What happened

Shares of U.S. oil and natural gas company Oasis Petroleum (NYSE:OAS) rose as much as 33% in the first half hour of trading on Aug. 5. That's an impressive advance, though investors have to remember that the stock is still down over 70% for the year -- including that big gain. The main driver of the early stock rally was the company's quarterly earnings update, which was, on the surface, pretty bad.

So what

Oasis lost $0.29 per share in the second quarter of 2020 compared to a profit of $0.14 in the same quarter of 2019. Revenue was off by nearly 70% and production was lower by nearly 40% year over year and down by a third sequentially from the first quarter of 2020. These are not particularly good numbers. However, given the massive supply/demand imbalance in the energy sector, driven by the economic shutdowns to slow the spread of COVID-19, investors had low expectations here.    

A worker standing in front of an oil rig with tablet in his hand

Image source: Getty Images.

Which partially explains why the stock rallied so much. Oasis has quickly circled the wagons to both ensure its long-term survival and limit the damage of weak oil prices. That included a massive 75% reduction in capital spending between the first and second quarters of the year. And while pumping less oil and natural gas isn't a great thing on the surface, with prices so low in April, it was probably the prudent long-term move. At this point, Oasis is suggesting that it will be cash flow neutral or better for the year based on recent energy prices. And it is starting to increase production again, noting that oil prices are up off the disastrous lows earlier in the year (oil actually fell below zero at one point). That's a much better backdrop than existed at the end of the first quarter and investors shifted their opinion on the stock in a big way.

Now what

Despite the improving outlook, Oasis is a relatively small U.S. energy company with a material amount of leverage. Conservative long-term investors looking at the energy sector will probably be better off sticking to larger, more financially secure companies like integrated energy giant Chevron. Yes, things are looking a little better, but Oasis' shares are likely to remain volatile for the foreseeable future.