The FTSE 100 was flat at the time of writing on Tuesday as surging miners offset declines in housebuilders as investors weighed the possibility of higher UK interest rates for longer.

The FTSE 100 was down 2 points to 7,568 at the time of writing after being slightly higher earlier in the session.

Investors were awaiting key US inflation data on Tuesday before the Federal Reserve interest rate decision tomorrow.

“The FTSE 100 was a touch higher but largely treading water ahead of US inflation numbers later on,” said AJ Bell investment director Russ Mould.

“These will offer a clue into the thinking of the Federal Reserve ahead of its meeting to decide interest rates tomorrow. A higher-than-expected number could hit market sentiment as it might suggest further US rate hikes are necessary.

“Compared with the Bank of England though, the Fed has a somewhat easier task. UK wage figures surprised on the upside to suggest inflation could be more persistent, which has driven gilt yields higher.

“We could be looking at higher rates for longer, with all the negative implications that has for the housing market and consumer spending. In such a scenario, the risks of a UK recession now have to be significantly higher.”

Investors reacted to the threat of higher UK rates by dumping FTSE 100 housebuilders.

FTSE 100 movers

Taylor Wimpey, Persimmon, Barratt Developments, and Berkeley Group Holdings were all down over 2% at the time of writing on Tuesday. Taylor Wimpey was down 3.4%.

Admiral was the FTSE 100’s top faller after Citigroup cut their rating to sell. Admiral shares were down over 6% at the time of writing.

“Admiral led the list of losers in the London market due to negative broker comment, and real estate stocks were also pressured thanks to the shift in UK rate expectations,” said Russ Mould.

Miners were storming ahead on Tuesday as China cut their 7-day reverse repo rate by 0.1% to 1.90% from 2.00%. The move had been largely expected after reports China were moving to stimulate the economy emerged last week.

Glencore was the FTSE 100’s top riser at the time of writing, gaining over 3.4%. Rio Tinto was up 3.1%.

Predator Oil & Gas Holdings (LON:PRD), the Jersey-based group, which in mid-March raised £2m at 5.5p per share to cover its works programme costs, has issued an Interim drilling Update on its MOU-3 well in Morocco.

It has encountered unexpected overpressured shallow gas at that well while appraising its Moulouya Fan primary reservoir target.

Group Interests

The £26m capitalised company is engaged in the exploration, appraisal, and development of oil and gas assets in Africa, Europe, and the Caribbean.

The company owns a diversified portfolio of oil and gas interests comprising a CO2 enhanced Oil Recovery project in Trinidad; as well as two gas exploration and appraisal projects in offshore Ireland; and a gas exploration project in onshore Morocco.

Management Statement

Executive Chairman Paul Griffiths stated that:

“Unforeseen overpressured gas at shallow depths is always a potential hazard in a new poorly explored sedimentary basin. I would like to thank our experienced drilling management team, Lonny Baumgardner and Moyra Scott, for overcoming successfully; using their extensive drilling experience, what could have developed into a very serious operational challenge.

The presence of shallow overpressured gas with an effective sealing caprock has added to the identification of two new potential gas reservoirs that were not known about pre-drill.

Of even greater significance is that the overpressured gas has validated shallow trap integrity and identified a clear path for the migration of deep gas into the next six targets to be evaluated by MOU-3.

We are very encouraged by what we have found to date, which we believe at this early stage is material in the context of our CNG development plans but remain cautious as we drill ahead through a section that may or may not contain more overpressured gas.

However, this is already an exciting beginning for our shareholders to our planned drilling and testing programme.”

Market Reaction

Upon this morning’s news the group’s shares have been an active market, leaping 30% at one stage to 7.30p.

Challenger Energy, Baron Oil, and Angus Energy are all awaiting near-term catalysts. Read on to consider the updated investment cases.

As the UK starts to enter the quiet summer trading season, arguably some of the best small cap oil shares are starting to look oversold. I’m not talking about Union Jack Oil (LON: UJO), which is cash generative and simply undervalued based on the fundamentals. I’m also not talking about Main Market-listed COPL, which has the potential to generate massive returns but has also disappointed investors for some time.

Instead, I’m talking about three FTSE AIM oil shares which have the potential to see large returns in the near future, with huge catalysts on the horizon. As a note of warning, this is not financial advice, and all three shares are comparatively high risk.

Let’s dive in.

FTSE AIM oil shares

1. Challenger Energy (LON: CEG)

Challenger shares have essentially been on a road to nowhere for over a year, and currently change hands for 0.1p apiece. However, the £10 million company may now be a buying opportunity.

