• Research

Apr 24, 2018

S3 Analytics: Utilities Short Interest Drops by $1 billion After a $5 billion 1st Quarter Surge

The Utilities Select Sector Spider (XLU) is down nearly 3% for the year and short interest in the ETF has been volatile as its stock price fell 9% by early February only to recover 70% of its losses with today’s trading. Short interest, which began the year at $2.6 billion, hit a year-to-date high of $4.6 billion in late March only to see short exposure retreat $1.8 billion to be slightly up for the year at $2.8 billion. Short selling in the underlying stocks of the U.S. Utilities Sector was just as volatile, by late March short interest in the sector was up 26% to just over $23 billion, but over the last month short exposure to the Utilities sector has declined by over $1 billion.

Short interest in the Electric Utilities and Multi Utilities sub-industries had the largest increases of short exposure this year, while the Independent Power Producer sub-industry had the largest decrease. Over the last month, short interest in the Gas Utilities increased by $248 million, while the Electric and Multi Utilities saw a decrease of over $1.3 billion.

Looking at individual stocks, Duke Energy (DUK) leapfrogged several other utilities to claim the top spot for the most shorted stock in the U.S. Utilities sector with an increase of over $1 billion in short exposure. Increased short activity in just four stocks (Duke Energy, Sempra Energy (SRE), Nextera Energy (NEE) and First Energy (FE)) made up two thirds of the year-to-date increase in short interest for the sector. On the down side, Dominion Energy (D) was the only stock in the top ten with a year-to-date decline in short interest with a drop of $43 million. 

The $4.8 billion first quarter increase in short interest in the Utilities sector has been slightly offset with a $1 billion decline over the last month. Decrease in short interest was pretty much across the board, with Sempra Energy (SRE) and Nextera Energy (NEE) short interest down $532 million, just over half the decline in short interest for the entire sector.

For the early part of 2018, increased short activity in the U.S. Utilities sector reflected the actual and potential loss of revenues from a prolonged warmer winter season; an increase in liabilities due to natural disasters such as hurricanes and wildfires; infrastructure issues such as pipeline leaks and nuclear facility cost overruns; green/renewable energy regulations; and impending higher interest rates. Over the last month, there has been a more positive spin in the sector with the growth of nuclear power generation and expanding natural gas infrastructures lessening the domestic need for more expensive foreign oil as well as U.S. corporate tax reform increasing earnings per share and making long term Capex spending more attractive. Furthermore, the possibility of consolidation in the sector is increasing as smaller companies are finding it difficult to compete with the vertical integration of the larger energy providers as well as their ability to diversify their revenue generation risk across several regions and production vehicles. Short sellers in the smaller cap Utility names must now account for M&A risk as a very real negative impact to their bottom line. If short interest in the sector continues to decline, we can expect stock price support of the largest shorts due to a steady stream of buy-to-covers.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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