Chevron (NYSE:CVX) faces legal headwinds that look likely to reduce my fair value estimate for the company.
Chevron has been accused of misconduct in two separate locations, namely Ecuador and Nigeria. Although Chevron's name was recently cleared in the incidents reported in Nigeria, the bad press can still have a major effect on the company's stock.
Moreover, In Nigeria, in 1998, a collection of villagers occupied an offshore barge in order to protest the work done by Chevron. These villagers were shot. Chevron has finally been cleared of any wrongdoing in the case (albeit 14 years later) and can now put the incident safely behind it.
The initial claim against Chevron in the Nigeria case was based on the idea that Chevron summoned government security forces to deal with the protesters who then shot two men and injured two others. However, this original appeal had already been thrown out of court. Recently, the complainants attempted to add an additional charge to the case. They alleged that the security forces had also tortured the protesters. However, Chevron has been cleared of wrongdoing in this regard, as well.
I find it interesting to note, however, that the reason the torture case was not taken seriously was not because it could be proved that the villagers were not tortured. Rather, the reaction was because of the "1991 federal law allowing victims of torture abroad to sue their abusers in U.S. courts authorizes suits only against individuals and not against multinational corporations or other organizations." This seems to possibly imply that Chevron may have gotten off on a technicality. The government-armed forces were responsible for the actual actions, but it is possible that shareholders might see Chevron in a less-than-favorable light following this lawsuit. The company certainly does not want blood on its hands moving forward, so look for it to quell any further word on this case.
In addition to this, locals in Nigeria are also vowing to put an end to Chevron's operations in Warri South-West Local Government Area of Delta State. The locals feel that Chevron has consistently neglected the community that lives in the area. I don't see the locals getting in the way of Chevron, which has enough power in the region to stay put. It does put its status on more tensioned ground, however. It will be nice, either way, to get the official and legal questions out of the way in Nigeria. Specifically, the company could lose between $1 billion and $5 billion in revenue if its projects in Nigeria are halted by the local government for one year. In a worst-case scenario, I would shave $3-$4 per share off of Chevron's current price.
If only all of Chevron's lawsuits could end this well for the oil giant. The company is also currently facing a lawsuit in Ecuador. The accusation in this case rests on the idea that Chevron deliberately contaminated water sources Ecuadorians relied on for drinking water. The plaintiffs in the case have successfully built up a very strong case using video footage to support their claims. In addition, the videos and other evidence allegedly show how Chevron "ignored pollution standards, manipulated evidence, caused harm to human health, and tried to entrap a judge in a bribery scheme." In addition, the company lied about the remediation measure it put in place. This resulted in several local Ecuadorians actually building their homes near areas containing high levels of toxins.
However, Chevron itself also recently released seven videos, which seem to prove that the case against them is based on fraud and deceit. Among other evidence, Chevron's videos show that the 'experts' that testified against Chevron in the case had not actually visited Ecuador. Moreover, it seeks to prove that the plaintiffs relied largely on a discredited report for their proof.
At this point, it is difficult to know who is in the right and who is in the wrong in this case. Whether or not Chevron is guilty, this kind of bad press will probably have a negative effect on the stock. However, there is hope yet for the company. The recent developments showing that the entire lawsuit may, in fact, be unmerited could save the company's reputation yet.
On a discounted basis, the company stands to lose up to $18 billion in a worst-case scenario. I anticipate some sort of settlement will conclude the matter, based off of Chevron's historical actions.
By way of comparison, Royal Dutch Shell (RDS.A), is also in the news for a bad lawsuit, currently. Its oil spill in Nigeria has recently received heightened attention. In the most recent development, it appears that the spill was a lot worse than originally announced. Shell, which is already facing huge fines for the spill, is likely to have to pay out even more now that this information has come to light. The news of the pay out will not bode well for its price in the coming weeks.
Also, worth noting as a benchmark, BP is still fighting the Gulf of Mexico battle and may be facing an additional complication in the legal proceedings surrounding the case. Shrimp processors have recently come forward asking the ruling to be delayed. They seek the chance to work toward a fairer settlement. BP, I'm sure, would like to end the ensuing legal battles and bad press from the Gulf spill, as would smaller deep-water drillers like ATP (ATPG), which have superior rigs but heavy debt to pay, too. As it may see from Chevron, however, wrongdoings can still haunt a company as many as 14 years later.
In response to its lawsuits, it is possible that Chevron will continue to divest lower margin assets and also free up cash. In a similar move, Exxon Mobil (NYSE:XOM) is nearing the end of its four-year effort to sell all of its company- and dealer-owned sites. Many of the sites have been bought by dealers who were given the Right of First Refusal and bona fide offer to purchase their sites. The rest are being sold to the highest bidders. All of the sites will continue to offer the Exxon brand of fuel. The move offers some serious capital for Exxon, which remains the largest of the oil companies. Chevron has had Exxon to compete with for years prior, and the same will be said for years to come.
As Chevon faces international lawsuits, and its name continues to alternate between smeared and cleared, it will still have to fight its large and powerful competitors. Its best hope, at this point, is that the lawsuits are cleared up with minimal damages and it can get back to what it does best: producing crude and trying to edge out its competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.