Anadarko Petroleum Corp.(NYSE: APC) is a "King" in the U.S. Oil and Gas Industry

Anadarko Petroleum Corp. (NYSE: APC) has been a big player in U.S. onshore oil and gas production, and it's about to get significantly bigger, unlocking incredible profits for investors.

Anadarko has stakes in some of the most prolific U.S. oil fields in Texas, Colorado, Wyoming, Utah, and Pennsylvania. It's also an international leader in unconventional production, employing methods like horizontal drilling to increase productivity rates from deep wells.

But a recent major development will propel Anadarko to the top of the U.S. oil and gas industry.

You see, the company reevaluated one of its Colorado oil fields and now believes it holds between 500 million and 1.5 billion barrels of oil and natural gas. This is huge. A billion-barrel field is a rare find; only a handful have been discovered in the United States.

This new discovery could increase Anadarko's annual production rate in the region by 20% in 2012. It also prompted Tudor, Pickering, Holt & Co. analysts to name the company "King of the Rockies" and raise its net-asset-value estimate for Anadarko by 5% per share.

Anadarko was already solid, but the new discovery has made it a must-have investment in the oil and gas industry. It's time to buy Anadarko Petroleum Corp. (**)

Anadarko Petroleum Corp.: An Oil Industry "King"

Anadarko's big oil find came from the Wattenberg shale in northeast Colorado. The formation was first discovered in 1970 and is listed in the top 20 U.S. oil and gas fields.

Anadarko has been using horizontal drilling, the technology it uses in the Eagle Ford shale oil field in Texas, to unlock the liquid-rich Wattenberg. Based on 11 test wells, Anadarko is confident it can drill between 1,200 and 2,700 wells over time, and will ramp up Wattenberg's development by drilling 160 wells in 2012.

The Wattenberg wells also have a quick payback rate.

A great example of this is its Dolph 27-1 well in the middle of the Wattenberg field. Anadarko has a 100% working and net revenue interest in the well, so it funds all operations as well as collects all the revenue. The well has 600,000 barrels of estimated ultimate recovery (the amount of oil and gas potentially recoverable from the well).

That gives the well about $15 million in net present value before taxes. (These numbers are based on New York Mercantile Exchange oil prices of $90 per barrel, and an operating cost of $4.50 per thousand cubic feet.) Each well costs about $4 million to $5 million initially in operating costs.

The company put the Dolph 27-1 well into production and it took just over 120 days to get its payout back. That means a four-month payback on a well that has produced up to 600 barrels per day.

The higher oil prices climb, the faster the payback. And that's on top of the profits pouring out the Eagle Ford, which has had shocking levels of production lately.

What a way to start the company's next chapter now that it has finally put the Gulf oil spill behind it. Anadarko owned a 25% stake in the Macondo well that exploded April 20, 2010 and leaked oil for almost three months.

The disaster could have bankrupted Anadarko, but its management - led by Chief Executive Officer James T. Hackett - successfully steered the company through the settlement process. Anadarko in October ended a long battle with BP PLC (NYSE ADR: BP) when it agreed to pay $4 billion in well-related claims in exchange for waivers of additional liability. This lifts uncertainty surrounding Anadarko's future spill-related costs.

The company currently has a market cap of $40 billion, with an enterprise value of $50 billion once you take net debt and net cash into consideration. The stock has gained 16% in the last year. Analysts give it a one-year price target of $100.40, which represents a 25% premium to Friday's $80.49 closing price.

Action to Take: Buy Anadarko Petroleum Corp. (NYSE: APC) (**).

Anadarko is a solid long-term investment. It has turned around its risk profile and is now sitting pretty on the most prolific U.S. oil fields.

Let's pick up our position in Anadarko now using limit orders near the current market price. There's also a liquid options market, which will generate some cash flow if you want to add it to your covered call portfolio.

(**) Special Note of Disclosure: Jack Barnes has no interest in Anadarko Petroleum Corp. (NYSE: APC).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Barnes & Noble Inc. (NYSE: BKS).

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