Despite the disastrous blowout of the Macondo well in the Gulf of Mexico (GOM), BP Plc and Anadarko Corp., majority owners of the well, remain good stock buys. This according to a report from analysts with Simmons & Co. International, Houston.

“Notwithstanding the obvious headwinds, including mounting Macondo liabilities, a yet-to-be stopped GOM leak, a potential stall in dividend payments, increasing credit-default spreads on BP debt, potential gross negligence or criminal liability claims and a clear lightning rod for criticism in the U.S., BP shares offer reasonable long-term value, in our view,” according to analyst Robert Kessler.

“BP’s book equity value ($104 billion), net property, plant and equipment costs ($108 billion) and pre-Macondo liquidation value ($170- to $211 billion) all well exceed our estimate of the likely range for discounted Macondo liabilities net to BP of $11- to $56 billion (undiscounted $18- to $91 billion),” he says.

Nonetheless, the coming 12 to 24 months are likely to be challenging for the producer. The investment bank characterizes BP’s credit as a high-risk upgrade, given myriad uncertainties.

“Having said that, the kitchen sink of headlines have been thrown at BP shares over the past two weeks, thereby partially desensitizing the shares to the news. Meanwhile, the brewing debate of BP pensioners versus Macondo victims is generally supportive of BP shares, in our view.”

BP Equity Value

What’s in the stock price? Simmons notes that BP shares are discounting a net present value of Macondo liabilities of about $64 billion, above the high end of its discounted Macondo liability range and above the mid-point of its undiscounted Macondo liability range.

Also, BP’s shares are 26% lower than in December 2008, when oil prices were $10 per barrel, and are similar to the 1998 level of market value. Yet, book value has increased by 142% or $62 billion.

The company is also showing adequate free cash flow during the crisis.

“At $75 per barrel, we estimate that BP generates $17 billion per year in free cash flow, before some $10 billion in dividend payments, which may be temporarily reduced or frozen at BP’s discretion,” according to Kessler. “By comparison, the current rate of gross spending at Macondo is about $30 million per day, or about $11 billion per year.”

Ships and drilling rigs surround the Discoverer Enterprise as it continues to recover oil from the Deepwater Horizon drill site, June 15.

Nonetheless, “headline risks” remain, he cautions. Although BP shares have withstood a litany of bad press during the continuing spill, Kessler advises that incremental buyers of BP shares should buy or hold the stock while understanding that the U.S. government may have a reasonably good chance of claiming criminal negligence, the dividend may be cut, and the total ticket for gross undiscounted Macondo liabilities may exceed $100 billion.

Anadarko Corp.’s stock is holding up well under pressure, according to an early June report from Ben Dell, analyst with New York-based Bernstein Research.

“We have run a worst-case scenario for Anadarko and we believe that even under the most bearish assumptions, Anadarko will still have cash flow of $2.2 billion to spend after liabilities in 2011. It should also have $200 million in cash flow to spend for the remainder of 2010, plus $3 billion of cash on hand.”

While these numbers are clearly lower than the company’s targeted spending of $5 billion to $6 billion per year, they do not suggest an imminent liquidity crunch, he reports. Dell believes actual liabilities will be lower than the firm’s bear case.

“In particular, our downside case assumes that oil prices will average just $75 per barrel in 2010 and 2011, and that gas prices will average $4.50 per thousand cubic feet. Both are below the forward-price strip.”

Dell predicts that the daily cleanup costs could reach some $25 million per day, and that cleanup could continue at that rate through all of 2011. Meanwhile, Anadarko has paid down $1 billion of debt so far in 2010 and will need to pay a further $707 million by the end of 2011.

“This is a manageable amount and the company should not have a problem funding it,” opines Dell. “Using slightly more bullish assumptions of gross cleanup costs of $15 million per day, cleanup continuing for only half of 2011, and oil and gas prices of $80 and $5.50, respectively, we find that Anadarko will have nearly $1.3 billion of available cash flow for the remainder of 2010 and over $4.6 billion in 2011.”

Crucial to Dell’s calculations is his belief that Anadarko will not be held responsible for economic impact damages beyond its share of $75 million, the current legal limit. Although BP has promised to pay beyond $75 million, BP faces an image issue that Anadarko does not share.

“We think Anadarko’s management will resist attempts to make it pay these damages. Furthermore, if BP is eventually found negligent, Anadarko could recover some of its cleanup costs as well. If Anadarko does not face a liquidity crunch, then we believe the value of the company is far above its current share price due to its strong operations.”

Dell still cautions that the investment controversies surrounding Anadarko are “serious” and there is no way to know the total cost of cleaning up oil that is still spewing. Although the company will clearly take a large one-time hit from cleanup costs, Dell believes its longer-term earnings power is still strong. Furthermore, even under “a most bearish scenario,” he estimates that Ana­darko will have positive cash flow after liabilities in 2010 and 2011 and currently has a $3-billion cash cushion to support itself. The spill should not bankrupt the company, so the loss of more than half of its market value seems like “a serious overreaction,” he reckons.

“In particular, if Anadarko is not at risk of going bankrupt, then it is very cheap. The company is currently trading at the lowest valuation in our group based on proved, developed reserves, just $16.60 per barrel of oil equivalent. Since Anadarko likely has the best exploration opportunities of any company we cover, current valuation levels are hard to justify.”

And BP and Anadarko are not the only explorers taking hits. The blowout has affected much of the offshore E&P sector, causing collateral damage to any company with deepwater holdings. Investors are wary of public outrage and the temporary moratorium on offshore drilling in the Gulf.

Irene Haas, analyst for Cannacord Genuity, reiterated the investment bank’s buy rating for offshore player ATP Oil & Gas Corp., but lowered the share-price target from $24 to $16. ATP recently announced that one of its key growth drivers, the MC 941 #3, will be completed as planned, but it estimates it can produce only up to 27,000 barrels of oil equivalent per day, compared with a pre-spill estimate of 33,000. The company could cut capex by $50 million to $100 million.

“We welcome this news, as an 18% to 24% 2010-production haircut is manageable,” says Haas. “We revised our estimates, with 2010 estimated cash flow per share declining from $6.87 to $4.60. The negative impact of the moratorium looks less severe than some might have feared.”

Haas believes the market has “beat this stock senseless” and, while operating in the GOM will be “no bed of roses,” she anticipates ATP will carry on and revise its plan to adjust to the regulatory uncertainties. At press time, ATP was trading at $13.04 per barrel of oil equivalent of proven reserves, nearly a 47% discount to Cannacord’s coverage universe, which trades at nearly $24.60 for proven reserves.