What happened
The stock market snapped back for the second straight day, with the S&P 500 closing Wednesday up by more than 1.1%. Fueling that rally was the expected approval by Congress of a $2 trillion stimulus program to help businesses and individuals weather the economic shutdown that has come as the world responds to the COVID-19 pandemic.
Energy stocks were among the biggest movers on the day, with shares of several large, dividend-payers jumping by double-digit percentages. Leading the way were Kinder Morgan (KMI 0.85%), Brookfield Infrastructure Partners (BIP 0.35%), Phillips 66 (PSX 1.13%), Marathon Petroleum (MPC 0.36%), and Occidental Petroleum (OXY 0.96%).
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So what
Shares of oil giant Occidental Petroleum rallied almost 12%, not only to the overall bounce in the market but also because of some company-specific news. Occidental announced Wednesday morning that it was cutting its capital spending plan by another $600 million, to 47% less than its initial expectation. While that would cause its production to come in 6% below its prior guidance, it will improve the company's ability to navigate lower oil prices.
Because it's cutting spending, Occidental likely won't need to reduce its dividend again despite a further slide in crude prices. Even after slashing its payout by 86% this month, Occidental still yields 3.6% following Wednesday's rally. Finally, Occidental also announced an agreement with top shareholder Carl Icahn, who has been battling with the company's management due to the strategies it adopted in its 2019 purchase of Anadarko Petroleum -- an acquisition that left holding a lot of expensive debt on its balance sheet. Under the agreement, Occidental is adding three new Icahn-picked directors to its board, and bringing back a former CEO as chairman.
Shares of leading refiners Phillips 66 and Marathon Petroleum jumped by about 11% and 20%, respectively. The main driver of their rallies is the expectation that gasoline demand will bounce back once the COVID-19 pandemic starts fading and the economy revs back up. Refiners have had to cut back on producing products like gasoline due to the pandemic -- Phillips 66, for example, cut output at its Bayway Refinery in New Jersey by 15% to 20%, and Marathon made similar moves at facilities in California and Kentucky.
Philips 66 also recently announced the deferral of several expansion projects, and suspended its share repurchase program to give itself more financial flexibility. Meanwhile, Marathon Petroleum has changed course on a plan to spin off its midstream operations -- instead, it's holding on to that more-stable business unit. Those moves will help these refining companies preserve their dividends -- which have risen to yield more than 7% at Phillips 66 and 10% at Marathon -- amid the current economic slowdown.
Energy infrastructure companies Brookfield Infrastructure and Kinder Morgan were also flying high Wednesday, rallying more than 15% and 6.6%, respectively, on the day. Even after those big moves, both companies' yields are way up this month. Brookfield, for example, now yields about 5.5% while Kinder Morgan's payout has risen above 7%, as even after Wednesday's rally, they have not recouped the losses from prior recent plunges.
While there's always a risk that a multiyear recession could force these companies to reduce their payouts, they appear to be on solid ground right now since both generate stable income from fee-based contracts and regulated rates. On top of that, both have strong balance sheets along with lots of liquidity -- cash and borrowing capacity -- to see them through this rough patch.
Now what
Many investors are growing increasingly optimistic that the stimulus package will reduce the duration and depth of the recession that will occur due to the COVID-19 pandemic. That's giving them the confidence to buy shares of beaten-down energy stocks, especially those that offer high dividend yields at their currently discounted stock prices.
