4 Beaten-Down Oil Stocks That Could Make Huge Moves if Crude Continues Its Momentum

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Crude oil has quietly rebounded 20% off its most recent low, which means it's now technically in a bull market. That said, while this rally brought the U.S. oil benchmark, WTI, to around $52.50 a barrel, crude is still down about 3% for the year. That overall weakness has taken its toll on U.S.-focused oil stocks, many of which are down more than 20% this year. However, this group could bounce back sharply if crude continues its upward momentum, especially if it can claw its way back above $55 a barrel, since that's the tipping point for many of these companies. Here are four oil stocks that could surge if that happens.

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WPX Energy: Down 21% year to date

WPX Energy (NYSE: WPX) has undergone a dramatic transformation over the last three years, completing $7 billion of transactions that have reshaped its portfolio and doubled oil output. Last quarter, for example, oil was up 27% thanks in part to robust results in the Permian Basin. Because of that, the company is on pace to increase oil production by 30% to 40% this year, with an aim to boost it another 35% to 45% next year. That said, the market's concern is that the company's leverage will remain elevated in the interim since it's still outspending cash flow at current prices, though it's working to get down to its target level by the end of next year. Given its rapidly increasing oil output, WPX stands to benefit from higher oil prices, so a further rise in crude could enable the company to hit its goals early, which should drive its stock higher.

Sanchez Energy: Down 43% year to date

Sanchez Energy's (NYSE: SN) stock initially skyrocketed this year after it made a bold move to buy more land in the Eagle Ford Shale. However, it has since come well off those highs due in part to weaker oil prices, which recently forced the company to scale back its drilling plans to better align spending with cash flow. Further, those weaker prices will make it harder for Sanchez Energy to meet its goal to get leverage to its target range next year since it needs oil around $55 to achieve that aim. Given the importance of that oil price, if crude rebounds, it would remove some uncertainty surrounding the company's financial situation, which could enable Sanchez's stock to regain its upward momentum.

Whiting Petroleum: Down 53% year to date

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Whiting Petroleum (NYSE: WLL) based its drilling budget on oil averaging $55 a barrel this year. However, with crude dipping into the $40s last quarter, Whiting decided to cut spending and reduce its rig count. As a result, the company only expects output to rise 14% by year-end, instead of its initial expectation for a 23% increase. Another reason Whiting had to cut spending is its weaker balance sheet. However, the company recently sold $500 million in assets, which will enable it to pay off all but $50 million of its bank debt. Meanwhile, if crude keeps running higher, Whiting Petroleum should be able to generate some excess cash flow to reduce debt further, which could lift the weight that has been causing its stock to sink this year.

Denbury Resources: Down 62% year to date

Denbury Resources (NYSE: DNR) has also struggled under the weight of debt this year. Borrowings under its revolving credit facility have risen from $301 million at the start of the year to $490 million at the end of last quarter, which is almost half of its available credit. While $39 million of that rise was the result of paying off some non-bank debt and $89 million due to an acquisition, the remainder is because Denbury outspent cash flow at lower oil prices. However, the good news is that the tide seems to be turning since the company noted that as long as crude stayed in the upper $40s, its bank debt would fall to between $425 million to $475 million by year-end. That said, if crude keeps running higher, Denbury will generate more cash to reduce debt, which would help ease its debt burden that has weighed down shares this year.

Greater risk but a much higher potential reward

The reason this group of oil stocks has fallen so sharply this year is that they need higher oil prices to thrive since they have higher cost structures due in part to their debt-laden balance sheets. While each is working on self-help initiatives that should eventually get them back on more solid footing, these companies could reach that destination much quicker if crude jumped into the mid $50s. While there's certainly a risk that won't happen, aggressive investors could make a mint betting that it does.

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Matthew DiLallo owns shares of Denbury Resources. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.