There are essentially three key catalysts to consider:

1. Cory Moruga sale — CEG is selling its interest in the Cora Moruga licence to Predator Oil & Gas for a gross estimated potential value of $9 million, including $1 million in cash after the transaction completes, a further $1 million six months after completion, an additional $1 million once the field starts producing 100 barrels of oil per day.

It’s also retaining the option to repurchase 25% of Predator’s holding in the field in the future, with the sale is expected to conclude by 31 August 2023.

2. Uruguay Area-Off 1 — this block offshore Uruguay last saw an update on 31 May. Volumetric assessment of its three primary prospects has been completed, with an assessed estimated recoverable resource of 2 billion barrels, and over 4.9 billion in a best-case scenario.

Additional work is ongoing to enhance prospectivity, and a ‘Formal adviser-led farm-out process has been initiated with strong interest received.’ CEO Eytan Uliel considers the block ‘clearly world class acreage with massive resource potential, in what has become a global exploration hotspot.’ The CEO is targeting a farm-out transaction by year-end.

3. Uruguay Area-Off 3 — CEG has bid for and ‘now anticipates being awarded’ this additional licence, which is the sole remaining block offshore Uruguay. For context, the other offshore exploration licences are held by majors including YPF (Argentina’s national oil company), Apache, and Shell.

Altogether, CEG now holds the second-largest exploration acreage behind Shell, with this new block boasting a current estimated resource potential of circa 500 million barrels of oil equivalent and circa 9 trillion cubic feet of gas. The licence should be awarded within the next month.

It’s not hard to envisage one of the majors operating in the area to sign up to a JV in the immediate future. If you’re already planning on spending significant capex, it just makes sense. Investors have been waiting for some time for the stream of good news to translate into share price movement — now may be the time to get in.

2. Baron Oil (LON: BOIL)

Baron has been on a wild share price ride in 2023, starting the year at 0.15p, peaking at 0.25p, and falling to 0.09 p today. As a buy and hold investor, this volatility hasn’t phased me, as I am waiting for the inevitable catalyst.

The two project catalysts to consider are:

1. Dunrobin UK licence P2478 CPR — BOIL has a 32% economic interest in the field, which has demonstrated a 201mmboe aggregate gross un-risked mean Prospective Resource, with a 34% Geological Probability of Success at the Dunrobin West Jurassic primary target.

Management believes that a single 800m vertical borehole on Dunrobin West can test both the Jurassic and the Triassic targets at an estimated gross drilling cost of £8.6 million on a dry hole basis. A farmout campaign to attract the necessary funding is underway — with success now more likely given the new floor to the windfall tax.

2. Chuditch CPR — BOIL has a 75% economic interest and the recent Competent Person’s Report shows that Chuditch-1 alone has 1,084Bscf gross Pmean Contingent gas resources attributable to the licence.

On 2 June, the company was granted a six month Chuditch extension, with contract year two now ending on 18 December 2023, with a subsequent commitment on entry into Contract Year Three for the drilling of one well to appraise Chuditch-1. In essence, this means that a decision on whether to enter the drilling phase is now required to be taken at or before that date.

There remains a ‘number of ongoing discussions with third parties regarding participation in the Chuditch appraisal well and future activities… the granting of a further six-month extension and its associated work programme maximises the chances of success.’

With Woodside and ENI operating feasibility studies in the area, there’s a good chance of a near-term JV. BOIL is opening up an investor Q&A on 20 June 2023.

3. Angus Energy (LON: ANGS)

Angus Energy shares have been changing hands for as little as 1p and as much as 1.83p this year and are now worth around 1.14p each.

But a re-rate higher could be in the offing:

1. ANGS’ flagship Saltfleetby field has now reached a steady operating state from three producing wells. And the company is now exporting gas to the National Grid — a key milestone that has slipped past the markets unnoticed.

It’s exporting at a combined average daily rate of 9.5mmscfd, reaching peak flows of over 10mmscf, with the new B7T well continuing to clean-up with the company anticipating it will exceed a combined average daily rate of 10mmscfd on a sustainable basis.

2. Angus, which sports a market cap a tad over £40 million, now expects to generate £2.5 million per month from the site each month from winter 2023. Or in other words, it’ll generate its market cap in 16 months. As gas prices will likely rise in winter, this could be even higher.

3. The company is also exploring natural gas and hydrogen storage options at Saltfleetby, and further target Namurian Reservoir could also yield positive results. CEO Richard Herbert notes that ‘properly engineered to manage H2 or CO2 as well as natural gas, storage at Saltfleetby has the potential to meet the twin demands of present and future administrations for clean energy and energy security’ with the storage capacity of the entire field between 700-800 million cubic metres, easily the largest potential onshore facility in the UK.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.