The energy-producing world is dominated by five major companies: BP (NYSE:BP), Total SA (NYSE:TOT), Shell (NYSE:RDS.A) and (NYSE:RDS.B), ExxonMobil (NYSE:XOM), and Chevron (NYSE:CVX). Prior to the start of this year, these majors had more than $112 billion in capital expenditures planned. Then 2020 happened. Let's see what the big energy names' drastic pullback in spending might mean for investors.

The unkindest cuts?

All together, these five majors have unveiled nearly $29 billion in cuts to capex for the remainder of 2020 - roughly 25% of what they originally planned to spend. Some waited for quarterly announcements to announce these spending cuts, while others issued these announcements between earnings reports during the first quarter. 

The deepest cuts came from Exxon, which cut $9.9 billion from its capex for the year, or 30%, in its May 6 Q1 earnings release. 

The energy major with the smallest reduction in capital spending forecast for 2020 was Shell, which slashed a relatively modest 20% of its capex budget.

The graph below shows what amount of capex was planned before 2020, and what is now planned for the entire year for each company. 

Energy Majors capex 2020

Date from Companies' SEC Filings. Chart by Author

The capex cuts mostly pared back upstream projects, where energy such as oil and natural gas is extracted from the ground -- particularly their exploration budgets. With oil prices so low, exploring for new wells to produce from makes little sense. 

Capital spending typically does not need to be reduced in downstream assets such as liquefied natural gas (LNG) or solar and wind projects, which generally aren't affected by the current downturn in oil prices.

The bad news

These spending cuts translate to new jobs not being introduced into the world economy when we desperately need them the most. Not all of the near $30 billion in cut spending would have paid for new workers, but given all the labor these scuttled projects would have required, a good number of potential jobs have evaporated along with the reduced spending. 

For investors hoping for growth in energy companies, capital spending is likely a good indicator of which companies have both the ability and the intention to grow. Companies use capital spending to increase assets or invest in projects that increase cash flow. Cutting back on that spending will prohibit growth in areas where these companies need it the most.

Finally, a large chunk of the remaining capital spending merely maintains existing assets. Most capital spending in downstream segments of companies goes toward keeping plants and processing facilities up to safety codes -- installing new safety systems, for instance, or complying with new local noise or air pollution requirements. This type of capex spending does nothing to help a company grow its output or cash flow. 

There's got to be good news somewhere

For investors looking to buy into energy stocks while commodities are low and the market is beaten down, these reductions can shed light on which companies are looking to diversify into other energy sources.

Solar panels and wind turbines under a blue sky.

IMAGE SOURCE: GETTY IMAGES

For example, Total stated that it will solarize its industrial facilities through its capital spending -- part of the six gigawatts of solar power projects it has announced for 2020. 

While Exxon and Chevron have started to invest in renewable energy sources, those companies would have to spend a lot more money to catch up to Total and Shell. 

For those still invested in energy companies, it helps to ask whether or not companies are properly diversifying out of volatile parts of the industry, and into either less volatile segments or sustainable energy projects. Companies that aren't getting the hints the industry is throwing out may soon be left in the dust. Investors will likely see more capex cuts in the coming years if those companies don't start diversifying.