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Anadarko Digs Its Way Out of Tronox Mess -- Is It Time to Buy?

NEW YORK (TheStreet) -- There's nothing Wall Street hates more than uncertainty. The anxiety level increases even more when the unknown leaves open the possibility of criminal prosecution.

In the case of Anadarko Petroleum (APC), which has built itself into a leader in exploration and production of oil and gas, investors only needed a little patience. Dark clouds have hovered above Anadarko for quite some time. The company has fought a lengthy lawsuit with the creditors of Tronox (TROX), following Tronox's 2005 spin-off from the energy and chemical company Kerr-McGee.

As Christopher Helman described it in Forbes, Tronox was created by Kerr-McGee as "a kind of pit of despair into which [Kerr-McGee] loaded up decades of toxic environmental liabilities and toxic tort claims, balanced them out with a handful of assets, then spun it out as a standalone public company." Then Anadarko acquired Kerr-McGee in 2006, supposedly without the taint of Tronox's messes. Tronox went bankrupt in 2009. Major litigation followed.

On Thursday, investors' persistent belief in Anadarko paid off.

Anadarko agreed on Thursday to pay more than $5.15 billion to clean up areas across the U.S. polluted by nuclear fuel, wood creosote and rocket fuel waste that caused cancer and other health problems. Anadarko assumed this liability through its 2006 acquisition of Kerr-McGee, its opponents argued.

Anadarko saw it another way. Company officials have claimed that the environmental liabilities belonged to Tronox. I happen to agree. The spin-off of Tronox, which then filed for bankruptcy, happened before Anadarko's purchase.

The case was brought by a trust which represents 11 state governments, Indian tribes, the U.S. government and individuals. All told, the group was seeking restitution and cleanup costs at over 2,000 U.S. sites. This is in addition to claims of more than 8,000 people who said they were exposed to cancer-causing agents in two of Kerr-McGee's wood treatment plants.

Back in December, U.S. Bankruptcy Judge Allan Gropper ruled that Anadarko must pay between $5.15 billion to more than $14 billion in cleanup costs. Anadarko sought to pay no more than $850 million. After three months, Anadarko has had a change of heart. And it looks like a great deal.

With close to $4 billion in cash on the books and $9 billion in operating cash flow, Anadarko won't be broken by this settlement. Not to mention, the repayments are likely to be spread out over a reasonable time period.

When you consider that Anadarko could have been asked to pay a much higher settlement, this has to be considered a win. For some context, oil giant BP (BP) has set aside more than $40 billion to settle disputes over the 2010 oil spill that polluted the waters of the Gulf of Mexico.

Anadarko investors understand this, especially since there were reports last year that Anadarko would pay close to $25 billion. This explains why the stock shot up more than 14% when the news was released Thursday.

With these dark clouds now resolved, management can refocus their attention towards rebuilding the company's position in oil and gas exploration.

Shares are now back to 52-week highs of $103.50. The real question is: are investors too late to the party?

While Anadarko is without doubt a standout company, these shares, which trade at 4 times that of both rivals Apache (APA) and Total (TOT), are no longer cheap. Buying at this level would require more patience and the conviction that management can continue to grow earnings to adjust for these new settlement charges. Waiting for a 10% pullback would be the best move at this point.

At the time of publication, the author held no position 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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