8 Energy Stocks to Add to Your Shopping List

The oil glut has energy stocks plunging, but analysts say there are opportunities in the market's wreckage. Natural gas companies in particular could benefit from oil’s woes. And, though most oil companies will struggle if prices linger below $60 per barrel, the group has been pummeled so mercilessly over the past few months that some of the better-positioned oil stocks have become too cheap to pass up. “This is not a homogenous group,” says Mark Hanson, an energy sector strategist at Morningstar. “The companies with less debt, lower-cost production and production hedges in place are in the best position to ride this out.”

After several years of relative stability, oil prices started to slide last summer. The decline accelerated earlier in December after OPEC chose to do nothing to constrict supply. West Texas Intermediate crude, which sold for $108 a barrel in June, closed at just under $56 on December 16. With demand weakened by a combination of slower growth overseas and increased use of alternative energy sources, experts think oil prices could stay down for some time to come.

As oil prices have fallen, investors have bailed out of energy stocks. From July 24 through December 16, the S&P 500 Energy index sank 31%. The decline in energy stocks is predictable. Falling oil prices will lead to lower profits for nearly all energy companies, and many producers will lose money. But the carnage in the energy sector also creates opportunity for long-term investors willing to pick through the rubble for the likely survivors. Below, we identify eight such stocks. (All prices are as of December 16.)

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Oil and gas producer Occidental Petroleum (OXY, current price $74.41; 52-week high, $101.38) has one of the lowest cost structures in the industry. That allows Oxy to profit even when oil prices dip to $60 a barrel, says Morningstar’s Hanson. To be sure, Oxy will struggle if oil lingers below that watermark, but the Houston-based company has a strong balance sheet and has proved to be an exceptional steward of its capital. That’s no accident. Oxy executives approach new exploration projects cautiously, stress-testing them to make sure they’d remain profitable even when oil prices plunge. Hansen thinks the shares are worth $99.

Cimarex Energy (XEC, $100.94; 52-week high, $150.71) has an even lower cost of production -- in the $50-per-barrel range -- which could allow it to continue drilling even when other companies have to mothball their wells. Cimarex also has little debt on its balance sheet. Hanson estimates that the stock is worth $113 today -- 12% more than its current share price.

Among domestic oil producers, Pioneer Natural Resources (PXD, $134.80; 52-week-high, $234.60) may be the most defensive stock, Hanson says. That's because the Irving, Texas, company has used futures contracts to lock in higher prices for 80% of its future output, and that will drastically mute the impact of falling prices on its profit and loss statement. Hanson thinks the stock is worth $187.

Companies that focus on natural gas production have also seen their share prices drop. Those declines are especially unwarranted, says Karl Chalabala, an analyst with Canadian investment bank Canaccord Genuity. For starters, gas producers have had to contend with lower prices for years, thanks to the fracking boom. And those prices are actually up substantially from their lows. Gas prices fell to as low as $2 per million British thermal units in 2012, but have since rebounded to $3.62 per million Btu’s.

The slide in oil prices could help boost natural gas even more, says Ronald Barone, an analyst with Maxim Group, a New York City investment banking firm. The reason: About 4% of the nation’s natural gas is produced as an ancillary benefit of pumping oil. If oil gets too cheap, fewer oil wells will be put into production, which will also reduce the supply of natural gas. Consulting firm Rystad Energy recently estimated that $150 billion in oil and gas projects may be shelved or delayed if oil prices remain depressed over the coming year.

At the same time, demand for natural gas is increasing at a brisk pace for a variety of reasons. More coal-based utility plants are being converted to gas to comply with environmental regulations. Next year, the U.S. will for the first time allow export of liquefied natural gas into the energy-starved European and Asian markets. Companies in energy-intensive industries, such as chemical manufacturing, are also bringing their manufacturing operations back to U.S. soil to take advantage of the nation’s cheap fuel costs, Barone says. That combination is likely to keep demand brisk for years to come.

With that backdrop, Barone’s favorite stock is EQT Corp. (EQT, $77.62, 52-week high, $111.47), which produces natural gas and natural gas liquids. The Pittsburgh company boasts one of the lowest cost structures in the industry and is capable of boosting production at a 20% annual pace for years to come. Barone thinks the shares will reach $134 within a year.

Rice Energy (RICE, $23.88; 52-week high, $34.34), formed in 2007, has developed some innovative drilling techniques, which are now being copied by other players that aim to get oil and gas from shale. The company's exposure to the oil market is negligible -- about 5% of production -- so the drop in its stock price “makes no sense,” says Canaccord’s Chalabala. And because the Canonsburg, Pa., company is young and small, it’s on a rapid growth trajectory. Chalabala expects Rice to more than double production next year, and thinks the stock will reach $42 in a year.

Range Resources (RRC, $58.22; 52-week high, $95.41), the first company to drill a vertical well in the Marcellus Shale basin a decade ago, has long-term leases on 1 million prime acres in western Pennsylvania. That allows Range, based in Fort Worth, Texas, to commit to long-term production contracts required by big utility companies. With production rising 20% to 25% a year, Range has both the experience and the reserves to be a major global player in natural gas, says Chalabala. His one-year price target: $76.

The slump in shares of Gulfport Energy (GPOR, $38.79; 52-week high, $75.75) is only partly related to the market’s malaise. The Oklahoma City producer replaced its chief executive early last year after the company made a number of missteps (for example, overestimating production and underestimating costs). His replacement slashed production estimates while spending money on a new well management system -- “all things you don’t want to hear.” But, Chalabala says, the moves were done for the right reasons, and now Gulfport is primed to meet Wall Street’s expectations. The company also now has the pipes in place to supply gas to the Midwest, where high demand for heating fuel means it commands premium prices. Chalabala thinks the stock will hit $55 within a year.

The safest way to play a dicey energy market is to go big. And no other energy company is bigger than ExxonMobil (XOM, $86.41; 52-week high $104.76). Not only does it have the financial muscle to weather a bad stretch, it is also well diversified. In fact, its refining and marketing arm (think gas stations) actually benefits from lower oil prices. Plus, the Irving behemoth pays a tidy dividend. At 3.2%, the stock’s yield is well above the market average. Morningstar analyst Allen Good says there’s little risk that Exxon will cut its dividend, which accounts for just 47% of profits. Good says the stock is worth $108.