From Worms Knowledge Base
What happens here is that the worm changes team. That's right, it switches from its current team to that of one of its opponents! Its name and health stay the same, but its colour changes, and henceforth it is controlled by a different player (or possibly the computer, if it's a CPU team). In the worm order of the new team, it would probably go last, although a random position could also be chosen.
Why on Earth would you use this? Well, you might want to alter the turn order to your advantage (especially near the end of a tight round), or in a game against a noob, you might want to even things out to make the round last longer.
Incidentally, Turncoat can be regarded as a special case of Shapeshift, and the two options could potentially be merged.