Chevron, A Dividend Champion In Trouble: What Is The Impact Of The Ecuadorian Judgment?

| About: Chevron Corporation (CVX)
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Chevron (NYSE:CVX), the world's fourth-largest publicly tradable energy company, is certainly experiencing some rough going at the moment. Not only is it a co-defendant to a $22 billion lawsuit in Brazil with offshore driller Transocean (NYSE:RIG), but now it is appearing more likely that an earlier judgment awarded by an Ecuadorian court, totaling $19 billion will be enforced. This has been a particularly bitter, divisive and acrimonious lawsuit, which has seen all manner of allegations relating to dirty dealings being made by both sides. This has raised significant concern, with Chevron being a significant holding in many investment portfolios. With this in mind I have set out with Seeking Alpha contributor Colin Lea, who will present the investment case for Chevron, while I will seek to determine the likelihood of the judgment being enforced and the impact this will have on Chevron.

Background to the Lago Agrio judgment

The Ecuadorian court judgment against Chevron has its origins in the Latin American oil boom of the 1960s, which occurred at the height of the Cold War, when U.S. hegemony, with the exception of Cuba, in the region was assured. With the discovery of oil in the region at this time the U.S. government, convinced of its supremacy in the region, saw this as an opportunity to reduce its dependence upon oil supplies from the unstable Middle East, which was a contested zone between the super powers.

This saw both the U.S. and Ecuadorian governments promote oil exploration and production in the region, creating an influx of U.S. oil companies, including Texaco and Gulf Oil Corporation (NASDAQ:GULF). In 1964, Texaco and Gulf formed a consortium with equal ownership rights, through their Ecuadorian subsidiaries, to conduct exploration and production. These operations were located in the north-eastern department of Sucumbíos, situated in the Amazon basin and centered around the city of Lago Agrio, as well as extending to Coca in the south and Shushufindi in the east, as the map below shows.

Source: Chevron Toxico

Texaco was the operator of the field on behalf of the consortium and commercial quantities of oil were discovered. Export operations commencing in 1972 after the completion of the trans-Ecuadorian pipeline (SOTE) to Ecuador's Pacific coast. Production continued to increase and reached 200,000 BOEPD by the end of 1973, resulting in Ecuador's gross national product more than doubling over a six year period.

Texaco, as the lead operator of the consortium, operated those fields exclusively until 1977 when Petroecuador, Ecuador's state owned oil company, took a 62.5% stake. However, Texaco continued operating in those fields until 1992, at which time Petroecuador took over the entire operation and Texaco totally withdrew from Ecuador. As part of the takeover agreement, Texaco agreed to clean up 161 pits at a cost of approximately $40 million, which was seen as its share of the total clean-up. This remedial work commenced in 1995 and was completed in 1998, at which time the Ecuadorian government judged the clean-up work to be satisfactory and signed an agreement releasing Texaco from any further liability. However, most importantly, this indemnity did not extend to third party claims, thus leaving the local residents with the ability to commence action against Texaco.

The first lawsuits against Texaco, the Aguinda and Sequihua lawsuits, commenced in 1993 in the Southern District of New York, in which the plaintiffs were residents of the areas in which Texaco had been operating. The basis of the plaintiffs' complaints were that Texaco had dumped more than 18 billion gallons of toxic waste from oil drilling in the Amazonian jungle from 1964 to at least 1990, and this was responsible for significant environmental damage and at least 1,400 deaths from cancers and other related ailments. Putting this in perspective, this is 85 times larger than BP's (NYSE:BP) Macondo oil spill in 2010.

When these cases commenced, the Ecuadorian government of President Sixto Dur´an Ball´en supported Texaco, making a diplomatic protest to the U.S. government. The protest was on the grounds that the case should not be pursued because it was damaging Ecuador's economic interests. At the time, the U.S. government ignored the protest and the Ecuadorian government retained a prominent New York law firm to present an amicus brief in support of Texaco.

Finally in 2002, the case Aguinda v Texaco Inc., 142 F. Supp. 2d 534, 537 (S.D.N.Y. 2001), was dismissed on the ground of forum non conveniens. This meant that the court was unwilling to take jurisdiction over the matter because it believed there was a more appropriate forum where the matter should be considered. The plaintiffs then appealed this ruling in the Second Circuit Court of Appeals, which ultimately affirmed the lower court's decision in Aguinda "B" "C" "D" v Texaco Inc [2002] USCA2 273; 303 F.3d 470 (16 August 2002). But this affirmation was subject to a number of conditions including; that Texaco agree to submit to the jurisdiction of Ecuador's courts, and waive defenses based on any statutes of limitation that expired between the date the lawsuit was filed and one year after their dismissal.

