Chevron, Shell Hit By Turmoil

Chevron & Shell Affected by Nigerian Unrest

In the last month or so, oil majors Chevron Corporation (CVX - Analyst Report) and Royal Dutch Shell plc (RDS.A), two of Africa's biggest energy producers, have come under a string of attacks from Nigeria's main militant group, The Movement for the Emancipation of the Niger Delta (MEND).

The West African country has struggled to control MEND's hostilities, which started attacking Nigeria's oil industry and kidnapping oil workers three years ago.

On May 25, San Ramon, California-based Chevron, the fourth largest publicly traded oil company in the world and with a strong presence in the Niger Delta, had to shut down approximately 100,000 barrels per day of oil production (about a quarter of its oil production in Nigeria) after a pipeline attack by MEND.

On June 10, the militants claimed responsibility for sabotaging a Chevron-operated pumping station though the company later identified the damage as a systems failure. Further, on June 13, Chevron admitted damage on one of its Nigerian pipeline but said output was unaffected as the infrastructure had already been shut down.

In the latest such incident, on June 15, the Nigerian rebels claimed they have destroyed another Chevron facility.

Royal Dutch Shell, Nigeria's largest oil producer, said on June 17 that Nigerian shipments will be disrupted for a fifth month in July as violence in the country escalates. The following day, the Anglo-Dutch group halted some oil production after an attack on one of its pipelines.

On June 21, Nigerian militants attacked three Shell oil sites, while four days later MEND bombed a Royal Dutch Shell pipeline supplying an export terminal in Nigeria.

Chevron's daily production in Nigeria last year averaged 376,000 barrels of crude oil. Though the recent pipeline breaches have interrupted some of the company's oil output in Nigeria, we believe that Chevron's robust development project pipeline, which is considered among the best in the industry, will offset these declines.

However, for Shell, which accounts for around half of Nigeria's oil output, the disruptions further threaten the company's already weak upstream outlook.

We currently rate shares of Chevron a Buy, while we have a Hold recommendation for Shell.