The last six months have been hugely disappointing for investors in BP (LSE: BP) (NYSE: BP.US). Sentiment in the oil major has fallen heavily as a multitude of challenges face BP in 2015 and beyond. This has caused the companys share price to drop by 12% during the period, which is a far worse performance than that of the FTSE 100, which is down 3% over the same period.
Present And Future Challenges
Indeed, BP currently faces the prospect of declining earnings from a stubbornly low oil price, further pressure from Russian sanctions, as well as a lack of progress with regard to its appeal against compensation payments resulting from the US oil spill.
The key problem for BP is that none of the three present difficulties are showing any sign of improving. For example, the oil price has fallen further and has dipped below $80 per barrel, while Russian sanctions are yet to fully bite and could even be ramped up by the EU and US. Furthermore, BP seems to be at the mercy of US regulators and courts when it comes to payouts for the Deepwater Horizon oil spill, which is clearly causing sentiment to worsen in the stock.
Reasons To Cheer
However, its not all bad for BP. It continues to have a stunningly attractive asset base that remains highly profitable and allows it to pay a very lucrative dividend. Shares in BP currently yield a highly enticing 5.6% and, in addition, the dividend is well covered by profit at 1.8 times. This means that even if profit were to fall due to the aforementioned challenges, BP should still be able to make its shareholder payouts.
Furthermore, BPs current share price appears to adequately price in the current problems and affords investors in the stock with a very ample margin of safety. For example, BP has a price to earnings (P/E) ratio of just 9.9. Were it to trade on the same P/E ratio as the FTSE 100 (which has a P/E ratio of 13.9), it would mean upside of 40% from BPs current share price.
Clearly, such gains are not going to happen overnight. However, even with a lower oil price, BP remains highly profitable as a result of its low cost curve. Furthermore, with the 20% stake in Russian operator, Rosneft, being a minor part of the business, BP is likely to remain highly profitable even if Russian sanctions start to bite. And, with the after-effects of the US oil spill unlikely to be so challenging over the medium term, BP could surprise on the upside simply because continued misfortune is more than priced in.
In other words, BP could beat the FTSE 100 in 2015 not necessarily by delivering strong performance, but simply because its share price offers a considerable margin of safety to investors.
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Peter Stephens owns shares in BP.