The FTSE 100 was firmly higher on Wednesday as the index took its lead for the Asian and US sessions which closed at, or very near, record highs.

London’s flagship index was 0.6% higher at the time of writing on Wednesday.

“The FTSE 100 regained some of the ground lost yesterday as a combination of airlines and precious metals miners helped give the market a lift,” said AJ Bell investment director Russ Mould.

“This followed gains in Asia and on Wall Street overnight, with Japan’s Nikkei 225 attaining a new record level.

“Testimony from Federal Reserve chair Jerome Powell before the US Senate saw him flag a return to normality in the labour market. While he made no commitment on rate cuts, jobs data is one of the most important influences on the Fed’s decision making because tight labour market conditions and rapidly rising wages can lead to inflation becoming entrenched”

The Fed chair’s testimony was shrugged off by markets which continue to fixate on AI-related technology shares propping up US indices such as the S&P 500.

“US indices are still hanging close to record highs, with enthusiasm over AI possibilities and hopes for a soft landing for the economy still buoying sentiment,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“Eyes will now be drawn to tomorrow’s Consumer Price Inflation report for indications about the future direction of travel. Another shift lower in headline inflation is expected, which should help maintain the largely optimistic outlook. A reading of 3.1% year-on-year is expected in June, down from 3.3% in May.”

The FTSE 100’s gains were broad on Wednesday, with all but 13 constituents trading in positive territory at the time of writing.

Airlines were among the top gainers with IAG soaring 3.4% and Easyjet adding 2.7%. IAG was the beneficiary of a broker upgrade, and Easyjet embarked on the trip higher in sympathy.

One of the few fallers was Barratt Developments after the housebuilder said it expected completions to fall again next year after a pretty dismal year’s trading in 2024.

“Barratt’s full-year trading update showed that it’s hard to build momentum when the entire housing market has been on unstable ground. The group completed around 14,000 new homes this year, which was towards the top end of group guidance, but still marks a big drop off from the prior year,” said Aarin Chiekrie, equity analyst, Hargreaves Lansdown.

“Buyers are very sensitive to mortgage availability and affordability pressures. Although there have been improvements on this front over the second half of the year, further easing of mortgage rates will be necessary for activity to pick up significantly.”

Barratt Developments shares were down 1.3% at the time of writing.

Those with good memories will remember the fanfare surrounding Petro Matad when it first discovered oil in Mongolia in 2010. Petro Matad made a series of discoveries that made it one of the most exciting London-listed exploration companies of the time.

Recent developments for the company are reigniting this excitement, and rightly so. Brokers’ price targets suggest Petro Matad shares could appreciate multiples of the current price, and there is now a solid foundation for them to do so.

UK Investor Magazine published ‘Four UK Small Cap Growth Shares to Watch Summer 2024’ just before the announcement of a material development for Petro Matad in late June. Should timings have been different, this selection would likely be Five stocks and include Petro Matad.

The company has been substantially derisked as an investment for new investors after raising $8.9m by way of a placing in late June. The funds will be used almost exclusively to take Petro Matad’s Heron project through to production in 2024/25, a milestone that will unlock substantial shareholder value.

However, it has not been plane sailing for Petro Matad, and many investors may have only recently considered the stock after a heavily discounted placing.

In 2010-2012, the Mongolian natural resources sector was in the limelight. Rio Tinto was developing the world’s largest copper deposit at the Olu Tolgoi copper mine, capturing the attention of global investors and Mongolia was opening up to overseas investors.

Petro Matad rode this wave for a short period as evaluation of its assets revealed the extent of the resources in place at its Block XX field. The excitement around the quality of oil in place was replaced by frustrations at the Mongolian bureaucracy, and Petro Matad shares suffered dearly. Early investors were left licking their wounds.

Fast forward past numerous hurdles and bumps in the road, a ruling by the Mongolian government to certify Block XX and the Heron discovery as special purpose land in 2023 represented a step change in the authorities approach. A land usage agreement signed in early 2024 has paved the way for production to begin. 

Production from Petro Matad’s assets has been a long time coming. The first production-sharing agreement with the Mongolian government was signed nearly 20 years ago, in 2005. The Petro Matad saga should serve as a lesson to natural resource investors about just how long it takes for the production of promising assets to begin. 

With approvals and licensing agreements seemingly mostly complete, Petro Matad now has a clear path to production and the opportunity for share price appreciation.

Early production at the Heron project is expected to help support exploration, evaluation and eventual production across the rest of the Heron prospect, and the Gobi Bear prospect. The company has a 5-year plan to reach production of 9,000 barrels of oil per day.

In addition to oil production, Petro Matad is harnessing Mongolia’s landscape for renewable energy generation through a JV with SunSteppe, which already has a battery storage system and a green hydrogen project powered by wind power underway. Petro Matad’s transition to an oil producer and clean energy producer will provide diversification and potential revenue streams long into the future.

Broker targets

Zeus has a price target based on a Core NAV of 4.3p, rising to 28.7p for Total Unrisked NAV. The greater of these two price targets represents substantial upside to the current share price of 2.8p.

The Zeus price target, as with most broker price targets for AIM companies, should be taken with two shovels of salt. That said, it does provide some scale of where Petro Matad shares could go in the medium term.

For context, much of the Total Unrisked NAV valuation (17.9p of 28.7p) is derived from further exploration of the Saiga and Gobi Bear projects in Block XX. Zeus’s price target does not include the renewable JV.

