Market Overview

Fine, Fine Everywhere A Fine For Chevron In Brazil

As one of the largest oil companies not only in the U.S., but in the world, Chevron (NYSE: CVX) is used to operating in some less-than-hospitable locales. Angola, Nigeria and Russia are just a few of the places where Chevron does business that aren't exactly top-notch vacation destinations.

Trouble of some kind or another is to be expected in those countries for Western oil majors, but Brazil should not be on that list. However, it is for Chevron. The Dow component and second-largest U.S. oil company has found all sorts of problems in Brazil, Latin America's second-largest oil producer behind OPEC member Venezuela.

Not only has Chevron been forced to halt its Brazilian activities, Brazilian regulators are suing Chevron and Transocean (NYSE: RIG) for $10.6 billion.

To put $10.6 billion into context, if Chevron had to pay that all itself, yeah it could afford it. Easily. But it's also about a third of what the company's 2012 capital budget is.

Well, to add insult to injury, Brazil's environmental protection agency has hit Chevron with another almost $7 million fine related to the November oil spill. That follows a previous fine of about $35 million. The agency said the new fine is in response to Chevron's poor handling of the spill.

All this for a spill of 3,000 barrels. The suit is equivalent to around $3.5 million per barrel spilled and it dwarfs the U.S. maximum fine of around $4,300 per barrel spilled, according to CNN.

Put another way, the $10.6 billion suit aimed at Chevron and Transocean plus the other smaller fines dealt to Chevron equals an amount more than two-and-a-half times the value of Chevron's Brazil assets. Even splitting the suit in half with $5.3 billion for Chevron and $5.3 billion for Transocean, a hypothetical scenario to be sure, means Chevron could possibly be facing a number that is roughly 25% above the value of its assets in Brazil.

Last year, Petrobras (NYSE: PBR) leaked over 4,200 barrels into Brazilian waters, but as Brazil's state-run oil company, it never faced a $10.6 billion suit. Oh yes, in July 2000 more than 1 million gallons leaked from a Petrobras refinery in Brazil, but the company never paid $10.6 billion in legal settlements or fines. For real time trading ideas, go here.

Perhaps to the chagrin of Brazilian regulators, Chevron's shares are within pennies of where they were immediately after the spill and currently yield a decent 3%. Petrobras features a dividend not worth mentioning and is the worst-performing global integrated oil stock in the past year. Even worse than BP (NYSE: BP).

In fact, over the past five years, Chevron is up 50%, while Petrobras ADRs are slightly negative. The bottom line is it's in the best interest of both parties, Chevron and Brazil, to resolve this spat. But a $10.6 billion suit for this offense is too much and with it, Brazil is saying it's not as open to foreign investment as some outsiders had hoped.


ACTION ITEMS:

Bullish:
Traders who believe that Chevron will rebound in Brazil might want to consider the following trades:
  • Long the Energy Select Sector SPDR (NYSE: XLE). Chevron is that ETF's number two holding.
  • Long Exxon Mobil (NYSE: XOM) as those two stocks have a tendency to move in tandem with each other.
  • Long Chevron as a conservative dividend play.
Bearish:
Traders who believe that Chevron's Brazil problems are just starting  may consider alternative positions:
  • Long Petrobras. Brazil's government gives the company all the best projects in Brazil.
  • Long the iShares MSCI Brazil Index Fund (NYSE: EWZ). Plenty of Petrobras exposure without owning the stock directly.
  • Long the ProShares UltraShort Oil & Natural Gas (NYSE: DUG) to play weakness in Chevron. (
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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