If that headline sounds like something you might hear from a used car salesman you’re not far from right. The company we’re talking about has been bruised and battered like a tired old car in a dealer’s lot. Yet unlike the typical used car, this one might be worth a test drive as it has the potential to stage a major comeback. Interested?
We’re talking of course about British Petroleum. The Oil and Gas giant’s troubles began a few years ago, when it was forced to take responsibility for the devastating Oil spill in the Gulf of Mexico, and have continued in 2014 thanks to a large stake in Russia’s Oil industry and the collapse of Oil prices by nearly 50% over the past six months.
Yet, while there may be blood in the water, there might also be bargains waiting to be found. In this article we will explore BP and try to gauge whether or not BP stock is a steal or just another lemon.
A Chain of Troubles
So how did everything go so wrong for British Petroleum? How is it that a company that was worth £120 billion in the spring of 2010 is now worth only slightly more than £70 billion? The answer: a chain of troubles. The big collapse in the stock’s price began in that spring of 2010 when one of the company’s deep water rigs spilled oil into the Gulf of Mexico in incredibly copious amounts. With the company estimating the damage at a jaw dropping $43 billion, it’s clear why the stock took a tumble.
But the company’s troubles didn’t end there; BP also owns 20% of Rosneft, the Russian Oil giant. In 2014, Rosneft shares fell as tensions escalated between Ukraine and Russia and as globally imposed economic sanctions tightened the grip on Russia’s economy. With Rosneft shares in the pits, BP’s couldn’t be far behind and the company’s share price was soon hit hard.
Last but not least, BP stock was in for another tumble due to the recent collapse in Oil prices. Since BP’s revenues depend heavily on oil sales, fearful investors turned to selling BP stock which brought the price down to current lows.
So is BP a Bargain?
In spite of all its troubles, BP is still one of the world’s largest Oil and Gas producers and is currently trading at a fraction of the share prices of its peers. BP’s revenues for 2014 exceeded $350 billion, and it has a strong management team with Bob Dudley at the helm. It’s true that BP has had numerous troubles which made investors fearful of the stock, and given those troubles, the stock price is trading at a discount. But that discount leaves room for positive surprises. And after such a collapse in the stock price, the upside, in the event the tide does turn, could be significant.
Upside and Risks
At the moment, buying activity in the stock signals that support rests at £3.6 a share or 360 GBX. If the tide does turn, the stock could return to 520 GPX, its high back in July 2014, a staggering 44% return. However, it’s clear that the tide does need to turn for BP and by “tide” we mean Oil prices, which need to bounce back in order for BP to make any upwards progress. So if one believes in a rebound in Oil prices, and one wants to buy an Oil giant at what may be a bargain basement price, then BP could very well be the stock to consider.
However, just as when buying a used car: buyer beware! Potential buyers should keep in mind that BP is currently not a stock for the faint- hearted; there is abundant risk attached to this investment as many things could go wrong and push the stock even lower. Moreover, if the stock rebounds, the journey back to the top will be jittery. But remember, no one ever said bargain hunting was easy.
Is this a good time to invest in BP? Have your say !