Enerplus, symbol ERF, has been in our portfolio for as long as we can remember. The company domiciled in Canada is one of our favorites. It pays a nice monthly dividend with a annual yield approaching 9%. The derivatives of this energy producer tend to be excellent income as oil and gas prices can go up and down quickly. The fund has likely made as much money off this one stock as any other security over the years. ERF is almost like owning a portion of an oil or gas well since they derive almost all of their income from these sources. ERF has some assets in the US as well in the east coast shale gas regions and some in the Bakken energy play in North Dakota. In all we continue to like the company and particularly at the current $23 price.
In the last month or so ERF has drifted downward in price from the upper $20's to now today around $23. Most traders and investors had considered the reason was due to the significant natural gas assets the company owns since natural gas prices have drifted downward due to the warmer than normal winter and the increasing supply of gas in the US. Shale gas in the US is so plentiful that the oil derricks in North Dakota not owned by gas companies have begun to flare off gas to get rid of it. So over the last few months short sellers have been bearing in on ERF in hopes that the gas situation would drive the price of the stock down and they could make profits from the lower price. Nothing wrong with this scenario as it happens all the time on Wall Street and many times these short sellers are proved wrong and they have significant losses. However most people considered the stock to be over sold at this point.
This morning however we find out that is not the case. ERF has been planning for some time to issue new equity or shares to expand their business that was unknown to most investors or traders. Issuance of these securities will be at $23.50 per share is just above the current $23 share price. If you are wondering how short sellers knew to drive the price down just below this price consider yourself smart. Short sellers this morning are taking profits from what is known as insider information. Not only did they know the strike price they knew the date of the announcement. We are willing to bet that insiders in ERF likely told people in Washington DC and others about the stock offering and of course the info spread to the short sellers who are taking significant profits from the info.
If your are also wondering if someone has reported this to the SEC, they have, but expect absolutely nothing to happen. After all the hoopla and talk of cleaning up this kind of insider business Obama and Congress are doing nothing and will do nothing to end this kind of trading. We suppose if you are in on the profits why kill the golden goose. This happens regularly, but since our portfolio is small in numbers of stocks held we rarely see it happen to us. Last time was last summer when Lorillard, symbol LO, was insider traded by someone in the Obama administration on news that no action was forthcoming on menthol regulation.
The STI Hedge Fund currently holds 3600 options at believe it or not $23 per share expiring in January 2012 or this Friday. With the stock trading just over this strike price we got lucky in our put option. Trust us we had no insider info, because if we had the position would have been a lot larger. But we do not like this kind of trading and again wonder if someone in power does not see or care what it does to the average investor when they are looking for honest dealing.
Lastly if one is looking a nice investment going forward ERF would likely be a good buy at this price. The upcoming stock issuance is price in and in the next couple of days the short sellers will be gone. Yes, the natural gas decline is there, but the risk at this level and dividend is good for most investors. ERF is 76% oil versus 24% gas. We continue to have it in our portfolio and will going forward.
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