Centennial Resource Development, Inc. (CDEV - Free Report) is likely to gain from its huge acreage position in the Delaware Basin. However, increasing lease operating expenses are a concern.
This $376.8-million exploration and production company currently has a Zacks Rank #3 (Hold). Centennial is an independent oil and gas exploration and production company. It primarily develops unconventional hydrocarbon reserves in the Delaware Basin, which is part of the prolific Permian Basin. Centennial Resource’s earnings are expected to grow 16% in the next five years.
Notably, shares of the company have gained 173.2% in the past three months compared with 76.2% rally of the industry it belongs to, which further proves the ongoing improvement in the upstream energy market.
Let’s take a closer look at the factors working in favor of the company right now.
What’s Favoring the Stock?
Centennial Resource is a pure-play Permian Basin — the most prolific oil resource in the United States — hydrocarbon producer. The company has a huge acreage position in the Delaware Basin, with operations across 78,200 net acres of land. Centennial Resource has 2,400 drilling locations in the sub-basin that are likely to provide the company with years of crude production.
Centennial Resource boasts a strong balance sheet, with only $1,135 million in long-term debt and a debt to total capital of 29%, way below the industry average of 36%. In fact, the company’s debt to total capital has persistently been lower than the industry in the past year, reflecting lower debt exposure. This can provide it with financial flexibility for growth projects. Notably, the company closed a debt exchange offer on May 22 to further decrease the principal debt amount by $127 million and $6 million in annual interest expenses. Moreover, it has a manageable current debt of $6 million, which can be covered by available liquidity of $468.1 million.
Backed by strong operational efficiencies, the company reduced total capital expenditure budget for 2020 by 60% to $240-$290 million from the original guided range of $590-$690 million. This will likely enable it to navigate through the current market uncertainty. Of the revised budget, 85% will likely be used for drilling and completion, and the rest will be utilized for facilities, infrastructure, land, as well as others.
The upstream company has hedged significant amount of crude volumes for the second and third quarters at a weighted average fixed price of $26.14 and $26.83 per barrel, respectively. This will provide it with protection against downside risks. The hedge position takes into consideration the upside potential of commodity prices in the fourth quarter, with weighted average price of $37.84 per barrel.
There are some negative factors that are holding back the company from attaining its growth potential.
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. 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. The rising costs will likely affect its bottom line in the coming quarters.
The company’s free cash flow remained negative for the last few years, reflecting weakness in operations. Even in the first quarter, it generated a negative free cash flow of $66 million. With crude prices under pressure, the situation is not expected to improve anytime soon.
While the Sino-U.S. phase-one trade agreement solved a few concerns of the United States, there are several unresolved issues. This raises a concern that the tariff war may again escalate. Moreover, demand destruction caused by coronavirus-induced lockdowns and travel bans has kept crude prices in the bearish territory. As such, Centennial’s profit levels will decline, since crude accounts for the majority of its production (58% in the first quarter).
To Sum Up
Despite significant production growth opportunities, increasing costs and negative free cash flows are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include Chaparral Energy, Inc. (CHAP - Free Report) , CNX Resources Corporation (CNX - Free Report) and Concho Resources Inc. (CXO - 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.
Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.
CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.
Concho Resources has a positive earnings surprise of 4.9% in the last four quarters.
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