Until about a week ago when Nigerian rebels threatened to attack major oil facilities in their country, which produces about 2.6 million barrels a day, Wall Street’s two-year romance with energy stocks showed definite signs of cooling. However, in reaction to the rebel threats, energy stocks staged a brief rally after many had recently fallen about 8% to 15% from their 52-week highs.

Spurring the recent skid in energy stocks was a hefty drop in the price of oil to a recent low of about $58 a barrel from more than $70 before a slight rebound to the low $60s. Warm weather in January and building inventories helped spur the falling oil price. Brokerage downgrades of selective energy companies also contributed to the stock drop. None, as far as I can tell, is issuing a bevy of outright sell recommendations. Rather, it’s often a case of switching an investment rating from a buy to a hold.

Still, energy shares are way ahead of the game, having risen a blistering 28.8% in 2004, followed by another 29.1% gain in 2005.

To money manager Tom Postin of Los Angeles-based P&W Partners, the recent decline in energy stocks was a buying opportunity. And he did just that, fattening his energy holdings. “You’ve got rising demand and diminishing supply, which are likely to remain in effect for quite a while,” he says. “Sure, the stocks are up, but many are still cheap on fundamentals.”

Supply-demand factors and the ongoing danger of supply disruptions, he argues, suggest that the prices of oil and energy stocks are headed up. “It’s just too soon to say goodbye to the energy sector,” he says. His favorite plays: Occidental Petroleum, which was the subject of some takeover speculation about a week ago, and Schlumberger.

About a month ago, Alan Gaines, a former institutional energy analyst and currently CEO of Dune Energy, a small Houston-based oil and gas producer, predicted that in six months the price of oil would hit $80 a barrel, while prices at the gas pump would climb to $4 to $5 a gallon.

Mr. Gaines, who still thinks that may happen over the summer, observes that supply-demand equations for oil and gas are precariously balanced and any disruptions in the hot spots, such as Iran and Venezuela, could jack up oil prices considerably. Further pointing to higher oil prices, he says, are insufficient incremental capacity and problems at the refining level.

Given the big gains in energy stocks, Mr. Gaines figures the easy money has already been made and greater selectivity is clearly called for. Still, he feels that for the next three to five years the energy sector should be overweighted in portfolios.

Among the big names, Conoco Phillips – which recently made a $34 billion offer for Burlington Resources – is viewed by Mr. Gaines as the cheapest major oil company around. Two other favorite biggies are Comstock Resources and Anadarko Petroleum. Mr. Gaines personally owns all three stocks. Among smaller names – which he also owns – his top picks are Carrizo Oil & Gas, Range Resources, and Allis-Chalmers Energy.

Like a number of Wall Street types, Mr. Gaines sees a wave of industry consolidation. The simple matter is it’s cheaper to buy reserves than to drill for them, and Mr. Gaines believes Wall Street (via takeovers) “is a good place to buy reserves on the cheap.” His favorite buyouts – again stocks he owns – are Marathon Oil, Pogo Producing, Murphy Oil, Range Resources, and Anadarko Petroleum.

The Complete Investor newsletter, noting how hard it’s becoming for big oil to keep up with the world’s growing energy needs, also looks for big oil to swallow small oil to fatten its reserves. By picking the right takeover candidates, ones that also possess solid fundamental prospects, the newsletter argues returns of as much as 20% on your money are in the offing. A big plus is said to be a projected 35% to 50% rise this year in major oil companies’ exploration and production budgets.

Its juiciest takeover targets are five North American companies that are thought likely to fetch 20% to 25% premiums above prevailing prices in any buyout. They are Devon Energy, EnCana, KCS Energy, Noble Energy, and XTO Energy.

Asked about recent takeover speculation, Occidental Petroleum, which has a market capitalization of about $38.7 billion, declined to comment.