A game changer

Investors had good reason to react in this way given that Mr Powell had previously said that the shrinking of the US central bank’s balance sheet was on autopilot [the US Federal Reserve is withdrawing $50bn (£39.4bn) of quantitative easing per month], and guidance was for the Federal Open Market Committee (FOMC) to push through another two interest rate hikes in 2019. That stance was completely at odds with a US yield curve that had already started to invert at low maturities, and a futures interest rate market that is predicting increasing recessionary risk.

Last Friday’s sudden volte face indicates that the US Federal Reserve has belatedly woken up to the fact that further tightening of US monetary policy and draining liquidity from the global financial system could be a step too far. The liquidity squeeze on markets outside the US has been significant given that offshore dollar debt is around US$12.8 trillion (£10 trillion), according to the Bank of International Settlements. It also comes at a time when there is clear evidence of a global economic slowdown both in China and in the eurozone, where both the economies in Italy and Germany could be on the verge of recession.

I will be monitoring events in the US very closely in the coming months as there are several major implications for investors if the US Federal Reserve decides to stop tightening monetary policy, the most obvious of which is to expect the US dollar to start to sharply weaken. If I am right then we can expect a major rally in commodity and energy prices, both of which are priced in dollars as are gold and silver. Importantly, I have exposure to upside from several of my share recommendations.

Playing the commodity complex

Aim-traded Sylvania Platinum (SLP:18.5p), a cash-rich, fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium and a constituent of my 2018 Bargain Shares Portfolio at 14.5p, is one of the lowest-cost producers in the world. It’s also one of the lowest rated. Even if my 28p-30p target price is achieved, the shares would still only be trading on a historic cash-adjusted price/earnings (PE) ratio of 8.5. Moreover, the company has a 76,000 ounces to 78,000 ounces (oz) production target for the financial year to the end of June 2019, markedly higher than last year’s record output of 71,000 oz, and one that is highly supportive of a sixth consecutive year of production growth. The 17 per cent pullback in Sylvania’s share price since I covered the annual results in late summer (‘Sylvania record output delivers maiden dividend’, 31 Aug 2018) is a decent repeat buying opportunity ahead of the second quarter trading report at the end of January. Buy.

Oil price recovery to boost small-cap players

The Brent Crude oil price has started to recover some of its hefty fourth-quarter losses, a major positive for Parkmead (PMG:55.8p), a small-cap oil and gas exploration and development company led by 19 per cent shareholder Tom Cross, the founder and former chief executive of Dana Petroleum until its sale to the Korea National Oil Corporation in 2010. I included Parkmead’s shares, at 37p, in my 2018 Bargain Shares Portfolio.

The one month forward Brent Crude contract slumped by 42 per cent from a high of $87 a barrel at the start of October to a low of $50 a barrel by Christmas Eve. It has since rallied by 16 per cent from that low point. As I pointed out in my last article (‘Parkmead enters into transformational talks on key project’, 28 Nov 2018), net of cash and liquid assets on its balance sheet, including a £6m stake held in oil and gas producer Faroe Petroleum (FPM), a company that is on the receiving end of a cash offer from Norwegian oil and gas operator DNO ASA, Parkmead’s exploration activities across 30 licences in the North Sea are in the price for only £19m. The most valuable of which are three licences in the Moray Firth that contain the Perth and Dolphin fields.

To put their value into some perspective, analysts at house broker Panmure Gordon have a risked valuation of £50m, or 50.5p a share, on Parkmead’s undeveloped oil resources, or £372m on an unrisked basis, the commercial viability of which is clearly enhanced by a recovering oil price. I also note the company’s takeover potential in light of DNO’s interest in Faroe. Buy.

The bounce in Brent Crude in the past fortnight has been mirrored by a similar recovery in US Benchmark West Texas Intermediate. This is clearly a positive for Aim-traded Trinity Exploration & Production (TRIN:14p), an independent oil and gas exploration and production company focused solely on Trinidad and Tobago that I highlighted in the autumn  (‘Resurrection points to a strong recovery’, 3 Sep 2018). The 2018 fourth-quarter oil price reversal dampened sentiment and Trinity’s share price is 17 per cent under water, but the investment thesis still holds.

Indeed, with Trinity achieving output of 3,000 barrels of oil per day in October, and bringing onstream six new wells in 2018, it is set up to further increase production this year. The debt-free company retains a cash balance of $17.6m (£13.8m), equating to 25 per cent of its market capitalisation of £54m, part of which is being recycled into its profitable onshore drilling programme. It is lowly rated, too, with the shares priced two-thirds below risked net asset value (NAV) of 38p a share based on 2P proven reserves of 23.18m barrels and cash in the bank, one of the deepest discounts in its peer group. Buy.

Bumper cash return for Bowleven shareholders

I also note this morning’s news from Africa-focused oil and gas exploration group Bowleven  (BLVN:32p), a constituent of my 2016 Bargain Shares Portfolio and 2017 Bargain Shares Portfolios (at 18.9p and 28.9p, respectively). I subsequently advised banking profits on half your holdings, at 33.75p, and running the balance ahead of drilling news at the Etinde offshore prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). I last advised running profits on the balance, at 30.5p (‘Bowleven drilling disappoints’, 28 Aug 2018).

