What happened

Shares of Rosehill Resources Inc. (NASDAQ:ROSE) shed more than 10% of their value by 10:30 a.m. EDT on Friday after the oil company priced an offering of stock at a steep discount to where it recently traded.

So what

On Monday, Rosehill Resources commenced a public offering of 6.15 million shares of its stock, with plans to use the funds it raised to finance its drilling plan as well as potentially making more acquisitions. The company priced that offering on Friday morning, raising $37.5 million in cash. That implies a price per share of $6.10, which is well below the more than $7.20 per share the stock traded at on Monday. Because Rosehill sold shares at a deep discount, it significantly diluted existing investors.

A man holding a toy-sized barrel of oil with "caution" written on it in one hand and cash in the other hand.

Image source: Getty Images.

Rosehill needed the money because it's significantly outspending cash flow to grow. While the company has generated nearly $75 million in cash flow through the first half of 2018, it spent that plus $225 million to drill new wells and acquire more drillable land. While that outspend enabled the company to grow its production 50% during the second quarter alone, it's not sustainable over the long term.

Now what

Rosehill Resources is a throwback shale driller that's outspending cash flow to grow as fast as it can. This growth has come at a high cost to shareholders, as the company has significantly diluted them to give it more fuel to continue drilling. While that strategy might work out if oil prices remain high, it could come back to burn the company if they tumble once again. That's why investors might want to avoid this oil stock and consider these top-tier options instead.

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