The 2013 Outlook for BP

LONDON -- In this festive mini-series, we look at the 2013 prospects for some of your favorite FTSE 100 (UKX) shares. Today, it's the turn of BP  (LSE: BP  ) (NYSE: BP  ) .

BP's shares have lost 8% during the course of 2012, in line with the oil and gas sector average. Meanwhile, the Footsie has gained 6%.

If markets don't like uncertainty, and keep a company's share price depressed because of it, I'm a little surprised BP's shares haven't performed better this year seeing as positive newsflow in two major areas has removed some of the uncertainty that prevailed at the start of 2012.

In October, BP announced it had signed heads of terms to sell its share of the troubled TNK-BP partnership in Russia to state-owned Rosneft. Rosneft will also be buying the other half of TNK-BP. The deal, which should complete in the first half of 2013, will see BP end up with over $12 billion in cash and a 20% equity stake in Rosneft.

BP's determination to have a substantial and long-term interest in Russia remains a fairly high-risk strategy, but climbing out of bed with the oligarchs of TNK-BP and into bed with the Russian state looks like the lesser of two evils.

An even bigger issue for BP going into 2012 was, of course, the continuing legacy of the Deepwater Horizon disaster of spring 2010. Here again, some of the uncertainty has now been removed.

In March, BP announced a $7.8 billion deal to settle the vast majority of private-sector claims for economic loss and property damage, which a U.S. court has just approved. In November, the company announced the resolution of all criminal claims relating to the disaster with a settlement amounting to $4.5.

BP is now left with just civil claims from U.S. federal, state and local authorities. I say "just," but the civil damages could be substantial if BP is found to have been grossly negligent: as much as $18 billion under the Clean Water Act alone.

However, BP is well prepared. The continuation of its programme of asset sales during the course of 2012 has taken the company's total cash proceeds from divestments announced since the calamitous oil spill to $38 billion.

BP's shares, having fallen from around 650 pence to 300 pence as a result of the Deepwater Horizon disaster, recovered to 500 pence within seven months, but have failed to get any higher in the two years since. Yet, there has been the positive news on the company's activities in Russia, and the settlement of private plaintiff and criminal claims in the U.S. Furthermore, the end-game for the civil claims is about to get under way with a trial scheduled for 25 February -- three weeks after BP announces its annual results.

At a recent share price of 426 pence, BP is on a forward 12-month price-to-earnings (P/E) ratio of just 7 with a prospective dividend yield of 5.4%. That compares favorably with Footsie peer Royal Dutch Shell, which is on a P/E of 8 and a yield of 5.1%.

Both companies, then, look cheap, but it strikes me there could be more upside for BP's shares in 2013 from its current rating if newsflow continues positive, with the U.S. civil claims obviously being far and away the biggest item on the news agenda.

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