Chevron Updates: Brazil Ban is Embarrassing But Has Little Impact on Stock

Brazil’s state prosecutors have slapped a lawsuit on Chevron (NYSE:CVX) and its contractor Transocean (NYSE:RIG) demanding $10.6 billion in damages and asking both the companies to suspend their operations in the country due to inadequate response to last month’s spill. ^[1] The latest actions from federal prosecutors follow a $28 million fine imposed on Chevron last month as state officials look to set an example for the rapidly expanding offshore exploration in the country. Chevron has accepted blame for the incident and maintains that its response to the event was effective. British major BP (NYSE:BP) is also facing multiple lawsuits in regard to the Macondo blowout incident in the U.S.

We have a $109 price estimate for Chevron which is at a 5% premium over its current market price.

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Strong action expected

Brazil’s state regulators are determined to pursue Chevron for the November spill which led to the leakage of ~3,000 barrels of oil. While the spill was contained within four days, prosecutors have accused the oil major of withholding information from the state regulator, ANP, and being ineffective in implementing contingency plans and assessing the size of the spill. ^[1]

Chevron’s production at the Frade fields in offshore Brazil account for almost 1% of its global production. The company also has plans to expand production in offshore Brazil that may be adversely affected in case the ban is upheld by the court. (See: Chevron Still Good for $109 Despite Brazil Ban for Leaks & Poor Handling) Offshore drilling in Brazil’s ‘pre salt’ finds is a challenging prospect as the reserves are found 2 KM below the ocean floor, making it difficult to handle spills, and hence the government is looking to proceed cautiously with the exploration.

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1. Brazil sues over spill, Financial Times [↩] [↩]