U.S. oil and natural gas producer Stone Energy (NYSE:SGY) did well for itself in 2003. Net income jumped 142% on an almost 35% bump in revenues. Better yet, the company replaced 143% of production volumes with organic growth in reserves. Indeed, with 85% of 52 drilled wells producing, Stone Energy is a (light) sweet combination of a cash gusher that is more than replacing reserves.

For the fourth quarter, Stone earned $1.02, up 40% year over year. That handily beat analyst estimates.

Stone benefits greatly from its U.S. location and, with natural gas accounting for 60% of revenue, is leveraged to an asset in short supply. While there is plenty of natural gas in the world -- and it is cheap at its source -- the cost to transport it to the U.S. is substantial. Long term, Stone's prospects look good, as do those of other domestic natural gas producers.

When compared to its peers on the New York Stock Exchange, Stone's 44.5% operating margins stand tall relative to those of Cabot Oil & Gas (NYSE:COG) and Houston Exploration (NYSE:THX). They also stack up nicely compared to the less-than-10% margins that characterize the integrated oil companies like ChevronTexaco (NYSE:CVX) and BP (NYSE:BP).

Since going public in 1993, Stone has grown its estimated proved reserves by a compounded annual rate of 24%. And, unlike Royal Dutch/Shell -- represented by two trading stocks, Royal Dutch (NYSE:RD) and Shell Transport (NYSE:SC) -- there is little cause to worry about the reliability of those reserve estimates. Stone uses an independent petroleum consultant to classify its reserves.

But don't think Stone takes anything for granted. The company has hedges in place for 2004 that allow it to participate in price rises but protect the company if prices fall below certain thresholds. This conservative approach is settling for shareholders concerned about the up-and-down nature of the oil and natural gas business.

Of course, no story is without risks. If there's a tumbleweed on Stone's acreage, it's the $370 million in debt -- but there is good news there, too. The company used its cash flow to reduce debt by $61 million in 2003.

Perhaps surprisingly, given a 44% runup over the past year, the stock still looks cheap. Natural gas is a good place to be for domestic producers, especially those smart enough to use cash flows to strengthen their balance sheets. At 10 times earnings, Stone is a steal.

W.D. spent a summer working in a Mobil Oil refinery, and has not lost his love for the smell of oil. If you would like to discuss Stone's future with other investors, or the oil industry in general, check out our Oil and Gas discussion board.

Fool contributor W.D. Crotty owns stock in ChevronTexaco.