Brazil Takes on Chevron, Transocean - Analyst Blog

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U.S. energy behemoth Chevron Corp. (CVX) and offshore drilling giant Transocean Ltd. (RIG) have been sued by a Brazilian federal prosecutor for R$20 billion ($10.6 billion) in damages following an oil leak 74 miles off the coast of Rio de Janeiro. The civil suit also seeks a court injunction to stop the companies' operations in the country. Both Chevron and Transocean claimed that they have not received any notice of the action.

The ruling has come after Chevron accepted full responsibility for the spill that began at its deepwater Frade field on November 7, about 230 miles from the beaches of Rio de Janeiro. The super-major's multibillion-dollar Frade project in partnership with Brazil's state-run energy giant Petrobras S.A. (PBR) and a Japanese consortium, was the South American nation's eighth most productive field in September with a daily output of 75,000 barrels of oil.

Chevron has already been temporarily suspended from 'all drilling activities' in Brazil by the local oil regulator - Agencia Nacional do Petroleo or ANP. The agency's diktat remains in effect until it identifies the causes of the spill and considers it safe to resume drilling. Prior to that, Chevron was slapped with a fine of R$50 million ($28 million) by the country's environmental regulator.

Chevron estimates put the size of the leak at approximately 2,400 barrels, or 100,800 gallons before it was plugged. The company has acknowledged that it had miscalculated the pressure and rock strength in the exploratory well.

While the leak is relatively small compared to last year's deepwater Horizon rig disaster in the Gulf of Mexico (GoM) - that killed 11 workers and spewed more than 200 million gallons of crude - and as claimed by Chevron, has already been contained to a great extent, it has rocked the company's credibility in Brazil.

With Brazilian officials accusing Chevron and Transocean - operator of the rig at the Frade project - of being negligent and slow in reacting to the incident apart from a lack of planning and environmental management, the firms could be in line for some legal headaches.

Transocean, which owned and operated the Deepwater Horizon, is already struggling with its direct involvement in the 2010 GoM accident and the ensuing uncertainty regarding the company's potential liability exposure.

Transocean shares currently retain a Zacks #5 Rank, which translates into a short-term 'Strong Sell' rating whereas Chevron has a Zacks #3 Rank (short-term Hold rating).

Longer-term, we are maintaining our Underperform recommendation on Transocean, while being Neutral on Chevron stock.

CHEVRON CORP ( CVX ): Free Stock Analysis Report

PETROBRAS-ADR C ( PBR ): Free Stock Analysis Report

TRANSOCEAN LTD ( RIG ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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