Energy's Fundamentals Scream Value

On the supply side, natural gas and oil production depletion is more significant than in previous cycles, as the "low-hanging fruit" has been picked. Remember, we have more than doubled the number of rigs drilling for natural gas in North America in the past year, and net natural gas production has been slow to respond.

On the demand side, while high prices may have curtailed some demand, economic growth combined with strong demand from China, India and other developing regions will continue to pressure the market for more hydrocarbon supply. Until increased drilling and new technology bring us new supply, the markets will remain tight, and oilfield activity will remain strong.

Stormy Results

One other important note from the Schlumberger call: The company said the impact of Katrina and Rita will carry into the fourth quarter, costing 3 cents to 4 cents.

That type of talk will likely come from just about every exploration and energy service company with exposure to the Gulf of Mexico and, as with Schlumberger, it will affect earnings. While those opportunity costs are real, they also should be considered when looking at the overall strength of the energy markets.

While the real number for Schlumberger was 86 cents for the quarter (it's wrong to adjust that number for the lost profit from the storms), the lost opportunities are not lost forever. Rather, they are mostly delayed. Future demand for drilling rigs, oilfield services and other energy-related products is not only sustainable but is likely to grow into the coming year.

Also, as Schlumberger and Noble(NE Quote) both indicated on their conference calls Friday morning, as cash levels rise, even after reinvestment in the business, companies are likely to increase dividends and accelerate share buybacks, a move that will only enhance shareholder value in the coming months.