Investors: How to play an oil rebound

Oil prices will likely come back eventually. And when they do, are you positioned to make money?

The collapse in oil prices creates a huge opportunity to scoop up once-prized energy assets at a fraction of the cost. That reality isn't being missed by the giant industry players. Royal Dutch Shell announced this week it's buying the U.K.'s BG Group to form an industry titan.

Some experts think that investors who are willing to stomach huge risks and endure the ups and downs of oil prices could find opportunities in the oil patch. "If you're smart about it, this is an opportunity," says Anthony Young, analyst at Macquarie Research. "If you can find good (energy) companies ... with strong balance sheets, you're probably buying at the lows."

That's the problem, though. There are 41 energy stocks just in Standard & Poor's 500 alone. Investors need a game plan to go drilling for riches amid a historic crash in the price of oil. The iPath S&P GSCI Crude Oil exchange-traded note, a measure of the price of crude, cratered 55% over the past year. Some think it could take 12 to 18 or even 24 months before the price of oil stabilizes, Young says. That means investors will need to focus on smart ways to play the commodity, including:

• Find energy companies that can boost performance with corporate moves. The top energy pick among analysts is Consol Energy, an explorer for coal and oil. What investors are jazzed about with Consol is that it can sell off coal assets and redeploy that cash into maintaining its oil-exploration business, Young says. This move not only reduces the company's reliance on slower growing coal, but allows it to boost its oil business and get ready for when prices recover, he says.

• Concentrate on the oil companies with staying power. Now's not the time to be speculating on small oil companies that might not have the resources to ride out a prolonged bear market in oil. Seven of the 19 defaults this year have been global energy companies, S&P says. If oil prices stay depressed, expect more energy company defaults. S&P added a number of energy companies to its "weakest links" list, including Hercules Offshore, which are the companies with the lowest credit ratings as well as negative credit outlooks.

• Follow the smart money's logic. Royal Dutch is eyeing the lucrative liquefied natural gas assets of BG. Along those lines, analysts are bullish on Range Resources, an independent exploration company. The company — like BG — is trading for a discount to its true value and is very large relative to other independent players, says Karl Chalabala, analyst at Canaccord Genuity.

And this underlies the tricky part of trying to pick individual energy stocks. Fadel Gheit of Oppenheimer says to focus on companies most leveraged to oil prices. His favorites: Range, BP, Apache, Hess, Marathon Oil, Murphy and Occidental.

The key is finding companies that can "ride out the weakness," Young says.