It was just prior to these two U.S. rulings that Chevron acquired Texaco in 2001 and merged that company into its operations. As a result of this 100% acquisition Chevron inherited all liability for any current and potential litigation that may be brought against Texaco for its prior and current oil and gas operations.

The plaintiffs then recommenced action in Ecuador in 2003, filing a new complaint against Texaco, now Chevron, which was vigorously defended by Chevron and became a particularly acrimonious case. The case then continued for almost nine years, with the Ecuadorian Superior Court of Nueva Loja (Lago Agrio) eventually finding against Chevron. The court awarded a judgment in favor of the plaintiffs on 14 February 2011 to the value of $17.2 billion, which was composed of two parts. The first part was an award for damages totaling $8.6 billion, and the second part was that Chevron apologize to the plaintiffs within 14 days of the judgment being issued, or an additional $8.6 billion in punitive damages would be applied. Chevron did not apologize within 14 days of the judgment, and is now liable for the full judgment of $17.2 billion. Chevron went on to appeal this judgment to the Appellate Panel in Ecuador. This court after considering the decision, affirmed the judgment awarded by the Superior Court of Nueva Loja.

Since the judgment was issued, Chevron has not in any way complied with the judgment and has sought to prevent its enforcement. In addition, it was virtually impossible for the judgment to be enforced in Ecuador, because Chevron did not have any operations in the country and only residual assets. Essentially this gave the plaintiffs a pyrrhic victory and as a result, they moved to have the judgment enforced in jurisdictions outside of Ecuador where Chevron has assets. But at that time, it seemed unlikely that the Ecuadorian judgment would be recognized outside of Ecuador, because of the 1993 finding of forum non conveniens.

However, the plaintiffs scored an important victory in January 2012, when the Second Circuit Court of Appeals issued an opinion in Chevron Corp. v. Naranjo, 667 F. 3d 232, ordering the vacation of a preliminary injunction that prohibited the plaintiffs from enforcing, or preparing to enforce, a potential Ecuadorian judgment against Chevron anywhere in the world outside Ecuador. Since the judgment was handed down Chevron has sought to have it overturned, or dealt with in a court it feels is more sympathetic to its position.

This saw Chevron apply to the Permanent Court of Arbitration in The Hague to have the matter arbitrated in accordance with the requirements and constraints of the U.S. Ecuador Bilateral Investment Treaty. The Tribunal investigated and found that it had jurisdiction over the matter and was in a position to arbitrate between the parties. On 16th February 2012, the tribunal issued a Second Interim Award on Interim Measures, in which it directed the Republic of Ecuador; "(whether by its judicial, legislative or executive branches) to take all measures necessary to suspend or cause to be suspended the enforcement and recognition within and without Ecuador" of the Lago Agrio judgment. However, Ecuador refused to comply and the plaintiffs continued to seek enforcement of the judgment outside of Ecuador.

The Second Circuit Court of Appeals opinion in Chevron Corp v Naranjo was a very important event for the plaintiffs and extremely negative for Chevron. This is because it opened the door to the plaintiffs being able to enforce the judgment in jurisdictions outside of Ecuador where Chevron holds assets. As a result Chevron appealed this decision in the U.S. Supreme Court, which rejected the appeal and upheld the Second Circuit Courts finding in October this year, opening the way for the judgment to be enforced globally. This then takes us to the situation now being witnessed, where the plaintiffs have sought to have the judgment enforced in jurisdictions where Chevron holds extensive assets.

How can the judgment be enforced?

With Chevron estimated to have only around $200 million of assets in Ecuador, it has been virtually impossible, until recently, for the judgment to be materially enforced, but that has changed now that it has been recognized as being enforceable outside of Ecuador. This has seen the plaintiffs commence action to enforce the judgment in Canada, Brazil and Argentina, and announce plans to file an action in Colombia.

The key reason for the plaintiffs choosing to pursue enforcement in Colombia and Argentina, besides Chevron having considerable assets in both jurisdictions, is that they have ratified the Inter-American Convention on Execution of Preventive Measures. A treaty dating from the late 1970s, which was signed by 16 Latin American countries including Argentina, Colombia, Chile, Peru, Uruguay and Venezuela, has only been ratified by seven countries; Argentina, Colombia, Ecuador, Guatemala, Paraguay, Peru and Uruguay, with its application in the other countries subject to ratification.

