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Time to Buy Anadarko

Stocks in this article: APC TROX BP

Moreover, the recent downward trend in oil prices may have an adverse impact on Anadarko's cash flow. That would seriously hurt investor confidence.

In the worst case scenario, Anadarko would be slapped with a fine of more than $10 billion. Then the business might have to tap its $5 billion line of credit, as well as sell some its less lucrative emerging-market assets in Mozambique and Brazil that are worth nearly $18 billion.

At this point, two things are fairly certain. First, although Anadarko's reserves and profits are under no immediate threat from the litigation, in the next several years the business will take a serious hit.

Second, we have learned from BP's (BP) enormous environmental disaster and lengthy litigation that the oil company's shares will likely remain under pressure until the liabilities and claims are finalized.

This is the primary reason why Anadarko's shares have not fully recovered. Before the ruling, the company's shares were hovering around $84. Since then, the stock has remained below the $80 barrier.

Anadarko shares will likely remain under pressure. They could fall even lower on any negative news.

On the other hand, this could turn into a buying opportunity for a long-term position in Anadarko Petroleum.

Although these massive environmental costs will be a big setback for Anadarko, the lawsuit is a short-term, one-off event which will be over within three years. The business has ample resources that can cover the potential payout. The long term outlook of the company beyond the next three years is still positive. The business is the biggest player at Eagle Ford and has impressive international properties that could continue to fuel growth. Anadarko has not been known as a high-yield stock. Currently, the business gives a below-average yield of just 0.9%. Given that Anadarko is not short of resources, the company could work on rewarding shareholders by pumping up its dividend and buyback expenditure. This could go a long way toward restoring shareholder confidence. A similar move was also taken by BP, which continues to reward shareholders by offering a yield of more than 4.5%.

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

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

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