Market conditions

The market conditions for early-stage natural resources companies favour Petro Matad. There has been a notable uptick in interest in the sector in recent months, and several companies have yielded investors very respectable returns, especially in speculative Helium-related plays. One would expect some of this cash to find its way into Petro Matad as the fast money spins into the next opportunity.

But this isn’t just a short-term play. The company says it expects the recent fundraise to take it through to production at Heron. This means cash flows and, very likely, further shareholder value creation through the evaluation of prospects in Block XX.

We must note, Petro Matad doesn’t come without potential operational setbacks that could pose a risk to the share price.

Barratt Developments, one of the UK’s largest housebuilders, reported a mixed performance for the financial year 2024, reflecting the ongoing challenges in the housing market caused by high interest rates and the cost-of-living crisis.

Indeed, the word ‘challenging’ was used twice in the company’s outlook. Investors will hope the new Labour government acts quickly to improve conditions for builders.

The company saw a slight improvement in its net private reservation rate, which rose to 0.58 per active outlet per week, up from 0.55 in the previous year. This 5.5% increase was partly bolstered by sales to the private rental sector and registered providers of social housing.

However, total home completions fell significantly to 14,004, an 18.6% decrease from the 17,206 reported in FY23. The decline was more pronounced in the first half of the year, with a 28.5% drop, while the second half saw a more modest 8.7% reduction.

The average selling price also saw a downturn, with the total ASP falling to approximately £307,000, compared to £319,600 in the previous year. The private ASP experienced a more substantial decrease of 6.4%, dropping to about £344,000.

Despite these challenges, Barratt’s forward sales position remained relatively stable. As of 30 June 2024, the company reported total forward sales of £1,912.3 million, representing 7,239 homes. This is down from £2,223.4 million and 8,995 homes at the same point last year.

Looking ahead, Barratt anticipates a further reduction in completions for FY25, projecting between 13,000 to 13,500 homes. The company attributes this to lower land buying activity in recent years and a forecasted 9% reduction in average sales outlets for the coming year.

Barratt’s problems were summed up by its CEO’s comments, who chose to focus on build quality and the balance sheet amid a slowdown in completions, which will concern some investors.

“Whilst we continue to navigate a challenging macroeconomic backdrop, we are delivering industry leading build quality, sustainability and customer service. Combined with the strength of our balance sheet, this has ensured we remain resilient and responsive through the cycle,” said David Thomas, Chief Executive.

Diversified Energy Company PLC has announced the acquisition of high-value natural gas assets from Crescent Pass Energy for £84 million ($106 million).

The deal, expected to close in Q3 2024, will bolster Diversified’s presence in eastern Texas with 827 net operated wells and over 170,000 acres of commercially attractive leasehold.

Funding for the acquisition comes from a mix of sources. Diversified will harness its NYSE listing to issue approximately 2.4 million new US dollar-denominated ordinary shares directly to the seller. The remainder will be financed through a senior secured bank facility and existing liquidity.

The purchase price represents a PV-20 valuation, signalling Diversified’s confidence in the assets’ long-term value. At £2,100 ($2,651) per flowing Mcfe, the deal is attractively priced within the company’s target range.

Current net production from the assets stands at 38 MMcfepd, with low annual declines of around 9%. This aligns well with Diversified’s strategy of acquiring stable, long-life assets. Estimated next twelve months EBITDA of £20.6 million ($26 million) represents a 3.8x purchase multiple.

“The target assets are a perfect fit with our existing East Texas operations and offer meaningful opportunities for cost efficiencies upon completion of the Acquisition,” said CEO Rusty Hutson, Jr.

“The accretive transaction adds scale to our Central region footprint and remains consistent with our strategy to focus on high-quality, low-decline producing assets at attractive PV values where we can apply our Smarter Asset Management approach to enhance margins and grow free cash flow.

“The evolution of our funding sources, illustrated by the use of direct equity issuance to the seller as a portion of the consideration, highlights the importance of our recent NYSE listing while providing additional financial flexibility. Our Company has a long-standing, demonstrated track record of delivering value to shareholders from our strategy of acquiring, optimizing, and managing mature producing assets, making us the Right Company at the Right Time.”

After a bump higher following the elections last week, the FTSE 100 paused on Tuesday as the index traded around breakeven with a clear interest in defensive sectors.

Severn Trent, United Utilities, National Grid and gold miner Endeavour were among the top gainers as investors favoured those companies with ‘safer’ attributes.

“The FTSE 100 closed broadly flat yesterday and has opened today in a similar fashion, without too many catalysts to drive a move either way. Housing sector investors welcomed Rachel Reeve’s speech yesterday and new supply pledges helped a slew of listed builders tick higher,” said Matt Britzman, senior equity analyst, Hargreaves Lansdown.

The housebuilders have provided support for the index in recent sessions, but the buying pressure started to ebb on Tuesday after Vistry released a positive trading update that didn’t wow investors.

Vistry shares slipped in early trade but picked up as the session progressed, although housebuilders Persimmon, Taylor Wimpey, and Barratts remained fairly static.

An update from BP provided the biggest counterweight to buying activity in defensive stocks. The company said production is fairly flat, and lower oil prices were curtailing any potential excitement from refining margins.

“The FTSE 100 ticked higher on Tuesday despite a weak update from index heavyweight BP acting as a drag on the market,” said AJ Bell investment director Russ Mould.

“A teaser ahead of second-quarter results later this month from BP suggests they won’t be a winner.

“The major issue is a big hit to refining margins, reflecting both market dynamics but also operational issues for the company. These factors also underpin guided impairments of $1 billion to $2 billion for the quarter. The broad range left the market with some uncertainty over how the second-quarter numbers will land.”