In principal, the convention binds the ratifying states to recognize any court awarded judgment delivered in the other ratifying states, and ensure that the judgment can be enforced within their jurisdiction. However, all of this is pending whether the judgment complies with their laws. The convention contains 26 articles, and provides the ratifying states with some discretion as to how the treaty is applied in their jurisdiction, as well as avenues of appeal. But it does not bind the ratifying states to any predetermined course of action.

The plaintiffs have filed an action seeking recognition in Canada

The plaintiffs have filed a lawsuit in the Superior Court of Justice in Ontario, Canada seeking enforcement of the judgment. They have done so on the basis that Chevron and its subsidiaries hold considerable assets in Canada, valued in the billions of dollars. Chevron also obtains over two percent of its production from Canada, which is a significant contribution to its bottom line.

However, it is early days in this case and for the judgment to be enforceable in Canada it must meet certain criteria. The first criteria is that it must be a judgment from a court with jurisdiction under the principles of international law as applied by Canadian courts. It is highly likely that the judgment will meet this criteria, particularly now that it has been recognized in the U.S. The second requirement that it must meet is that the judgment must be final and conclusive in its original jurisdiction, which it is and therefore meets this criteria. The third requirement is that the judgment must be for a definite and ascertainable sum of money, or sufficiently clear and limited in scope, that the principles of comity require the domestic court to enforce. Again it is arguable that the judgment meets this requirement because it is for a clearly tangible sum of money.

But even where the judgment meets the criteria to be recognized, Canadian law offers three affirmative defenses to the enforcement of the foreign judgment. The first defense is that the judgment is based on a penal, revenue or other public law of the foreign jurisdiction. The second, being the judgment was obtained by fraud. While the third is that the judgment was issued in circumstances that deprived the Canadian defendant of natural justice and violates Canadian public policy. It is highly likely that if the Canadian courts recognize the judgment, Chevron will seek to utilize the second and third defenses.

Chevron has long argued that the judgment was the result of corruption, bribery and intimidation within the Ecuadorian legal system. But under Canadian case law, as set out in the case of Beals v. Saldanha, [2003] 3 S.C.R. 416, 2003 SCC 72, the defense of fraud must be based on previously indiscoverable evidence. In this case, Chevron is unable to revive any arguments of fraud that have been previously heard or recognized by an Ecuadorian court, so it will need something new if it is to utilize this defense.

I believe that another important reason for the plaintiffs choosing to seek enforcement in Canada is that Canada is a member of the British Commonwealth and a former British colony. As a result, Canada's legal system is similar to that used by Britain and other Commonwealth countries, such as Australia, and is underpinned by the same legal principles. This would mean that should the judgment be recognized by a Canadian court, then it is highly likely that it will be recognized and become enforceable in countries such as Australia, where Chevron has considerable assets.

An action seeking recognition of the judgment has been filed in Brazil

The plaintiffs on 27th June 2012 filed an action in Brazil seeking enforcement of the judgment. This action has been filed with the Superior Tribunal of Justice and asks that court to recognize the Ecuadorian judgment. Where plaintiffs are seeking to execute a foreign judgment in Brazil, it must first be recognized by the Brazilian courts in order to make it binding and executory.

For it to be recognized, it must meet five specific criteria, with the first being that the judgment has been rendered by a competent court. The second requirement is that the judgment has been served by proper notice of process and that it is final. The third requirement is it must be in proper form for its execution at the place where it was rendered. The fourth requirement is that the foreign judgment has to have been authenticated by the nearest Brazilian consulate, and has been submitted to the Superior Tribunal of Justice with an official translation thereof. The final requirement is that the foreign decision must not be contrary to Brazilian sovereignty, public policy or good morals.

When the Superior Tribunal of Justice considers whether it is a legitimate judgment that can be enforced in Brazil against a Brazilian national, it also considers whether there is a "clear indication" that the Brazilian national intended to submit to the foreign court's jurisdiction. Once the foreign judgment has been confirmed, it may be enforced before the relevant Brazilian lower court.

It would appear that the Ecuadorian judgment meets the first four requirements, but doubtful whether it would meet the final requirement. Furthermore, I am certain that Chevron would argue that there is no clear indication that its Brazilian subsidiaries have submitted to the jurisdiction of the Ecuadorian court. This makes it difficult to predict whether the judgment would be recognized in Brazil.

