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.