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Here’s Why Big Oil Stocks Are Rallying

Alex Kimani

Under normal circumstances, a company's management suspending a share buyback program is construed to mean that it lacks confidence in the future or thinks the shares are overvalued, meaning the move does not usually go down well with investors.

But these are hardly ordinary times.

On a rare day for the battered energy sector, shares of leading oil majors are rallying hard after they suspended buybacks and cut CAPEX--but maintained the all-important dividend.

Chevron Corp. (NYSE: CVX) announced a 20% cut in its FY 2020 guidance for organic capital and exploratory spending of $20B to $16B as well as suspension of its $4B stock buyback program, in a strong response to the oil price crash.

Chevron, however, has kept its dividend program intact with management reaffirming that it remains 'very secure:'

"The dividend is our number one priority and it is very secure," chimed CEO Michael Wirth on CNBC's Squawk Box. "We're taking actions to preserve cash. It will have some impact on production in the near term, but we've stayed with our financial priorities, which include protecting the dividend."

CVX shares have surged 16.8% at 12:00 pm ET on Tuesday. Chevron stock now sports a 9.52% yield--the highest in more than three decades--after the shares plunged nearly 50% YTD.

Chevron Corp. Dividend Trends

Source: MacroTrends

Chevron will end the first quarter having spent just $1.75B of the $5B earmarked for buybacks in the current financial year with no plans for further repurchases. Meanwhile, much of the CAPEX cuts will come in the Permian Basin--a key engine of Chevron's production growth. Chevron expects to cut production in the basin by 20%, translating into 125,000 fewer barrels of oil equivalent per day--or 2.5% of the basin's total current production.

Related: What Will It Take To See $65 Oil Again This Year?

However, Chevron says it expects its global production to remain flat compared to a year ago despite less spending on drilling--a clear demonstration that shale companies have learned to drill more efficiently.

"The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction. At the same time, we are focused on completing projects already under construction that will start-up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover," said Jay Johnson, Chevron's Executive Vice President of Upstream, in a company release.

Chevron, though, did not provide any glimpse into what to expect for the upcoming earnings despite bemoaning the impact of Covid-19 and a glut in supply.

Chevron is not alone in launching solid austerity measures.

On Tuesday, Royal Dutch Shell (NYSE: RDS.A) followed in the shoes of Europe's Big Oil; Italy's Eni SpA, French major Total SA and Norway's Equinor ASA (NYSE: EQNR) by suspending its share buyback program.

Shell has announced plans to lower operational costs by $3B-$4B p.a. over the next 12 months and cut FY20 CAPEX guidance to $20B compared to the previous guidance of ~$25B. The Dutch oil and gas giant has suspended its share buyback program after completing the current share buyback tranche and has also launched a divestment program of more than $10B of assets in the current financial year, depending on market conditions.

Europe's Big Oil--once regarded as a bastion of predictable shareholder paybacks--is now curbing investor returns and also trimming CAPEX as low oil prices continue to crash energy markets. The companies are saddled with debt, and many have been forced to significantly cut back on investments.

Related: Saudi Arabia’s Oil Price War Is Backfiring

RDS.A shares have rocketed 21.2% at 12:50 pm ET on Tuesday's session and now sport a juicy forward yield of 14.0%.

Rising tide

Source: CNN Money

They say a rising tide lifts all boats, and the entire sector is flying in early morning trade. The benchmark Energy Select Sector SPDR Fund (XLE) has rallied 13.5% at 12:30 am ET on Tuesday as crude oil prices surged on hopes the U.S.senate will soon approve a $2T coronavirus aid package that could potentially support oil demand. 

April WTI crude has climbed +5.1% to $24.56/bbl while May Brent has risen +3.9% to $28.08/bbl on expectations of a weaker dollar since the stimulus package will increase the money supply.

Exxon Mobil Corp.(NYSE: XOM), the biggest Western oil major, has no buyback program in place and is yet to announce new measures in response to the crisis. XOM, one of the heaviest CAPEX spenders, needs ~$77 a barrel to fund its ambitious capital spending and dividend from cash flows. Still, XOM shares have rallied 11.3% on at the time of this writing.

Not everybody is sanguine that the good times will last, though.

Whereas U.S. Treasury Secretary Steven Mnuchin has voiced confidence that a stimulus deal will be reached soon, Edward Moya, senior market analyst at broker OANDA, has warned that volatility is likely to remain high and the rally could end up being short-lived.

By Alex Kimani for

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