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What Will Drive Centennial Resource’s Cash Flow Growth in Q3?

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Cash flow from operations growth

Centennial Resource Development (CDEV), a pure play Delaware Basin–focused exploration and production company, is expected to experience 275.9% YoY (year-over-year) cash flow growth in the third quarter. The YoY jump in the company’s cash flow from operations growth is expected to be mainly driven by strong production growth and improvements in its operating margins.

This growth could be partially offset by the negative impact of price differentials on the company’s average realized sale prices and could be the driver of a sequential fall in its cash flow from operations. The WTI Cushing–WTI Midland spread averaged $11.5 per barrel in the third quarter compared to $0.7 per barrel in the third quarter of 2017 and $7.8 per barrel in the second quarter of 2018.

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Valuations

Centennial Resource Development was trading at a forward price-to-cash flow from operations multiple of 8.4x on October 17, below its two-year average of 16.3x. However, it was higher than the industry median of 5.2x. CDEV’s premium valuation may reflect its strong cash flow from operations growth expectations. CDEV is expected to post cash flow from operations growth of 157.4% in 2018, significantly higher than the industry median of 60.5%.

Analysts’ recommendations

A total of 90.5% of analysts surveyed by Reuters have rated Centennial Resource Development as a “buy,” and the remaining 9.5% have rated it as a “hold.” SunTrust Robinson recently upgraded CDEV to a “buy” from a “hold.” Overall, CDEV has seen six rating updates over the past three months, including five new coverage initiations and one rating upgrade. CDEV’s average target price of $26.8 implies a ~28% potential upside from its current price level.

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