3 Energy Stocks That Could Double by 2016

Source: LINN Energy LLC

The crude oil price plunge over the past year pulled nearly every single energy stock down with it. But some were more battered than their peers as they are being weighed down by other issues. That said, a rising tide of rising oil prices will likely lift all boats and send some of the weakest-performing energy stocks higher. Here are three we think could double by next year if oil prices enjoy a meaningful rebound.

There are very few stocks that I'm more ambivalent about thanDenbury Resources. As an oil producer that employs advanced extraction techniques to squeeze lots of oil out of older reservoirs that we have long thought were no longer able to produce, the company has some very unique benefits and risks. Some of the benefits are wells with very low decline rates that don't require lots of capital to maintain existing production and little-to-no exploration-and-finding costs because it's going back to previously dug wells. On the flip side, the ability to grow production is very capital intensive and takes a couple of years of planning because Denbury needs to source CO2 for injecting into the well. Also, since it's repressurizing old wells, there is almost no natural gas in the reservoir, so Denbury is almost exclusively an oil producer.

So, here's my quandary. If oil prices were to rebound somewhat, this company absolutely has the potential to double. Shares today are priced at less than 40% tangible book value and its price-to-earnings ratio of 4 means the market is pricing this company to perform miserably for quite some time.

Of course, the only thing that could hold the company back from doubling is oil prices. Denbury has a relatively strong portfolio of futures contracts to sell its existing production and much of its 2016 production at higher-than-market prices. But without an improvement in prices before those contracts expire, much of Denbury's advantage could get wiped out in one fell swoop.

I'm not going to sugarcoat it: Denbury is a speculative bet on oil prices with a binary outcome. If prices rebound within a reasonable time frame to a more sustainable level, then Denbury could easily double. If we're looking at a longer oil price lull, then Denbury could be in big trouble.

: I'm with Tyler on being ambivalent (which I admit I had to look up) on not only Denbury Resources, but my choice LinnCo . Like Denbury, its stock price has been beaten down due to weak oil prices over the past year as the stock is now down a very disappointing 71%. That said, the oil price weakness isn't solely to blame for LinnCo's poor showing. What's really weighing it down is the debt taken on by its parent LINN Energy, which is pulling LinnCo down as its only assets are units of LINN.

At the moment LINN can handle its debt because it has plenty of cash flow to fund its interest, capital expenditures, and current distribution rate since, like Denbury, much of its current production is locked in via futures contracts. But problems will arise in the future should the current, or lower, oil and gas prices persist, as that will drag LINN's cash flow down, making it not only harder to maintain its debt, but hampering its ability to maintain and grow production as well as its shareholder distributions.

All that said, the cure for what ails LINN Energy, and therefore LinnCo, is the price of crude oil. Higher oil prices -- say, to the $75-per-barrel range by next year -- could lead to a doubling of both LINN Energy's unit price and LinnCo's stock price. It's a binary outcome, for sure, as stagnant oil could push LinnCo's shares even lower as investors not only fret about LINN's debt but the industry's overall exposure to debt, which could lead to a number of bankruptcies if oil takes another plunge.

Jason Hall: The offshore-drilling sector has been hit especially hard over the past year:

SDRL data by YCharts.

Low oil prices and weak global demand growth will continue to weigh on offshore projects -- and, frankly, onshore shale production can easily increase to meet short-term demand. This will continue to put pressure on offshore drillers.

But looking at the bigger picture, offshore reserves are almost definitely going to be a key part of meeting global demand. It's "when" more than "if."

With that in mind,Transocean LTD has big upside from here, and it's looking like Transocean's management is putting it in a solid position to ride out the downturn.

Transocean's fleet is one of the largest in the industry, but it's older and management has identified 20 floating vessels that it will scrap. This will impact revenue, but this will also significantly reduce the company's operating expenses.

Furthermore, Transocean's newbuild program schedule is very favorable. Five of the 12 newbuilds currently on order are already contracted, and the next newbuild that isn't already under contract won't be delivered until Q3 of 2016. Furthermore, the company was able to reach an agreement to delay delivery of two ultradeepwater drillships until 2019 and 2020.

While Seadrill, with its newer, more capable fleet, might seem like the easy pick here, I'd say the 13 newbuilds -- and $3.5 billion in payments to shipbuilders -- scheduled over the next 18 months leave it significantly more exposed than a less-leveraged Transocean. Both have upside, but Transocean just seems a lot better positioned in the current environment.

The article 3 Energy Stocks That Could Double by 2016 originally appeared on Fool.com.

Jason Hall owns shares of Seadrill. Matt DiLallo owns shares of Denbury Resources, Linn Co, LLC, Linn Energy, LLC, and Seadrill. Tyler Crowe owns shares of Linn Energy, LLC and Seadrill. The Motley Fool recommends and owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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