With the U.S. equity markets continuing to test new highs, value stocks are becoming harder to find. Still, despite a broad market that appears fairly valued, I think there are still several bargains out there, especially in the energy sector. With that said, let me highlight two oil and gas producers that I believe could be significantly undervalued.

Ultra Petroleum
First up is Ultra Petroleum (OTC:UPL), a natural gas producer with primary assets located in Pennsylvania's Marcellus shale, Wyoming's Jonah and Pinedale fields, and Utah's Uinta basin. Though the vast majority of the company's production consists of natural gas, Ultra's recent acquisition of liquids-rich assets in the Uinta will help meaningfully improve its commodity mix.

Photo Credit: Flickr/Nicholas A. Tonelli.

This year, the company plans to reduce capital spending in the Marcellus, where wide basis differentials are affecting the profitability of its operations, and to ramp up spending at its highest-rate-of-return opportunities in Wyoming and Utah. Thanks to extremely low production and development costs, the company's operations in Wyoming and Utah offer exceptional economics even at low oil and gas prices.

For instance, its Wyoming assets can generate returns in excess of 70% at a gas price of $4.50 per MMBtu, while its Utah assets are expected to earn returns greater than 500% at a wellhead oil price of $80 per barrel. As a result, the company expects to deliver 40% growth in cash flow and EBITDA, which could actually prove to be conservative, given its exceptional performance in Utah so far, where current production is significantly higher than the company's guidance.

The main reason I believe Ultra Petroleum could be meaningfully undervalued is because the value of its assets is significantly lower than its enterprise value. Under an increased investment scenario assuming a $4.50 per Mcf wellhead gas price -- roughly the current spot price -- the PV-10 value of Ultra's proven reserves, defined as their pre-tax future net cash flows discounted at 10%, comes out to $8.5 billion. That represents a roughly 25% discount to its current enterprise value of around $6.3 billion, suggesting significant upside.

Devon Energy
Next up is Devon Energy (NYSE:DVN), one of the largest independent exploration and production companies in the U.S., with sizable stakes in premier North American liquids-rich resource plays, including the Permian Basin, the Eagle Ford shale, and Canada's oil sands. Largely because of outmoded concerns regarding its exposure to natural gas and depressed prices for its oil sands production, the company currently trades at just over 10 times forward earnings -- a significant discount to its peers.

Photo credit: Flickr/Paul Lowry.

By comparison, shares of EOG Resources (NYSE:EOG), Hess (NYSE:HES), and Chesapeake Energy (OTC:CHKA.Q) -- similarly sized oil and gas producers with operations in many of the same U.S. shale plays as Devon -- currently trade at 16.4, 17.8, and 11.4 times forward earnings. While the discount to Hess and EOG is perfectly reasonable, given those companies' much greater exposure to liquids, the discount to Chesapeake seems unwarranted.

Not only are Devon's production and reserves more liquids-weighted than Chesapeake's, but its oil growth prospects are also much stronger. Devon expects full-year oil production to average between 210,000 and 230,000 barrels per day this year, which represents 25% growth from fourth-quarter levels alone. By contrast, Chesapeake expects to grow its oil production by just 1%-5% this year.

In addition to its strong prospects for oil production growth, Devon also retains a great deal of natural gas optionality that offers tremendous upside should gas prices rise significantly in the years ahead. It also boasts a phenomenally strong balance sheet, with more than $6 billion in cash and equivalents that gives it a great deal of flexibility to weather commodity price downturns and other challenges.

Over time, I suspect, the markets will stop overlooking Devon and recognize it for the exceptionally well-managed company that it is. This should help bring its valuation closer in line with some of the peers I mentioned. Analyst price targets for the stock range from the low $70s per share to the mid-$80s, the latter of which represents more than 30% upside from Devon's current price of around $64 a share.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.