Chevron's Assets Outweigh Troubles In Latin America
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When a judge recently blocked Chevron's (NYSE: CVX) earnings in Argentina, they acted on behalf of the Ecuadorian judgment, which penalized Chevron with a hefty $19 billion fine for environmental damages. Consequently, many analysts have predicted that Chevron, which still refuses to pay the fine, may end up paying the fine in the end. Analysts believe that if Chevron pays the $19 billion fine, its share price may fall $10.
However, Chevron will be able to regain its losses eventually because of its stable business elsewhere in the world and also because of increased investment in regions that are less unstable. According to Enrique Bruchou, a representative of the lawyers in the country, Chevron has $2 billion in assets in Argentina. In Ecuador, the company was ordered to pay $19 billion for allegedly polluting the Amazon rainforest and harming the health of the community by improper disposal of waste derived from oil exploration.
Texaco (bought by Chevron in 2001) was accused of causing serious environmental damage between 1964 and 1990 in the region of Lago Agrio, in the Ecuadorian Amazon. As the company has few assets in Ecuador, the country's judiciary has asked nations such as Argentina, Brazil, and Colombia to impose embargoes.
Since June, there has been a movement in the Superior Court of Justice (STJ) requesting the approval of a Brazilian ruling against Chevron in Ecuador similar to what Argentina did, but the court didn't agree to confiscate assets of the company. Chevron said it had no knowledge of any decision rendered in Brazil or abroad to determine the freezing of assets of Brazilian subsidiaries. The company also stressed that it never operated in Ecuador and that the environmental damage in question was caused by a joint venture between Texaco and Petroecuador, the Ecuadorian state company which held more than 60% of shares of the company.
Meanwhile, a Canadian court said that Chevron's case must be fought in the U.S., and that Canadian law does not have jurisdiction over this matter, when Ecuadorians requested Canadian lawmakers to force Chevron to pay the $19 billion. However, Chevron's investors do not have to fear much. The company has a capital budget of $37 billion for 2013. That money will be used for investments across the world, where Chevron sees growth, opportunities and profits. For instance, Chevron will invest a whopping $33 billion in Angola, Nigeria, Kazakhstan, Australia and right in the U.S., in Gulf of Mexico. The money will be used to upgrade existing facilities, to explore and drill in new fields and also to purchase assets that will multiply Chevron's profits. Obviously, Chevron has chosen countries that are particularly oil investment-friendly. These countries that I mentioned above are known for their investment friendliness and also for ease of business. In fact, Chevron has knowingly decided to invest much of its money in stable countries and avoid countries like Ecuador and Argentina, where populist governments have often targeted American oil companies to win voter support. Chevron's strategy of increasing its capital budget to $37 billion, almost the same as ExxonMobil's (NYSE: XOM) and $7 billion more than Royal Dutch Shell's (NYSE: RDS-A) is a really wise one.
Meanwhile, ExxonMobil faced an increase of $3.3 billion in costs thanks to its liquefied natural gas project in Papua New Guinea. It is the latest project in the Asia-Pacific to be affected by cost overruns, in a moment that will most likely see similar increases in North America and Africa. A jump of over 20 per cent in costs amounting to $19 billion, was driven by unfavorable exchange rates and delays caused by dissatisfied workers and landowners.
Regarding BP (NYSE: BP), the Russian oil company Rosneft agreed to buy all of BP's shares in the Consortium TNK-BP. For the 50% that British Petroleum owned in the consortium, Rosneft will pay an amount of $17.1 billion. BP had been trying to wash its hands off clean for many months, especially when its relationship with other stakeholders went sour.
Petrobras (NYSE: PBR), in a document aimed at analysts and investors, said that the oil production target for 2012 is maintained. The company's board noted that the numbers for 2012 and 2013 should remain stable in comparison with 2011, when production stood at 2.022 million barrels per day (bpd). The estimate considers oil production only in Brazil.
Royal Dutch Shell is trying to circumvent international sanctions to pay a debt of $1.4 billion it owes to Iran in exchange for grain by Cargill, industry sources said. Shell wants to pay the debt as the interest levied on unpaid amounts is growing, especially after failing to close accounts with the National Iranian Oil Company (NIOC) before the EU started its embargo on oil imports on July 1.
At the moment, Chevron trades at $107 and has a market cap of $211 billion. With an enterprise value of $203 billion, it is one of the largest oil companies that you can invest in, no matter how much Chevron will eventually have to pay. Its profit margin is 10.70% and its operating margin is 15.72%. Certainly, Chevron will be able to fill the gaps left by paying the huge fine (if only it has to pay at all) thanks to steady profits and wise investments in Africa, Kazakhstan and Australia. With revenue of $224.77 billion and a total cash of $21.58 billion, Chevron will certainly be able to offset its difficulties in Latin America. Though it may be a little upsetting to see Chevron's stock suffering if it pays the fine, investors need to know that any setback is only temporary and momentary. The company will strike back with renewed force.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Petroleo Brasileiro S.A. (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!