There are a number of oil and gas companies that are facing lawsuits at the moment. Lawsuits, of course, are a part of an industry as precarious as this. In this article, I will examine four oil and gas companies currently facing litigation and how it will affect each stock.
BP p.l.c. (BP), for example, will soon settle a discrimination lawsuit that has been waged against it for $5.4 million. The lawsuit is in a way related to the Gulf Oil Spill, as the plaintiffs are women who claim that BP did not hire them during the cleanup operations solely on the basis of their gender. Despite the fact that BP is settling, I do not think that there is sufficient evidence that the company engaged in gender discrimination at all. In fact, I feel that this is a company with a very open and fair gender equity policy. BP denies that it has done anything wrong, and the lawsuit really seems to be an unfair conclusion to the situation.
As you can see in this regard, the lawsuit places BP in a bad light even though the company is most likely innocent of all charges. Of course, $5.4 million is not much for a company as large as BP (its Market Cap is over $128 billion). However, the company will need to make sure that this will not cause more lawsuits to come to light, as it cannot afford to keep itself in court. BP is up right now, with a trading price above $40 per share (up from about $37 earlier in the week), but I don't know how long it can last. Of course, finishing its business with the Gulf Oil Spill will help it get back on track and invest in oil operations.
In other situations, the lawsuit in question can create a bad impression of the stock simply because it is highly likely that the allegations are true. Looking at Chevron Corporation (CVX), we can see that the lawsuit that Ecuador has waged against this company is most likely based on truth rather than fiction. In an Ecuadorian court, Chevron was found guilty of polluting the Amazon River. As a result, it was required to pay damages, but it simply did not, saying the ruling was based on unfair court proceedings and even corruption and fraud. Ecuador has already tried filing a lawsuit against the company in Canada.
In recent news, Ecuador attempted to wage yet another lawsuit, this time in Brazil, in order to force Chevron to pay the damages that it owes to the injured parties. The company has no assets left in Ecuador, so in order to enforce the court ruling, the people of Ecuador have to sue the company in other countries where they do have assets. This case has been going on for a long time, with Chevron maintaining its innocence throughout. Let's consider the ramifications that a long-term case like this can have on the stock of a company.
Chevron is certainly big enough to absorb a loss of $18 billion (what the Ecuadorian court ordered), but it sure would not help its bottom line. Chevron is currently trading around $105 per share, and the minute it is made to pay the court's fee (if it is), that price could drop almost to its 52-week low of $86.68.
On the other hand, lawsuits can also have a positive impact on a company's stocks. Take ATP Oil & Gas Corporation (ATPG) for example. This company's shares rose substantially on the news that it had filed a lawsuit against another firm. Specifically, ATP filed a lawsuit against the US government for suspending offshore drilling following the Gulf of Mexico oil spill in 2010. Perhaps that is the reason why the company's stocks rose: the perception of the general public at the time was that the US government was indeed to blame.
Another reason why this particular lawsuit could have been a positive catalyst for ATP as compared to the lawsuits faced by BP and Chevron is that ATP itself is the company which filed the suit. In other words, it is assumed that they have the stronger position in the argument. ATP is significantly smaller than the other companies in court with a market cap of just over $209 million, but it's just as busy.
The lawsuit here could provide a huge boost for the company, as it would provide a significant amount of money to invest in new wells. ATP trades for just over $4 per share and any boost would likely reward investors more than the more expensive buys. Keep in mind that this company traded at over $16 per share within the last year, and if it can get back to that level, the 4x return on investment would certainly make some believers out there.
Lastly, let's look at Anadarko Petroleum Corporation (APC). Anadarko's value dropped substantially in response to a suit in which claimants want Anadarko to pay "$25 billion to clean up 2,772 polluted sites and compensate around 8,100 tort claimants who say they have been harmed by the toxins". That value drop led analysts to discount the company's value by $2 billion for settlement or penalties.
The case began in May and Anadarko has recovered from any initial doubts that investors had. However, with the case's outcome uncertain, Anadarko is not sitting so healthy right now. The stock is on the lower side of its 52-week range, and a $25 billion payout would certainly hurt its bottom line. Anadarko could use a win here, especially with its EPS ratio suffering (now at -1.44). If Anadarko can settle and move on, with minimal loss, it may be a company to get behind, as it just announced a new Gulf of Mexico venture.
You will never get out of court in this industry. Some companies can weather the storm more than others, but BP proves that even the larger companies are susceptible to large court cases bringing doom. For now, monitor how these cases affect the bottom lines and see which company can come up relatively unscathed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.