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Why Centennial Resource Development Stock Dropped 5% at the Open on September 1

What happened

Shares of U.S. onshore oil and natural gas production company Centennial Resource Development (NASDAQ: CDEV) fell roughly 5% at the open on Sept. 1. A similar drop happened on the last day of August as well, and for the very same reason.

So what

The energy sector has been hard-hit by the efforts to slow the spread of COVID-19. When governments around the world effectively shut down their economies, demand for oil and natural gas plummeted, pushing prices for these energy commodities sharply lower. Although economic activity is starting to pick up again, an energy supply glut continues to pressure commodity prices. Moreover, the recovery has been anything but robust. So exploration and production companies like Centennial Resource Development are facing notable headwinds. Adding to the concerns here is the company's debt-heavy balance sheet, with a financial-debt-to-equity ratio of roughly 4.5.

Image source: Getty Images.

Commodity price moves can lead to material changes in investor sentiment at Centennial. As was the case yesterday, natural gas is the energy source seeing a notable drop today. Natural gas made up 45% of Centennial's second-quarter production. Thus, it is hardly surprising that investors would take a dour view of the stock, again, in the face of weak natural gas prices. That said, by roughly 10:30 a.m. EDT, oil prices had started to tick higher and Centennial's stock price decline had moderated, leaving it down only about 2% or so.

Now what

Investors have legitimate concerns about the future prospects of debt-heavy Centennial Resource Development. It is not an appropriate energy investment for risk-averse investors. In fact, at this point the only thing that investors can realistically expect with some certainty is continued share price volatility. Energy prices will probably play a starring role in that.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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