Clearly, buying shares in BP (LSE: BP) (NYSE: BP.US) and Tullow Oil (LSE: TLW) this time last year would not have proved to be a wise move. That’s because the price of oil has sunk from a high of around $115 per barrel in July to less than $60 per barrel, with oil stocks such as BP and Tullow Oil seeing investor sentiment weaken and leading to major share price falls.
In fact, BP and Tullow Oil’s share prices have fallen by 16% and 52% respectively since January 2014, which is a huge disappointment for their investors. And, while the near-term prospects for oil seem to be pretty dismal, now could be a great time to buy a slice of both companies for long-term growth. Here’s why.
Investor Expectations
At the present time, most investors are expecting the price of oil to keep on falling. Certainly, this may happen, with Saudi Arabia being rumoured to be happy to maintain current production levels so as to slow down the progress made by the shale industry. So, an oil price of less than $50 or even $40 per barrel could be on the horizon in the short run.
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Clearly, this will have a negative impact on the profitability of stocks such as BP and Tullow Oil. However, it may not hurt investor sentiment to the same extent, since the market appears to be pricing in such falls.
For example, BP trades on a price to earnings (P/E) ratio of just 10.5 (which is considerably lower than the FTSE 100’s P/E ratio of 15.1), while Tullow Oil has a price to earnings growth (PEG) ratio of just 0.2. Both of these figures indicate that the two stocks offer exceptional value for money and that further oil price falls are adequately priced in. In other words, they seem to offer a considerable margin of safety at their current price levels.
Looking Ahead
Although it may seem hugely risky to buy oil stocks such as BP and Tullow Oil at the present time, it appears to be a logical move. For example, both companies offer good value for money and are forecast to increase their bottom lines next year. While it may take time for their share prices to rise, investors can afford to remain patient in the interim, with BP offering a yield of 6.5% and Tullow Oil having a yield of 3%.
As a result, and while there may be some lumps and bumps over the coming months, BP and Tullow Oil could turn out to be excellent longer-term buys due to their impressive income prospects and highly attractive valuations.
