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Why Centennial Resource (CDEV) is Down 9.4% Since Q1 Earnings?

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Since the announcement of weak first-quarter results on May 4, Centennial Resource Development, Inc. (CDEV - Free Report) has seen a 9.4% decline in share price. Demand destruction caused by coronavirus-induced lockdowns and travel bans has kept crude prices in the bearish territory. This is hurting upstream companies like Centennial.

Weak Q1 Earnings

Centennial reported adjusted first-quarter 2020 loss of 24 cent per share, wider than the Zacks Consensus Estimate of a loss of 5 cents. The company had recorded adjusted earnings of 8 cents in the year-ago period.

Revenues from oil and gas sales fell to $192.8 million from $214.6 million a year ago. Moreover, the top line missed the consensus mark of $209 million.

The weak quarterly results were primarily due to lower production and commodity price realizations. Moreover, increased operating expenses affected the profit level.

CENTENNIAL RES Price, Consensus and EPS Surprise

CENTENNIAL RES Price, Consensus and EPS Surprise

CENTENNIAL RES price-consensus-eps-surprise-chart | CENTENNIAL RES Quote

Divestment

The company agreed to divest saltwater disposal wells and associated produced water infrastructure located in Reeves County to WaterBridge Resources’ subsidiary. The agreement was signed on Feb 24, 2020 and is expected to generate a total of $225 million.

Operations

Total Production Falls

Total production in the reported quarter averaged 71,820 barrels of oil equivalent per day (Boe/d), down from 72,035 Boe/d in the year-ago period. Of the total output, 57.8% comprised crude oil. The downside can be attributed to lower NGLs output. The company has reduced the current operated rig count from five to zero due to the ongoing market uncertainty.

Oil production averaged 41,512 barrels per day (Bbls/d), up from 40,508 Bbls/d in first-quarter 2019. Natural gas production amounted to 117,751 thousand cubic feet per day (Mcf/d), up from the year-ago quarter’s 99,596 Mcf/d. However, natural gas liquids (NGLs) production was 10,683 Bbls/d, lower than the year-ago quarter’s 14,927 Bbls/d.

Price Realization Declines

The company reported average realized crude price of $45.14 a barrel (excluding the effects of derivate settlements), down from $48.15 in the March quarter of 2019. Moreover, average natural gas price dropped to 78 cents per Mcf from $1.39 a year ago. NGLs were sold at $14.30 a barrel, down from $19.74 in first-quarter 2019.  

Operating Cost Rises

Centennial incurred $801.6 million of total operating costs in first-quarter 2020, significantly higher than $209.5 million in the year-ago period. Exploration costs rose to $4 million from the year-ago level of $2.5 million. Higher impairment charges also increased the costs.

On a per Boe basis, the company’s first-quarter lease operating expenses were $4.99, higher than the year-ago level of $4.61. Gathering processing and transportation costs increased to $2.59 per Boe from the year-ago period’s $2.32.

Capital Expenditure

In first-quarter 2020, its capital expenditure was $175.4 million, including $146.8 million in drilling and completion activities. The company reduced capital spending on facilities, infrastructure and others for five straight quarters.

Balance Sheet

At the end of the quarter under review, cash balance totaled $3.8 million, down from the fourth-quarter level of $10.2 million. Total debt outstanding amounted to $1,135 million, rising from the fourth-quarter level of $1,075 million. It had a net debt to book equity capitalization of 29%. The banks decreased Centennial’s borrowing base on the credit facility to $700 million from $1.2 billion. This has resulted in a decline in available liquidity to $468.1 million. Notably, it has launched a debt exchange offer to decrease total debt and interest expenses.

Guidance

Centennial intends to reduce general and administrative expenses by approximately 30% on an annualized basis. As such, it has decreased workforce and the salaries of the remaining workers. To navigate through the current oil price weakness, it has hedged an average of 19,400 Bbls/d of crude for the rest of the year at a weighted average fixed price of $26.79 per barrel.

The company has suspended all short-term drilling and completion activities due to the prevailing market weakness. If the commodity prices fail to improve, May production will decline 40%. Moreover, it has reduced total capital expenditure budget for 2020 by 60% to $240-$290 million from the original guidance of $590-$690 million. Of the revised guidance, 85% will likely be used for drilling and completion and the rest will be used for facilities, infrastructure, land and others.

Zacks Rank & Stocks to Consider

Currently, Centennial has a Zacks Rank #3 (Hold). Some better-ranked players in the energy space include RGC Resources Inc. (RGCO - Free Report) , CNX Resources Corporation (CNX - Free Report) and Comstock Resources, Inc. (CRK - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

RGC Resources’ 2020 earnings per share are expected to rise 14.8% year over year.

CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.

Comstock Resources’ 2020 sales are expected to gain 30.8% year over year.

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