With only a quick glance, arguably most investors would be tempted to walk away from midstream energy giant Enbridge (ENB). A multinational pipeline operator, Enbridge undoubtedly commands infrastructural relevance. However, both the business and the broader hydrocarbon industry suffers from two major headwinds, initially posing significant challenges to ENB stock.
First, the Federal Reserve recently resumed its interest rate hikes in July after holding off in June. While the central bank recognized progress in its disinflationary objectives, consumer prices remain significantly elevated from policymakers’ core target. Fundamentally, then, higher borrowing costs don’t bode well for the wider commodities sector, including energy products. That’s not great news for ENB stock.
Second, social changes such as remote work have translated to millions of white-collar workers no longer putting commuting miles on their vehicles. Per the U.S. Federal Highway Administration, vehicle miles traveled have steadily increased since the pandemic doldrums. Still, current levels remain largely below that seen during the recent pre-pandemic years. Again, this doesn’t bode well for ENB stock.
However, a significant fundamental catalyst could change the narrative for the midstream energy operator. It’s quite possible that options traders recognize the shifting tides, thus presenting a viable opportunity for Enbridge.
ENB Stock Rings Up Unusual Options Volume
Following the close of the Aug. 11 session, ENB stock ranked among the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 8,788 contracts against an open interest reading of 102,010. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 481.60%.
Moving down the informational column, call volume hit 8,349 contracts while put volume reached 439. This pairing yielded a put/call volume ratio of 0.05. However, the put/call open interest ratio stands at 1.32, which has bearish implications.
In terms of the most unusual activity based on volume-to-open-interest (Vol/OI) ratios, calls with a $35 strike price with an expiration date of Aug. 18, 2023 clocked in a multiple of 20.50X. In this case, the bid-ask spread as represented by the midpoint price ($1.75) came out to 11.43%.
Regarding the most unusual puts, that honor goes to the $37.50 put option with an expiration date of Sept. 15, 2023. Here, the bid-ask spread as represented by the midpoint price ($1.48) clocked in at 10.14%.
Generally speaking, options flow data from Fintel suggests that the broader sentiment in the derivatives market is bullish. Traders bought several calls – a classic optimistic tactic – during the Aug. 11 session. As well, on July 24, traders sold a significant amount of puts, which also carries bullish implications.
Moving on from the options arena, Wall Street analysts presently rate ENB stock as a consensus moderate buy. This assessment breaks down as five strong buys, three moderate buys and eight holds. What’s more, the expert pricing spectrum is very encouraging.
For example, the mean price target stands at $44.08, implying 20% upside potential from the Friday close. Further, the high-side target hit $60, implying over 63% growth. Most impressive may be the low-side target, which while sitting at $38.94 still implies 6% upside. Theoretically, even if you “lose,” you win.
Fundamentals Augment Enbridge
While the technical data generally points to a positive outcome for ENB stock, it’s the fundamentals that really bring the narrative home. For one thing, I’m skeptical that the work-from-home initiative that bolstered the economy during the worst days of the pandemic will continue forward unchanged. Frankly, the actual trend doesn’t support the assumption.
For example, the Associated Press reported that Zoom Video Communications (ZM) is “asking employees who live within a 50-mile radius of its offices to work onsite two days a week, a company spokesperson confirmed in an email.”
It’s just my opinion but I don’t think this policy will fly well. Either everybody complies with the new directive or nobody does. Given the power that corporations have – because they sign the checks – more folks will likely be asked to return, first on a hybrid basis and eventually fulltime. That should help bolster ENB stock.
Second and I believe more importantly, consumers continue to hold onto their combustion-powered vehicles due in large part to inflationary pressures. That’s incredibly significant for ENB stock because a) these consumers are not yet pivoting toward electric vehicles and b) demand for hydrocarbons should remain robust and potentially rise.
So, while ENB stock may look like a troubled investment at the moment, it could be due for a comeback because of positive fundamental catalysts. Better yet, it appears that options traders anticipate the trend to finally come around.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
