Best stocks to buy if the oil bottom is in

Published Wed, Oct 7 20153:23 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

If oil has bottomed, certain Canadian energy stocks could offer some of the highest returns on the recovery. These companies had the most to lose as oil prices dropped because it is so expensive to extract petroleum out of Canada's oil sands, so it stands to reason they will gain the most if crude recovers. Crude oil plunged more than 60 percent the last 12 months before rebounding slightly to hold in a narrow trading range just below $50 a barrel in the last few weeks. That stabilization prompted many analysts to call a bottom and forecast a greater comeback by the end of next year. "Oil tends to do very well after such as sharp decline," said Nicholas Ghattas of Fundstrat. "This could create a significant alpha trade opportunity in Canadian resource stocks at some point." Randy Ollenberger of BMO sees the most potential in shares of Canadian Oil Sands , MEG Energy , Suncor Energy and Canadian Natural Resources . "If oil bottoms and moves higher it wouldn't take much to move these Canadian names," the analyst said, noting that now they are operating on essentially a zero margin because of high extraction costs. If WTI can gain $10 or $15 to around $60 a barrel, Ollenberger said Cenovus and MEG could see 30 percent upside from their current prices by the middle of next year. Year to date, the stocks are down about 20 and 40 percent, respectively. Read More Strategist Paulsen: Market bottom is not in Macquarie's Chris Feltin is also bullish on some of the energy-related companies, with "buy" ratings on Canadian Natural Resources, Crescent Point , Suncor and TORC Oil & Gas . "We would argue the exploration and production space would get the first bid," said Feltin, who is based in Calgary, Alberta. "I think from an equity perspective, if there's any incrementally positive (move in oil) … you'll see an immediate response," Feltin said. The Canadian economy's greater dependence on commodities makes the country's stocks as a whole more sensitive to moves in oil prices than U.S. equities. "Broadly the Canadian stocks are a little cheaper," Feltin said. "From a valuation perspective the benefit would go to Canadian players." Charles Schwab analysis also found a very tight correlation between energy and Canadian stocks. "Canadian stocks have behaved like a leveraged bet on commodities, as they have tracked 1.5 times the MSCI World Energy Index over the past 15 years," said Schwab's Jeff Kleintop. "No other global sector tracks Canadian stock market performance so closely." When WTI gained more than 9 percent in a month, Canadian Natural Resources, Suncor and the MSCI Canada Index had significantly higher median returns than the S & P 500 in that month and the two months following, according to analysis using Kensho. The U.S. dollar had a median decline of 0.6 percent against the Canadian dollar during that time, the analysis showed. Gains in the Canadian currency would reduce the burden of U.S. dollar-denominated debt for Canadian companies, Ollenberger said. To be sure, the rebound in Canadian energy stocks won't likely come in the next quarter. Analysts don't expect crude oil to recover to near $60 a barrel until 2016. In the meantime, extended pressure from low oil prices will likely also cause smaller companies to face significant hurdles. "Persistently low commodity prices are putting pressure on some producers as hedges roll off and stresses build up potentially leading to a crisis for some companies," Kleintop said. China is another factor for uncertainty as a slowdown in the world's second-largest economy was a major component behind the recent slump in commodity prices. "The China dividend has been a huge tail wind. Is that over? Is it the end of the commodity supercycle? Not sure," said Tim Gramatovich, chief investment officer at Peritus Asset Management. Canada's real gross domestic product declined from January to May before picking up slightly in June and July, according to the latest figures from Statistics Canada . The 0.3 percent gain in July was led partly by a 2.9 percent expansion in mining, quarrying, and oil and gas extraction. "You're trying to figure out the survivors in the space," Gramatovich said. He has holdings of debt in Canadian exploration and production firms Northern Blizzard , Teine Energy and Osum Oil Sands. In the meantime, one Canadian energy company is already jostling for a strategic position. On Monday, Suncor made an unsolicited offer of $4.3 billion to acquire all the outstanding shares of Canadian Oil Sands. "It's consistent with their strategy," Macquarie's Feltin said. It's "implicitly making a bet that this is a bottom in oil and will benefit from a rise in oil prices." Read More Is this boon to oil 'hogwash?' In April 2014, Warren Buffett 's Berkshire Hathaway invested more than $500 million in Suncor . He added to holdings in Suncor in February 2015 and Phillips 66 , while shedding stakes in Exxon and ConocoPhillips . Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

A Suncor refinery in Edmonton, Alberta.

Geoff Robins | AFP | Getty Images

If oil has bottomed, certain Canadian energy stocks could offer some of the highest returns on the recovery.

These companies had the most to lose as oil prices dropped because it is so expensive to extract petroleum out of Canada's oil sands, so it stands to reason they will gain the most if crude recovers.

Crude oil plunged more than 60 percent the last 12 months before rebounding slightly to hold in a narrow trading range just below $50 a barrel in the last few weeks. That stabilization prompted many analysts to call a bottom and forecast a greater comeback by the end of next year.

"Oil tends to do very well after such as sharp decline," said Nicholas Ghattas of Fundstrat. "This could create a significant alpha trade opportunity in Canadian resource stocks at some point."