Explanations, some of which are fanciful, behind Enbridge’s share price gains

Trying to determine the reason why behind the dramatic stock price moves of Enbridge Inc. in the last couple of weeks is an exercise that will tax the sharpest of minds. And when some of those sharps minds are prepared to engage in conspiracy theories the problem 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 by almost $6 in the week’s low. Those gains took place a period of much larger-than-normal trading volumes.

Those increases need to be considered alongside this news that Enbridge raised $2 billion of equity – that could rise to to $2.3 billion – through the sale of 49.14 million shares at $40.70, a cost set in a very healthy 5.7 per cent discount to the closing cost of the shares on the day the deal was priced.

The final factor – the one that has got the conspiracy theorists working overtime – may be the large recent buildup in the short interest in Enbridge. Short sellers participate in that activity since they’re convinced the shares will trade lower in the near future: If that view is correct it will allow them to profit from continued falls in the cost of the shares since the short sellers covers the short position at a lower price.

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We know that because the end of January, Enbridge’s stock price was off by a lot more than $5: it fell to $43.16 on Wednesday from $48.66; we also realize that in the first two weeks of February, the short position in Enbridge on the TSX jumped to 37.194 million shares from 31.444 million C an increase of 18.3 percent. (In those days Enbridge had the seventh-largest short position on the TSX.)



In Ny, where Enbridge also trades, the short position buildup was much lower. “This is a reliable utility stock,” noted one Canadian participant who was interested in the increase.

This participant submit 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 these theories can be proven, conversations along with other market participants, observe that the big short position and the have to cover might have had an impact within the share price surge. (We will have some indication once the TSX next reports Enbridge’s short position.)

Participants obtain that view since the size of the deal – an equity offering of $2 billion is five times the total amount that Enbridge raised in mid-2014, the last time it sold common shares – and the discount; large deals need a large discount, and Enbridge and the underwriters agreed to a proper concession. (On its 2014 equity financing that raised $460 million, the discount was 2.04 per cent.)

Put the 2 together and it might be presumed the selling price (and therefore the necessity to cover the short) would rise. And that’s what happened: on Thursday the shares improved by $2.38 to $45.54, a trend that continued Friday with another gain of $1.44. (On Thursday, volume around 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 capability to raise capital. This can be a very unusual market and investors have tended to pay attention to macro factors. By pre-funding our equity requirements for the next two years we have answered the market’s concern for what is definitely a attractive growth program.”

bcritchley@nationalpost.com