Further to this, Brazilian prosecutors are currently pursuing their own actions against Chevron and its driller Transocean, regarding two oil spills in Brazil in November 2011 and March 2012. As part of these actions they are seeking $22 billion in damages from Chevron and Transocean and, if the Ecuadorian judgment is recognized, it may leave the Brazilian courts unable to recover any assets from Chevron in the event that their own action is successful.

An Argentine court has frozen Chevron's local assets

It is in Argentina where it appears that the plaintiffs have the greatest opportunity to enforce the judgment at this time. Not only does Chevron have assets valued at around $2 billion in the country, but Argentina has ratified the Inter-American Convention on Execution of Preventive Measures, reducing the burden placed on the plaintiffs to have the judgment recognized by the Argentine legal system. As a result, in early November 2012 the plaintiffs commenced action in Argentina to commence enforcement of the judgment.

As a result of this action, an Argentine court on 7th November issued an order embargoing or effectively freezing Chevron's assets in Argentina. The order states that all the cash flows from sales and bank deposits be frozen, as well as applying to 100 per cent of Chevron's capital stock in Argentina, 100 per cent of its dividends and its entire minority stake in Oleoductos del Valle. It also includes 40 per cent of any current or future money that Chevron Argentina holds, as well as 40 per cent of all its crude sales. According to the plaintiff's Argentine attorney, the order will stay in place until the full $19 billion judgment is collected, which means that any additional assets invested by Chevron in Argentina would be subject to seizure until the judgment is paid off in full.

Generally, for a foreign judgment to be recognized in Argentina there are a series of guidelines or conditions that must be met as set out by s517 of the Codigo Procesal Civil y Commercial de la Nacion (OTCPK:CPCC). Normally, there are four criteria that a foreign judgment must meet in order to be recognized as enforceable in Argentina, the first of which is that the judgment must be final and originate from a court with jurisdiction over the subject matter, and personal jurisdiction over the defendant company according to Argentine law. The second criteria, is that the defendant company must have been personally served with the summons and, in accordance with the due process of law, given an opportunity to enter a defense against the foreign action.

The third criteria is that the judgment must have been valid in the jurisdiction where it was rendered, and its authenticity must be established in accordance with the requirements of Argentine law. While the fourth criteria is that the judgment must not violate the principles of international public policy of Argentine law; and finally, the judgment must not conflict with a prior or contemporaneous Argentine judgment on the same dispute involving the same parties.

It would appear that the judgment meets all of these criteria and, by virtue of the Inter-American Convention, has already been recognized by the Argentine courts. The order embargoing Chevron's assets, at this time, appears to be nothing more than Argentina acting in accordance with the treaty requirements, with Chevron afforded the opportunity to defend the plaintiff's attempts to appropriate its Argentine assets. A further issue for Chevron in Argentina is that the order embargoing the company's assets, or any order awarding those assets to the plaintiffs, will apply to the full judgment. This effectively means that Chevron will be barred from investing further assets in Argentina, because those assets will also be at risk of seizure until the full judgment has been fulfilled.

It is clear that Chevron has the opportunity to defend the enforcement in accordance with the Argentine law and has commenced this process, having filed a motion in Buenos Aires seeking to have the order revoked. The principle argument of this motion is that the plaintiffs' lawyers have no legal right to embargo assets which are owned and controlled by its Argentine-based subsidiaries, because they are not the subject of the judgment.

It is also important to consider the political and economic ramifications should the plaintiffs be successful in having the judgment enforced in Argentina. Chevron would be prevented from proceeding with its partnership with the Argentine state controlled oil company YPF (NYSE:YPF), to develop the shale oil and gas fields of the Vaca Muerta. Without this development, Argentina's status as a net energy producer will be threatened, placing constraints on the country's economic growth and threatening a balance of payments crisis. It is also highly likely that Chevron would withdraw from Argentina in such circumstances.

This would also be a significant blow for Argentina and the government of President Christina Fernandez de Kirchner, which needs considerable investment in YPF, and technical assistance, if it is to access the energy reserves of the Vaca Muerta and avert a balance of payments crisis. It would also undermine the rationale behind the government's expropriation of YPF from its Spanish parent Repsol (OTCQX:REPYY) in April of this year. Another significant impact would be further damage to Argentina's already tarnished reputation among investors and companies considering investing there. It would also certainly make other international oil majors reluctant to invest in Argentina, effectively cutting the country off from much needed capital and the technical expertise required to grow its energy industry.

