Top Latin America Analyst Says $19B Ecuador Judgment Will Be Enforced Against Chevron

Chevron's stock price appears to be down in recent weeks in large part due to the company's $19 billion Ecuador liability.

An influential Latin America investor analyst this week concluded that the $19 billion Ecuador judgment “will be enforced” and only “risk tolerant investors” with a long-term investment plans should buy Chevron’s stock.  The title of the report: Chevron, A Dividend Champion In Trouble.

Included in the analysis is a chart that shows how the value of Chevron’s stock has dropped considerably in recent weeks as the oil giant has suffered multiple courtroom setbacks in the Ecuador case, including a devastating defeat when the U.S. Supreme Court declined to hear the oil giant’s appeal. See chart here.

Expressing concerns shared by some large Chevron shareholders, the analyst observed that “surprisingly” Chevron’s Chairman and CEO John Watson and other company executives have been “reluctant to recognize the financial impact” of the litigation.  The lawsuit was first filed in 1993 in New York by indigenous and farmer communities from Ecuador against Texaco, which was bought by Chevron in 2001.

During the past few years, shareholders have complained that Watson has been withholding information from investors and have demanded he be more transparent. One U.S. Congresswoman asked that the SEC investigate the company to determine if it is lying to shareholders about the Ecuador risk.

An analyst with the Colombian-based independent investment firm, Caiman Valores, has joined a growing chorus of Wall Street analysts in questioning Chevron’s management of the historic litigation. See here.

Writing on the influential Seeking Alpha web site, the analyst said: “Chevron … is certainly experiencing some rough going…. (i)t is appearing more likely … the judgment … will be enforced. While it is difficult to predict the outcome, it is certain that this matter will continue to run for many years and at great cost to Chevron….”

The analyst also made observations about the controversial role of Watson, who was a key Chevron official who vetted the Texaco purchase:  “It certainly raises questions as to why Chevron's due diligence of Texaco was not more thorough, before purchasing the company, and why management has consistently downplayed the impact of the case,” he said.

Confronted publicly last week about the growing risk posed by the Ecuador liability, the embattled Watson – in conduct most unbefitting a CEO -- called the Ecuadorians and their lawyers “criminals”.  Yet Chevron is the party that has been found by multiple courts to have committed severe environmental abuses that some believe rise to the level of criminality. For a partial summary of the devastating charges against Chevron, see these claims filed against the oil giant by a New York lawyer who has been the target of Chevron’s corporate espionage and vicious personal attacks. See here.

As a result of Chevron’s refusal to pay the Ecuador judgment, the Ecuadorians have been forced to file asset seizure actions in Canada, Brazil and Argentina.  Chevron stripped all but a few residual assets from Ecuador.

The Caiman Valores analyst cited not only the Ecuador litigation but also growing legal problems facing Chevron in Brazil, where the oil giant’s offshore drilling practices resulted in a spill earlier this year. Prosecutors in Brazil have brought a $22 billion lawsuit against Chevron for trying to mislead officials about that spill.

Meanwhile, news accounts surfaced recently about yet another explosion at a Chevron refinery in California.  This is just one more example of the company’s shoddy standards and unsafe culture, which has led to an ongoing criminal investigation by the Environmental Protection Agency.  See here for additional background.

In the blog, the analyst offered different scenarios on the impact of the liability on the company’s stock price.

One investor writing in the comment section of the blog concluded that full payment of the $19 billion judgment would cost Chevron roughly $10 per share.   He said: “Hence if CVX [Chevron] pays out $19 billion, it should lower the stock by roughly $10 per share…. This implies that Mr. Market now puts the probability at around 80% that CVX will pay the full amount eventually.”

Seeking Alpha makes four important points about the Ecuador case:

1) The 1995 remediation agreement between the Government of Ecuador and Chevron did not release the private claims in the lawsuit. This is Chevron’s key defense in ongoing litigation in the U.S. and in the countries where the Ecuadorian communities have filed seizure lawsuits.

2) The Government of Ecuador filed an amicus brief in support of Chevron when the lawsuit was first filed in the U.S. in 1993, citing economic concerns should the company be sued successfully. Today, one of Chevron’s main defenses is that Ecuador’s government has committed fraud and has pressured the courts to rule against the company, even though Chevron submitted 14 affidavits to a U.S. court arguing it could get a fair trial in Ecuador. The court agreed and sent the lawsuit to Ecuador, where it was re-filed in 2003.

3) Before the court allowed the trial to be moved to Ecuador, it required Chevron to submit to Ecuadorian jurisdiction and Chevron agreed. The analyst wrote: “Since the judgment was issued, Chevron has not in any way complied with the judgment and has sought to prevent its enforcement.”

4) Chevron was the sole designer and operator of the substandard oil production system in Ecuador that was built to dump waste into the environment to save money. Chevron now wants to blame the state-owned oil company for the pollution, but PetroEcuador did not operate the system until after the lawsuit was filed.

Seeking Alpha argues that Argentina -- where a court already has frozen Chevron assets because of its Ecuador liability -- offers the “greatest opportunity” to enforce the judgment because of a treaty between Argentina and Ecuador that “reduc(es) the burden” on the Ecuadorians to have the judgment recognized and enforced.

Brazil is probably the least likely country to allow enforcement because it may want to recover the $22 billion in its own lawsuit, according to the blog. If successful in Canada, though, the blog observed that “it is highly likely that it be recognized and become enforceable in countries such as Australia, where Chevron has considerable assets.”

For an earlier summary of Wall Street’s increasingly critical view of Chevron’s stock because of the Ecuador matter, see here.

