Transocean

Market cap: $21 billion

2009 Revenue: $12 billion

P/E ratio: 9.2

Dividend yield: N.A.

Ticker: RIG

    The disaster that killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico didn't just crush BP's stock. It also sank shares of offshore driller Transocean, which owned and operated the Deepwater Horizon (which BP had leased). The rig was insured for $560 million -- already paid to Transocean -- but investors feared the company would be held liable for billions in cleanup costs and restitution.

    Transocean maintained that its contract with BP shields it from liability. BP disagreed. So Transocean published the contract: BP "shall assume full responsibility for and shall protect, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination ... without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]." BP even indemnified Transocean against "gross" negligence or "any other theory of legal liability" claimed by plaintiffs or regulators.

    Most analysts now agree the early worries were overblown. "We think that the company is well indemnified against blowout-related liability," writes Stifel Nicolaus analyst Thaddeus Vayda. He has an $82 price target for Transocean shares, up 22% from the current $67.

    We think Transocean's upside is even greater, despite increased scrutiny of offshore drilling and the Obama administration's decision to reverse its expansion of gulf exploration. Oil prices have risen 17% since May as global demand has rebounded to 2007 levels. Weakness in the West has masked voracious demand in China and India. As North America and Europe recover, the return of triple-digit oil seems likely. Meanwhile production isn't keeping up with demand. All of that means a greater need for deepwater drilling. And consider this: There's a correlation between the price of oil and the value of the long-term contracts oil companies sign to lease Transocean's drilling rigs. Transocean earned $16.57 per share back in 2007 (when oil prices averaged $64). Apply its current 9.2 P/E ratio to those earnings, and you've got a $150 stock.

Royal Dutch Shell

Market cap: $108 billion

2009 Revenue: $278 billion

P/E ratio: 8.3

Dividend yield: 5.5%

Ticker: RDSA

    Offshore drillers like Transocean tend to be the energy sector's more volatile stocks. If wild rides aren't your thing, consider Royal Dutch Shell. "Buying this stock is kind of like buying a utility with a call option on oil prices," says Greg Padilla, co-manager of the Nuveen Tradewinds Global Resources fund, which owns a significant Shell stake. Padilla means that as a compliment, but we'd go further. Yes, the stock has attributes that conservative investors favor, such as low debt and $28 billion a year in free cash flow. Shell's 5.5% dividend yield is higher than Chevron's (3.6%) or Exxon Mobil's (2.5%). It trades at a bargain 8.3 P/E, a shade below the 9.1 average for its peer group (and well below the S&P 500's 13).

    But Shell is also a growth story. Analysts expect it to increase profits at a higher rate than any of its Big Oil brethren over the next two years. The reason? Many of them are struggling to find enough new oil to offset depletion in old wells. By contrast, Shell is expanding reserves and pumping up production. "They're one of the few majors with significant production growth," says Ben Fischer, portfolio manager of the Allianz NFJ International Value Fund.

    The key has been Shell's hefty investment in research and development, typically higher than that of any other oil company. Next year, for example, Shell will open a $19 billion plant in Qatar that uses state-of-the-art technology (backed by 3,500 Shell patents) to convert Qatar's abundant natural-gas supplies into 260,000 barrels a day of diesel and other liquid fuels.

    Shell has another advantage: geography. Much of the world's oil and gas is located in countries that are politically unstable, riddled with violence, or run by corrupt politicians (and sometimes all of the above). Perhaps burned by its experiences in places like Nigeria, Shell is now placing some of its biggest bets on unconventional oil-and-gas production in ultrastable countries such as Australia, Canada, and the U.S.  "People tend to look at Royal Dutch Shell as a safe place to get a dividend yield, which it is," says Fischer. "But it has a really good set of strategic initiatives going for it too."

Lennar

Market cap: $2.8 billion

2009 Revenue: $3.1 billion

P/E ratio: 25

Dividend yield: 1.1%

Ticker: LEN

    Lennar is one of the nation's largest homebuilders -- which hasn't been anything to boast about. It has careened from earning $1.4 billion in 2005 to a loss of $417 million in 2009, and its stock has swooned from $67 to $15 a share.

    So why recommend Lennar? Consider the big picture. Between 1959 and 2007, housing starts in the U.S. averaged 1.5 million a year, a figure propelled by a potent force: Historically there have been 1 million to 1.5 million new households formed in the U.S. every year. But since the end of 2008, housing starts have averaged 575,000 a year. "It's unbelievable -- housing starts have been near 50-year lows for two years," says Karl Case, the Wellesley College economics professor who started sounding the alarm about the real estate bubble back in 2004.

    Yes, foreclosures and inventories of unsold homes continue to be a drag on home prices -- and Lennar is a stock that will require patience -- but the market seems to be clearing. Inventories have declined for four consecutive months and are now down 25% since 2008. Harvard's Joint Center for Housing Studies expects 1.2 million household formations per year through 2015. Case thinks demand could soon outstrip supply, which would lead to higher prices. Analyst Stephen Kim of Alpine Funds is more optimistic: "There's no question you're going to see a snap-back in the housing market."

    Moreover, Lennar has a history of making lemonade from real estate lemons. During the S&L crisis in the early 1990s, it made a small fortune buying distressed properties at 30¢ or 40¢ on the dollar and then reselling them for 50¢ or 60¢. The operation was so successful it was eventually spun off into a separate company -- LNR -- that was acquired for $3.8 billion. The brains behind LNR was Jeffrey Krasnoff, and he's now back at Lennar running a new distressed real estate unit called Rialto. Michael Winer, manager of the Third Avenue Real Estate Value Fund and a Lennar shareholder, thinks Rialto can cash in even without an immediate rebound in home prices. Says Winer: "This is a stock that could move very quickly. By the time everybody believes there's a recovery underway, it'll be too late. Lennar could already be up 40% or 50%."