Drax, DRX, Shares Down 13% At Open – Why?

Drax (LON: DRX) shares are down 13%, or around a £, at open. This is not some general market fall, as the FTSE 100 is down only the 1% so far today. This is also not just some fat finger mistake caused by the one trade, for there is a stream of trades at this new price as we can see from the ticker:

Drax trades from London Stock Exchange

The problem is that there's no obvious reason for this move in the Drax share price. As of pixel time there's no new announcement (the last announcement to the market from the company was on 17/5) and no news widely shared elsewhere.

It's therefore, in the absence of that hard information desired, necessary to speculate as to what is causing this. One possibility is simply a retreat in sentiment. Drax has done well over the past month and six weeks which it arguably should have been doing. We know the electricity market is on a tear, as a provider of baseload Drax should be doing very well indeed in financial terms. It's possible simply that sentiment has flipped and so the share price fall.

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Another possibility is that the impacts of shipping costs have become more apparent. Perhaps clear in investors' minds. As we know Drax ships in woodchip from the US to power the furnaces. The current turbulations in the global shipping market might be making some nervous.

Finally there's the possibility of all being spooked by the recent discussions of windfall taxes on energy providers. From the Labour Party side (and this is not to take sides, this is merely to be descriptive) the argument has been to impose a windfall tax on the profits of the fossil fuel companies. As of yesterday the discussion in Tory policy circles has been that since all energy companies have been making those “excess” profits then any windfall tax should be on all energy companies. To include, specifically, the wind, solar and biomass producers. That would include Drax, of course.

If it's that last then this is a good example of how regulatory and political risk can exist even in the most stable of jurisdictions. It would also make sense if this were the reason. The rise in Drax shares over the past couple of months has been, largely enough, driven by thoughts of the extra profits to be made in the current energy market. If those are now to be taxed away then that rise in value goes not to shareholders but to the Treasury.

All of this is speculative of course for we don't in fact know why the price has dropped as yet. But precisely because it is all speculative this means that we need to monitor those news sources in order to try and determine a trading position. It could be merely that the market is spooked by the talk of a windfall tax. If that's so and a denial is issued then we might well see Drax shares rebound. Or, if such a tax is announced then there could well be another fall – for currently the price only reflects the possibility of such a windfall tax.

As the morning wears on the speculation is indeed that this is over worries about a windfall tax that would be wider than just the fossil fuel companies. The Drax share price is likely to be volatile until there is clarity on the issue.