By:
Riya Hegde, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Centennial Resource
Development, Inc. Class A (NASDAQ: CDEV) operates as an oil and natural gas
company. It focuses on the development of unconventional oil and liquids-rich
natural gas reserves in the Permian Basin. The company was founded in 2014 and
is headquartered in Denver, CO.
• CDEV derives its
revenues through three segments: Oil, Natural Gas Liquids and Natural Gas. In
FY 2018 79.7%, 13.3%, and 7% of revenues came from these three segments
respectively.
• The oil and natural gas
industry is cyclical which causes the volatility of commodity prices. This has
quite a large impact on Centennial because these lower prices can decrease
revenues on a per unit basis while also decreasing the amount of oil, natural
gas, and natural gas liquids that the company can produce economically,
reducing their reserve quantities.
• Predominance in the
Delaware and operational flexibility.
Key
points:
Centennial is definitely
feeling the effects of volatile commodity prices as expressed through its
decline in stock price. Management has many goals set in place for the future
of the company, but this doesn’t seem to be having much of an effect on the
price of their stock. They’re focusing on securing a financial position in
response to volatility. They aren’t looking forward to their prospects and
responding to their continuous decline in stock price.
There are various things
management has expected and are expecting for CDEV in 2019 and moving forward.
The total capital budget has been reduced 15% in 2019 to now $845 million and
is looking to be even lower by the end of FY 2019. This is due to Centennial
looking to reduce their operational costs as well. Centennial expects to
increase crude oil production by approximately 12% in 2019. They plan to keep a
flexible approach in regard to their operational activity in response to
volatile commodity prices. Although takeaway capacity has had its effect on
crude oil prices, the deals that Centennial has structured with BP and
ExxonMobil in the Permian basin positions them well in order to scale their own
production while maintaining their lower operational costs. CDEV has about
85,000 net acres in the Delaware Basin, which gives them a predominance of
about 80%. They plan to operate between four to five rigs in Reeves County in the
Delaware Basin while continuing to develop and test additional zones, in
response to their expectation to increase oil production.
Although the decline in
their stock price isn’t specific to Centennial, and many companies in the industry
have experienced price declines due to the simple volatility in the industry,
Centennial just doesn’t seem to be responding well to the decline in stock
price and making positive change. They have missed their earnings for the past
three quarters in a row and their P/E ratio is under the market average due to
their lack in EPS growth. The company could benefit with more attention paid to
the price decline and actions taken to increase this which would benefit the
overall financial health of the company.
What
has the stock done lately?
For
the past month the price of Centennial has been relatively flat and not seeing
much change except for its 52-week low on December 3 of $2.92. The company has
missed its earnings for the last three quarters and the next earnings report
date will be on March 2nd, 2020.
Past
Year Performance:
In the first half
of 2019, CDEV’s stock price fell around 31% due to oil prices being volatile.
Additionally, when the company decided to pull back in average daily oil
production in 2019 and this news came out, there was a one-day plunge in their
stock price. It has since seen a steady decline It hit its 52-week low price of
$2.92 on December 3, 2019, and high of $16.45 on December 4th, 2018.
Source:
FactSet
My
Takeaway
CDEV was pitched on April
12, 2019 and added to the AIM Equity Fund at $9.21 with an initial price target
of $11.80. CDEV’s stock price has since significantly fallen and is now
currently trading at $3.41. My recommendation for this stock would be to sell
since it is nowhere near reaching its price target and is seeing a continuous
decline. Admittedly, CDEV has been increasing revenue and meeting the goals and
expectations set forth by management, however these changes being made are not
being reflected in the stock price and should therefore be sold from the AIM
fund.
Source:
FactSet