Other courses of action being considered to enforce the judgment

The plaintiffs have also advised of their intent to seek recognition of the judgment in other Latin American countries that signed, and/or ratified, the Inter-American Convention on Execution of Preventive Measures, where Chevron has assets. This includes Colombia which has ratified the convention, Venezuela which has signed it but not ratified it and Panama, which is not a party to the convention. The likelihood of success, in these jurisdictions, will depend upon how the convention interacts with local laws regarding the enforcement of foreign judgments, along with whether the judgment will recognized.

It is difficult to predict whether the judgment will be enforced, but it appears that the greatest likelihood for success at this time is in Argentina. This would not allow the full recovery of the judgment, because Chevron only has $2 billion of assets in the country, and as such it is highly likely that recovery in other jurisdictions would continue.

The impact of the judgment on Chevron

While it is difficult to predict the outcome, it is certain that this matter will continue to run for many years and at great cost to Chevron. According to the plaintiff lawyers, the matter is already costing Chevron somewhere in the vicinity of $200 million per annum in legal fees, and I can only see this increasing as Chevron has to defend itself against enforcement of the judgment in multiple jurisdictions. One aspect of the case that is clear is that the Ecuadorian judgment if enforced would have a significant financial impact on Chevron, with the penalty representing 8% of Chevron's 2011 revenue of $236.5 billion and 67% of that year's net income of $27 billion.

However, surprisingly to date, Chevron's management has been reluctant to recognize the financial impact stating in Chevron's 2011 Annual Report:

"The ultimate outcome of the foregoing matters, including any financial effect on Chevron, remains uncertain. Management does not believe an estimate of a reasonably possible loss (or a range of loss) can be made in this case. Due to the defects associated with the Ecuadorian judgment, the 2008 engineer's report on alleged damages and the September 2010 plaintiffs' submission on alleged damages, management does not believe these documents have any utility in calculating a reasonably possible loss (or a range of loss). Moreover, the highly uncertain legal environment surrounding the case provides no basis for management to estimate a reasonably possible loss (or a range of loss)."

This indicates that Chevron's management has, as yet, not estimated a possible loss for this matter, nor has it established a provision. I believe that the strategy behind this is that there can be no claim by the plaintiffs that Chevron has admitted to the validity of the judgment.

Determining Chevron's indicative fair value

However, if the full judgment were to be enforced it would have a significant financial impact on Chevron and its stock price. Accordingly, I have set out to value Chevron using a discounted cash flow methodology across three scenarios. The first scenario being that the judgment is not successfully enforced in any way and there is no impact on Chevron other than legal costs.

In the second scenario, I have accounted for a partial enforcement of the judgment and in the third scenario I have allowed for the worst-case scenario, with the judgment being enforced in full. I have chosen to use a DCF methodology because Chevron is composed of a variety of business across all segments of the oil and gas business. With regard to each valuation scenario, I have not incorporated the impact of other operational and legal issues that Chevron is currently experiencing, including the legal action launched by Repsol and the case against Chevron in Brazil. The assumptions for each scenario are set out in the table below.

Source data: Forecast oil and gas prices are obtained from the U.S. Energy Information Administration, Chevron 2011 Annual Report & Financial Filings 1Q12 to 3Q12.

After taking into account the assumptions for scenario one, where no enforcement of the judgment has occurred, I have determined an indicative fair value for Chevron of $120 per share as shown by the chart below.

At the time of writing, Chevron's share price is at around $105 and this represents a 15% upside for investors. However, when the assumptions for scenario two are used, where there is partial enforcement of the judgment restricted to Argentina, an indicative fair value per share of $118 is calculated as the chart below illustrates.

Based on Chevron's current share price, this represents an upside of almost 12% for investors. It indicates that Chevron is capable of absorbing both the losses in asset values and revenue generation created by this scenario with a minimal impact on its share price. However, what is more difficult to quantify is the opportunity cost of not being able to partner with YPF in exploiting the oil and gas resources of the Vaca Muerta, and the future revenue this would generate.

However, in scenario three, which is the worst-case scenario where Chevron is forced to comply with the full $18 billion judgment, the impact on the company's share price is significant. As the chart below illustrates, taking the assumptions listed above into account, I have calculated an indicative fair value of $99 per share.

