Trying to ascertain the reasons behind the dramatic share price moves of Enbridge Inc. in the last little while is definitely an exercise that will tax the sharpest of minds. So when some of those sharps minds are prepared to engage in conspiracy theories the situation becomes even more intriguing.
What all participants are attempting to understand are the dynamics, that saw the shares rise by $3.84 over the week and by almost $6 in the week’s low. Those gains took place a period of much larger-than-normal trading volumes.
Those increases have to be considered alongside the news that Enbridge raised $2 billion of equity – that could rise to to $2.3 billion – via the sale of 49.14 million shares at $40.70, a cost set at a very healthy 5.7 per cent discount towards the closing price of the shares at the time the deal was priced.
The final factor – the one which has the conspiracy theorists working overtime – may be the large recent buildup within the short interest in Enbridge. Short sellers engage in that activity because they are convinced the shares will trade reduced the near future: In the event that view is true it’ll allow them to profit from continued falls in the cost of the shares because the short sellers will cover the short position at a lower price.
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We realize that because the end of January, Enbridge’s stock price was off by more than $5: it fell to $43.16 on Wednesday from $48.66; we know that in the first two weeks of February, rapid position in Enbridge on the TSX jumped to 37.194 million shares from 31.444 million C a gain of 18.3 percent. (In those days Enbridge had the seventh-largest short position on the TSX.)
In New York, where Enbridge also trades, rapid position buildup was reduced. “This is really a reliable utility stock,” noted one Canadian participant who was interested in the increase.
This participant put forward two theories: The underwriters shorted the stock prior to the offering; or “brilliant speculators who sensed there was a 49 million shares issue coming at a knockdown price.”
While none of those theories can be proven, conversations along with other market participants, note that the big short position and also the have to cover might have had an effect within the share price surge. (We will possess some indication once the TSX next reports Enbridge’s short position.)
Participants have that view because the size of the offer – an equity offering of $2 billion is five times the amount that Enbridge raised in mid-2014, the final time it sold common shares – and the discount; large deals need a large discount, and Enbridge and the underwriters decided to a healthy concession. (On its 2014 equity financing that raised $460 million, the discount was 2.04 percent.)
Put the 2 together also it might be presumed that the market price (and therefore the necessity to cover the short) would rise. And that is what went down: on Thursday the shares were up by $2.38 to $45.54, a trend that continued Friday with another gain of $1.44. (On Thursday, volume on the TSX was almost six times normal.)
Other market participants possess a different take: They reason that the cost of oil has become a proxy for Enbridge.
John Whelen, Enbridge’s chief financial officer, said “the market perception has been around our ability to raise investment capital. This is a very unusual market and investors have tended to focus on macro factors. By pre-funding our equity requirements for the following 2 yrs we have answered the market’s concern for which is an extremely attractive growth program.”
bcritchley@nationalpost.com
