LONDON—BP PLC's $18.7 billion deal to settle all federal and state claims from the deadly Deepwater Horizon spill in the Gulf of Mexico lets the company leave behind a dark episode.

Now, BP's challenge is to convince investors that, after years of belt-tightening and scaling back its ambitions, the company can re-establish itself as a pioneering and profitable force among the world's top energy companies.

Thursday's settlement, which still needs to be approved by a federal judge, provides clarity over the financial penalties BP will face for the catastrophic blowout and removes a constraint on its spending.

"The company can now focus on future growth and moving on," BP Chief Financial Officer Brian Gilvary said in an interview.

That won't be easy. BP is a very different company today than it was before the April 2010 disaster, and it is a difficult time for a repositioning. And, with one of its major liabilities addressed, it could be an acquisition target, analysts said.

The oil spill defined BP's trajectory over the past five years, transforming the oil giant into a much smaller, leaner entity. BP has sold off more than $40 billion-worth of assets in the wake of the spill to help pay for legal and cleanup costs. The company's oil and gas production volumes have plummeted nearly 20% to 3.1 million barrels a day last year from 3.8 million barrels a day in 2010.

It was a humbling period for one of the world's oldest and most storied oil companies, whose mergers with Amoco and ARCO in 1998 and 2000 made it a formidable force and helped coin a term for a new kind of oil company: the "super major."

Under Bob Dudley, the company's first American CEO and an Amoco veteran, the company entered a period of retrenchment in the wake of the spill. It devised a 10-point, three year plan intended to restore trust and value to the company through a renewed focus on safety, value creation and an aggressive divestment plan. That completed in 2014. Then the oil market collapsed.

The slide in oil prices over the past 12 months have hit BP and others' balance sheets and instigated a wave of cost-cutting measures. BP saw its profits slump 40% in the first quarter compared with a year earlier as oil prices fell to their lowest level in six years.

This year BP has slashed capital spending and lowered the value of reserves in places like the North Sea and Angola, two regions that are key to the company's projected cash generation over the next five years. Meanwhile, it remains exposed to significant political risk through its stake in state-owned Russian oil company OAO Rosneft.

The settlement removes a key risk and represents a starting gun on life after Deepwater Horizon. The company's shares jumped on the news, rising about 5% on Thursday in the wake of the announcement.

"It's good to clear the thing up and know what the liability is," said Paul Mumford, an investment manager at BP investor Cavendish Asset Management Ltd.

For the company the settlement with the federal government and five U.S. states is seen as a pragmatic move that averted long and drawn-out litigation and draws a line under its legal tussle with the U.S. government.

It will cost BP an extra $10 billion on top of the $44 billion it has already incurred in legal and clean up charges, but the payments will be spread out over 18 years at about $1.1 billion annually. Payments for fines under the Clean Water Act and to clean up natural resource damages won't begin until 12 months after the agreement is completed, giving BP some additional breathing space.

The company already has some funds set aside that can be used for the initial annual payments, though not enough.

The payouts, Mr. Gilvary said, "will simply become one more use of cash that we need to make sure we plan for into the future."

It will cost less than the worst case scenario. A judge could have imposed a $13 billion fine for federal Clean Water Act violations, and the states were seeking up to $35 billion in damages.

"I am neither pleased nor disappointed," Mr. Gilvary said. "I see it as a realistic solution to a difficult problem and we've reached what we believe to be a satisfactory agreement."

The settlement could also reignite speculation around a possible merger.

BP has long been the target of takeover rumors and low oil prices have historically spurred giant oil companies to snap up rivals. Royal Dutch Shell PLC's $70 billion deal for BG PLC earlier this year as the latest example. A statement by the British government that it would oppose any foreign move on BP in the wake of Shell's bid for BG only served to stoke speculation there could be interested parties.

Now that BP has settled a large portion of the litigation relating to its Gulf of Mexico spill, that removes "one level of uncertainty for a predator" that might consider a bid for BP, said Cavendish Asset Management's Mr. Mumford.

Write to Sarah Kent at sarah.kent@wsj.com and Justin Scheck at justin.scheck@wsj.com

Access Investor Kit for Royal Dutch Shell PLC

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B03MLX29

Access Investor Kit for Royal Dutch Shell PLC

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B03MM408

Access Investor Kit for Rosneft

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=RU000A0J2Q06

Access Investor Kit for Dominion Resources, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US25746U1097

Access Investor Kit for Royal Dutch Shell PLC

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US7802591070

Access Investor Kit for Royal Dutch Shell PLC

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US7802592060

Subscribe to WSJ: http://online.wsj.com?mod=djnwires