When good dividend payer (3.21%) Chevron (CVX) bought Texaco it inherited a huge environmental lawsuit against Texaco by Ecuador. Ecuador won that suit in Ecuadorian court, but Chevron has been appealing the suit in courts outside of Ecuador. On October 9, 2012 the US Supreme Court refused to hear Chevron's request to have the verdict permanently blocked. The current level of damages amount to $18.2B. That's about 8.3% of Chevron's market capitalization.
That's not the only bad news Chevron has gotten lately. After the Macondo well disaster in the Gulf of Mexico, the standard for safe deep sea drilling has gone up. The huge damages BP (BP) was made to pay by the US, triggered an avaricious streak in many other countries. Chevron had what most would consider a mild oil spill in Brazil with a leak of approximately 3,000 barrels of crude into the Atlantic Ocean off the coast of Rio de Janeiro, Brazil. After this one, a second spill of roughly the same size was found. This has led to a variety of lawsuits against Chevron and Transocean (RIG). Chevron and Transocean are now being sued for $22B in environmental damages by a Brazilian federal prosecutor (April 2012). It is unclear how this will turn out in Brazilian courts, but this does seem like an extravagant sum for relatively minor leaks.
Brazil's largest oil workers union (FUP) filed a lawsuit against Chevron and Transocean that seeks to cancel their rights to operate in the country as a result of the spill. FUP (the Brazilian union) wants the court to force Chevron to give up a field that cost about $2B in investment. Before the spill, the field was producing up to 80,000 bopd. FUP also seeks unspecified financial damages for the Brazilian people. In CVX's favor Brazilian oil regulator ANP told a Senate hearing that a report on the first spill does not find CVX negligent. However, the federal prosecutor filed his case after this hearing, so just about anything may happen. At the very least CVX is losing time and money due to the halt of its development and production in Brazil for now. Both CVX and RIG were served with an injunction against operating in Brazil by a local court on September 25, 2012. They have 30 days to comply. So far CVX has only paid a $17.3 million fine levied by ANP.
The original fine was only for the first spill. After the second spill, the fines are expected to grow to the $100+ million range. The possible loss of trained personnel is also an issue for CVX. Seventeen of CVX's and RIG's employees involved in the latest incident have had to surrender their passports. They are being required to stay in the country to face prosecution, although a Brazilian judge did give permission for one of the accused employees to leave the country.
If this wasn't bad enough CVX's Richmond, CA refinery was damaged in an August 6, 2012 fire. CVX now says that the crude unit damaged in the fire will remain closed through the end of 2012. The refinery has operated at about 60% capacity since the fire. The total refining capacity at the plant is approximately 245,000 bpd. CVX's total US refining capacity is about 928,000 bpd. This accident could spark prosecution for negligence. A corroded pipe, which may be the cause of the fire, was inspected, but not replaced last year. It could lead to further regulatory reform, which would also be costly to the company likely nationwide.
On top of this the EPA has started its own criminal investigation into CVX's Richmond refinery for illegally burning pollutants into the atmosphere from 2005-2009 (East Bay News September 23, 2012). Chevron has already paid $170,000 in fines for this. However, the new investigation intends to prove that there was intent to deceive the EPA by routing hydrocarbon gases around equipment meant to monitor them -- a criminal act. Now regulators believe it was not possible to measure how much pollution was actually burned into the atmosphere. One would expect more severe fines at the least. With the criminal intent, CVX could be slapped with heavy "penalty" awards. Plus there is the strong possibility that Richmond citizens with breathing problems may sue the company.
Let's not forget that the state of California is mad about the recent gasoline hikes, which are partially due to the decreased California refining capacity as a result this fire. Federal investigators probing the cause of the Richmond refinery fire are focusing on possible corrosion in a decades old pipe. CVX inspected this pipe last year, but did not replace it. I would not be surprised to see California sue CVX for the cost of its negligent and arguably illegal behavior. In other words, California may try to lay some of the extra costs California drivers are now paying for gasoline at CVX's door. This could be very expensive for CVX.
CVX is a great company, and it has been for years. However, with all of these unexpected costs that CVX is facing, I think it is time to unload this historically strong, steady dividend payer (3.21%). The dividend could get cut. At the very least the earnings seem sure to suffer badly in the next few years. They could suffer for the next decade if the $22B Brazil is now seeking is awarded. The company may be a historically great one, but I don't see much upside for the next few years. Plus the criminal complaints that have been and are likely to be lodged against CVX will take time to play out in the courts. It seems inevitable that some criminal behavior will be proved. Where there's such a huge amount of smoke, there is sure to be some fire. These criminal complaints will sully CVX's name for the next several years. There are other companies that are more likely to produce for you. For instance, BP with a 4.60% dividend is probably rebounding from its Macondo well disaster. Total (TOT) with a 5.02% dividend has been called unethical, but is not facing any major lawsuits currently. A US court recently dropped a probe into a former unit of Eni (E) over corruption charges in Nigeria. Eni pays a hefty 4.98% dividend. None of these companies are facing the problems CVX is. They are all likely better bets to shelter your money in an income producing major oil company.
The chart of CVX does not reveal a lot, so I have not included it. A lot of the events which seem likely to lead to poorer than normal near term (at least one year) performance from CVX are fairly recent. The cumulative effect of these negatives, along with the world economic negatives, should lead to a significant pullback in CVX stock. It is time to get out of this historically great performer. Long term good sentiment has held it up so far, but that good sentiment seems likely to wane as the negative news keeps pouring in. The Brazilian fiasco seems likely to go on for years. With the California state government in dire economic straits, it may target deep pockets CVX as a possible source of revenue. On top of this many are currently saying that oil is oversupplied in this waning world economy. The Libyan oil coming back online has added to this to this. I see no appreciable upside. If you own CVX, it is time to sell it. If you are an aggressive trader, you might consider shorting it.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CVX over the next 72 hours.