Nostrum Oil & Gas Up 40% – But Really?

Nostrum Oil & Gas PLC (LON: NOG) shares are an odd one to see a 40% jump in just one morning. Nostrum is a smallish producer of petroleum products operating in the pre-Caspian basin and has a total cash flow significantly below its debt burden. Cashflow below that is, not free cashflow or anything so useful as gross or even net margin. This is not something we’d expect to see reaching for the stars as a share price.

In fact, the recent Nostrum results don’t show anything likely like that. The big action is in trying to move the registered jurisdiction of the outstanding notes (ie, debts) of the company from New York to London. The solicitation request and the agreements received. OK, that’s interesting news but it’s also well over a week old and it’s not something likely to produce a Nostrum share price bounce today.

So what is happening here then? If Nostrum is a smallish producer, the oil and gas price hasn’t suddenly changed, political reality hasn’t, the debt burden hasn’t, then why a 40% bounce in the Nostrum share price?

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The answer being that there hasn’t been such a bounce, not really. This is a technical issue to do with very illiquid shares in a very small company.

The more things are bought and sold then the closer together the buying and selling price – liquidity reduces spreads that is. OK, there’s not much trade in Nostrum the total market capitalisation is only £8.8 million according to the London Stock Exchange (£12 million according to Google, but that’s using a different share price, which we’ll get to). This means that Bid is – currently – 5.0p and Offer is 6.5p.

The first thing to draw from this is that this would be a difficult thing to trade in and out of. If we were to do so, buy at 6.5p, then there’s got to be a pretty substantial rise before that price – the 5.0p – that we can then sell at meets our purchase price. Illiquidity is not the traders’ friend.

But now think one stage further. This is not a continually open market. These are off book transactions being reported. And some of them, the purchases, are being reported at 6.5 pence, as purchases. And others are being reported at 5.0 pence, as sales. The result is that the share price is bouncing around like billyoh and not, in fact, really moving. We get a 30% price movement just by the one trade being reported as a sale, at 5.0p and the next as a buy at 6.5p.

The volatility in the Nostrum Oil share price is largely a technical illusion that is. It’s also, given that wide spread, something that would be extraordinarily difficult to trade.