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Chevron Facing Wall Street Criticism Over $19 Billion Ecuador Liability

Wall Street analysts rarely take controversial positions on publicly traded companies whose stock is doing well. But Chevron’s mishandling of its $19 billion liability in Ecuador for dumping toxins into the Amazon is beginning to look like the exception, at least to the analysts at Seeking Alpha and a commentator at the influential proxy advisor Glass Lewis.

One thing is indisputable: cracks are beginning to appear in Chevron’s determined effort to keep Wall Street in line with the idea that the Ecuador judgment represents no short-term threat to the company’s financial position.  One analyst even predicted the lawsuit eventually could lop as much as 20% off the company’s share price. Even worse, the U.S. Supreme Court just dinged Chevron’s final attempt to block enforcement around the world.

Some of these analysts are beginning to get that the judgment in Ecuador – from the very court where Chevron wanted the issues resolved– is based on overwhelming scientific evidence that proves Chevron committed what is probably the largest oil-related environmental disaster in world history. See here and here.

The fact that the plaintiffs now have launched seizure lawsuits targeting billions of dollars of Chevron assets in Brazil and Canada certainly takes the idea of litigation risk for Chevron to new and unchartered territory, leading one analyst to advise shareholders to dump the stock for now. Further, numerous U.S. courts, including the Supreme Court, recently denied Chevron’s increasingly desperate attempts to derail the litigation while several institutional shareholders and a U.S. Congresswoman have asked the SEC to investigate the company for lying about its Ecuador risk.

Consider the various analyses from Seeking Alpha, an award-winning website for stock research that has more than 800,000 followers.  Kiplinger’s recently named Seeking Alpha the Most Informative Website; it also received a “Best of the Web” award from Forbes.

Seeking Alpha recently dismissed Chevron’s fake fraud narrative and wrote in reference to the pending seizure action in Canada:

“Canada has a reputation for fair legal proceedings. This will make it incredibly difficult for Chevron to continue claiming that the lawsuit is based on fraud. I think it is highly unlikely, furthermore, that fraud is the reason for the charges against the company. In fact, I think that these recent developments may be the start of a downward trend for the company that it will struggle to recover from.” 

Another Seeking Alpha analyst, David White, said just this week that Chevron shareholders should sell. In a blog, entitled Chevron Can't Seem To Turn The Bad News Faucet Off, White devoted his entire analysis to all of Chevron’s many legal problems in Ecuador, Brazil and the company’s own home state, California.  Federal and state criminal prosecutions and hefty fines are a possibility due to safety problems at a refinery in Richmond, a small city just across the Bay from San Francisco. White wrote:

“…with all of these unexpected costs that CVX is facing, I think it is time to unload this historically strong, steady dividend payer….If you own CVX, it is time to sell it.”

Another Seeking Alpha analyst wrote that Chevron is “losing support from all corners” in its bid to evade the Ecuador judgment.  He also highlighted the growing number of courtroom setbacks suffered by Chevron’s legal team at Gibson Dunn & Crutcher, which was brought in two years ago to “rescue” the oil giant from its impending liability.

The analyst also reported concerns about the lawsuit from both shareholders and Members of Congress, writing that many of Chevron’s institutional investors have “made it clear … that a settlement is the preferred course of action, as it appears increasingly unlikely that Chevron will be able to avoid paying out a significant portion of its available cash over this lawsuit.”

“Although I believe it is in Chevron's best interests to settle the suit, this may represent a huge hit for the company, which I think could force its price per share as low as $80, a level not seen since 2010,” the analyst concluded.

Another Seeking Alpha analyst wrote that the $19 billion liability in Ecuador and a separate $20 billion potential liability in Brazil resulting from an oil spill there in 2011 is “cast(ing) a long shadow” on Chevron’s stock, which “could tumble” as a result.

He wrote:

“Chevron is continuing to build its cash balance, which now stands at $21.1 billion compared to $15.8 billion at the close of 2011. I think that fears over suits brought against it in Brazil and Ecuador, despite a Chevron show of bravado in casting these litigations as fraud, are contributing to Chevron's rapid accumulation of cash.” 

Noting that other oil majors give dividend increases, buy something and/or pay down debt when they have that much cash, the analyst projected that “it’s unlikely that its cash balance will be substantially drawn down until both of these super-suits are settled or dismissed, which could be a matter of years.” That was written in early September.  Chevron has yet to do anything with its huge surplus.

The analyst wrote that the liabilities in Ecuador and Brazil together “could wipe out Chevron's healthy cash balance as well as a significant portion of its equity. This in turn would lower Chevron's outlook across the board. Chevron is a comfortable hold, but a risky buy in the current environment.”

Glass Lewis, a leading proxy advisory firm, just this week urged shareholders to “remain vigilant” in holding Chevron accountable relative to its disclosure obligations. Courteney Keatinge, an analyst at Glass Lewis, wrote:

“As these legal battles consume considerable company resources and leave the company exposed to significant risk, shareholders should continue to remain vigilant in ensuring that Chevron is managing and disclosing these issues properly and sufficiently.” 

Another analyst, Fadel Gheit at Oppenheimer & Co., following a meeting with Chevron's CEO John Watson in 2011, wrote that "a $2-3B settlement [in the Ecuador lawsuit]... could remove uncertainty and reflect positively on the stock.”  Later, in May of this year, after the Ecuador trial judgment was upheld on appeal, Gheit doubled-down on his belief that "a reasonable settlement with the plaintiffs impacted by the oil contamination in Ecuador...could boost the stock.”

Gheit is generally pro-Chevron and he has written about the case in ways that suggest he does not fully understand how the legal process works. His recognition that Chevron now faces real liability is yet another example of the how company is beginning to lose some of its allies on Wall Street.

Become a follower of The Chevron Pit.

Also follow us on Twitter at @ChevronPit and like us on Facebook.

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