Chevron's Bad Month Not Reason To Sell Stock
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The plaintiffs in the ongoing court case against Chevron (NYSE: CVX) brought by litigants in Ecuador over legacy pollution costs recently filed suit against the company in Canada in an attempt to enforce an $18 billion judgment. In response, Chevron released a statement indicating that "the Ecuador judgment is a product of bribery, fraud, and it is illegitimate. The company does not believe that the Ecuador judgment is enforceable in any court that observes the rule of law."The statement goes on to note that the fact that enforcement action was sought in Canada, rather than in the U.S. where the corporation is headquartered, indicates that the plaintiffs are trying to circumvent the law. Several U.S. courts previously ruled in Chevron s favor in the case.
I don't think that Chevron is caught off guard by the move to Canada, as since the early days of the trial it has known that Ecuador intended to use a legal strategy to file lawsuits in global courts until a settlement agreeable to its demands was met. However, at this point the case is severely damaging Chevron's public image and stock price, and whether or not Chevron predicted the move the company should be taking action to take this particular litigation off the table.
Chevron Should Settle with Ecuador to Move On, Move Stock Up
In late May, forty of Chevron's institutional investors formed a group to pressure Chevron into settling the Ecuador case. In a letter to Chevron, the group requested a meeting with Chevron executives to discuss the damage that the Ecuadorian spat has caused to Chevron's stock price, noting the groups' belief that despite Chevron's maneuvers to avoid settling "its financial exposure has only grown over time and its options to evade the $18 billion judgment have greatly narrowed in recent months."
It appears that Chevron's institutional investors believe that the reputational damage from Chevron's actions carries greater financial weight than simply settling the case. At the same time, these investors filed a request with the Securities and Exchange Commission to investigate Chevron, citing material differences between statements by Chevron's management and Chevron's public filings that could amount to misrepresentation. I agree that it is in Chevron's best interests to settle the case, as the way the litigation is tracking indicates that Chevron will not be able to ignore the judgment indefinitely - and Ecuador is making it clear that it is not going to give up. I think that the longer Chevron waits, the more remote the chances of a mutually agreeable settlement will become.
The Ecuador case is also impacting other areas of Chevron's business. Further fallout came last week, when Chevron fired its lobbying firm, Ogilvy Government Relations. In a statement, Chevron indicated that there was a "material conflict of interest with Ogilvy", apparently related to an Ogilvy employee's presentation in early May to Amazon Watch, an environmentalist group that is taking Chevron to task over its Ecuador settlement. Chevron will easily be able to find another lobbyist and moves like this will not impact its stock price, but this shows just how far-reaching the case is for Chevron.
On the Positive Side
Chevron's annual shareholder meeting on May 30 went relatively smoothly, despite protests organized by environmentalist and social issues groups. Its shareholders rejected a measure that would require Chevron to report on its insurance and other risk factors related to hydraulic fracturing, as did shareholders at Exxon Mobil's (NYSE: XOM) annual meeting when presented a similar measure. The proposal at Chevron actually received fewer supporting votes than it did last year, which I think augers well. Though a case can be made for the mandatory release of fracking disclosures, I believe that disclosures made out of context can (and will) be easily misunderstood by the public at large. Ideally, I believe Chevron and others should be working on a strategy of investor education looking ahead to a time when disclosures are federally mandated.
Chevron is finding it difficult to escape damaging news. On top of the Ecuador struggles, Brazil just confirmed that it expects Chevron to pay some type of restitution for the relatively minor November 2011 spill in Brazilian waters. Regulators are indicating a final determination is likely by next month. Then on June 4, Fitch affirmed Chevron's default rating at "AA" before withdrawing coverage of the firm, citing business reasons. Last month Fitch also withdrew coverage of Exxon Mobil, again business reasons.
It is proof of Chevron's resilience and sound fundamentals that despite the flood of attacks in the media, its stock is not taking a slide. Currently trading around $96, it is down 10% in the last thirty days - but then again, so are many of its peers. Exxon Mobil is down 11%, Royal Dutch Shell (RDS.A) is down 14%, and Marathon Oil (MRO) is down a worrisome 20%.
The exploration and production industry as a whole is being battered by a host of factors, many of which are not within its control. This represents a certain buy side opportunity, as with a price to book of 1.5 and a forward price to earnings of 7.1 Chevron is looking cheap. Its dividend, currently at 3.7%, helps offset concerns over the pending litigation. Chevron might be a hold for more cautious investors, but it shouldn't be written off.
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