Coming into the end of the year, I challenged my readers to help me find great stock ideas using what I think will be one of the strongest energy trends of 2014; the relative premium for global crudes that I think will be realized compared to US crude. It's time for me to reveal the stock I've come up with based on this thesis: BP.
Now, I have always felt that making 'best stock' recommendations is less about actually finding a stock to hold for a full 12-month period and checking the results come December. It is much more about the process of translating macro energy ideas into investable ones, and that's the point of choosing BP.
What I hoped to get from readers were their own ideas of exploration and production companies that could leverage a global crude price that I believe will average above $15 and likely touch $25 in the coming year. Obviously, a higher price premium will translate into higher profits, provided the production costs and tax structures are similar. That's the reason the rush for US shale assets despite the oil price discount has been so heated; light taxes, rebates and a supportive government make the US a great place to find and produce oil and gas. Oil production got its start here in the United States, and the support for the industry has a long and deep history -- You can’t find a better place to drill for oil than here in the US.
But when premiums for global crude run closer to $20, the math can change, and no company is better equipped to cash in from that trend than BP. While 40% of their assets are here in the US, a significant 60% of production comes from elsewhere, significantly in Azerbaijan, Angola and the North Sea. Their position in Russia with their long and convoluted TNK-BP interest was finally resolved in 2013 with their sale to Rosneft and frees BP from a major headache for the coming year. In the United States, BP has its oil assets biased towards the Gulf of Mexico, an oil production play I believe has been strongly undervalued in comparison to the more hyped shale plays in the Bakken, Eagle Ford and Permian Basin.
But with any long-term recommendation comes the question of share price and with BP, that price has been inexorably and negatively tied to the deepwater horizon tragedy of 2010 and the continuing legal liabilities emerging from it. Without going into a deep legal analysis,…