What happened

Shares of North American exploration and production company Talos Energy (TALO 1.10%) fell as much as 14% when trading got underway on Nov. 9. The big news came out after the bell on Nov. 8, when the company announced a large stock sale.

So what

Secondary equity offerings are often viewed negatively by investors because they dilute current shareholders. However, there's a positive aspect to them, as well, given that the company ends up with cash that it can use to fund growth initiatives or to strengthen the balance sheet, among other things. Only it isn't actually Talos that's selling the shares here, it's shareholders. Affiliates of Apollo Global Management and Riverstone Holdings are selling 6 million shares with an underwriter option for another 900,000.

A person in protective gear in front of oil wells.

Image source: Getty Images.

The key here is that Talos will see no cash from these sales, it is merely large investors cashing out. That, perhaps, makes some sense given that the stock has roughly doubled over the past 12 months. However, a sale like this generally acts as an overhang on a stock because it means the broader market has to absorb a large number of shares in a very short period of time. Often the shares get sold below the current market price just to get the sale done. As you might expect, investors can view such stock sales even more negatively than when a company sells its own stock. Wall Street reacted accordingly.

Now what

Talos is a fairly small energy company, with a market cap that's just a touch under $1 billion. Although it is highlighting carbon capture on its investor website, the truth is it's predominantly an exploration and production company tied to the often volatile ups and downs of oil and gas prices. Most investors would probably be better off with larger, more diversified names in the energy patch, such as ExxonMobil or Chevron, a fact that would be true regardless of the stock sale that's hampering Talos' shares today.