It’s been a slightly disappointing few weeks for investors in BP (LSE: BP) (NYSE: BP.US), with the oil major’s share price making strong gains until the start of July, at which time it pulled back so that its year-to-date performance is roughly in line with that of the FTSE 100 at +1%.
Indeed, last week’s results show that the company continues to make good progress, with second-quarter profits being one-third higher than the same quarter last year. However, shares have reacted rather negatively to the update as a result of concerns raised by BP surrounding the potentially detrimental impact of further Russian sanctions on its stake in Rosneft.
Despite this, BP continues to be a top prospect and could have a great long-term future. Here’s why.
Highly Profitable
Despite making a loss in 2010, largely as a result of costs relating to the Deepwater Horizon oil spill, BP has made a strong profit in each of the last three years. For instance, BP’s profit in 2013 was 42% higher than it was in 2009 and, while it has been volatile over the last three years, this is simply ‘par for the course’ for an oil stock like BP. This is a highly impressive performance, since it has been a period of vast change for the company as it has been forced to set aside vast amounts of compensation to those affected by the oil spill and has sold numerous assets, too.
Weakened Sentiment
This period of change, though, has seemingly not impacted the bottom line. However, it has caused market sentiment to weaken, as can be seen in BP’s share price over the last four years. Although it has recovered from the 305p lows of 2010, BP’s share price remains 25% below its pre-oil spill level of 660p despite the company now being more profitable than prior to the spill.
Indeed, BP’s attractive valuation is evidenced by its low price to earnings (P/E) ratio of 10.3. This is considerably lower than the FTSE 100’s P/E of 14 and shows that there is vast scope for an upward rerating of BP’s shares. Meanwhile, BP’s yield of 4.7% means that the company is still highly relevant for income seeking investors, too.
Looking Ahead
Certainly, further Russian sanctions could impact on BP’s bottom line as a result of it having a stake in Rosneft. However, the threat from this appears to be priced in, with BP trading at a substantial discount to the wider market. Indeed, BP’s performance as a company over the last few years does not appear to have been translated into strong share price performance, with it continuing to suffer from weak market sentiment. This, then, is where investors can benefit from buying shares in a highly profitable company, with a great yield, at a low price. Doing so really could help to pay off your mortgage a little quicker than you’d planned.
