Shares of exploration and production company Centennial Resource Development (NASDAQ: CDEV) rose roughly 8% at the open on Aug. 4. There wasn't any specific news today, but the company released earnings after the close on Aug. 3. Investors took solace in the fact that things weren't worse.
Centennial posted second-quarter 2020 earnings of $0.02 per share, down from $0.07 in the same period of 2019. However, that was a vast improvement over the writedown-driven loss of $1.99 per share in the first quarter of 2020. There were a couple of key takeaways from the second stanza of the year. Notably, Centennial worked quickly to reduce costs and production in the face of low oil prices. That helped it manage through the difficult period and, based on the choice early in the span to store some of the oil it was producing instead of selling into a weak market, allowed it to be prepared for a time when markets improved. That improvement started to take shape as the quarter progressed.
In fact, based on the current price range of oil, Centennial believes it will be breakeven on a cash flow basis for the full year. That's no small feat for the driller in the current oil market. Moreover, it suggests that the heavily leveraged company will be able to muddle through the downturn without having to take more drastic actions than it already has (it completed a debt exchange in May) to shore up its balance sheet.
So while the year-over-year decline in earnings was less than desirable, the overall earnings story here wasn't so bad, all things considered. That said, there's still a huge supply/demand imbalance in the energy space that's likely to keep oil prices low for some time. In other words, the problems Centennial is facing are likely to linger. Long-term investors looking at the energy patch are probably better off sticking to larger energy names with stronger finances, such as an oil major like Chevron. Owning Centennial's stock is likely to be a bumpy ride for the foreseeable future.
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