Big Oil's Cleanup Third Quarter

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Earlier this month, oil started seeping from one of Chevron's (NYSE: CVX) appraisal wells off the coast of Rio de Janeiro. The spill lasted for a week from Nov. 8-15, and the company, initially quiet on the matter, has since claimed responsibility. This recent spill is just one the environmental problems plaguing the second largest oil company in the U.S.

Oil, oil everywhere
The dangers of deepwater drilling aren't new. BP's Deepwater Horizon disaster showed the world just how horrifying things can get when something goes awry. Though Chevron's recent spill wasn't nearly as bad, it reminds us how complicated it is to drill four miles beneath the ocean's surface. If something goes wrong, it is a long and complicated -- not to mention expensive -- process to fix it.

Somewhat inconceivably, despite having an emergency spill plan in place and approved by Brazilian authorities, Chevron was not prepared to carry it out. This is an epic fail on management's part. After BP's disaster, there is no reason for a company engaging in deepwater drilling to be woefully unprepared for an accident.

Questionable clean-up
On top of not having a proper emergency plan in place, Chevron is approaching clean up the way my brother cleaned up his room when we were kids: Shove everything under the bed. The company was using high-pressure streams of sand to push the oil to the ocean floor. Not surprisingly, Brazil is investigating the legality of this method; its federal environmental crimes unit is especially concerned with ocean pollution and damage to coral reefs.

Chevron has claimed that it wasn't using sand or chemical dispersants at any point, but rather surface skimmers and other vessels that work to contain the spill. I totally believe them.

Trouble ahead, trouble behind
This isn't Chevron's only problem in South America. In fact, at an estimated $28 million, it isn't its most expensive problem. Not even close. Chevron is still dealing with a court case in Ecuador over 18 billion gallons that were dumped in the country in 1972 and 1992. Texaco, which later merged with Chevron, claimed to have cleaned up the mess for $40 million in the 1990s. A U.S. court disagreed, ruling that Chevron owes an additional $18.2 billion. Chevron's appeal is pending in the Ecuadorian courts.

Tell me something good
Despite not having its environmental act together, Chevron performed well for the third quarter, easily beating analysts' estimates.

Company

EPS Estimate

EPS Actual

Revenue

Net Income

Chevron$3.47$3.94$64.43$7.83
ExxonMobil (NYSE: XOM) $2.13$2.12$125.33$10.33
ConocoPhillips (NYSE: COP) $2.16$2.52$63.63$2.62
Total (NYSE: TOT) $1.75$1.75$64.00$3.90

Source: Company statements.

It was generally a great quarter for oil companies, as profits rose in line with oil prices, with Chevron and ConocoPhillips turning in particularly better-than-expected performances.

Royal Dutch Shell (NYSE: RDS-A) is another company, like Chevron, that performed exceptionally well this quarter, doubling its net income over the same period last year, but it is plagued by environmental issues abroad.

Foolish bottom line
Oil companies spill oil, and they probably always will. Taking ownership of the spill is important, but so is cleaning it up properly. The fallout damages the environment, and despite companies' record performances this quarter, million- and billion-dollar fines will hurt any company's bottom line.

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