocarbon producer, Centennial is well-positioned to capitalize on the crude price rally. Global growth prospects have improved significantly as vaccination rollout led to increased fuel demand in a few large economies.

Centennial's constant focus on capital cost reduction helped generate a free cash flow of $77.2 million in the third quarter, which significantly increased from $10.5 million in the year-ago period. CDEV hiked its 2021 free cash flow guidance to $200-$220 million from its previously mentioned $140-$170 million. It will likely stick to the two-rig drilling program into 2022. Also, CDEV made new oil hedging deals for the next year to reduce risks.

For 2021, Centennial increased its production guidance to 60,500-61,850 Boe/d from the previously mentioned 56,000-63,000 Boe/d. With the massive increase in commodity prices, higher output will boost the company's profits. Capital expenditure is estimated at $300-$315 million, the majority of which will be allocated for drilling and completion activities. Notably, CDEV expects to complete 41-43 gross wells this year.

Risks

A high degree of uncertainty is still prevailing in the exploration and production business as some major economies are being affected by new coronavirus variants. This introduces uncertainty in the global demand recovery, likely affecting Centennial's operations.

Key Picks

Investors interested in the energy sector might also look at the following companies that presently carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Marathon Oil Corporation MRO, based in Houston, TX, is a leading exploration and production company, with its operations mainly concentrated in the United States (including Oklahoma, Eagle Ford, Bakken and Northern Delaware) and Equatorial Guinea. As of 2020-end, MRO had approximately 972 million oil-equivalent barrels in net proved reserves (52% crude oil/condensate and 69% proved developed).

Marathon's earnings for 2021 are expected to surge 213.8% year over year. MRO currently has a Zacks Style Score of A for Growth, B for Value and Momentum. Marathon has achieved its initial $500 million gross debt reduction target for 2021, largely funded by the first-quarter free cash flow of $443 million. The company is now aiming to more than double it to $1.4 billion.

RPC, Inc. RES is among the leading providers of advanced oilfield services, and equipment to almost all prospective oil and gas shale plays in the United States. The company derives strong and stable revenues via diverse oilfield services, including pressure pumping, coiled tubing, and rental tools.

RPC is expected to see an earnings growth of 100% in 2021. RES witnessed three upward revisions in the past 60 days. With no debt load, the company had cash and cash equivalents of $80.8 million at the third quarter-end. This reflects its strong balance sheet that will provide the company with massive financial flexibility. It allows RPC to remain afloat during tough times.

PetroChina Company Limited PTR is China's largest integrated oil company. PetroChina is one of the largest producers of crude oil and natural gas globally. The company's natural gas business offers lucrative growth prospects in the coming years as China moves from coal to natural gas.

PetroChina is expected to see an earnings growth of 411% in 2021. PTR currently has a Zacks Style Score of A for Value and B for Momentum. In the first six months of 2021, PetroChina's upstream segment posted an operating income of RMB 30.9 billion, nearly tripling from the year-ago profit of RMB 10.4 billion.


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