Prior to the 2010 Deepwater Horizon oil spill, BP‘s (LSE: BP) shares were trading at over 650p each and the company was viewed by most investors as a relatively stable income company with a diversified and resilient asset base.
However, that view has changed significantly since 2010, with BP’s share price falling heavily in the aftermath of the tragedy and reaching a low of 305p in 2010. Since then, compensation payments have been a continual thorn in BP’s side and, in addition, the company has had to contend with doubts surrounding its 20% stake in Russian operator, Rosneft, with the country being subject to sanctions. Furthermore, BP has had to overcome a lower oil price that has decimated its profitability and left its future prospects under an even greater cloud of uncertainty.
As a result, BP’s share price is now just 374p; a fall of 42% from its pre-Deepwater Horizon oil spill price of 650p. And, while this is disappointing for the company’s investors, it also presents an opportunity. That’s because BP’s share price could easily rise by a third over the medium term, with the company’s income prospects and growth potential signalling that today is a great time to buy shares in the oil and gas producer.
For example, BP currently yields a whopping 7%, which is among the highest yields in the FTSE 100. Unlike a number of its resources peers, though, BP continues to prioritise the payment of dividends and, looking ahead to next year, its shareholder payouts are expected to be covered 1.15 times by profit. This indicates that, while there may not be huge scope for an increase in dividends, they appear to nevertheless be sustainable at their current level.
The key reason why BP’s dividends are due to be adequately covered by profit next year is that the company is set to deliver exceptional earnings growth. For example, BP’s bottom line is forecast to rise by 85% this year and by a further 24% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.5, which indicates that share price growth is very much on the cards.
This combination of a high yield and strong growth prospects at a reasonable price is likely to stimulate investor sentiment in BP. With interest rates due to remain low over the medium term and such high growth rates being relatively unusual, BP appears to offer a mix of growth, income and value that is not available at a large number of other stocks. As such, it would be of little surprise for the company’s share price to rise by at least a third, since this would equate to a dividend yield of 5.3% and a forward P/E ratio of 16.5 – both of which appear to be very reasonable either on an absolute or relative basis.
So, while the past has been very challenging for BP, it now appears to be the perfect time to buy a slice of the business. Although its long-term future may be somewhat uncertain, that creates an opportunity to buy in at a very low price and reap the rewards in 2016 and beyond.
