When we think of penny stocks our minds drift off to dreams of literally paying pennies for a stock that rockets in value so that it's worth dollars in the future. However, more often than not a stock trading for pennies is nothing more than a shell and typically goes to zero. Instead, investors looking to profit from lower-priced stocks should look to the Securities and Exchange Commission's definition of penny stocks as those trading under $5 per share.
This opens up a whole new world of stocks that, while beaten down, are real businesses that have real prospects to create wealth instead of being tickers manipulated on a screen.
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Here are five such stocks from the energy industry. A warning: While these beaten-down energy "penny stocks" could soar, each comes with an extra helping of risk that could obliterate the investment. Buyer beware.
1. SandRidge Energy Inc. SandRidge's stock has taken a major hit from plunging oil prices over the past year, falling from over $7 per share in summer 2014 to under $2 a share by spring 2015. SandRidge needed an oil price north of $80 to increase production and grow into its debt-filled balance sheet. However, the driller is working to reduce its costs so that it can earn the same returns at current oil prices that it enjoyed when oil was over $80. If the company can accomplish this before running out of money, SandRidge's stock could reverse course and head higher.
2. Energy XXI Ltd.If there's one recurring theme on this list it's that falling oil prices crushed the stock price of energy companies that had too much debt. That's certainly the case at Energy XXI as its shares fell from the lower $20 range to less than $4 over the past year. The culprit here is the company's massive debt, which is among the worst rated by Moody's. That debt, which was piled on when Energy XXI acquired a rival shallow Gulf of Mexico driller last year, has acted as a weight as oil prices plunged. However, oil prices are improving, and so are the prospects that Energy XXI can get out from under this weight.
3. Key Energy Services Key is a bit of an oddity on this list as it's the only company that doesn't produce oil and gas. Instead, it makes money by providingoil-field services. The problem is that services it provides are volume-based and low-margin. The need for those services has fallen along with oil prices, leading to a big drop in Key Energy Services' revenue, which is worrisome due to its weak balance sheet. However, as oil and gas activity improves, so should Key Energy Services' prospects and its low-single-digit stock price.
4. Halcon Resources Corp.Halcon is much like Energy XXI in that its credit rating is among the worst rated by Moody's. Its rating is bad because, like Energy XXI and SandRidge Energy, it piled on debt to expand its business when oil prices were much higher. That debt load left the company flat-footed when oil prices fell, forcing Halcon to scramble to secure its liquidity. Halcon recently conducted a debt-for-equity swap and now has enough liquidity to get it through the next few years, even if oil prices remain weak, with upside if prices improve.
5. Eagle Rock Energy Partners L.P. The last name on this list used to have a debt problem, but it corrected that when it sold its midstream business in 2013. In fact, it now has some of the best debt metrics among upstream-focused master limited partnerships. Furthermore, the company has plenty of liquidity to pursue growth, whether organically or via acquisitions. What Eagle Rock needs now is for the market to realize the company is turning itself around, which would send the unit price up from its current low-single-digit perch.
Investor takeawayThere's one key theme among these energy penny stocks: all had too much debt, which upended their operations once commodity prices tumbled. However, all five are in the process of fixing their balance sheets. That puts them in position to potentially thrive as oil and gas prices improve, which could turn each one into a hot penny stock that could actually make investors money instead of burning their dreams and portfolios.
The article 5 Hot Penny Stocks to Buy In Energy Now originally appeared on Fool.com.
Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. 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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