Here’s why I’m adding this exciting penny stock to my holdings!

This Fool explains why he is adding this penny stock to his holdings and delves deeper into the reasons behind his decision.

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One penny stock I will be buying for my holdings is Zephyr Energy (LSE:ZPHR). Here’s why.

A penny stock on the up

Zephyr Energy is a gas and oil production business with a focus on undertaking economically attractive projects. It focuses its efforts in the Rocky Mountain region of the US. It is led by a management team with a vast and diverse history in the oil and gas sectors.

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So what’s been happening with the Zephyr share price? Well, as I write, the shares are trading for 5p. At this time last year, the shares were trading for 2p, which is a 150% increase over a 12-month period.

The fact that Zephyr shares have jumped is not something I’m getting particularly excited about. As a penny stock, it is prone to sharp share price movements upwards and downwards.

Risks to consider

Firstly, the gas and oil markets are saturated and dominated by larger players. These players have a larger profile, presence, and financial muscle. If Zephyr finds a lucrative asset, it could be beaten to it or even outbid or bought out by a larger player.

Zephyr’s performance is currently linked to the potential it is forecasting for some of its core assets. Forecasts are not guaranteed and may not come to fruition. If this were to happen and performance was to be affected, the shares in the penny stock could plummet.

Why I’m buying Zephyr shares

A Q1 update released two days ago was promising for me as a soon-to-be-owner of the penny stock. During the quarter, Zephyr sold 144,540 barrels of oil, which was up from Q4 figures. By the end of Q1, it had 185 wells available for production. This included seven new wells that came online during the quarter. Production seems to be ramping up, which will only boost performance. Zephyr also said Q1 revenues totalled $11.5m and a high profit margin was achieved. It did not provide comparisons of these figures to past trading, however.

General market conditions are another factor in me looking to add Zephyr shares to my holdings. According to Statista, demand for oil is on the rise and next year will surpass pre-pandemic levels.

Finally, Zephyr recently rebranded and restructured its business last year with a focus on leaner, more efficient working to generate as much profit as possible. This fresh impetus, coupled with its strong management team and their respective experience, could boost performance and returns.

I think the risk to reward ratio is quite low. At 5p per share, I’m planning on adding 10 Zephyr shares to my holdings which equates to 50p overall. This is not a huge risk or imposition for me and if I were to lose this amount due to the penny stock sinking, it would not affect me too much.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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