The sharp collapse in oil prices continues to hit energy stocks hard with many having lost over 50% of their value since the rout began. Those stocks that have been hit the hardest are smaller upstream oil companies. Despite the uncertainty surrounding oil prices investors should not be deterred from investing in the industry with a number of bargains available. 

Now what?

In fact, market turmoil has turned some of these energy stocks into undeniable bargains and here are my three favourites.

Pengrowth Energy Corp. (TSX:PGF)(NYSE:PGH) focuses on the production of heavy crude and is well positioned to weather the storm in crude prices with 75% of its 2015 production hedged at $94 per barrel and 56% of its 2016 production at $90.

It has also made solid inroads into the development of the Lindbergh thermal oil sands project, with it being on schedule and having already commenced first steam. It is expected to become major cash flow generator because it is a long-life asset that will be very cheap to maintain. This should see it remain profitable over the long term, even if oil prices remain stubbornly low.

The final sweetener for investors is Pengrowth’s dividend, which even after being slashed by half still yields a very tasty 7%. This will see patient investors be rewarded while they wait for Pengrowth’s shares to rally on the back of firmer oil prices. 

Colombian-based Gran Tierra Energy Inc. (TSX:GTE)(NYSE:GTE) has fallen into disfavour with investors because its oil discoveries in Peru were not as promising as initially thought. This forced it to significantly reduce its oil reserves but despite this it remains on a solid footing and holds considerable promise.

It has a solid balance sheet and remains virtually debt-free, unlike many of its peers. This is a considerable advantage in the current harsh operating environment and gives it a considerably degree of flexibility for managing its operations.

Importantly, even after slashing capital expenditures by two-thirds it has been able to grow its oil output with first quarter 2015 production up by 2% year-over-year. It also remains highly liquid with US$204 million on hand and expects to fund its 2015 capital program from these funds and cash flow.

Each of these attributes leave Gran Tierra well positioned to bounce back strongly once oil prices rebound.

Intermediate oil producer Surge Energy Inc. (TSX:SGY) is also well positioned to rebound strongly. It continues to hold some of the best light and medium oil acreage in Canada. The quality of these assets is reflected by Surge’s record first quarter 2015 production that grew by 37% year-over-year, despite capital expenditures for that period being slashed by 56%.

More impressively, Surge continues to generate a solid netback, a key measure of profitability, despite sharply weaker oil prices. For the first quarter its netback was $32.67 per barrel and this can be attributed to the quality of its oil assets.

Finally, investors will continue to be rewarded by its increasingly sustainable and juicy 8% dividend yield as they wait for Surge’s share price to rebound.

So what?

All three companies, while being risky investments in the current environment, offer investors considerable upside once oil rallies. Furthermore, in the case of Surge and Pengrowth, investors will be rewarded by their juicy dividend yields while they wait for this to occur.

 Looking for energy plays that offer considerable potential upside? Then don't miss these two energy plays for your watch list.

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