Chevron May Rethink Ecuador Strategy after US Court Move on Shell: Analyst

By Leslie Moore Mira, Platts
18 October 2011

New York, NY – Chevron likely wants a resolution in the ongoing legal dispute over the former Texaco assets in Ecuador, Oppenheimer analyst Fadel Gheit said Tuesday, adding that Monday's US Supreme Court agreeing to hear a case charging Shell for human rights violations in Nigeria could hold implications for Chevron.

"The legal team at Chevron will rethink their position" after the Supreme Court said it would hear the Shell case, Gheit said in a phone interview.

"If you open the case for Shell, you have to open it for Ecuador," Gheit said. Gheit wants Chevron to reach a settlement in the Ecuador case because the dispute has become a "distraction" to the company.

The Supreme Court agreed to decide whether Shell can be held liable for acts of torture and other human rights violations in Nigeria in the 1990s. The court agreed to hear an appeal of a case brought by 12 Nigerian plaintiffs who allege Shell should be held responsible for violence against people who opposed oil exploration in the Ogoni region of the Niger Delta.

Analyst Mark Gilman of Benchmark Capital said in a phone interview that the jurisdictional aspect in the Shell case shares a "common denominator in a very limited way" with the Chevron dispute in Ecuador. But the Nigeria case is "very different" because Shell has assets in Nigeria while Chevron no longer owns Ecuador assets, Gilman said.

Chevron spokesman Kent Robertson said in an email that a link between the two "isn't quite accurate."

"Chevron is being sued under Ecuadorian law, not US law," he said. "I'm not sure I see how a ruling from the US Supreme Court, regardless of which way it goes, would have any influence over Ecuador's courts."

In a note to investors on Tuesday, Gheit said "we think a $2-$3 billion settlement, or 10% of the $27 billion judgment, could remove uncertainty and reflect positively on the stock."

Met with Watson

"The $20 billion is totally out of the question," Gheit said. But "10 cents on the dollar would probably be a good starting point."

Gheit, Gilman and other analysts met with Chevron CEO John Watson, CFO Patricia Yarrington and others on Monday over lunch.

Gilman estimates that the Ecuador dispute puts a 3%-5% "discount" on Chevron's stock price, but said: "we believe the shares are undervalued significantly more than that." Benchmark has a "buy" rating on Chevron.

Of Chevron CEO Watson, Gheit said, "I really think that he wants to get this thing over with." The years-long dispute is a "distraction" to the company, Gheit said.

Chevron "would like to see this case closed," Gheit said. "In my view, it will probably entail payment."

Unlike Gheit, Gilman does not think the litigation is "a material distraction to the management." Debating whether Chevron might settle "is not terribly worthwhile because I don't think it's going anywhere," he said. "They're not going to settle this case. Therefore, it's moot."

Robertson said "Chevron takes no pleasure in litigation and has tried to resolve this case in the past. "However... it is hard to see a way forward without the government of Ecuador owning up to its remediation responsibilities."

Karen Hinton, a spokeswoman for the plaintiffs in the Lago Agrio case, said in an email that, "we won an $18 billion judgment against Chevron for massive contamination.... If and when the judgment is upheld by Ecuador's appeals court, we will enforce the judgment."

Plaintiffs in Lago Agrio, Ecuador, have argued that Texaco, which Chevron acquired in 2001, left behind a massive sprawl of oil pollution that sickened residents in the area.

Chevron has said that it has remediated for the pollution and it also has argued that a lawyer for the plaintiffs pressured members of the Ecuador judicial system to make a ruling favorable to the plaintiffs.

Gheit Tuesday raised Oppenheimer's 12-18 month price target for Chevron stock to $120 from $110. In intraday trading, the company's stock was up 1.66% at $100.25/share.

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