So far, 2016 has not been smooth sailing for U.S. oil futures. The commodity has been very volatile this year with prices recovering from a 12-year low of $26.21 a barrel in February to $50/barrel mark in early June, slipping again to under $40 only to rally toward $50 once more.

The Current Situation

While factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers contributed to jump in prices earlier this year that saw the benchmark recover significantly, these issues have largely vanished from the market. As of now, overproduction of crude and a glut of refined products keep the commodity under pressure.

At over 525 million barrels, current crude supplies are up 15% from the year-ago period and are at the highest level during this time of the year. As it is, improvement in oil fundamentals remain fragile with the existing stocks of refined product inventories – gasoline and distillate – remaining at their maximum seasonal levels in at least 20 years despite healthy demand. Piling on the misery is the Baker Hughes report revealing a steady rise in the U.S. oil rig count and pointing to the resurgence in shale drilling activities.

But over the past few trading days, West Texas Intermediate (WTI) crude futures have rallied to top $45-a-barrel after leading producers Saudi Arabia and Russia agreed to cooperate on measures to stabilize the oil market. However, the countries stopped short of pledging any kind of production freeze.

How to Invest in Energy Stocks?

While record high inventories and robust production could still push the commodity to the depths of multiyear lows, signs are emerging that oil prices are likely to stabilize and gradually pick up. Not only is global demand expanding but energy companies have significantly scaled back on plans to explore for and bring out more oil. This should lead to lower future production and supply/demand rebalancing.

However, not all oil stocks are the same. In fact, one needs to have an appetite for risk in order to invest in the energy sector. For savvy investors though, there are opportunities to earn big returns.

Value Investing to the Rescue

Given this uncertainty, it will be wise for investors to apportion their funds in value stocks.

Value investing has always been a popular strategy, and with good reason too. After all, who minds stocks that have solid outlooks and decent dividends?

Specifically, for investors who are risk-averse, value investing offers an opportunity to enter the market and grab stocks that have otherwise been overlooked by a majority of investors, and are thus trading at cheap multiples. Thus, investing in small-cap value asset class might just fit the bill for such investors.

The Small-Cap Advantage

Owing to their significant growth potential, small-cap stocks (stocks with a market cap of around $1 billion or below) usually tend to outperform their large-cap peers over time. However, these can also be riskier than well-known large-cap companies. Nonetheless, the growth potential of small-caps given the current economic backdrop of continued strength in the U.S. dollar and oil price unpredictability is tempting.

Moreover, over the long run, value stocks tend to outperform their growth-oriented counterparts. This is because growth stocks have a propensity of possessing high valuations fueled by positive outlook for future growth. Thus, it might become difficult for such a stock to grow as much as its undervalued counterpart.

We thus believe investing in small-cap value stocks could actually be a safer bet as these stocks generally yield high returns and generate exponential gains over time. Moreover, taking into account that such stocks are far more volatile in nature, they possess far higher potential for price appreciation.

However, most of these players are generally not industry giants and hence, a little extra effort must be put in to select the correct stocks. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

Here Are the Stocks

Our research shows that stocks with Value Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the great investment opportunities. Then, from among them, we selected those with dividend yield of over 2% and finally zeroed in on four stocks that have a market cap of under $2 billion.

CONE Midstream Partners L.P. (CNNX - Free Report) : Headquartered in Canonsburg, PA, CONE Midstream Partners is a master limited partnership focused on natural gas and condensate gathering in the Marcellus Shale in Pennsylvania, Ohio and West Virginia.

Zacks Rank: #1

Value Score: ‘A’

Dividend Yield: 5.2%

Midcoast Energy Partners L.P. (MEP - Free Report) : Formed by Enbridge Energy Partners L.P., Midcoast Energy is a master limited partnership with headquarters in Houston, Texas. It is in the business of owning and further developing Enbridge’s natural gas and natural gas liquids midstream business in the U.S.

Zacks Rank: #1

Value Score: ‘A’

Dividend Yield: 18.1%

NGL Energy Partners L.P. (NGL - Free Report) : It is a limited partnership operating a vertically integrated propane business with three operating segments: retail propane; wholesale supply and marketing; and midstream.

Zacks Rank: #1

Value Score: ‘B’

Dividend Yield: 8.6%

Archrock Partners L.P.  (APLP  - Free Report) : Houston, Texas-based Archrock Partners is a leading provider of natural gas contract compression services to clients spread all over U.S.

Zacks Rank: #2

Value Score: ‘B’

Dividend Yield: 7.6%

Bottom Line

If you are looking for fresh picks that have potential to move in the right direction, definitely keep the 4 abovementioned stocks on your list as these look well-positioned to soar in the near term.