What happened
Shares of U.S. energy company Oasis Petroleum (OAS) rocketed over 40% at the open of trading on Friday. Over the next half-hour, the stock gave back most of that advance, hovering at around a 15% gain by 10 a.m. EDT. Shortly after, it was near a loss of 13%. Then the price briefly entered positive territory before slipping into a single-digit decline on the day. And it wasn't even noon yet! That's a heck of a ride, but it shouldn't be too surprising.
So what
Over the past year, Oasis' stock has lost 90% of its value. This year alone, it is down around 80%. Its market cap has fallen from roughly $2 billion a year ago to around $200 million today. Oasis is a penny stock, with a price below $1 per share, and it is asking shareholders to approve a reverse stock split so it can avoid being delisted by the New York Stock Exchange.
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A relatively small absolute move for a penny stock can be a huge percentage-point move. Moreover, price volatility isn't uncommon among penny stocks, which are fairly high-risk investments that most long-term investors should avoid. And it doesn't require much (or any) news to push prices around in dramatic fashion.
That said, Oasis' stock saw a massive increase in trading volume on Thursday and Friday this week. Average volume over the past 30 days is around 34,000 shares. On Thursday, the volume was over 300,000, and today has seen trading volume well in excess of the longer-term average. That helps explain the big price moves, but it really doesn't help explain why.
There's no news to suggest what's going on. The shares are owned by a lot of index funds, which could be buying and selling shares. Or some investor could be buying the stock believing it is cheap (at roughly $0.65 per share, 100,000 shares only cost $65,000, not a huge sum for an institutional level account). It's hard to tell what's happening, one of the biggest problems with penny stocks: Things get hazy very quickly.
What is clear is that Oasis' business is struggling today along with the broader energy sector. Low oil and natural gas prices suggest that its bottom line will remain in the red this year, after losses in each of the last two years. In fact, the company's early expectations to be cash flow positive in 2020 now look unlikely. It based its projections on $55 per barrel oil, but crude is trading at around half that value, or less. Add in a financial-debt-to-equity ratio of over two times, suggesting it has a notably leveraged balance sheet, and this stock is only appropriate for aggressive investors, with today's price volatility another example of why.
Now what
This really isn't the kind of excitement that long-term investors should be looking for. Oasis, and most other penny stocks, are best left to others. All but the most aggressive investors should steer clear of this roller coaster.
