Why BP plc could be the best investment opportunity on earth!

Buying BP plc (LON: BP) right now could be a profitable move.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Stating that BP (LSE: BP) could be the best investment opportunity on earth may seem like a rather unlikely assertion to make. After all, the oil price is standing at just under $50 per barrel and BP’s share price has fallen by 22% in the last year. However, this could prove to be the perfect moment to buy it for the long term.

A key reason for that is simple investment theory. As investors, we all wish to buy shares when they’re low and to sell them when they’re high. However, for a share price to be low in the first place, there must be a good reason for it. In other words shares don’t simply trade lower ‘just because’, but rather require some kind of uncertainty to do with the company, its industry or the wider economy in order to offer a wider margin of safety and more upside potential.

In BP’s case, the reason for its share price demise has mostly been external factors. For example, in recent years it has been hit hard by the Deepwater Horizon oil spill as well as sanctions against Russia, while the lower oil price has caused its profitability to come under severe pressure. Looking ahead, there’s scope for further pain if oil prices fall, although with BP having a sound balance sheet and strong asset base it should be able to outlast many of its smaller rivals if black gold were to trade far lower than its current price level.

Margin of safety

Evidence of the negative impact on BP’s valuation of the above factors can be seen in its price-to-earnings growth (PEG) ratio standing at just 0.1. That’s low because of BP’s share price fall, but also because it’s expected to bounce back with strong profit growth in the 2017 financial year. In fact, BP’s pre-tax profit is forecast to rise by over 100% next year and while this is highly dependent on the price of oil, BP still offers a wide margin of safety so that if the oil price does fall its shares could still offer major capital gains.

In terms of the outlook for the oil price, in the short run it may disappoint somewhat. That’s because the supply/demand imbalance that has largely been responsible for its weakness in recent months is set to continue over the short-to-medium term. However, in the long run, demand for oil from the emerging world in particular is likely to rise and when coupled with a potential supply constraint as investment in exploration falls due to a lower oil price in the short term, the prospect of $100-plus oil is relatively high.

So, while BP has been a poor performer of late and could record lacklustre performance in the coming months, for long-term investors it appears to have huge appeal.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BP. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »