The more the markets hate a sector, the more the reasons start to pile up for long-term investors to look at it. With OPEC calling for higher prices down the road, production in the United States plummeting and global growth expected to pick up in the next few quarters, this could be the perfect storm for energy stocks.

In a new report, while hardly pounding the table, Merrill Lynch does remain bearish on the rest of this year, and the firm is incrementally more positive on 2016. The report also lists four exploration and production stocks that may be solid portfolio additions now. We picked three companies, two are rated Buy at Merrill Lynch and the third is widely held across Wall Street.

PDC Energy

This stock is very well liked on Wall Street and may offer outstanding upside potential. PDC Energy Inc. (NASDAQ: PDCE) is a domestic independent exploration and production company that produces, develops, acquires and explores for crude oil, natural gas and natural gas liquids, with primary operations in the Wattenberg Field in Colorado and in the Utica Shale in southeastern Ohio. The Wattenberg Field operations are focused on the liquid-rich horizontal Niobrara and Codell plays, and the Ohio operations are focused in the condensate and wet gas portion of the Utica Shale play.

ALSO READ: UBS Says Huge Oil Merger Should Go Through: 3 Big Stocks to Buy

Some investors have seemed to be worried about the company’s hedge book, which rolls off in 2017. Wall Street analysts feel if oil rebounds to around the $70 level by then, much of the current concern will prove unwarranted. In addition, the company’s capital efficiency, which ranks very high to peers, helps to keep balance sheet risk lower.

The Merrill Lynch price target for the stock is a very hefty $72. The Thomson/First Call consensus target is $68.40. The stock closed Monday at $55.52.
Parsley Energy

This is a small cap stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an independent oil and natural gas company focused on the acquisition, development and exploitation of unconventional oil and natural gas reserves in the Permian Basin in West Texas. As of December 31, 2014, Parsley’s acreage position consisted of 133,274 net acres, including 103,036 net acres in the Midland Basin and 30,238 net acres in the Delaware Basin, and estimated proved oil and natural gas reserves were 90.9 million barrels of oil equivalent.

Some Wall Street analysts think production will increase while capital spending drops going forward, and that the southern Midland Basin asset is at the end of the cost curve for U.S. oil productions, where the company margins in 2017 could be as high as three times that of peers in the region.

The stock is not covered at Merrill Lynch. The Wall Street consensus price target is $21.22. The shares closed Monday at $15.85.

ALSO READ: 4 Top Jefferies Growth Stocks to Buy Now

Pioneer Natural Resources

This is a stock many Wall Street analysts love for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) was the ultimate shale-oil growth story for the past five years, and it has been eviscerated in the sell-off that started almost a year ago. The stock has s declined almost 30% since April and could be offering aggressive investors a potential entry point that could be very timely.

Pioneer is a huge player in the Permian basin and the Eagle Ford in Texas, and it owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. In addition, the company owns its own frac fleets, allowing Pioneer to be a low-cost, high-margin producer, which could prove to be huge if prices trend sideways at current levels for a protracted period.

Some analyst think that Pioneer could add rigs to the tune of up to two per month the rest of this year, and as many as eight rigs in the first quarter of next year.

Pioneer investors are paid a tiny 0.07% dividend. The stock is rated Buy, the Merrill Lynch price target is a massive $170, and the consensus target is also set high at $160.72. Pioneer closed trading on Monday at $123.82.

ALSO READ: Low Crude Oil Prices Risk $1.5 Trillion in New Investment

There is still a long way to go for the energy sector, and the sledding may remain tough the rest of this year. Investors willing to carve out some capital and plan on holding positions for up to 18 months could be well rewarded.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.