This represents a 6% fall in Chevron's share price, which while not major, is significant enough to be noticeable. Again, in this scenario, the hardest aspect to account for is the opportunity cost associated with the lost assets and production in Canada, Brazil, Argentina and Colombia. I believe that this opportunity cost is significant would prevent Chevron's share price from reaching its full value for at least the short term. But it is important for investors to remember that this lost production only makes up 6% of Chevron's total revenues and that Chevron would eventually continue to grow in value.

Other matters for consideration

It is likely that Chevron will continue to contest the application of the judgment despite having its last appeal to the U.S. Supreme Court rejected. The key plank to Chevron's defense will be its assertion that the judgment rendered by the Ecuadorian court is the product of fraud. There are also matters concerning the application of the national interest that Chevron can raise with the governments of those countries where enforcement is sought by the plaintiffs, so I wouldn't be expecting a speedy resolution to this matter.

There are also allegations by Chevron shareholders that the company and senior management have mismanaged the matter. It certainly raises questions as to why Chevron's due diligence of Texaco was not more thorough, before purchasing the company, and why management has consistently downplayed the impact of the case. It also seems that management have failed to recognize the impact of the regime in Ecuador and the impact that this could have on the outcome of the case. Another contentious issue is that the Ecuadorian government in office at the time of the Texaco withdrawing its operations approved the environmental clean-up completed by Texaco.

As a result, if the judgment is successfully enforced I would expect a shareholder class action to commence. It is more than likely that the key planks of this action would be that Chevron's management have mismanaged the matter and failed to act in the best interests of its beneficial owners.

What can we learn from Chevron's Experience?

Chevron's experiences in Latin American, and in particular Ecuador, are a litmus test for other major oil producers and clearly outline the risks associated with exploring and producing in the region. It certainly shows the risks an oil company faces when operating in a Latin American country, where regime change may see them facing litigation, and an unfavorable response to operations and clean-ups that have previously been approved. Egregious fines are becoming more common these days in the oil world. They are usually levied by corrupt states like Venezuela and Kazakhstan, as a form of blackmail in order to extract more money from oil companies once they start production. They are also used as an excuse for a state takeover of oil assets.

Another important lesson is that when companies are acquiring another company as part of a takeover or merger, that full diligence should be conducted and all aspects of the targets' operations, including actual and potential litigation, fully considered. Overall for investors, these are the types of issues that should be uncovered when conducting due diligence on a company being invested in, and they are certainly representative of the types of risk an investor will take on when investing in a company that chooses to operate in Latin America. In saying that, I am not saying to be risk-averse, but to weigh up the true risks and the impacts they can have on the company in which you are investing and ultimately the value of your investment.

Furthermore, beside the direct financial impact of such events, there is a high degree of brand and perception risk associated with such activities, and these events have certainly damaged Chevron's brand and environmental credentials. Despite this degree of risk, there is certainly a benefit for these companies to continue operating in Latin America, but they must recognize that they need to limit the impact of their operations, and ensure that the reward is commensurate with the risk.

Bottom line

The likelihood and extent of the enforcement is difficult to predict because it is occurring concurrently across a variety of legal jurisdictions, with each having its own standards for the recognition of foreign judgments. This is further complicated, by the application of the Inter-American Convention on Execution of Preventative Measures, in those Latin American countries that have ratified the treaty. Then, to add another layer of complication, there are a number of economic and political factors that need to be considered, particularly with regard to the enforcement of the judgment in Argentina.

Chevron will also continue to defend itself against the judgment, and the central plank of this defense will be its ongoing assertions that it was obtained fraudulently and through coercion. All of which makes it extremely difficult to determine the final outcome of this matter. However one thing is certain; it will continue to be a bitterly contested and acrimonious matter between both parties, which will take considerable time to fully resolve, unless Chevron agrees to a settlement.

Despite the tremendous sums of money involved and the complex nature of the multi-jurisdictional litigation, I do not believe that investors should avoid investing in Chevron. It is the world's fourth-largest publicly tradable energy company and an integrated energy company comprised of downstream and upstream operations, and is geographically diversified with strong revenue generation. It continues to consistently pay a solid dividend with a yield of around 3.5%, and as the valuations illustrate the impact of even the worst-case scenario is minimal, with the indicative fair value being 6% lower than its current share price. But investors should be aware that there are a range of unquantifiable risks currently impacting Chevron, with the majority being litigation in a range of jurisdictions for a number of different matters that are separate to the enforcement of the Ecuadorian judgment. As history has consistently demonstrated, investors should expect the worst from the unknown until it can be quantified. Therefore, I believe that only risk tolerant investors with a long-term investment horizon should be considering Chevron at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.