The fire that struck Richmond's refinery on the 6th of August caused a furor in Richmond, California, and the controversy is not over yet. Just a while ago, Chevron Corporation (CVX) had planned to shut down the refinery until investigations are completed so that the cause behind the fire could be ascertained. In Chevron's favor, investigators have ruled out that the company's fire truck could have possibly caused the inferno.
The residents of the communities nearby have protested, but Cal-OSHA spokesman Peter Melton maintained that when compared with other oil refining companies in the Bay Area, Chevron still has a better fire record. Analysts note that its employee safety record is consistently above average in spite of these incidents. The U.S. Chemical Safety Board expects the probe to last between 12 and 18 months. The agency noted that Chevron will be held accountable for the fire if it is found to be at fault.
Initial investigations have favored Chevron, but there could be certain consequences resulting from the fire. An analyst at Trefis notes that the fire incident may result in lowered refining turnout. The fire may hamper production and operations at the refinery for many months. Thus, I believe there may be repercussions felt in the third quarter earnings. Chevron's market estimates fluctuate around the $112 mark at the moment.
Last year, Chevron raked in profits amounting to $27 billion, but it was asked to pay only $11,545 in damages for the Richmond fire. Thus, Chevron has not lost a lot of money on account of the fire. In the next few months, Chevron will obviously try to undo the damages and compensate those who have been affected. This might cause a little disturbance in the company's numbers, but in the long run, there isn't going to be a significant effect. Moreover, high oil prices in the Bay area make Chevron a very good company to stick with.
If we were to consider the actual incident, Chevron is not an exception. Accidents such as the one at Richmond do happen occasionally in spite of all precautions being taken. Most big oil corporations take a lot of precautions against accidents such as these and Chevron is no exception. However, it becomes very important for the company to clean up its act and make sure that the affected community is compensated.
Highly trained quality assurance teams can make sure that machinery and equipments are functioning well, twice a day, if need be. Though it may cost more money for companies to be that vigilant, it ultimately pays off. When there are no untoward incidents, companies are doing themselves big favors, and investors perceive such companies as reliable and trustworthy. Chevron will certainly have its team of decision makers who would know what needs to be done so that such accidents are not repeated.
We must remember the mess that BP p.l.c. (BP) created in the Gulf of Mexico, many months ago. BP has now found itself in an embarrassing situation regarding the oil-spill compensation to Gulf Coast victims. Much of the funds that should have been given to real victims have been given to non-victims - frauds. BP was misled, but being such a big company, it has to get at least this right!
Environmentalists recently warned that Gazprom is a company that is searching for disasters to happen, especially in the Russian Arctic. The company's safety records are dismal and by not adhering to international standards of safety, oil leaks and spills may occur in the endangered Arctic environment. The Wall Street Journal reported that Nigeria's National Oil Spill Detection and Response Agency has asked Exxon Mobil Corporation (XOM) to clean up Qua Iboe terminal in Nigeria, after the oil spill. The oil spill has already caused Exxon Mobil to be hyper vigilant about its other facilities across the world.
Similarly, Royal Dutch Shell plc (RDS.A) has been asked to clean up its territory in Nigeria as well. Apart from cleaning up the mess in Nigeria, Shell has also had to appease the government in Iraq and thus miss out on opportunities in Kurdistan. Only Anadarko Petroleum Corporation (APC) has remained relatively spotless when it comes to environmental damage and oil spills. Moreover, the company is doing extremely well in Mozambique and recently entered into an agreement with South Africa's government as well.
Chevron has some impressive numbers to boot. With a net margin of 10.79% and $19.77 million total cash in hand, Chevron is in a very strong position. In the last five years, Chevron's growth has averaged 3.84% - which is decent enough for a company that huge. The company's total debt is $10.23 billion and its total assets add up to $219.37 billion. With a debt-to-capital ratio of 0.08, one can expect that the company is in a strong position and will make for a good long-term investment plan. There might be fluctuations in the short term because of incidents such as Richmond.
Though the indefinite shutdown may impact Chevron's production in the short term, it will eventually start operating at Richmond and avoid long-term effects. However, the fire may negatively impact its cash flow for the third quarter, as it will have to pay compensation to the people who are affected by the fire. It shall not affect Chevron's profit margin, as the fire will not affect its sales in the long term. Chevron's oil fields in the Middle East and elsewhere in the world have been producing in surplus, which will add up to the margin. The ramifications of the fire at Richmond will affect Chevron's fundamentals in the short term, and that too negligibly. I do not see adverse long-term affects at all.
A company's image can't be spotless and when it comes to accidents like the one at Richmond, Chevron has very few of them and is still one of the most respectable oil companies in the world, with a safety record that is surprisingly enviable. Those who have invested in Chevron need not fear much. Though this incident has ruffled a lot of feathers, Chevron is still doing better than other oil companies. These are the factors that make Chevron a definite buy, no matter what fluctuations one notices every other week.