I was first attracted to the company due to its cash-rich balance sheet and the fact that its interest in the Etinde prospect, in which Bowleven holds a 20 per cent equity interest, was effectively in the price for free. At the end of November 2018, the company had net cash and liquid assets of $80m (£63m) and will be due a further $25m (£19.7m) from its joint venture partners at Etinde when the final investment decision (FID) is made on the project. So, with surplus cash on its balance sheet, the board has announced a special dividend of 15p a share to return £50m of cash to shareholders. The dividend will be paid on Friday 8 February 2019 and the shares have an ex-dividend date of Thursday 17 January 2019.

This means that having top-sliced half the holding at 33.5p in April 2018, investors who backed the company in my 2016 Bargain Share Portfolio will have banked cash equating to 129 per cent of their original investment after the shares go ex-dividend, so have a free ride on the balance of their holding, which will be worth 45 per cent of their original capital investment. On the same basis, investors who followed my advice in my 2017 Bargain Share Portfolio will have banked cash equating to 84 per cent of their original investment and still hold shares worth 29 per cent of the capital they first invested.

I would advise running profits on the balance of your holdings ahead of half-year results at the end of March. The reason for doing so is that net cash post the special dividend and the FID payment equates to £32.7m, a sum equating to almost 60 per cent of Bowleven’s market value of £55m post the dividend payment. This means that its exploration assets, which have a book value of $199m, are effectively in the price at 15¢ in the dollar, a massive discount to their carrying value. Run profits.

Chariot down, but not out

I would advise running your diminished profits on Aim-traded Chariot Oil & Gas (CHAR:2.5p), a £10m market capitalised oil exploration company with activities in Morocco, Namibia and Brazil. I first advised buying Chariot’s shares at 8.29p in my 2017 Bargain Shares Portfolio, top-slicing two-thirds at 17.5p ('Bargain Shares on a tear', 3 Apr 2017), participating in the one-for-eight open offer at 13p on the balance of your holdings (‘On the earnings beat’, 5 Mar 2018), and last recommended running profits when the price was 9p (‘Countdown for Chariot’, 14 Sep 2018).  The fact that the price has slumped since then reflects the disappointing drilling news last autumn on the company’s Prospect-S in offshore Namibia. Chariot is the operator and holds a 65 per cent stake.

It was the second duster the company had last year, hence the share price reversal. It also makes the decision to bank a 110 per cent profit on two-thirds of the holding the right decision in hindsight. That said, Chariot ended 2018 with net cash of $19m, a sum worth 50 per cent more than its current market capitalisation, and is targeting the drilling of the Mohammedia licence prospect MOH-B, offshore Morocco, which has a gross mean prospective resource of 637m barrels across two targets. It is part of a larger portfolio in the Mohammedia and Kenitra licences, totalling 2.4bn barrels of gross mean prospective resources. A partnering process has been initiated and drilling preparations have begun.

Clearly, the 42 per cent net profit made on this holding is a disappointing result, but with the company priced below cash on the balance sheet, I see scope for recovery. Run profits.

Mpac guides to strong 2019

The laggard in my 2018 Bargain Shares Portfolio, Mpac (MPAC:125p), a small-cap niche packaging engineering business supplying customers in the pharmaceutical, healthcare, nutrition and beverage industries, has issued a reassuring pre-close trading update for the 2018 financial year. Expect profits to be in line with estimates of analyst Paul Hill at Equity Development, who predicts a 15 per cent rise in pre-tax profits to £1.3m on revenues of £57m to deliver EPS of 4.9p, up from 4.2p in 2017. Mr Hill is maintaining his closing net cash position of £25m, a sum worth 124p and one that completely backs up Mpac’s share price. Net cash also accounts for half of Mpac’s NAV of 253p a share.

Importantly, the company has won further new contracts for delivery in 2019, having announced a major contract win in the autumn that accounts for up to a third of Equity Development’s 2019 revenue forecast of £60.4m (‘Mpac back on track’, 5 Sep 2018). Improving visibility on the sales book de-risks 2019 estimates. Moreover, as sales rise so too does Mpac’s profitability, the reason why analysts expect operating margins to rise from 2.6 per cent in 2018 to 4.9 per cent and almost double 2019 operating profits to £3m. The operational gearing of the business, a blue-chip client base and underlying market growth of around 5 per cent for the high-speed, cutting-edge packaging machinery and equipment that Mpac supplies, are key bull points as is the fact that 85 per cent of sales are derived from outside the UK. I am also reassured that the issues with two legacy contracts that held back progress last year, and which I highlighted in my September article, have been sorted. Please note that I have fully taken into account Mpac’s pension deficit in my analysis. Recovery buy.

■ Limited Offer until 10 January 2019. Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com at the promotional price of £12.50 per book plus £2.95 postage and packaging per book, or by telephoning YPDBooks on 01904 431 213 to place an order. Postage and packaging is only £3.75 if both books are purchased. They are being sold through no other source. A detailed outline of the content is available on YPDBooks website.

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