Chevron Is Being Attacked On All Sides

| About: Chevron Corporation (CVX)

Chevron Corp. (NYSE:CVX) has been a stalwart slow, steady growth, dividend payer (3.32% currently) for many years. Huge numbers of US trust funds, mutual funds, and retirement funds own this stock. It has a market cap of $212.64B and "current" assets of $56.0B as of June 29, 2012 with only $32.7B in "current" liabilities. The current assets include $21.2B in cash and cash equivalents. To clarify CVX has total assets of $219.4B as of June 29, 2012. That's about as solid as you can get. The US government can only dream of a balance sheet like CVX's.

Unfortunately Chevron is in the process of being attacked on all sides. Many countries are strapped for money, and their lawyers see Chevron as the ultimate in a deep pockets defendant. In recent developments Chevron has been sued by Ecuador in Argentina in order to seize CVX's estimated $2B in assets there. These assets are meant to be a partial payment of an Ecuador court judgment against CVX for dumping billions of gallons of toxic waste into Amazon waterways. This was actually done by Texaco, but CVX bought Texaco in 2001. Chevron claims this judgment was the result of fraud. However, there is little doubt that Texaco (and so CVX) was substantially guilty. The only question may be about the size of the award. Notably the US Supreme Court recently refused to hear a challenge of the Ecuadorian court verdict. This substantially leaves CVX in the position of having to pay the award.

The lawsuit in Argentina to seize CVX's assets there is based on an international treaty in Latin America called the Inter-American Convention on the Execution of Preventive Measures. The treaty from the late 1970s allows for the freezing of the assets of a defendant who fails to pay a final judgment. The treaty has been ratified by Argentina, Ecuador, Columbia, Peru, Paraguay, Guatemala, and Uruguay. Venezuela and Chile have signed the treaty, but have not yet ratified it.

Chevron has comparatively little in assets in Ecuador. This leaves Ecuador with no alternative, but to try to seize assets in other countries in order to force payment by Chevron. Thus far, Chevron is claiming that the verdict was a product of substantial fraud. However, it is by Ecuador law a legal and substantive verdict, and therefore it should be enforceable under the Inter-American Convention treaty. The only hope for Chevron in this case seems to be the President of Argentina -- Cristina Fernandez de Kirchner.

Cristina Fernandez de Kirchner recently took over controlling interest (51%) in YPF SA (NYSE:YPF) on the grounds that Repsol (OTCQX:REPYY) was not pursuing the development of Argentine assets actively enough. Cristina Fernandez de Kirchner could take the same view of a Chevron freeze by Ecuador that she took on the YPF takeover. In other words, she could (with the help of the legislature) deny the seizure of Chevron assets because it is against the national economic strategy of Argentina.

Argentina is still a net exporter of oil, but only barely. It would like to import a lot more. It is a net importer of natural gas with production in 2010 of 43,069 mcm in 2010 and consumption of 45,197 mcm in 2010. I don't have the latest figures, but they are likely as bad or worse. The 2010 figures were a net import need of 2,128 mcm. If the Argentine economy is to expand it must expand its natural gas use for electric power production, heating, and a variety of manufacturing processes. To be able to afford this, Argentina must produce more natural gas itself.

Chevron recently signed a memorandum of understanding to help YPF develop the prolific Vaca Muerta field. Chevron has the financial resources to do this. It will not even try to do so, if it is not guaranteed by Argentina that Argentina will not allow other countries to seize Chevron's assets in Argentina. If Argentina does allow Ecuador to seize Chevron's assets, Ecuador will have little to no ability to continue Chevron's development goals at a pace acceptable to Argentina. Will Argentina then seize Ecuador's new assets? This seems a worse scenario than Argentina just refusing to allow Ecuador to seize Chevron's assets.

In this analyst's opinion, Argentina would be better off to issue an official assurance to Chevron that it is performing work critical to the Argentine economy. Therefore Argentina will allow no country to sue Chevron in Argentina for actions it may have taken outside of Argentina. In reality, this is not an overstatement of the facts.

