BP: Buy For The Yield, Stay For The Turnaround Story

| About: BP p.l.c. (BP)
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I have found one of the most lucrative strategies in playing the market is to buy companies that are currently going through a lot of distress before their fortunes turn around and sentiment improves on their shares. It is not an easy game to play as it is human nature to seek the safety of following the head. It also can be tough to separate companies that have been permanently impaired from the firms just going through a temporary downturn.

One stock I like here because its prospects will be much brighter in 2014 is BP Plc. (NYSE:BP), the old British Petroleum. The company is still getting through the landmines created by its epic spill in the Gulf of Mexico in 2010. In the last few years the company has raised more than $40B through divestitures and has paid approximately $25B in cleanup costs and fines since the spill. Its civil trial is due to begin soon and one should expect a lot of negative headlines over the next few months during the trial. However, the company prospects brighten considerably in 2014. I will be starting to accumulate shares in anticipation of next year's sunnier days on any major pull back in the market and/or selling slightly out of the money puts to pick up premium and/or get a lower entry point. It is a stock that you buy for its five percent plus yield and stay for the turnaround story which should be obvious to the market sometime in the back half of 2013. Here is what you need to know:

The Trial:

The civil trials will occur in several segments throughout the year if a settlement is not worked out at some point in the process. The company will obviously have billions of dollars in civil suit judgments to be paid and also will face a fine for the amount of oil spilled. The company got some good news yesterday when a judge agreed with the company's claim that it collected 810,000 barrels of oil from the spill site which could save it $3.5B in fines.

These trials will be a turbulent time for the company as it is rocked by allegations in the trials and the accompanying sensationalized press articles as the proceedings are released. However, one piece of good news is that the states that are suing the company are very pro-business and are dependent on maintaining and growing energy production off the coasts in their states with the exception of Florida. I would not find it too speculative to believe a settlement will be reached prior to the trial's conclusion.

In addition, I am looking toward the decision on the Keystone pipeline for a direction on how the administration will deal with the oil & gas industry going forward. If they acknowledge the reality that the industry has created one of out every five jobs since the recession ended (and most of the high paying ones) as well as put the country on its way to be energy independent in the next 10 to 20 years, and approve the pipeline, I think this will improve sentiment on BP and how it will be dealt with.

The stock represents good value here based on valuation and if an investor can look past 2013 which will see falling revenues and earnings before recovering in 2014.

4 reasons BP represents deep value at $41 a share:

  1. The company sports an A rated balance sheet and the shares yield over five percent (5.1%).
  2. BP has easily beat earnings estimates the last two quarters and the consensus earnings estimates for FY2014 have gone up more than 6% over the last month.
  3. The stock sells for just over 7x forward earnings for 2014 and is priced at just 12% over book value. An extremely cheap valuation for a 5% yielder.
  4. The nine analysts that cover the shares have a $51 median price target on the shares. Analysts also expect 4% growth in revenues and over 10% increases in earnings in 2014.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.