) recently launched a legal appeal against charges claiming
pollution of Ecuador's Amazon region. The court demands fine
payment of $8.6 billion plus an additional 10% as compensation to
claimants. The charges stem from Texaco's (acquired by Chevron in
2001) operations in Ecuador between 1964 and 1992. Chevron is one
of the largest energy companies in the world, and competes with
other established oil producers like
), ConocoPhillips (
), BP (
) and Anadarko (
Our price estimate for Chevron stands at $104
, roughly in line with the stock's market price.
While there is no certainty as to which side will win the legal
battle, it is worth taking a look at how Chevron's value could be
affected if it is ordered to pay the maximum fine.
Brief Look at the Case
The case accuses Texaco of causing environmental damage in
Ecuador prior to Texaco's acquisition by Chevron in 2001. The
people of Ecuador initiated litigation against Texaco in 1993,
suggesting that the company dumped oil-drilling waste in unlined
pits, damaging the Amazon forest and harming the living species in
the region. Chevron asserts that the waste pit sites were
cleaned up before being handed over to Ecuador's state-owned oil
Given the substantial $9.5 billion potential payout, this
appears to be the biggest environmental battle ever fought by an
oil company. Before this, Exxon Mobil had to pay $4 billion for its
role in the accidental spilling of oil near Alaska. BP has paid
close to $3.5 billion so far for the damage stemming from an
accident at its drilling rig in the Gulf of Mexico.
Assuming a scenario in which Chevron is ordered to pay the
maximum penalty of $9.5 billion, the reduction in cash would
decrease its equity value by approximately 5% (on our estimates).
This scenario would drop our
$104 price estimate for Chevron stock
down to about $99.
While this particular impact would be a one-time charge,
long-term impacts could include tighter anti-pollution regulations
and stricter enforcement. This would likely raise costs for oil
companies, an affect that would be reflected in profit margins.
See our full analysis and $104 price estimate