Please ensure Javascript is enabled for purposes of website accessibility

These High-Yielding Energy Stocks Are Cutting Deeply to Preserve Their Dividends

By Matthew DiLallo - Mar 26, 2020 at 9:11AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Energy companies are deferring growth projects and suspending buybacks so they can maintain their dividends during these turbulent times.

The market meltdown from the global impact of the COVID-19 outbreak has forced companies to alter their plans dramatically. The energy sector has been among those walloped by the pandemic. Not only has it impacted oil demand, but a supply shock also blindsided the industry after OPEC's market support deal with Russia collapsed, causing a price war at a time that demand is falling off a cliff.

With oil prices and consumption cratering, energy companies are slashing spending. While several have already had to reduce their dividends to stay afloat, others are working hard to preserve their lucrative shareholder payouts by cutting deeply into other spending categories.

A jar of coins with the word dividends written on the front.

Image source: Getty Images.

Protecting the payout at all costs

Oil giant Chevron (CVX 0.54%) recently unveiled several cost-cutting initiatives. Topping the list was a plan to reduce its capital spending program by 20% to around $16 billion. The company also suspended its share repurchase program and expected to reduce its operating costs by about $1 billion by the end of the year. These moves will help it preserve cash while keeping its production roughly flat with last year's level. 

One thing Chevron made clear is that "the dividend is our number one priority and it is very secure," according to a statement by CEO Michael Wirth on CNBC. The CEO further stated that it's "taking actions to preserve cash," which will have "some impact on production in the near term." However, these moves are crucial for "protecting the dividend," which has seen its yield skyrocket above 8% in recent days over fears that Chevron might reduce its payout. The company also intends to continue selling assets to both bolster its balance sheet and preserve its dividend. 

Reinforcing the foundation

Royal Dutch Shell (RDS.A) (RDS.B) recently made similar moves. The oil and gas giant reduced its capital spending program from $25 billion to $20 billion, which is a 20% decrease. It also suspended its share repurchase program and will cut between $3 billion and $4 billion in operating costs over the next 12 months. 

These combined moves will improve Shell's free cash flow by about $8 billion to $9 billion this year, which will help it support the dividend. That payout yielded more than 11% in recent days on concerns that Shell might reduce it because of the downturn. That seems less likely following its spending cuts, especially considering that Shell began the year with about $20 billion in cash on its balance sheet and another $10 billion of available credit. Meanwhile, it expects to complete another $5 billion in asset sales this year to further bolster its financial profile.  

Pressing pause

Refining and logistics company Phillips 66 (PSX 1.78%) is taking a similar approach. The company plans to reduce its investment spending by about 19% to $3.1 billion. Among the actions it's taking is deferring the Red Oak Pipeline and Sweeny Frac 4 projects. Meanwhile, its master limited partnershipPhilipps 66 Partners (PSXP), plans to defer the Liberty Pipeline project, which it recently took over from its parent, as well as postpone making a final investment decision on the proposed ACE pipeline. 

Phillips 66 also plans to pause its share repurchase program. It had already repurchased $440 million in stock through mid-March as it took advantage of the plunge in its share price. However, with refining margins deteriorating, it's working to preserve cash so that it can maintain its dividend, which has seen its yield rise to about 8% in recent days. Phillips 66 Partners, meanwhile, will enhance its financial flexibility by deferring and delaying those two pipelines, putting it in a better position to preserve its now 11%-yielding payout.

Putting a priority on preserving the dividend

The dual shockwaves from OPEC and COVID-19 have upended energy markets. That's causing investors to grow concerned about the sustainability of dividends across the oil patch. While several payouts won't survive this downturn, Chevron, Shell, Phillips 66, and others are cutting deeply into capital spending and suspending their buyback programs to preserve their payouts during these challenging times.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.A
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$172.64 (0.54%) $0.92
Phillips 66 Stock Quote
Phillips 66
PSX
$96.77 (1.78%) $1.69
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Phillips 66 Partners LP Stock Quote
Phillips 66 Partners LP
PSXP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
334%
 
S&P 500 Returns
117%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.