Centennial Resource Development (NASDAQ: CDEV) is already up 90% since new management took the reins in 2016. But that could be just the beginning of its run. That’s because the executive team quickly scooped up drillable land in the Permian Basin, locking up a prime position in the heart of the oil-rich shale play. That position, along with the company’s best-in-class balance sheet, has enabled it to unleash a gusher of oil in the past year, with even more on the way. And that fast-growing output, when combined with rising oil prices and falling costs, positions the company to generate significant earnings growth as the oil market continues its recovery.
Just getting started
Centennial Resource Development is growing oil production at a breakneck pace these days. After producing 19,200 barrels per day (BPD) last year, the company expects output to surge 85% this year to about 35,500 BPD. That puts it on a trajectory to produce an average of 65,000 BPD by 2020 and deliver peer-leading growth.
Fueling that growth is Centennial’s prime position in the Permian, where it’s drilling gusher after gusher. In 2017, the company’s wells delivered the second-highest average daily production rate in its peer group. Meanwhile, drilling results in 2018 are coming in even better than last year’s average because the company has started using the latest well completion technology, which is yielding better-producing wells and higher returns. At $60 oil, many of these wells are generating internal rates of return in excess of 100%.
Two more forces to ignite earnings growth
The scorching hot production growth by Centennial Resource over the past year fueled even more impressive earnings growth. While the company’s oil equivalent output catapulted 193% year over year, earnings jumped a stunning 330%. Two other factors helped drive the accelerated growth rate: Centennial Resource Development’s ability to benefit fully from the uptick in oil prices and its growing scale. The company’s increasing size has been a key factor in helping push cash operating costs per barrel down by 23% year over year as it spreads expenses across more barrels.
Those dual forces should continue driving accelerated earnings growth in the coming years. That’s because, unlike most of its peers, Centennial has no oil hedges in place due to its highly bullish stance on crude. The company is thus able to capture the full impact of the uptick in oil prices. In fact, it’s on pace to realize the second highest per-barrel price for oil in its peer group since many rivals locked in much of their production at lower levels this year, thus muting their ability to benefit as oil surged. Centennial’s ability to get the full benefit of higher prices should allow it to earn even more money on its growing stream of oil production in the future.
The company will also benefit from its foresight to lock up capacity on oil and gas pipelines well before it needed the space. In fact, it has already secured the infrastructure necessary to support its 2020 production target. As a result, Centennial won’t need to slow its pace nor shut in wells due to the current pipeline crunch in the Permian. Instead, its transportation costs per barrel will continue to decline as it spreads those expenses over more barrels.
A three-pronged attack
Three factors position Centennial Resource Development to deliver unparalleled earnings growth in the coming years. First, it’s growing production at a peer-leading pace thanks to its exceptional position in the Permian Basin and a top-tier balance sheet. Second, it’s enjoying the full benefit from the improvement in oil prices since it has no hedges holding it back. Finally, it’s starting to capture the advantages of its increasing scale as costs get spread across a larger production base. And oil could have much farther to run, making this an intriguing stock for growth-focused investors to consider.
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