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 0.53%) 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 1.19%) 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.