While turnaround stocks can prove to be some of the most profitable investments, they can also fail to turn. That seems to be the case for BP (LSE: BP), since the oil major has repeatedly disappointed investors over the last handful of years. That’s because it has experienced a series of major problems which have caused its share price to fall heavily. Now, it trades within 10% of its 10-year low and with the oil price being low, many investors may feel there’s little hope for BP to make a successful turnaround.
However, BP could be on the cusp of doing just that. Certainly, the oil price could move in any direction in the short run, but the reality is that no market in history has ever remained outside of equilibrium in perpetuity. In other words, the current price of oil is simply uneconomic for a number of producers and while they may be surviving at the moment, they’re unlikely to be able to cope with falling profitability in the long run. That’s especially the case since interest rate rises are ahead and are likely to raise costs for indebted companies yet further.
As such, the laws of supply and demand are likely to kick-in and with demand for oil likely to rise over the coming years as the emerging world continues to develop, black gold could be a much better investment than many investors realise right now. That view is perhaps best evidenced by the forecast rise in global energy demand of 25% between 2014 and 2040 and while clean energy is set to become a larger part of the energy mix, fossil fuels such as oil are likely to be remain in high demand, too.
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Share price impact
This could act as a positive catalyst on BP’s share price in the long run and with BP having a relatively sound balance sheet with a low cost base, it may emerge in a stronger position relative to its peers following the low ebb in oil prices. When combined with the prospects for a higher oil price, this may lead to higher profitability down the line and with BP trading on a forward price-to-earnings (P/E) ratio of 12, there seems to be considerable scope for an upward rerating. This point is further evidenced by BP’s price-to-book (P/B) ratio of 0.95, which shows that BP may be undervalued at the present time.
Of course, in the near term the price of oil may remain low and fail to positively catalyse BP’s share price. However, with BP having a yield of 7.7% and its dividend expected to be fully covered by profit next year, its income appeal could cause an improvement in investor sentiment moving forward. This could help it to reverse at least some of the share price losses from previous years and when coupled with the potential for a higher oil price and the company’s low valuation, means that buying a slice of BP right now could be a shrewd long-term move.
