Centennial Resource Development, Inc. CDEV has lost 57.3% year to date, compared with the oil-energy sector’s 3.3% decline. Moreover, the stock, carrying a Zacks Rank #4 (Sell), has been seeing downward earnings estimate revision by most analysts.
Downward Estimate Revisions
The Zacks Consensus Estimate for the company’s 2019 earnings has been revised downward to 31 cents per share from 44 cents in the past 60 days. Notably, all the 10 analysts have made downward revisions.
The upstream energy firm has also been witnessing downward earnings estimate revisions for the third and fourth quarter of 2019 by all analysts over the same timeframe.
Reasons for the Downgrade
Crude Weakness: The escalating tariff battle between the United States and China along with growing fears of recession has been denting demand for oil.
Since Sep 1, the Trump administration has imposed a 15% tariff on roughly $112 billion of imports from Beijing. America is set to levy a 15% tariff on a separate batch of Chinese goods of roughly $160 billion in value from Dec 15.
Beijing retaliated by imposing additional tariffs on several imports from the United States to initiate its plan of levying extra duty on $75 billion of American goods. Of the total of 5,078 U.S. products that Beijing imports, 1,717 items have seen additional tariffs of 5% and 10%, respectively. The rest of the tariffs will be put into effect on Dec 15.
Importantly, for the first time in more than a year that the two big economies have begun a trade war, China — one of the largest crude importing countries in the world — has levied a 5% tariff on U.S. oil products, which is likely to hurt global energy demand. This is expected to prompt many analysts to downwardly revise 2019 estimates for worldwide crude demand.
Declining oil demand is weighing on the price of the commodity, trading at around $57 a barrel, and the price is unlikely to recover soon. Since crude contributes nearly 57% to total production volumes, the bearish crude pricing scenario is hurting the oil explorer’s bottom line. In other words, the estimate revisions were probably due to weakness in the crude pricing scenario, which is largely responsible for shaping Centennial’s fate.
Rising LOE & Pipeline Bottleneck: For 2019, the company expects lease operating expenses (LOE)in the band of $4.35 to $4.95 per barrel of oil equivalent (BoE), higher than $3.74 BoE in 2018. The expected rise in LOE will hurt the crude explorer’s bottom line.
Moreover, being a pure-play Permian producer, the pipeline bottleneck problem in the prolific basin is hurting the company’s operations.
Stocks to Consider
A few better-ranked players in the energy space include National Oilwell Varco Inc. NOV, World Fuel Services Corporation INT and Delek Logistics Partners LP DKL. While National Oilwell sports a Zacks Rank #1 (Strong Buy), World Fuel and Delek Logistics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
National Oilwell is likely to see earnings growth of 75% in 2019.
World Fuel beat the Zacks Consensus Estimate in each of the trailing four quarters, the average positive earnings surprise being 16.4%.
Delek Logistics is likely to see earnings growth of 4.9% through 2019.
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