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Tickers in this Article: HERO, PDS, WEL, PCZ, SU, BQI, IO, WRES, GW
One of most intriguing aspects of the stock market is a stock trading under five dollars. While these shares don't fall into the classic SEC definition of penny stocks, there are plenty of former high flyers in the oil and gas world that are now trading for fractions of what they were a year ago. No company's share price trades this low without reason, but if market, credit and economic conditions improve, these companies may become rockets again.

Betting on Energy
In order to take some of the uncertainty and risk out of the penny stock mystique, we can place our bets on a sector that should come back when the economy strengthens, and benefit long term from global trends. I'm speaking of the energy sector. (Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless, read The Lowdown On Penny Stocks.)

The Resource Plays
With just a $60 million market, Warren Resources, Inc. (Nasdaq:WRES) looks interesting based on land holdings. The independent exploration and production firm's two major projects include coal bed methane in the Rocky Mountains and secondary oil recovery within the Wilmington Basin field, which comprises over 231 thousand gross acres. The Wilmington Basin, representing about 90% of proved reserves, is the third largest oilfield in the U. S. The combination of lower natural gas prices and one-time impairments caused Warren to report a $241 million loss for 2008. Positives for the company included increasing cash flow, a 123% increase in 2008 over 2007, and a 77% total revenue increase to $109.2 million. Analysts' consensus for Warren set a one year price target of $7.09, according to Thomson Financial Networks, about six dollars higher from where it was trading in the first half of April 2009.

With a barrel of oil hovering near $50, the Canadian oil sands just aren't profitable. This has caused many larger oil companies to shelf projects in the area. But, as the price of energy rises and returns to its $150 per barrel highs of last summer, Oil Sands Quest's (AMEX:BQI) 731,000 acres along the Saskatchewan and Alberta border and its 488,000 acres in the Pasquia Hills oil shale could be worth far more than the $1 the company trades for. With only a $230 market cap, Oil Sands Quest could be a future buyout target as consolidation in the oil sands industry continues. This consolidation was shown by the recent Suncor Energy (NYSE:SU) / Petro-Canada (NYSE:PCZ) deal. Shares of BQI traded as high as $6.95 during the previous oil boom. (Find out how to stay on top of data reports that could cause volatility in these markets Become An Oil And Gas Futures Detective.)

The Niche Service Stocks
"Pick and shovel" plays are often a great way to play an industry. It doesn't matter who wins, if you're the one providing all the necessary gear. By providing the software and seismic data equipment that E&P firms need, ION Geophysical (NYSE:IO) fills the ever-growing niche of finding new oil and gas deposits. Via its suite of products, including its new successful Firefly wireless 4-D land seismic system, ION has managed to increase revenue year over year, with 2008 revenue essentially flat at $680 million. The company reported earnings per share (EPS) of 50 cents for full year 2008 and finished the year with $35 million in cash on its books. Analysts, according to Thomson Financial Networks, have placed a $4.50 share price target on the stock. ION has traded as high as $18.26 in the last 52 weeks.

As one of the leading pressure control and emergency response companies, Boots and Coots International Well Control (AMEX:WEL) allows energy firms to operate safely and more efficiently. The company's three divisions, pressure control services, snubbing and hydraulic work, and equipment rental, have continued to contribute profitability to the shares. Revenue for full-year 2008 increased 99% to $209 million. Shares of Boots and Coots currently trade at a low P/E of 5 due to the diluted EPS of 28 cents for 2008. (Learn more in Assess Shareholder Wealth With EPS.)

The Drillers
With its late 2008 purchase of Grey Wolf, Precision Drilling Trust (NYSE:PDS) became one of the largest land drillers in the world, according to total rig count. It also left the Can-Roy with $1.2 billion in debt at the end of 2008. In order to help cushion its debt load and enhance liquidity, Precision suspended its monthly dividend payments in February for an indefinite period. Shares have cratered from their 52-week high of $28.59. While it's a bad time for acquisition for many companies, some will have the last laugh if they can survive long-term. When oil retraces its highs, drilling activity will increase and Precision should be able to restore its dividend payments. Two analysts according to Thomson/Firstcall, have a mean price target of $14 and the units can be had for a ridiculously low P/E of just below 2.

With the focus on deep water drilling, the shallow Gulf of Mexico seems to have been forgotten. The mature fields are often seen as secondary to faster growing deposits in deeper colder water. Combine that with increasing hurricane risk, low oil prices and a debt load of just north of $1 billion and you can see how Hercules Offshore (Nasdaq:HERO) has been struggling as of late. The company has the distinction of being the largest operator of jackup drilling equipment in the Gulf, and the main liftboat operator worldwide. In order to repay debt, Hercules began cold-stacking some of its rigs, including six jackups, three submersibles and 10 barges. The driller has also reduced head count by 25% since November and is planning on selling some older, obsolete driller rigs in order to raise cash. If these cost cutting measures work, Hercules may once again hit its highs. (Drill down into financial statements to tap into the right companies and let returns flow, read Unearth Profits In Oil Exploration And Production.)

Bottom Line
The market and uncertainty has created some pretty low stock prices. Investing in companies trading for less than a Lincoln is risky, but they may provide the jolt our sagging portfolios need. By betting on energy stocks and taking a long-term approach, we can mitigate some of that risk. The companies mentioned are a good place for further research.

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