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7 Undervalued Oil and Gas Stocks Ripe for Gains

Stocks in this article: DVNSUAPAUPLEPDKMPPXD

BOSTON ( TheStreet) -- World oil prices are down by about 20% from the first quarter's $100 a barrel crude, hurt by the European sovereign debt debacle, the depressed economies of the U.S. and China, and a huge domestic supply of natural gas and a rising supply of oil from the Middle East.

And investors took that to mean there's not much profit to be had in the energy sector, as selling pushed share prices down 5.3% this year for the group, versus the benchmark S&P 500's 6.8% gain.

As a result of the sell-off, some of the energy industry's best companies' shares are in the bargain bin and trading at prices far below reasonable valuations.

But the sharp declines many of these companies have seen defy logic, at least from a long-term investment perspective, as they are positioned to take ongoing advantage of what is surely a long-term trend -- oil and natural gas generated and consumed in North America.

One prime example of the market giving up on quality is the exploration and production giant Apache (APA), which is selling at a forward price-to-earnings ratio of 6.8, or just under half that of the S&P 500's 12.9 P/E.

This at a time when analysts are giving Apache shares 20 "buy" recommendations and six "buy/holds," while Standard & Poor's has a price target on its shares that is a 65% premium to its current price.

Yes, there's oversupply in many energy commodity sectors in the U.S. today, especially of coal and natural gas. But a long, hot summer could knock that down significantly as air conditioner use skyrockets. And longer term, domestic demand for North American shale oil products and natural gas is assured as big consumers such as utlities switch over to them.

Standard & Poor's analysts wrote in May that "despite the recent pullback in (exploration and production) equities, we are positive on the fundamentals of the group and think valuations are inexpensive relative to historical ranges."

It said that the industry's earnings per share grew about 27% in 2011, and although it's expected to slip 3% in 2012 on lower oil and gas prices due to the current big supply and because increased production from onshore shale plays have pressured spot prices, "we think the group is generating strong production growth, especially onshore U.S., which will help drive cash flow growth over the next several years."

Similarly, oil transport and storage, which includes companies that own pipelines and tank farms, have seen their earnings hurt by lower oil and gas prices in the near term, long term they are in a sweet spot given that they own or control unique infrastructures that are virtually impossible to duplicate and that can only bode well for long-term earnings and cash flow.

Here are seven highly rated North American-focused energy stocks with excellent long-term prospects ranked in inverse order of the number of analysts' "buy" ratings:

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