Crius Energy Trust: Nasty Bear Raid Victim Or Weak Stock Searching For A Scapegoat?

Crius Energy In Damage Control Mode As Shares Tumble to 20-Month Lows

Crius Energy might as well be called Crisis Energy after yesterday’s ugly stock rout. At one point, shares fell $1.54 (-17.62%), which is quite dramatic for the usually glacially-moving Energy Trust company. Given that there was no catalytic news release to inspire such events, we ask: Was Crius the victim of some nefarious short seller plot? Or was the weakness simply the inevitable byproduct of a stock which has shown no material strength since last April. We explore.

The session actually began quite benignly, little different than many others over the past several months.  Volume was light, and price was contained within a $0.30 band dating back to February 6th. There was nothing usual to suggest the imminent carnage which lay ahead. Then it happened.

Between 11:20-11:30am, a burst of approximately 90,000 shares saturated the market (most of them sell orders, obviously). Prices quickly raced down to the $8.50/share area, piercing the 3-week consolidation low. Sensing blood—and perhaps the avalanche of sell orders coming down the pike—other algos sold the bid. Prices collapsed immediately, reaching $7.05/share less than a hour later. A rare Trust Fund implosion had taken place. Below are the basic price action forensics:

Fortunately, Crius Energy Trust (TSE:KWH.UN) was able to pare its losses—but the damage had already been done. With the stock closing at 2-year lows, and with technical destruction firmly in-hand, the company faces an uphill battle trying to woo investors back. While the move catalyst may have been artificial, nobody wants to invest in a stock that’s dead money.

The bearish plunge also puts the company in a position no company wants to be. Mainly, having to spend the time & energy consoling investors rather than wooing them. It’s hard to raise your investment profile with Investor Relations forced into defending a negative narrative—however true/untrue it might be.

Realizing this, Crius management issued a press release the same day to attempt to quell investor angst. It was the right move; volatility has dropped noticeable throughout today’s session.


Crius Energy Responds

On February 28, 2:45pm, Crius Energy issued a press release to address “false and misleading statements in a blog posting issued today by an anonymous, self-described short seller of our trust units.” The release followed a proven crisis management formula which is encapsulated by the three D’s: Defend, Deny, Defame. Judging by the price action so far today, this strategy has proved effective.

In the brief 4-paragraph statement, the company defended its investment-worthiness by reminding investors that a “reputable syndicate of eight investment banks conducted due diligence… of the Trust’s initial public offering in November 2012… and have participated in, and conducted further due diligence in respect of, subsequent prospectus offerings of the Trust in June 2015, June 2016 and June 2017”.

The implication is clear: none of the Investment Banks had previously uncovered any of the “false and misleading statements” claimed by the short seller. This is indication #1 that something is not right here. Either the short seller’s assertions are correct, or multiple investment banks are derelict of their duties. We leave it up to investors to decide which is more likely.

Crius then denied that it is unaware of any material events leading to the underlying weakness. As per the release: “Crius Energy confirms that it is not aware of any undisclosed material change in the business, operations or affairs of the Company that would account for the recent increase in trading activity”.

That statement is self-explanatory.

Finally, Crius defamed (questioned the intentions) the story’s antagonist by saying, “The Trust cautions investors that the self-described short seller has chosen to conceal the identity of the persons and entities who are responsible for the blog posting, and who stand to profit, at the expense of our unitholders…”

The implication of such action is clear. If the information supplied by the short sellers was accurate, then why did they conceal their identities? Were they fearful of regulatory scrutiny had their negative bashing proved fruitful? Were they protecting themselves from a possible defamation lawsuit from Crius Energy themselves?

The situation is akin to ‘unnamed sources” breaking a big news story—hard to verify if you can’t investigate the source.


Weak Energy Market Is Not An Excuse

With all that said, Crius Energy stock was hardly a pillar of strength lately. With the S&P/TSX Capped Energy Index down about 15% YoY, the sector is experiencing rough times.

In a way, you can say conditions were ripe for such moves to take place. The proverbial powder keg was present in the room, and the “critical mass effect” generated from the short sellers was the match that lit the fuse. Recent technical weakness acted as the kerosene or “primer” for sell side-algos to act.

However, just because the ingredients are present does not mean the capitulation needed to happen. If indeed the anonymous short seller(s) did act on bad faith, we believe the regulators must step in.

After all, we’re in an age where smart algos can and do analyze social media ‘chatter’, and derive actionable trading decisions from it. In other words, what private investors say online (i.e. stock boards) does have some material effect on sentiment components of sell/buy side program trading applications. We at the Midas Letter—with our considerable readership—take this responsibility seriously.

The hive effect is real, and we look forward to additional information Crius Energy management has forthcoming. But from the author’s standpoint of known information right now, it’s seems hard to doubt management on this one.

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