Is It Time to Buy Anadarko Petroleum Stock?

Anadarko Petroleum Corporation (NYSE: APC  ) is setting records, which isn't necessarily a surprise given the fact that oil and gas production in the United States is hitting levels not seen in many years. In fact, Anadarko's average daily sales volumes hit a record last quarter. Anadarko is realizing the benefits of a global, diversified business model, with significant operations spread across domestic onshore fields, the deepwater Gulf of Mexico, and several international interests.

As you'd expect, Anadarko's stock price has risen right alongside its business results. Shares of Anadarko are up an astounding 41% just since the beginning of the year. This has expanded its valuation, and as a result it's reasonable to question whether or not the stock has further room to run.

In a new golden age

You may have heard that oil and gas production is in full swing in the United States, and that's certainly true. The U.S. Energy Information Administration has reported that there are now four oil-producing areas of the United States that are producing at least one million barrels per day. Oil production is at levels unseen in decades, and natural gas production is booming thanks to revolutionary advancements in drilling technology that are unlocking previously unavailable deposits.

Add it all up, and it should come as no surprise that exploration and production companies are minting money. Anadarko delivered record average daily production of 848,000 barrels of oil equivalent per day. Adjusted earnings per share rose to $1.32, representing 25% growth year over year. Anadarko is in great financial shape, with $5.4 billion in cash on hand.

These strong results are occurring throughout the industry. For example, Devon Energy Corp. (NYSE: DVN  ) had a great quarter itself. Its U.S. oil production soared 79% year over year. Operating income jumped 47%, and adjusted earnings per share rose 16%. With its success, Devon greatly improved its financial condition during the quarter by paying down $3.2 billion in debt.

Anadarko valuation: A decent buying opportunity?

Of course, it's worth noting that there is a cost to buying Anadarko, which is that its valuation has caught up to its great business results. With such a dramatic rally just since the beginning of 2014, its valuation has expanded significantly. Anadarko trades for 19 times forward earnings, which is a significant premium to the forward multiple of the broader market.

And, Anadarko is much more aggressively valued than some of its closest competitors. For example, Devon Energy trades for just 11 times forward earnings estimates.

Cash flowing through to shareholders

As Anadarko racks up impressive growth, it's sharing its success with investors. After its last earnings report, management increased its dividend by 50% after releasing second-quarter results. Anadarko's current dividend yield is only about 1%. That being said, with a high rate of dividend growth, your income potential can greatly increase over time.

Indeed, this isn't the first time Anadarko has rewarded its investors with a big dividend increase. Over the past five years, Anadarko has increased its distribution by 24% compounded annually.

The Foolish bottom line

Anadarko is ramping up production across its diverse portfolio, thanks largely to booming oil and gas production in the United States. This is resulting in significantly higher cash flow and a greatly improved financial condition.

That being said, it's reasonable to question whether this is truly a good time to buy Anadarko. This might seem like a surprise, given how successful Anadarko has been in recent months. In times like these, it's useful to remember that even a very strong company like Anadarko can turn out to be a poor investment if too high a price is paid.

With that in mind, it may be wise to wait for a slight pullback before jumping into Anadarko at these levels.

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