E Split Corp ENSPF

Life in a rabbit hole

[Obscure1]

My investing strategy goes like this: find an interesting story, research the craap out of it, devise an exit strategy and then dive in.  

My investment of ENS has followed the script pretty much to a T.  It started with me liking ENB's management and business strategy but not loving the returns.  A few years ago, I built up a large position in ENB which I traded 2 or 3 times each year around the ex-dividend dates.  The trading allowed me to more than double the 7% yield.  Textbook plan and implementation.  Then, ENB changed its guidance from 12% CAGR to 5% to 7%.  That meant the company intended to grow its dividend at 3% instead of the double digit strategy that they have been implementing for years.  Net result, I got out of ENB and reinvested in SU at $20 per share.

One of the things that I learned from investing and trading ENB was that once the pros have created a pattern, they stick to it >>> until they don't.  

I enjoy studying numbers because they take emotion out of buying and selling decisions.  Many investors get "invested" in their holdings which imo is a mistake. My worst beatings in the market have happened because I was so sure I was right.  "The market has missed this factor and it is only a matter to time until they get it right".  That is "ego" talking.  The market doesn't give a craap about right or wrong as it only cares about profits and losses. 

Focus OB1 focus!

I missed selling before the last Raise because Middlefield (and other Splits) changed the rules of the game when it came to Raises.  I told myself that I wouldn't let it happen again.  That is why I sold 3/4 of my position in ENS at an average of $12.15 per share.  I would  have/should have sold the balance at that price but I got greedy.  Why did I sell?  I sold because I could see historical trading patterns or in this case Raises were based upon specific percentage Premium to the NAV.  

In the current situation, my sale was right, but for the wrong reasons.  Instead of Middlefield doing what it has always done in terms of doing a Raise, they have remained on the sidelines when my numbers predicted they would jump in.  

What do you do when you are wrong?  You can DENY and wait to be proven RIGHT (which I have learned by experience is a losing strategy) or you can dive back into the numbers and see if you can come up with an explanation for why something did or didn't happen based upon your pre-existing assumptions. 

I expected Middlefield to pull the trigger on another raise and I was wrong.  The first thing I did was rework the numbers.  Nope, they were right.  Then I had to rework the assumptions and that is where it gets dicey.  

In the past, the cost of doing a Raise for the common shareholders was always close to 6.6%.  Knowing the cost made predicting the timing of the next Raise pretty easy.  All you have to do is know how much a Raise will cost and then calculate how much Premium over the NAV has to be in the ENS share price to cover the 6.6% cost.  All good >>> until something changes. 

I started writing a lot of technical stuff here but I eliminated it as I very much doubt that anyone cares.  I thought I had everything under control in my model until Middlefield and the rest of the industry started issuing Prefs below $10.  OK, that was a surprise but all you have to do is change your model. Then the December Raise came along and suddenly the 6.6% cost of a Raise for the common shares gets thrown out the window.  In December, the cost of the Raise was only 5.2% which was a new factor.  That was not great news for ENS nvestors because lower costs mean lower Premiums need to be achieved.  Why did the math change?  I'm pretty sure that the ATM (At The Market) offerings cost less from a legal and admin standpoint.  That makes sense as the leagle beagles don't have to go through filing a new comprehensive prospectus as they have already done so.  That means much less blah blah blah which means their hours drop which in turn means the legal fees drop.    

The fees paid to the investment dealers remain the same (just under 4% net to the ENS common holders as the commons pay for everything.  The bottom line is that the lower costs mean lower Premiums need to be achieved which means they can come to market faster and more often than in the past.  Not great news for us as we are likely to see more Raises and we all know what that means.  Duck before the Raise and buy back a few days later at a discount. 

If I think I'm so smartt (it has nothing to do with being smart as it is all about the numbers), why hasn't Middlefield trigger another Raise???  My answer to that is based upon a guess which is not a science. .  When the math works (based upon what they have done on past Raises), then what is the problem?

The market is very interest rate sensitive.  ENB in particular is even more interest rate sensitive than most stox because a big part of ENB's attractiveness to investors is the sizeable dividend which creates a high yield. 

If you look at the charts, you will see that ENB closed at $47.95 on FEB 1.  What a coincidence that JPowel doused the hot market with comments about its intentions to NOT reduce interest rates during their next FOMC meeting in March.  

