- Drax shares are down 12% over the past two days
- 5% of that is today
- Only if we know why can we decide upon a trading position
Drax Group (LON: DRX) shares are down 12% in the last two days, 5% this morning. What is it that’s going on here, given that energy prices are through the roof and Drax is an energy producer? This is not what we expect to happen after all, major players in booming markets we’d generally not expect to lose value like this. The problem is that there’s no one singular answer to this question. We thus need to walk through the options to try to work out why. For only once we’ve done that can we have an idea of what any trading position should be.
For background. Drax operates what used to be a coal fired electricity generation plant. Most of it has been converted to burn biomass – North American woodchip. This is, under current rules, said to be carbon neutral. A nonsense but that’s what the rules say – and recall, we must always trade on reality, not what should be.
So, we’ve an electricity generation plant and electricity prices are through the roof. But the prices of woodchip, the depreciation due on the plant, those haven’t moved, at least not to anything like the same extent. So, Drax should be coining it. So, why’s that share price declining – and 12% is significant on a company of Drax’s size.
Also Read: Best Stocks To Buy When Energy Prices Rise
One thought is that political opinion is turning against the very idea of biomass – that would rather damage Drax as a business. But that’s rather a longer term worry than current.
It’s also possible that investors think that the electricity price is peaking and that will damage future profits. But it has to be said that there’s no obvious sign of that – nor is it likely there will be until Russian matters and Russian gas are sorted out.
Then there’s that whole worry over the windfall tax effect on DRX but again, that’s a worry that seems to have rather receded. It’s been placed on the oil and gas producers and the decision has just come through that it won’t be extended to other energy companies.
There’s no specific news from Drax itself to explain this share price fall. The last news was the purchase of a Canadian woodchip plant and that was a few days back, meaning the effect should already be in the share price by now.
The problem here for us as investors or traders is that we don’t know why Drax shares are down 12% in a couple of days. So, we can’t evaluate if we think they should be down that 12%. If we can’t do that then it’s difficult to think of whether the decline in DRX is likely to continue or will reverse. We’re in a bit of an information fog and that’s not a good place to be making trading decisions.
Now, if we could work out why the Drax price fall then the trading response to it would become obvious.