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In this Thursday, Jan. 26, 2012 photo, higher than locally average gas prices are digitally displayed at a Chevron gas station downtown Los Angeles. Chevron says Friday, Jan. 27, 2012 that its net income slipped 3.2 percent in the fourth quarter as its refineries struggled to pass on the higher cost of crude oil. (AP Photo/Damian Dovarganes)

Damian Dovarganes/AP

Energy giant Chevron Corp. just can't seem to catch a legal break.

It's involved in courtroom brawls in Canada, and also in Argentina, Brazil, Ecuador and at home in the United States. The totals claimed by its adversaries are dancing around the $30-billion (U.S.) mark, serious change even for one of the world's biggest oil companies.

It isn't surprising then that Chevron stock has recently dipped around 10 per cent from a record reached in late September. The decline gained traction after the U.S. Supreme Court rejected a Chevron manoeuvre in its longest-running legal battle, an $18.2-billion judgment resulting from claims over pollution in Ecuador.

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Chevron is also facing legal challenges in Canada and Argentina as a result of the judgment by an Ecuadorean court, with plaintiffs trying to seize Chevron's assets wherever they can around the world to make good on the award. In Brazil, the company is fending off another gargantuan claim, a $10.7-billion judgment from a civil lawsuit over an oil leak in 2011.

It isn't every day that a company of Chevron's enormous size – it has $205-billion in market capitalization – faces legal challenges sizable enough to make a dent in its stock price, and investors may wonder whether there is a decent investment play here.

Chevron's travails bring to mind the case of another oil industry titan, BP PLC, following its Gulf of Mexico blowout in 2010. BP's shares lost more than half their value after the massive oil spill, but in hindsight, the drop was a buying opportunity as the shares subsequently recovered much of their losses.

Given that investors know the worst-case amounts that legal claims could result in, Chevron shares won't take as large a tumble as they did in BP's case, where investors fretted over a spill liability that couldn't be accurately quantified. But by depressing the stock price, the legal wrangling may have set up a buying opportunity in a high-quality name.

The investment thesis here is simple: When good companies hit a rough patch, it's usually a good idea for investors to use the weakness to pick up stock at bargain prices.

Chevron, despite its legal headaches, is one of the bluest of blue chips. It's paid dividends for a century, and its payouts have been increasing for the last 25 years, an enviable track record. The current yield is 3.5 per cent, double the rate on 10-year U.S. Treasuries.

There's nothing wrong with Chevron in the profit department.

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In this year's third quarter, the company reported results that were down 30 per cent from the second quarter, but it still made $5.3-billion, or $2.69 a share.

The size of its profits and its relatively low debt indicate Chevron can absorb all the legal adversity it is facing, even though the exact amount that the oil company will ultimately have to pay is still unknown.

Chevron has attacked the Ecuadorean lawsuit, saying it "lacks legal or factual merit."

The company says "the highly uncertain legal environment surrounding the case provides no basis for management to estimate a reasonably possible loss," according to a recent filing.

It has downplayed the environmental damage from the Brazil spill.

Despite the potential impact, there were no analyst questions on the legal cases, nor did Chevron offer any comment on them, during the company's most recent earnings conference call on Nov. 2.

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An estimate of the cost of the Ecuadorean award was posted earlier this week on Seeking Alpha, an investor-oriented website, suggesting a worst-case hit would knock the shares down to a fair value of $99, compared to $120 if the judgment is not enforced.

The range suggests quite a bit more upside than downside from current levels, particularly if Chevron reaches a settlement for less than the full amount.

Brokerage analysts are bullish on the company, with 20 "buys," eight "holds" and only one "sell," according to Bloomberg.

The lone bear, Chris Kettenmann, chief energy strategist at Phoenix Partners Group, has an $83 target price on the stock, based on a belief that oil prices will fall, with West Texas crude sliding to $80 a barrel, from about $86.50 now.

Mr. Kettenmann also worries about costs at Chevron's natural gas projects in Australia and the possibility the company could launch a costly acquisition. Many companies in the oil business have legal fights, but "Chevron clearly has the most", he says.

On the other end, the most optimistic is Deutsche Bank. Its analyst has a $140 price target.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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