Chevron’s Outlook Goes From Bad to Worse

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Chevron (NYSE: CVX) seems unable to get out of the way of the runaway train of bad news that is determined to take the stock down from its recent 52-week high. Shares sold off during Wednesday’s session on lower guidance from the company, news that the refinery fire in California is worse than originally thought and a court loss that will cost the company significantly. While Chevron has been able to shrug off bad news and surge along with its peers in the oil industry, the combination of these negative developments are too much to ignore. As such, the stock is a sell and should drive you to find better alternatives in other names.

California Burning

While the fire at Chevron’s Richmond California refinery was originally expected to have a minimal impact on the company, this is no longer the case. In a release earlier this week, sources are now reporting that the refinery’s crude unit will likely be shut down through the end of the year. The refinery has capacity of 245,000 barrels per day and is a major component of Chevron’s overall U.S. production capacity. The company’s total U.S. capacity stands at 928,000 barrels per day. The fire has been a major component of the sharp price spikes facing consumers throughout California. Also responsible for the high prices was the power failure at a refinery in Torrance that is operated by ExxonMobil (NYSE: XOM).

Chevron Loses Appeal

Back in 2001, when Chevron bought Texaco, it inherited an enormous environmental lawsuit for damages caused in Ecuador between 1964 and 1992. The suit involves citizens of Lago Agrio and the current level of damages is $18.2 billion – that is not a typo, billion with a ‘b’. In February of 2011, the court in Ecuador ruled against the company, triggering Chevron to countersue the plaintiffs and secure an injunction staying the enforcement of the verdict. It argued not only that the judgment was unenforceable on jurisdiction, but that the plaintiffs had used fraudulent means to secure the verdict.

The case made its way through the court system, but on October 9, 2012 the U.S. Supreme Court denied Chevron’s request to have the verdict permanently blocked. What that means for the company is that it suddenly finds itself with an outstanding bill that represents roughly 8.3% of the company’s market capitalization. A simple ‘ouch’ does not really do justice to the hit that a litigation loss of $18.2 billion represents. While it remains unclear precisely how the judgment will be satisfied and when, it is an extremely negative development for the company.

Alternatives

As alternative energy options become increasingly critical to the future of both U.S. Department of Energy policy and to the success of the companies in the sector, the cloud following Chevron should lead you to consider other options. ExxonMobil just received approval to work with Qatar Petroleum International to build export terminals in Texas that would allow the partnership to begin exporting liquefied natural gas (LNG) to the Middle East within five years. Additionally, a partnership between Exxon, BP (NYSE: BP), ConocoPhillips (NYSE: COP) and TransCanada (NYSE: TRP) has agreed to move forward with the construction of a pipeline across Canada that would allow the alliance to export natural gas to Asia.

CVX data by YCharts

What the chart above illustrates is that prior to Wednesday’s selloff, Chevron was the top performing stock in the sector over the last three months. Exxon now stands as the strongest performer in the industry and represents the most attractive buy. BP offers the highest dividend, but one of the lower operating margins. In many respects, Chevron has the strongest collective fundamental metrics; this is of far less importance given recent developments.

Until Chevron works through this current set of problems, the stock is a sell. While over the long-term, the company will almost certainly come out alright, there are simply better options at current levels. Based on the various negative developments for the stock, it should not be a part of your core portfolio.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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