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Wall Street Questions Chevron Over $19 Billion Ecuador Liability

Wall Street Questions Chevron Over $19 Billion Ecuador Liability

Published 10-16-12

Submitted by Amazon Defense Coalition

Some Wall Street analysts are beginning to pose tough questions to Chevron over its $19 billion Ecuador environmental liability as a U.S. Congresswoman and shareholders are asking the SEC to determine if company management is misleading investors over the issue, according to the Amazon Defense Coalition.

“One thing is indisputable: cracks are beginning to appear in Chevron’s determined effort to keep Wall Street in line with the idea that the Ecuador judgment represents no short-term threat to the company’s financial position,” wrote The Chevron Pit in a blog published today.

New questions from analysts are coming at a time when the U.S. Supreme Court ruled against Chevron's effort to block enforcement of the $19 billion judgment and several institutional Chevron shareholders representing $580 billion in assets have asked the company to try to settle the case. Last year, at the annual meeting, shareholders were in open revolt against CEO John Watson for his mishandling of the Ecuador case.

The questions also come at a time that Chevron is under criminal investigation for flaring toxic gas at its refinery in Richmond, California.

The blog is below:



Chevron Facing Wall Street Criticism Over $19 Billion Ecuador Liability

Wall Street analysts rarely take controversial positions on publicly traded companies whose stock is doing well. But Chevron’s mishandling of its $19 billion liability in Ecuador for dumping toxins into the Amazon is beginning to look like the exception, at least to the analysts at Seeking Alpha and a commentator at the influential proxy advisor Glass Lewis.

One thing is indisputable: cracks are beginning to appear in Chevron’s determined effort to keep Wall Street in line with the idea that the Ecuador judgment represents no short-term threat to the company’s financial position.  One analyst even predicted the lawsuit eventually could lop as much as 20% off the company’s share price. Even worse for Chevron, the U.S. Supreme Court just dinged the company's last attempt to block enforcement of the Ecuador judgment.

Some of these analysts are beginning to get that the judgment in Ecuador – from the very court where Chevron wanted the issues resolved– is based on overwhelming scientific evidence that proves Chevron committed what is probably the largest oil-related environmental disaster in world history. See here and here.

The fact that the plaintiffs now have launched seizure lawsuits targeting billions of dollars of Chevron assets in Brazil and Canada certainly takes the idea of litigation risk for Chevron to new and unchartered territory, leading one analyst to advise shareholders to dump the stock for now.  Further, numerous U.S. courts, including the Supreme Court, recently denied Chevron’s increasingly desperate attempts to derail the litigation while several institutional shareholders and a U.S. Congresswoman have asked the SEC to investigate the company for lying about its Ecuador risk. 

Consider the various analyses from Seeking Alpha, an award-winning website for stock research that has more than 800,000 followers.  Kiplinger’s recently named Seeking Alpha the Most Informative Website; it also received a “Best of the Web” award from Forbes.

Seeking Alpha recently dismissed Chevron’s fake fraud narrative and wrote in reference to the pending seizure action in Canada:

“Canada has a reputation for fair legal proceedings. This will make it incredibly difficult for Chevron to continue claiming that the lawsuit is based on fraud. I think it is highly unlikely, furthermore, that fraud is the reason for the charges against the company. In fact, I think that these recent developments may be the start of a downward trend for the company that it will struggle to recover from.” 

Another Seeking Alpha analyst, David White, said just this week that Chevron shareholders should sell. In a blog, entitled Chevron Can't Seem To Turn The Bad News Faucet Off, White devoted his entire analysis to all of Chevron’s many legal problems in Ecuador, Brazil and the company’s own home state, California.  Federal and state criminal prosecutions and hefty fines are a possibility due to safety problems at a refinery in Richmond, a small city just across the Bay from San Francisco. White wrote: 

“…with all of these unexpected costs that CVX is facing, I think it is time to unload this historically strong, steady dividend payer….If you own CVX, it is time to sell it.”

Another Seeking Alpha analyst wrote that Chevron is “losing support from all corners” in its bid to evade the Ecuador judgment.  He also highlighted the growing number of courtroom setbacks suffered by Chevron’s legal team at Gibson Dunn & Crutcher, which was brought in two years ago to “rescue” the oil giant from its impending liability.

The analyst also reported concerns about the lawsuit from both shareholders and Members of Congress, writing that many of Chevron’s institutional investors have “made it clear … that a settlement is the preferred course of action, as it appears increasingly unlikely that Chevron will be able to avoid paying out a significant portion of its available cash over this lawsuit.”

Although I believe it is in Chevron's best interests to settle the suit, this may represent a huge hit for the company, which I think could force its price per share as low as $80, a level not seen since 2010,” the analyst concluded.

Another Seeking Alpha analyst wrote that the $19 billion liability in Ecuador and a separate $20 billion potential liability in Brazil resulting from an oil spill there in 2011 is “cast(ing) a long shadow” on Chevron’s stock, which “could tumble” as a result. 

He wrote:

“Chevron is continuing to build its cash balance, which now stands at $21.1 billion compared to $15.8 billion at the close of 2011. I think that fears over suits brought against it in Brazil and Ecuador, despite a Chevron show of bravado in casting these litigations as fraud, are contributing to Chevron's rapid accumulation of cash.” 

Noting that other oil majors give dividend increases, buy something and/or pay down debt when they have that much cash, the analyst projected that “it’s unlikely that its cash balance will be substantially drawn down until both of these super-suits are settled or dismissed, which could be a matter of years.” That was written in early September.  Chevron has yet to do anything with its huge surplus.

The analyst wrote that the liabilities in Ecuador and Brazil together “could wipe out Chevron's healthy cash balance as well as a significant portion of its equity. This in turn would lower Chevron's outlook across the board. Chevron is a comfortable hold, but a risky buy in the current environment.”

Glass Lewis, a leading proxy advisory firm, just this week urged shareholders to “remain vigilant” in holding Chevron accountable relative to its disclosure obligations. Courteney Keatinge, an analyst at Glass Lewis, wrote:

“As these legal battles consume considerable company resources and leave the company exposed to significant risk, shareholders should continue to remain vigilant in ensuring that Chevron is managing and disclosing these issues properly and sufficiently.” 

Another analyst, Fadel Gheit at Oppenheimer & Co., following a meeting with Chevron's CEO John Watson in 2011, wrote that "a $2-3B settlement [in the Ecuador lawsuit]... could remove uncertainty and reflect positively on the stock.”  Later, in May of this year, after the Ecuador trial judgment was upheld on appeal, Gheit doubled-down on his belief that "a reasonable settlement with the plaintiffs impacted by the oil contamination in Ecuador...could boost the stock.” 

Gheit is generally pro-Chevron and he has written about the case in ways that suggest he does not fully understand how the legal process works. His recognition that Chevron now faces real liability is yet another example of how the company is beginning to lose some of its allies on Wall Street.

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The Amazon Defense Coalition is a part of a regional, national and global struggle for environmental and collective rights in the Ecuadorian Amazon

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