Shares in BP (LSE: BP) have been a perennial disappointment in recent years with one problem after another for the company to face. In 2010 it was the Deepwater Horizon oil spill that caused investor sentiment to rapidly erode. Since then, compensation payments for the disaster have kept BP’s valuation pegged back, while its exposure to Russia at a time when sanctions were being imposed also caused its share price performance to disappoint.
Following all of this, BP now faces a low oil price environment. This is clearly having a hugely negative impact on its profitability, with BP’s bottom line having fallen by 83% in the last financial year. And with BP’s management team saying they’re planning for oil to remain at or below $60 per barrel over the medium term, the market appears to be pricing-in further problems in 2016 and beyond.
Evidence of this can be seen in BP’s dividend yield, with it currently standing at an incredible 7.7%. Clearly, the market is expecting a dividend cut and while there’s a good chance of this, BP has stated that the payment of dividends remains a priority. Therefore, it may be a modest reduction rather than a slashing of shareholder payouts. That’s especially the case since BP’s net profit is due to be within 10% of fully covering next year’s forecast dividend payout.
However, even a modest dividend cut may not hurt BP’s share price performance by as much as many investors believe. That’s because, with a world-class asset base, relatively low costs, a sound management team and a margin of safety evidenced by its ultra-high yield, BP could prove to be a strong performer over the medium-to-long term.
Value for money
Similarly, Petrofac (LSE: PFC) also offers a wide margin of safety. It trades on a forward price-to-earnings (P/E) ratio of 8.3, with its bottom line being forecast to rise by as much as 174% in the next financial year. Furthermore, Petrofac offers a yield of 5.2% which, as with BP, indicates that its shares offer good value for money.
With Petrofac having a strong order backlog and its order intake for the year-to-date showing a disciplined approach to securing new business, it appears to be on track to survive the current downturn in the resources market. With its portfolio continuing to perform in line with expectations and a reorganisation across its operations due to start in January, now could be a good time to buy a slice of it for the long term.
Slimming down
Meanwhile, Anglo American (LSE: AAL) has made several key changes to its business of late, with dividends being cancelled until at least the end of 2016 and a reduction in the number of operating divisions from six to three. Furthermore, Anglo American may seek to offload further assets as it aims to become leaner and more profitable. It makes sense to concentrate its efforts on those areas where it believes the risk/reward ratio is most favourable.
With Anglo American trading on a forward P/E ratio of just 8.2, it appears to offer excellent value for money. Certainly, there’s the scope for further falls in its share price following its decline of 77% year-to-date so it appears to be a stock for less risk-averse investors. However, with a new strategy and a very low share price, it could become a strong performer over the medium- to-long term.
