Drax: Investment firms bet that Drax’s share price is set to fall

The watchdog requires investors to publicly report short bets if they reach 0.5 per cent of a company’s issued share capital.

Drax declined to comment but the company will publish its end of year trading results later this month.

Its share price stood at 443p yesterday, having fallen 29 per cent over the last year.

Russ Mould, investment director at AJ Bell, said investors short a stock when they believe the share price is going to go down.

“They borrow the stock, and pay a fee to the holder for the privilege, and must also cover any dividend payments that the owner misses during the loan period,” he said.

“The hedge fund then sells the stock it has borrowed. If all goes to plan, and the share price falls, the hedge fund buys back the stock, pockets the difference and returns the stock to its original owner.

“If it goes wrong, and the share price goes up, the hedge fund will eventually close its position, buy back the shares, swallow the loss and return the shares to the actual owner.”

Drax, which spent £150m on buying back shares last year, announced in December its adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) – a measure of profitability – stood at £1,164 million and said that figure is “in line with consensus estimates”.

The company has been shorted by a number of other investment firms since 2014, including BlackRock.

Drax said it is in a strong financial position and has contracts to supply more than £4.4bn of power until 2025.

And last month, the government approved Drax’s plans to fit carbon capture technology to the North Yorkshire biomass plant.

Ministers are also consulting on plans for bill payers to foot the cost of supporting Drax until the end of the decade once its existing subsidy scheme ends in 2027.