After a morning dominated by the fallout of Silicon Valley Bank’s capital raise, markets were dealt a US jobs report that presented more questions than answers about the strength of the US economy.

The US economy added 311,000 in February, smashing estimates of 225,000. However, the US unemployment rate rose to 3.6% and wages were slightly softer.

Today’s data confirmed resilience and even strength in the US economy despite persistently high rates of inflation. While this is good news for the US economy, the higher unemployment rate and softer wage growth makes the next decision on interest rates a tough one to call. This was reflected in seesawing market moves after today’s US jobs report.

A horrible truth for markets is the Federal Reserve doesn’t need to rein in their rate hikes until the real economy starts to suffer. US CPI next week will have a big influence on whether the Fed hikes 50bps or 25bps at their next meeting.

The FTSE 100 was deep in the red before the US jobs report and remained around 1.6% down after the release.

S&P 500 futures were pointing to a higher open after finishing down heavily yesterday.

The FTSE 100’s banks were the most severely beaten down stocks on Friday, although they had recovered from their worst levels.

HSBC was trading down 5% and Barclays was down 3.8% to 157p. Barclays has traded below 154p on Friday morning.

Most FTSE 100 stocks were in the red on Friday with defensive dividend payers the only shares gaining. National Grid was 1.1% higher and BT added 0.8%.

UK growth surprise

The chaos surrounding SVB and the US jobs report has overshadowed a pleasant surprise in UK GDP growth in January. The UK economy grew 0.3% as the Premier League returned after the World Cup and more children returned to school.

However, there were warnings the good news could be short-lived and the general trend suggests further economic downside.

“The underlying trend in the economy appears to be one of gradual contraction, thanks in part to an ongoing downtrend in retail spending. We’re expecting a technical recession in the UK in the first half of this year, albeit one that’s not as bad as first feared,” said Tom Hopkins, Portfolio Manager at BRI Wealth Management.

This oil company has recently seen some interesting momentum being created in its shares, particularly with private investors.

The Isle of Man-based Petro Matad (LON:MATD) is focussed upon the exploration, development and production of oil in Mongolia.

The £47m capitalised group holds 100% working interests and is the operator of two Production Sharing Contracts with the Government of Mongolia.

The country’s leading explorer has 100% interests in production sharing contract blocks, including Ongi Block V that covers an area of approximately 7,937 sq kms; and Matad Block XX that consists of an area of approximately 218 sq kms in Mongolia.

Last month the company easily raised $6m gross @ 2.5p a share to provide funds to drill the Velociraptor prospect in Block V, which could prove transformational.

On Block XX the company is about to move ahead with completing the Heron-1 oil discovery into a production well and to start generating cash flow. Crews and equipment are ready to be brought in, while DQE is contracted for a multi-well drilling. Petro China has the ability to export crude through its nearby facilities.

The 2023 Exploration Licencing Round

The Petroleum Authority of Mongolia has a round in progress offering 14 blocks in southern half of the country. The company has an application out on one round and has identified three other blocks in subsequent 2023 rounds.

Renewable Energy possibilities

Mongolia has huge renewable energy generation potential from solar and wind projects.

The group has formed a joint venture with SunSteppe Energy, which is a Mongolian renewable energy project developer. The JV projects, ranging in size from a few tens of megawatts to hundreds of megawatts, have already been identified in solar supplied battery storage to help improve Mongolian grid efficiency and in clean energy supply to mining projects in the South Gobi region.

Analyst Opinion – a ‘potential company-maker’

Craig Howie at Shore Capital, the group’s NOMAD and Joint Broker, has an updated risked net asset value of 14.5p on the shares, against 11.5p previously.

Shore Capital rate the company’s Velociraptor-1 well as being a ‘potential company-maker’, targeting 200mmbbl.

His estimates for turnover in the 2023 year to end December are $4.68m (nil), producing a loss before tax of $2.37m ($3.27m).

For next year he has predicted a very much higher revenue of $13.87m, upon which he forecasts a $1.64m pre-tax profit.

Analyst Peter Hitchens at Progressive Research, influenced by the Velociraptor prospect, has increased his risked exploration net asset value for the shares from 29.0p to 58.7p per share.

Conclusion – an exciting ride ahead

For the time being this group is well funded and able to go about its work.

Apparently, there are plenty of opportunities in the group’s expanding oil areas of operation, while the JV on renewable energy holds interesting possibilities.

