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Think Oil Will Go Up? Then These 3 Stocks Are Ridiculously Undervalued

Over the last few months, it’s been a tough time to be an investor in Canada’s energy patch.

Not only did the price of crude collapse—taking natural gas with it—but there’s also the added uncertainty of Alberta’s recent election. Because of all the recent activity, many Canadian investors have stampeded out of the sector, content to avoid another meltdown.

But for investors who think energy will eventually recover, this could be a great buying opportunity. There are dozens of energy stocks trading at values that will look ridiculous if oil recovers to levels close to last year’s peak of close to $110 per barrel.

Here are three of what I think are the most undervalued stocks in the entire sector.

Penn West

It isn’t just the price of crude that’s driven down shares of Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) more than 75% over the last 52 weeks. The company has also had to deal with a debt-laden balance sheet, a dividend cut, and even an accounting scandal.

But it has made progress. It sold assets to help bring down the debt, which has been partially offset by the value of its U.S. dollar-denominated debt increasing once converted back to Canadian dollars. It has also done a nice job improving operating numbers thanks to some strategic layoffs and better efficiency. Additionally, management has completed an overhaul of the accounting department to ensure there aren’t any other accounting issues.

Because of these issues, Penn West shares are incredibly cheap. Shares have a book value of $10 per share, which is nearly four times higher than their current levels. On this metric alone, Penn West is among the cheapest oil stocks in Canada. It’s also incredibly cheap on other metrics, including price per flowing barrel.

Right now, Penn West really just needs the price of crude to increase. Most of its issues can be solved with $75 oil.

Athabasca Oil

An investment in Athabasca Oil Corp (TSX:ATH) is an investment in potential. The company doesn’t have a lot of production right now, but if growth goes as planned, the company could be a huge operator in just five years.

It has two main projects on the go. The first is the Hangingstone oil sands project, which has just recently begun production. By the time the third phase of Hangingstone is completed in 2018-19, the company predicts up to 80,000 barrels of daily production.

The secondary project is in the Duvernay, where the company expects to drill more than 1,000 wells. This has been temporarily suspended because of low oil prices, but original projections were for production from the region to hit 60,000 barrels per day by 2019. Combine that with Hangingstone, and in five years Athabasca could have the same production as Crescent Point has today.

Athabasca also has the balance sheet strength to survive these tough times. The company does have $500 million worth of debt due soon, but that’s offset by nearly $700 million in cash from a recent asset sale.

Bellatrix

It isn’t just me that thinks Bellatrix Exploration Ltd. (TSX:BXE)(NYSE:BXE) is ridiculously cheap. Two noted U.S.-based value investors—including the legendary Seth Klarman—have recently announced large stakes in the company.

Currently, shares trade hands at approximately 0.5 times book value, 1.6 times sales, and just 5.3 times earnings in the last twelve months. Debt is an issue, but most of it doesn’t mature for years, giving management a bit of breathing room.

Bellatrix is mostly a natural gas producer, a commodity that may not be depressed for long. Natural gas is a by-product of new drilling techniques, which means that its supply will likely go down as fewer oil wells are drilled. After years of depressed prices, the supply/demand balance might actually swing back to the producer’s favour.

While these energy companies are cheap, they all need prices to recover. If you’re a believer in oil and natural gas heading higher in the next 12-24 months, then these stocks should double, and possibly more. If that happens, these stocks look like a good option for the more speculative part of your portfolio.

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Fool contributor Nelson Smith owns shares of PENN WEST PETROLEUM LTD.

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