NEW YORK (TheStreet) -- Here's one more reason to buy energy stocks. Besides cheap oil, the group is weak because of investor fears that many energy companies will run into financial trouble and go bankrupt.
But this is unlikely to be a problem, for a simple reason.
Oil service companies and banks know that oil producers are profitable long-term partners. So they'll help them out by making concessions rather than hold them to contracts and loan deals that would put them under.
That's the clear message from oil service companies, oil producers and industry analysts.
If this scenario is correct -- and overblown fears about widespread bankruptcies indeed do recede -- this will boost sentiment towards energy stocks and drive them higher, suggesting that now is a good time to buy energy names.
The springiest ones will be microcap companies that look like they are having a near-death experience now because their stocks are well below $5 -- but wind up pulling through. These are also the riskiest.
A safer way to play this trend is to go with larger-cap names that run much less risk of going bankrupt but are still weak because the bankruptcy fears haunting the group overall.
Six stocks in this category include: BP (BP - Get Report) , Southwestern Energy (SWN - Get Report) and Matador Resources (MTDR - Get Report) , according to several money managers in the sector. Whiting Petroleum (WLL - Get Report) , Apache (APA - Get Report) and Ultra Petroleum (UPL - Get Report) all look interesting because they have fallen far enough to get a five star rating at Morningstar, the research group's highest rating.
A seventh stock to consider is energy services company Halliburton (HAL - Get Report), which could benefit in the long run from the cost cutting drive among producers. The dash to save cash will give them a chance to promote their latest equipment and services that help trim costs by boosting production efficiency.
"As our customers struggle with cash flows, they will be very focused on optimization and gaining higher levels of efficiency, and I expect that this will bode very well for Halliburton," CEO Dave Lesar told investors in the company's January conference call.
"Price reductions are now occurring across all product lines," said Halliburton's Lesar.
Check in with oil producers and you hear the same message about big discounts.
"We have been very engaged with our suppliers and service providers to capture immediate reductions in costs, ranging from 10% to 40%," Occidental Petroleum (OXY - Get Report) Chief of Operations Willie Chiang told investors in the company's Jan. 29 conference call.
"In past cycles we saw cost reductions of reduction of 20% to 30% in 18 to 24 months. We think we will see the same type of thing. I think we will see broad-based cost reductions," said Lamar McKay, the head of energy production at BP, in his company's February conference call.
"We want to work with our service providers. We do have a partnership here that goes beyond the next quarter, or the quarter after that," says Anadarko Petroleum (APC) CEO R.A. Walker in his company's Feb. 3 call. "This is going to be a year of transition, to a different service costs that gets synced up with a different commodity environment."
Banks are also revising loan covenants to help keep producers from going into default, says Mike Breard, an energy analyst at Hodges Capital Management, a point being missed by the numbers crunchers. "People who just do Excel spread sheet analysis don't stop and think about the real world and how banks will help their customers," says Breard. "If your bankers have been making good money off you for twenty years, they are not going to just turn their backs on you. They aren't looking to put oil companies out of business. The banks don't want to take possession of oil companies. I would say surprisingly few oil companies are in any real danger."
Plus many energy companies took advantage of low interest rates during the past few years to refinance their debt and extend maturities to 2020, says Breard. Others are pulling down financing now. Breard cites recent successful capital raises by Bonanza Creek Energy (BCEI - Get Report) and Diamondback Energy (FANG - Get Report) , both owned by Hodges Capital, as a signal that financial distress will be rare. "This just shows that there is money available." It's also a sign of investor interest in beaten down energy stocks.
Of course, for energy companies to steer clear of financial trouble, many will need to see the price of oil stabilize and continue rebound. Will it? That's the outlook of Jonathan Waghorn, who helps manage the Guinness Atkinson Global Energy Fund (GAGEX). He thinks declining supply as producers trim capital budgets will help drive Brent oil up to $70 a barrel by the end of the year, and then higher after that.