Market Overview

No Brazilian Samba For Chevron, Transocean


Shares of Dow component Chevron (NYSE: CVX), the second-largest U.S. oil company, and Transocean (NYS: RIG), the world's largest provider of offshore drilling services, are slumping this afternoon on news the Brazilian government has asked the two companies to halt activity in the oil rich South American county.

Chevron has been under pressure in Brazil since owning up to an oil spill that started off the country's last month at platform managed by Switzerland-based Transocean. Transocean is already engaged in a legal spat tied to its role in the 2010 Gulf of Mexico oil spill and with the stock down almost 40% this year, the company cannot afford much more in the way of spill-related press.

For Chevron's part, the stock slumped in the days after news of the spill initially broke last month, but after flirting with $92, the stock has since rebounded nicely. However, if the company is forced to suspend its Brazilian activity for a significant length of time, or worse yet, depart the country altogether, the stock could again be vulnerable in the near-term.

As always, there are winners and losers. The potential losers are obviously Chevron and Transocean, so let's take a look at the potential winners if these two energy giants depart South America's second-largest oil producing nation.

SeaDrill (NYSE: SDRL): As we noted yesterday, SeaDrill is the anti-Transocean. The company's reputation isn't sullied and it's safety record isn't as spotty. With Brazilian oil production ramping up significantly (the country is one of just five with rising oil output), companies like Transocean and SeaDrill need to be involved in Brazil. Looks like SeaDrill will be able to do just that. Transocean's situation is far more tenuous.

BP (NYSE: BP): As far flung as it may seem, BP could be a winner if Chevron leaves Brazil. The second-largest European oil company bolstered its presence in Brazil through acquiring assets there from Devon Energy (NYSE: DVN) and if the British oil giant can stay on the right side of the Brazilian government, it might find a new outlet with which to increase production, something wary investors are clamoring for.

Royal Dutch Shell (NYSE: RDS-A): Earlier this year, Europe's largest oil company said it's looking to boost its Brazilian investments by billions of dollars per year. There will be more for Shell and chief rival BP to invest in if Chevron is ushered out of Brazil, that much is certain.

Total SA (NYSE: TOT) The French oil giant already has a presence in Brazil and has been looking to boost that through ethanol partnerships and acquisition, natural gas production and, of course, oil exploration. Bereft of the safety issues that BP has faced and Chevron is currently facing, Total could be an under-the-radar play on increased Brazilian oil output in the coming years.

Action Items

Traders that are bearish on Chevron and/or Transocean should consider the following trades: Long the ProShares UltraShort Oil & Gas (NYSE: DUG), short the iShares Dow Jones US Oil Equipment Index Fund (NYSE: IEZ) and short the Energy Select Sector SPDR (NYSE: XLE).

Traders that think Chevron and Transocean will pull through this situation should consider the following trades: Long the ProShares Ultra Oil & Natural Gas (NYSE: DIG) or long the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP).

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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