Chevron faces lawsuit, massive fines in Brazil

How will this affect the oil company's bottom line?

By Benzinga Dec 27, 2011 5:07PM

Image: Brazil (© Donald Edwards/age fotostock)By Gordon WilcoxBenzinga Staff Writer


As one of the largest oil companies in the world, Chevron (CVX) is used to operating in some less-than-hospitable locations. Angola, Nigeria and Russia are just a few of the places where Chevron does business that aren't exactly top-notch vacation destinations.


Western oil majors expect trouble of some kind or another in many countries, but Brazil should not be one of them. Until now. Chevron has found all sorts of problems in Brazil, Latin America's second-largest oil producer behind OPEC member Venezuela.


Chevron -- a Dow component and the second-largest U.S. oil company -- has been forced to halt its Brazilian activities. If that wasn't enough, Brazilian regulators are suing Chevron and Transocean (RIG) for $10.6 billion. 


Chevron could certainly afford to pay that $10.6 billion all by itself if needed. But that amounts to about a third of the company's 2012 capital budget.


To add insult to injury, Brazil's environmental protection agency has hit Chevron with an almost $7 million fine related to the November oil spill off the coast of Rio de Janeiro. That follows a previous fine of about $35 million. The agency said that the new fine is in response to Chevron's poor handling of the spill.


All this for a spill of 3,000 barrels. The suit is equivalent to around $3.5 million per barrel spilled and it dwarfs the U.S. maximum fine of around $4,300 per barrel spilled, according to CNN.


Put another way, the $10.6 billion suit, plus the other small fines Chevron has been slapped with, is more than 2.5 times the value of Chevron's Brazil assets.


Last year, Petrobras (PBR) leaked more than 4,200 barrels into Brazilian waters, but as Brazil's state-run oil company, it never faced a $10.6 billion suit. And in July of 2000, more than 1 million gallons leaked from a Petrobras refinery in Brazil, but the company never paid $10.6 billion in legal settlements or fines. 


Perhaps to the chagrin of Brazilian regulators, Chevron's shares are within pennies of where they were immediately after the spill and currently yield a decent 3%. Petrobras features a dividend not worth mentioning and is the worst-performing global integrated oil stock in the past year. Even worse than BP (BP).


In fact, in looking at the past five years, Chevron is up 50%, while Petrobras ADRs are slightly negative. The bottom line is that it's in the best interest of both parties, Chevron and Brazil, to resolve this spat. But a $10.6 billion suit for this offense is too much and with it, Brazil is saying it's not as open to foreign investment as some outsiders had originally hoped.


ACTION ITEMS:

Bullish:
Traders who believe that Chevron will rebound in Brazil might want to consider the following trades:

  • Long the Energy Select Sector SPDR (XLE). Chevron is the number two holding for that particular ETF.
  • Long Exxon Mobil (XOM) as those two stocks have a tendency to move in tandem with each other.
  • Long Chevron as a conservative dividend play.
Bearish:
Traders who believe that Chevron's Brazil problems are just starting may consider alternative positions:
  • Long Petrobras. Brazil's government gives the company all the best projects in Brazil.
  • Long the iShares MSCI Brazil Index Fund (EWZ). Plenty of Petrobras exposure without owning the stock directly.
  • Long the ProShares UltraShort Oil & Natural Gas (DUG) to play weakness in Chevron.
Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.

More From Benzinga:

3Comments
Dec 28, 2011 1:47PM
avatar
"Chevron could certainly afford to pay that $10.6 billion all by itself if needed. But that amounts to about a third of the company's 2012 capital budget."
Sure, it can afford it but that kind of cash would still leave the shareholders reeling, surely. The market would have to react.
Dec 28, 2011 1:35PM
avatar
Long Exxon? Maybe. But what about BP? Everyone loves a lil oil in their water, so come on, go long BP already!
Dec 28, 2011 1:32PM
avatar
Good point. The suit against CVX and RIG is far too large and Brazil doesn't look good here either. Thanks for highlighting that in this piece.
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