One of the hardest-hit companies in the energy sector during this latest downturn has been Pengrowth Energy Corporation (TSX:PGF)(NYSE:PGH). Over the past year, shares have declined more than 55%, and management was forced to slash the company’s four-cent-per-share monthly dividend in half.

In comparison, Suncor Energy shares are only down 15% during the same period. Obviously, Suncor has downstream operations that help shield it from the price of crude, but that’s not the only thing driving its outperformance against mid-tier operators like Pengrowth. There’s also the quality issue, which is especially prevalent during times of weakness in crude.

There are other reasons why Pengrowth is struggling as well. The company is burdened by a high debt load, which has ballooned to more than $2 billion thanks to debt in stronger U.S. dollars being converted back to Canadian loonies.

Plus, many of Pengrowth’s long-term shareholders are growing weary of the company and its management. This latest setback is just the latest in a series of blunders, including an overexposure to natural gas in 2010-11, as well as a dividend cut back in 2012. Yes, the company has cut its dividend twice in just three years.

And finally, there’s the new NDP government in Alberta, which has caused most of Alberta’s oil producers to sell off. Premier Rachel Notley has vowed to review royalty rates paid by energy producers, with an eye towards increasing them. Obviously, that’s not good news.

Combine all these issues, and it’s easy to see why shares are so depressed. But there’s also a lot of potential for upside, especially when oil recovers. Let’s take a closer look at the bull thesis.

Things are looking up

Thanks to the Lindbergh project finally coming online during the fourth quarter of 2014, the company has finally transitioned to being a more balanced producer, with oil and natural gas production running about the same.

Just phase one of Lindbergh has added about 12,000 barrels of oil to daily production, which is expected to be about 70,000 barrels per day for 2015. Lindbergh has the potential to add 50,000 barrels to the company’s daily production, and at a low cost, too. Cash costs totaled just over $15 per barrel during the first quarter, meaning Lindbergh can contribute to the bottom line even if energy prices remain weak.

But for at least until the end of 2016, Pengrowth doesn’t really have to worry about oil prices. That’s because the company hedged most of its oil production at prices around $90 per barrel. It hedged about half of its natural gas production at higher prices as well.

While debt is a long-term issue, the company still has some breathing room. Just $170 million is coming due in 2015, and nothing is due in 2016. Plus, the company just renewed its $1 billion operating line of credit until 2019, giving it some additional wiggle room.

Thanks to the hedging program, the company looks to be in little danger of breaching its debt covenants, which currently kick in 3.5 times its EBITDA. In fact, at $60 per barrel, management actually predicts the debt-to-EBITDA ratio to decline throughout 2015. There’s also the possibility of selling off the hedges, which are currently worth approximately $400 million, and using the cash to pay down debt.

Shares still pay a generous monthly dividend, good enough for a yield of 7.6%. Perhaps you could make the argument that the dividend would be better off eliminated and the estimated $100 million annually put towards debt, but the hedging program and massive cut in capital expenditures ensures there’s enough cash flow in place to sustain the payout—at least in the short term.

The bottom line? Pengrowth is taking the steps it needs to take during times of market weakness. Once the price of crude recovers, many of its issues aren’t a very big deal anymore. I predict that when that happens and investors are no longer worried about bankruptcy, shares of the company will at least double. Sure, the name is risky, but at least investors are getting paid a nice dividend to wait.

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Fool contributor Nelson Smith has no position in any stocks mentioned.