Centennial Resource Development, Inc. (CDEV) is a natural gas and oil producer in the Delaware Basin of West Texas. As discussed in my previous article about Range Resources (RRC), I am very bullish on oil in 2019. I believe that oil prices will surge similarly to how they have in the past when WTI Crude prices have reached levels as low as we are seeing today (WTI Crude price is currently $47.24 per barrel). I believe that Centennial Resource Development is another company, much like Range Resources, that is in great financial position to take advantage of an increase in the price of WTI Crude.
For starters, CDEV is currently trading at a price of $11.28 which is below it’s book value of $12.13. This discount alone proves a slight undervaluation of the stock. The stock is currently trading at a discount for its total book value without accounting for the forward looking growth that is inevitable with an increase in oil prices.
Centennial Resource Development had a high level of operating cash during the first nine months of 2018 at just under $500 million and a high level of investment in growth. This investment in growth was made up of $115 million in acquisitions of properties and $723 million in drilling capital expenditures. The companies combination of cash from operations and an investment in growth gives me the impression that they are in great position to take advantage of greater demand for their product in 2019. Even after this investment in growth the company is not overly leveraged. It has over $500 million in long-term debt but this shouldn’t pose too much of a problem due to the company’s ability to generate cash.
In order to get a very raw price target for CDEV we can use Eddy Elfenbein’s “World’s Simplest Stock Valuation” calculated as:
(Growth Rate/2 + 8) · EPS = Fair Value
Centennial Resource Development’s next 5-year growth rate is 70.60% and its average estimate for next year’s EPS is 0.88. When we plug this into our stock valuation multiple we get:
(70.60/2 + 8) · 0.88 = $38.10