We await further news on the progress of its Heron-1 completion and into production, while its Velociraptor exploration well adding to the excitement.

A year ago, the group’s shares were 3.45p each, before peaking at 5.6p in January of this year.

Now at 4.25p they could offer patient investors an exciting ride as they inevitably increase in value, possibly even multiplying.

A small US lender focused on US tech companies and startups has sparked a sell off in global banks, including the FTSE 100’s leading banks.

SVB, or Silicon Valley Bank, set about raising capital yesterday and triggered a chain of events that left investors questioning the stability of the financial system.

SVB launched a $1.8bn placing to help cover losses in their bond portfolio. This raised concerns about the health of the bank and the possibility of a bank run. SVB themselves have called for calm.

Nonetheless, SVB shares have been destroyed in frenetic trade and major US indices suffered yesterday. The volatility spilled over into Europe’s session and the FTSE 100 tanked 2% early on Friday while the French CAC and German DAX were down around 1.5%.

Contagion

The big question is around potential contagion in the international financial system and whether SVB’s issues will be limited to other smaller lenders, or if the world’s largest financial institutions will be impacted. There is no indication large banks are under any pressure at this point.

Some analysts have highlighted the ‘sell first, ask questions later’ nature of this mornings trade in Europe’s biggest banks.

Barclays was down over 8% at one point on Friday while Deutsche Bank was down nearly 10% before recovering. These are some of Europe’s largest banks and well capitalised institutions, and the move is mostly based on sentiment, rather than any immediate financial strains.

“In a heavily interconnected banking industry it’s not so easy to compartmentalise these sorts of events which often hint at vulnerabilities in the wider system. The fact SVB’s share placing has been accompanied by a fire sale of its bond portfolio raises concerns,” said AJ Bell investment director Russ Mould.

“Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable – the SVB situation is a reminder that many institutions are sitting on large unrealised losses on their fixed-income holdings.”

Global equities were deep in the red on Thursday after the Federal Reserve Chair concluded a materially hawkish testimony to Congress and raised concerns of higher interest rates for longer.

The FTSE 100 was down 0.7% to 7,876 at the time of writing while the German DAX shed 0.4%. US futures were pointing to a lower open.

“The FTSE 100 took another step back on Thursday as a second day of testimony in front of Washington lawmakers by Federal Reserve chair Jerome Powell largely stuck to the hawkish tone of the previous day,” said AJ Bell investment director Russ Mould.

“While Powell softened things a little by saying nothing is decided yet, the clear message is future rate decisions will be dependent on the data and for now that seems to be tilting things more towards a 50-basis point rather than 25 basis point rate rise later this month.

“This would shatter the market’s comfortable illusion at the start of the year that rates were about to pivot and a soft landing for the US economy could be engineered.”

US 10-year Bond yields briefly touched 4%, before falling. A higher yield in US treasuries made the FTSE 100’s bond proxy stocks seem less attractive with companies including British Land, Land Securities, SSE and Whitbread falling.

Aviva

Through the gloom of the UK’s miserable weather conditions and generally negative stock markets, Aviva was a ray of light after reporting strong results for 2022. Operating profit jumped 35% to £2.2bn and the company rewarded investors with a share buyback and dividend hike.

“For investors, news of a £300m buyback was welcomed with open arms – the capital position remains strong, and the potential for further buybacks alongside a 7.8% forward yield looks attractive,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

Cyclical selloff

It was a tough day for the FTSE 100’s cyclical stocks. The prospect of tighter monetary policy for an extended period damped demand for companies reliant on stronger economic conditions. The miners were down heavily. Rio Tinto dropped 4.8% while Endeavour Mining tanked 5.6% after reporting 2022 results.

The outlook for Entain in 2023 has caused concerns among investors on Thursday as group profit after tax dumped 88% to £33m due to amortisation of acquired intangibles and exceptional costs.

Underlying EBITDA grew 13% to £993.2m.

The company’s own warnings of regulatory headwinds in 2023 may prove a hurdle for higher profits in the coming year as the group pins hopes on growth in the US.

The group’s 50% stake in US joint venture BetMGM enjoyed an 18% uplift in net gaming revenue in 2021, outperforming group net gaming revenue of 12%.

The impact of regulatory changes in the UK was responsible for slow group online net gaming revenue which dipped 1%.

“Entain has been facing mounting investor pressure, and rising player protection measures in Europe are not going to help. The business opportunity in America looks much brighter.”

