BP (NYSE:BP) became the latest petroleum sector company to reduce its dividend in light of this year's deep oil market downturn. The energy giant slashed its quarterly payout by 50%, which will halve its yield from its prior level of 10.7%. It was the company's first payout reduction since just after the Deepwater Horizon disaster in 2010, when it halted its dividend for several quarters. 

The move reflects BP's new capital allocation strategy: The energy company intends to reduce its investments in oil and gas production, and shift that capital instead to low-carbon energy sources. BP anticipates increasing its spending on cleaner energy from around $500 million per year to about $5 billion per year by 2030.

Scissors cutting a $100 bill in half.

Image source: Getty Images.

The other part of this strategy involves changing the company's financial framework. BP plans to deleverage its balance sheet to maintain a strong, investment-grade credit rating. It also intends to support a resilient dividend at the reset level while returning additional cash to shareholders via share buybacks.

Overall, BP plans to return 60% of its surplus cash to shareholders via the dividend and share repurchases once it brings its debts down to the targeted level of $35 billion. The company had $40.9 billion of debt outstanding at the end of the second quarter.

BP rival Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) slashed its dividend by 66% earlier this year. However, their U.S. peers ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are maintaining their dividends for the time being despite the pressure those payments are putting on their balance sheets.