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2020 may be defining year for shale producers, Barclays says

As shale oil and gas producers struggle to impress investors, 2020 promises to be a big year, Barclays said in a Jan. 9 note. Producers who can consistently provide free cash flow will likely succeed, while those who struggle to satisfy shareholders could find themselves in serious trouble.

In the note, Barclays said the sector was "still early in the narrative shift" from production growth to free cash flow, even though many independents have been preaching their change in approach since early 2018 or before. Still, the firm said, the message has not taken hold with all investors.

"Time does not heal all wounds, but forging new track records is a good start," Barclays said. "We think there will be further bifurcation between the haves and have nots."

The firm credited the sector for largely demonstrating capital discipline and the commitment to maintain that mindset through 2020, as it believes executives "get it." A number of producers used their third-quarter 2019 earnings calls to announce production cutbacks in favor of increased free cash flow, which Barclays said was a positive step for more than one reason.

"This sets up for an improved oil macro in late 2020/2021 due to moderating US oil growth and sustainable [free cash flow]," the firm said. "While we thought the market would wait around until mid-2020 to meaningfully price this in, heightened geopolitical risk and potential for E&Ps to lock in attractive 2020 crude prices now via hedging could bridge the time gap and partially de-risk FCF this year."

Barclays said companies with strong track records that have already demonstrated a commitment to fiscal discipline will benefit from the changing mindset. The bank mentioned Devon Energy Corp., EOG Resources Inc., Parsley Energy Inc., ConocoPhillips Co. and Marathon Oil Corp. as companies that have past results to interest shareholders, while Noble Energy Inc. could interest some with its share buyback plans.

On the other hand, companies who are looking to integrate new assets after major deals, such as Callon Petroleum Co., Occidental Petroleum Corp. and PDC Energy Inc. may have trouble impressing the investment community. All three of those companies made major acquisitions during 2019 and have seen their stock values skid since.