“Nebraska and Maine are likely to go live by H2 2023. Georgia, Kentucky, and Minnesota are possibilities, whereas Missouri and North Carolina could stall. This could deliver 15-20% TAM growth.”

“Entain’s biggest opportunity is in the online sports betting space. The Super Bowl betting record proves huge potential. Our experts say that Entain also needs to move beyond the NFL season and capitalize on other events throughout the annual sporting calendar.” 

Aviva shares perked up on Thursday after the insurance and wealth firm said operating profit surged 35% to £2.2bn smashing analyst expectations.

Unlike some of their competitors, Aviva has managed to keep a lid on costs are carve out an increase in operating profit. However, Aviva was hit the same market swings as their peers and recorded an overall loss for the year due to adverse changes in investments.

Nonetheless, an increase in insurance premiums net of reinsurance helped operating profits higher and investors cheered the news sending Aviva shares over 3% to the good.

Aviva is regarded by many as a pillar of their income portfolio and today’s announcement reinforced this assertion with a final dividend hike to 20.7p to total 31p for the 2022 full year. This is sharp increase on 2021’s 22.05p pay out.

The firm will also commit an additional £300m to share buybacks meaning Aviva has returned £5bn to investors since 2021.

“Aviva’s the latest insurer to push through hefty hikes for its general insurance premiums, a trend expected to continue over 2023 as the cost to service claims has risen in this inflationary environment,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

“The tricky backdrop pushed underwriting profitability down a touch, but the diversified model showed its strengths as performance on the whole was resilient. The life insurance business should be able to benefit from the growing number of pension schemes that now find themselves in the position of being able to de-risk – we’d expect to see an uptick in bulk purchase annuity business over the coming year as a result.”

“For investors, news of a £300m buyback was welcomed with open arms – the capital position remains strong, and the potential for further buybacks alongside a 7.8% forward yield looks attractive.”

In the last few weeks there has been a considerable amount of investor interest built up in this company, especially since the issue in January this year of its 336-page document for listing new shares on the Official List.

With its Head Office in Calgary, Alberta the £20m capitalised Canadian Overseas Petroleum (LON:COPL) is engaged in the exploration, appraisal, development and production of oil and gas assets with producing assets and reserves principally in the Converse and Natrona Counties in the US state of Wyoming, where it is the operator and majority working interest owner of three oil producing units.

The Wyoming operations are environmentally responsible with minimal gas flaring and methane emissions combined with electricity sourced from a neighbouring wind farm to power production facilities.

The group also has interests in sub-Saharan Africa through its ShoreCan joint venture in Essar Nigeria, as well as independent interests in other countries.

The ‘game changer’

However, the ‘game changer’ was declared by the company in late December 2022. 

That was at its Frontier 1 11-27 recompletion which has been defined as the oil-bearing reservoir covering a large area at its Cole Creek asymmetrical anticline, some 9 miles in axial length with around 2,500 feet of structural/stratigraphic closure.

There are five known conventional oil reservoirs at Cole Creek – Lakota, Dakota, Frontier 2, Frontier 1 and the Shannon. The group has a 100% working interest in the Cole Creek leasehold on all rights below the Shannon.

An ‘Oil Down To’ elevation at the base of the Frontier 1 perforations has been determined. This elevation is some 760′ below the crestal elevation of the Cole Creek Anticline. The area within the ‘Oil Down To’ elevation is about 8,000 acres with reservoir sand thickness ranging from 50-115′, thinning in the northern area. 

In late January the announced the first oil production from the Frontier 1 reservoir sands.

In an Operations Update issued at the start of March the company reported that severe winter storms from late December to late February had impacted production operations at its Barron Flats Shannon Unit and its Cole Creek field.

The high winds, very low temperatures and drifting snow caused it to suspend operations during the storms. 

The Group’s Strategy

The strategy of the group has two key elements: the first is to accelerate production at the company’s Wyoming assets through increased gas injection, drilling and development; the second is to expand its activities in Sub-Saharan Africa and elsewhere by accessing exploration, un-appraised and undeveloped assets as well as producing assets.

Conclusion – taking a positive out of the negative

Some 19 pages in the early part of the Prospectus were Risk Factors, negatively covering almost every eventuality.

In the last year the shares of have fallen 85% from 39p to around the current 5.9p, the big question now is – are the shares oversold?