What does that have to do with ENS?

ENS is a leveraged version of ENB. When ENB goes down, ENS should go down even more. On the surface, a $1 drop in the price of ENB only causes a $0.44 drop in the NAV of ENS but you have to take into consideration that the price of ENS only costs 1/4 the price of an ENB share.  

None of this matters to Middlefield.  They ONLY care about issuing shares and the ONLY limiting factor on the surface is whether the Premium to the NAV covers the cost of a Raise.  

BUT, the lack of a Raise tells me that Middlefield has not been successful in convincing the investment dealers to do another bought deal for an investment based upon ENB.  Why would the investment dealers not bite as they love the oversized commissions they make on Split deals?  If invstor sentiment towards ENB is poor due to a changed interest rate outlook, then the dealers won't bite because they want slam dunks. 

So where does this leave us?

I'm not convinced that Middlefield will be able to sell a deal to the dealers until sentiment for ENB changes.  As such, I bought back half of my position on Thursday and Friday at an average of $11.51.  So, I get the win because of JPowell changing sentiment, not because of my model.

Will a Raise happen and if so, when?

Yes and my guess for timing will be at the beginning of March.  In the meantime, I think that the share price of ENB may rally perhaps as early as Monday or Tuesday as divi hunters love them sum divies.  

The real question imo is what happens on ex-divi day.  Historically, the pros have played the ex-divi dates like a Stradivarius.  However, the share price of ENB bottomed out at $1.31 below the stock started trading ex-divi which is historically low.  For my numbers based thinking, my assumption is that the market is simply getting more efficient and has adjusted to the previous emotion based price dumps in the past. 

For ENS shareholders, the real price dump was $1.32 - $0.88 = $0.42 which accounts for the divi that ENS collected on its ENB shares.  When you apply the 0.44 factor to the $0.42, difference is only $0.18 which is within the range of a normal day.  Prior to the last ENB dividend, the normal ramp up of the ENB share price before the ex-divi was very predictable.  That pattern changed in November 2023.  In fact, the share price almost absorbed the dividend and quickly shot up again.  

So far, leading up to ENB going ex-divi next Wednesday, the ENB share price movement has been downward like is was last November.  Have the pros established a new pattern.  I don't know but we will find out in the next couple of weeks.

To that end, I bought back half of my position as I mentioned above.  What that really means is that I don't have a clue how things are going to turn out in the next couple of weeks.  

I don't like wishy washy as it lacks direction which in turn elimates bench marks. 

My gut tells me that we will see ENB start moving back up on Monday and Tuesday and then get smacked a bit for a short time following the ex-divi date.  After that, I think we will see the price of ENB go back up like it did  last November.  I think ENB is undervalued here and the pros will know it as well. 

If the ENS share price doesn't follow an ENB price ramp, the Premium will drop in a hurry.  That will kill the opportunity for Middlefield to do another Raise in the near term.  If the ENS share price jumps up on the heels of optimism that the ENB price going up, then I expect we will see a Raise at the beginning of March. 

None of this is investment advice.  Helll, I don't even trust my own instincts these days as evidenced by my buying back a half position. 

My best advice is to buy and hold and trust that ENB management will get it right.  Going down the rabbit hole is fun for me, but ugh.

[Experienced]

Obscure...nice analysis as usual Seems you agree with my earlier post that Middlefield didn't do the raise because there wasn't enough investor interest to do an overnight raise....nothing to do with the math. As for the rest, I will stick to my usual "back of the envelope" approach and keep things simple.  For splits I only buy them when the premium is very low single

[Beuler]

What is the historical average premium they do offerings on ens? Some of the other splits get as high as 40%.alway wise to trim off excess when it gets ridiculously high. 

[Experienced]

ferris beuler...agreed that is why I posted that I buy when the premium is low and sell when the premium gets into the teens.   Sometimes I sell too soon but as I said to clients when I was a financial advisor...nobody went broke taking a profit... 

[Beuler]

Selling bottoms not great advice, maybe 3 months maybe a year will see 15 again. 

[Experienced]

You clesrly missed my point beuler

[stickbot]

Just chart, novel long fantasies just makes one confused..

[Beuler]

Clearsy missed mine, tides rising, div is safe.