My Top Pick for 2014

 | Dec 12, 2013 | 3:30 PM EST  | Comments
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I recently challenged readers to find great stock ideas using what I believe will be one of the strongest energy trends of 2014: the relative premium for global crude that will be realized compared to U.S. crude. The stock I've come up with based on this thesis is BP (BP).

I have always believed that making "best stock" recommendations is less about finding a stock to hold for a full 12 months and checking the results in December and 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 was their ideas for exploration-and-production companies that could leverage a global crude price that I believe would average above $15 and likely touch $25 in the coming year. Obviously, a higher premium will translate into higher profit, provided the production costs and tax structures are similar. That's why the rush for U.S. shale assets despite the oil price discount has been so heated; low taxes, rebates and a supportive government make the U.S. a great place to find and produce oil and gas. Oil production got its start in the U.S., and the support for the industry has a long and deep history. You can't find a better place to drill for oil than the U.S.

But when premiums for global crude run closer to $20, the math can change, and no company is better equipped to cash in on that trend than BP. While 40% of its assets are in the U.S., a significant 60% of production comes from elsewhere, mainly Azerbaijan, Angola and the North Sea. BP's position in Russia with its long and convoluted TNK-BP interest was finally resolved in 2013 with a sale to Rosneft, which frees BP from a major headache in the coming year. In the U.S., BP has its oil assets concentrated in the Gulf of Mexico, an oil production play I believe that has been strongly undervalued in comparison to the more hyped shale plays in the Bakken and Eagle Ford shales and the Permian basin.

But with any long-term recommendation comes the question of share price, and with BP, that price has been negatively tied to the 2010 Deepwater Horizon disaster and the continuing legal liabilities emerging from it. Without going into a deep legal analysis, there have been enough rulings in the past year to conclude that the legal overhangs might not entirely go away but will be far more manageable in the coming year. Those legal overhangs have continued to keep the BP's shares in the $40s for so long while virtually every other major oil stock has rocketed higher in the last two years.

With lessening pressure from civil and federal liabilities and strong presence in the Gulf of Mexico and U.S. grossly undervalued in the shares, I expect great performance from BP in 2014. Add BP's ability to leverage a stronger global price for 60% of its production, and I'm ready to make it my top stock pick for the upcoming year.

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