Unfortunately for Chevron this is not the only place it is being sued by Ecuador. Ecuador's lawyers are also suing Chevron in Canada and Columbia. Plus the original $18.2B judgment was raised to $19B by an Ecuadorian judge in July. By the time Ecuador gets done, it is bound to have a significant impact on Chevron's businesses around the world when you add in the $22B lawsuit recently filed in Brazil for the two oil spills (roughly 3000 barrels each) offshore Brazil in 2011. I have no idea how this will play out, but the amount being sought for these relatively small oil spills seems far out of line with their actual impact. Plus, chevron did act quickly to clean them up.

It seems that Brazilians want to make sure they get all of the rewards from Brazilian oil in both developing it and marketing it. This is contrary to international law. However, it is always unclear exactly how these things will play out. It does not help that the other company involved, Transocean (NYSE:RIG), is a repeat offender of major proportions. RIG was one of the main players in the Macondo well disaster. Chevron is also facing lawsuits in the US, and it is possibly facing criminal charges in both the US and Brazil. I'm sure there are other lawsuits around the world against Chevron. However, the South American lawsuits seem by far the worst. Chevron could end up being effectively barred from development in South America. This would put a serious crimp in its development plans.

If the above were not bad enough, Chevron also reported weak earnings in Q3 2012 of $2.82 per share -- a miss. This was far below the Q3 2011 figure of $3.69 per share. Revenues decrease 9.9% year over year, which was also a miss. Crude oil production fell 3.2% year over year. Crude oil and natural gas prices in North America were also depressed. This led to a 17.1% drop in upstream earnings year over year. However, new (in process) projects are expected to turn this around soon.

Downstream earnings plunged from $1,986.0 million to $689.0 million year over year. Don't forget the Richmond California refinery is offline due to a fire. Part of the explanation for the above bad results is unquestionably the extremely low natural gas prices and the lower crude oil prices. Chevron has seldom as bad a quarter as Q3 2012. It has seldom, if ever, faced so many significant lawsuits and/or judgments against it.

The two year chart seems to support a near term down trending view too.

Click to enlarge

The slow stochastic sub chart shows that CVX is oversold in the near term. This does not mean that it cannot become more oversold. The main chart shows that CVX is in a weak uptrend that seems on the verge of turning into a downtrend. CVX's price line appears ready to pass through its 200-day SMA going downward. This would be a sell signal. Given all of the above negative fundamental information and the anticipated US economic trouble due to the fiscal cliff, it seems reasonable to anticipate this push downward. CVX seems a sell at the current time. There is downside support at approximately $96 , $90, and $81.50. The 2008-2009 low was at about $58 per share. I don't foresee this; but it should not be ignored. Unless you want to take the very long view on CVX, now seems an appropriate time to sell.

Oil prices normally drop in a recession; and we are now sufficiently close to the fiscal cliff (without any progress) to say that the US should be assured of at least a mild recession next year. If you sell now, you will with reasonable certainty get a chance to buy back next year at a lower price. If you are an active investor, you may wish to short CVX. Alternatively, you may wish to buy puts or put spreads on the stock. Yes, you have to keep the Middle East troubles in mind, but if you are shorting, you should be able to cover reasonably quickly.

CVX does trade at a quite reasonable P/E of 8.93 at the moment. However, some of the above mentioned details may negatively impact this in the next year or two. You should keep in mind that the Richmond, CA refinery is scheduled to come back online in Q1 2013. Some are also saying that the Bush tax cuts will be extended one more year. However, that will not prevent sequestration, which is a less tractable law. Still, there is some reason to consider a rally not long after the US elections are over.

Other US major oil company dividend payers such as Exxon Mobil (NYSE:XOM) -- 2.50% dividend -- and ConocoPhillips (NYSE:COP) -- 4.60% dividend -- seem like much better investments at this time. They have much less uncertainty attached to them.

Note: Some of the above fundamental data is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in CVX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.