3 Energy Stocks to Buy Now

Buying energy stocks might feel like stepping in front of a Mack truck these days. Oil prices have collapsed, and major energy producers are playing a game of chicken as they pump at full throttle to try to drive weak producers out of business. Yet, with the sector deep in bear-market territory, share prices may already reflect much of the bad news.

For one thing, oil prices may have already bottomed. West Texas Intermediate crude, the U.S. benchmark, fell below $44 a barrel before rebounding to $52 in early February (at that price, it’s down 49% since last summer). But the market looks balanced between supply and demand. The world is expected to consume 92.4 million barrels a day this year, and the U.S. Energy Information Administration sees supplies touching 93 million barrels. That leaves scant spare capacity in case of a supply disruption. “Prices will go up, probably sooner rather than later, and people will be surprised at how fast they rise,” says Mike Breard, an analyst with Hodges Capital Management, in Dallas.

Kiplinger’s forecasts that oil will recover to $70 a barrel this spring. If we’re right, energy stocks are likely to post sharp gains. But even with oil in the $50 range, well-managed companies can make money. That’s certainly true of Chevron (symbol CVX, $110). Although the behemoth’s earnings plunged 30% in the fourth quarter, to $3.5 billion, its refining operations saw profit growth, offsetting weakness in the production side of the business. The company is spending billions each year to replace depleted wells and says it’s on track to boost oil-and-gas production by 21% by 2017. Chevron recently cut its capital budget and suspended share buybacks, but it has made protection of its $1.07-per-share quarterly dividend a priority. (Share prices are as of February 6.)

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A stock with more potential (and more risk) is Chesapeake Energy (CHK, $21). Under former CEO Aubrey McClendon, the company acquired vast acreage throughout U.S. shale basins. Faced with a debt-laden balance sheet, current CEO Doug Lawler sold $5 billion worth of assets last year to shore up the firm’s finances, and he’s now focusing on improving profitability and buying back shares, says UBS analyst William Featherston, who recommends the stock. And if oil prices rebound to $80 a barrel, the stock will be worth at least $40 a share, says Tom Sudyka, comanager of the LK Balanced Fund.

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Helmerich & Payne (HP, $68), an energy-services stock, has tumbled more than 30% in the past six months. The firm mostly provides rigs to land-based oil-and-gas producers. And although earnings rose 17% in the October–December quarter from the same period a year earlier, CEO John Lindsay warned that the results were “overshadowed by a rapidly deteriorating energy market.” Helmerich & Payne expects drilling activity and U.S. day rates for its rigs to decline sharply.

Yet Helmerich, the largest U.S. land driller, is likely to dig out of this hole and emerge stronger. The firm used the last downturn in oil prices to bolster market share from 9% in October 2008 to 16% at the end of 2014. Its land rigs are more profitable (on a daily operating basis) than those of major rivals, and its fleet is considered one of the most advanced and efficient.

On top of that, the stock yields a robust 4%. The company boasts a strong balance sheet and has ample cash to support the dividend. “The stock’s upside potential is much greater than the downside risk,” says Breard.