Should You Buy Into Anadarko's Rally?

This article was originally published by TheStreet on April 7, 2014

By Sarfaraz A. Khan

NEW YORK (TheStreet) -- Shares of Anadarko Petroleum  (APC_) have rallied about 16% since last Thursday when news broke that the energy company reached a record $5.15 billion settlement in an environmental case.

The question now is whether the stock has more upside.

The shares trade at about 63 trailing earnings, which is not extraordinary considering the stock was trading at a similar multiple about nine months ago. With 6% to 7% growth in production expected this year and with the absence of concern about more litigation, the company could see its shares continue to go higher.

Analysts are optimistic. According to data compiled by TheStreet, 20 analysts have a buy rating on the stock and three have a hold rating.

On Thursday, Anadarko confirmed that it had reached a settlement to resolve all environmental claims filed against Kerr-McGee, a company Anadarko bought in 2006. Anadarko is expecting to record a net tax benefit of $550 million related to the settlement.

The settlement was the biggest environmental fine ever by the Justice Department, surpassing the  2010 Gulf of Mexico oil disaster involving BP  (BP_) which resulted in criminal fines worth $4 billion.

Despite its massive size, the Anadorko settlement was at the low end of estimates. A trust representing the U.S. government was initially targeting $25 billion from Anadarko to clean up more than 2,700 sites and to compensate claimants from Tronox (TROX_), a chemical company that had been spun off by Kerr-McGee. The claimants argued that the spinoff unfairly burdened Tronox with the environmental claims.

With $3.7 billion in cash reserves at the end of last year, plus an inflow of more than $3 billion through asset sales expected this year and $5 billion in unused credit facility, Anadarko can easily make the required payments for the settlement.

The company can now refocus on production growth. The company has amassed attractive acreage in the Rocky Mountains and in the Southern and Appalachia regions. This year, Anadarko is expecting a 10% increase in sales volume from its onshore assets in the U.S, excluding the impact of asset sales.

In the fourth quarter, sales volume from assets in the Rocky Mountains region rose 3% to a record 336,200 barrels of oil equivalents per day. The Wattenberg gas field in Colorado has performed exceptionally well, with daily production of 72,000 barrels of oil equivalents in the fourth quarter, up 28% from the third quarter and 95% from the fourth quarter of 2012. Growth is expected to continue as Anadarko is adding a new plant and pipeline in the area.

From the Southern and Appalachia region, Anadarko reported a 24% year-over-year growth in fourth-quarter sales to 273,000 barrels of oil equivalents per day. The growth was partly attributed to higher production from Eagle Ford Shale in South Texas. Anadarko has been evaluating its Wolfcamp shale assets in West Texas and is targeting higher activity there in coming quarters.

Anadarko is also one of the biggest producers from the deepwater Gulf of Mexico with more than 2 million net acres and eight operating facilities. Investors should watch for Anadarko's Lucius field in the Gulf, which could start producing in the second half of the year, and for Heidelberg, which could start up in 2016.

Moreover, the company and its partners have also discovered massive amounts of natural gas in offshore Mozambique, with reserves estimates of between 45 and 70 trillion cubic feet, which can be a game changer for Anadarko and Mozambique's economy. The Mozambique liquid-natural-gas project could start up in 2018.

At the time of publication, the author held no positions in the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.