?Now that the First National Bank of Ben and Hank has taken over the country’s banking system, the president-elect will become commander in chief and banker in chief. Capitalists who benefited from 30 years of deregulation, relying on Adam Smith’s invisible hand to make sense of a free marketplace, have been slapped. They are angry, disillusioned, worried—and resigned to the new world order.


They may bemoan what has happened, but how could it be otherwise? The complex web that is the world’s financial system forced no other choice. Buyers and sellers of credit-default swaps first held by Lehman Brothers alone included 350 other institutions around the world! The whole mess is essentially one vast global margin call.


Cash is king. The flight to quality is so overbooked, angry passengers are lined up 10 deep at the ticket counter.


In the oil and gas world as in the financial world, risk has new respect and asset valuations are so redefined, they hold up M&A activity. Resource plays still boast tons of long-term potential, but their current value is down because immediate cash flow is what everyone needs.
Energy equities are undervalued. But here’s the thing: “Bull markets are born on pessimism, grow on skepticism and die on euphoria,” said the late, great investor Sir John Templeton.


Therefore, the next bull market is right around the corner. It’s a question of timing.


For Templeton’s wise comment, I thank Jim O’Mealia, president and chief investment officer of Sunnymeath Asset Management Inc. in Red Bank, New Jersey, who cited it in his last performance update. O’Mealia reminds us that, after the 1974 market lows, stocks rebounded 42% in the next 12 months. After the October 1987 crash, they rose 23%, and after the 2002 bottom, they regained 33%.


You do have to wonder, however, what the rally will look like this time. After all, the U.S. economy, long a beacon of deregulation and free markets, has popped like a balloon. Last month, irrational exuberance about the economy, the stock market, real estate, consumer spending—even about E&P plays—turned into irrational fear. Even healthy, cash-rich companies and individuals have adopted a more measured tone, a conservative stance.


We have seen this scenario occur before.


In October, during the height of the crisis, the analysts at Houston-based Tudor, Pickering, Holt & Co. Securities issued this cryptic, yet eloquent summation, after Bush signed the $700-billion bailout into law: “Rules changing in middle of game.?Can’t short stocks. Government bailout. Too big to fail. Clamor for everyone to put nose in trough.?Much truth and necessity in some of this.?But capitalism built on back of smart people climbing over skeletons of dumb ones.?Now politicians controlling process?


“Next decade of this business almost certainly less fun/interesting/profitable than past decade.?Stepping off soapbox now.”


Love those guys—you always know exactly what they think. No dancing around.


As of October 6, E&P stocks, as measured by the S15OILP (the S&P 1,500 E&P sub-index), had their gains retraced, going back to the June 2005 level of 405, according to a Pritchard Capital Partners report. “This is 34% below the level seen in December 2007 of 609, which was the last time that the forward 12-month curve on gas was at current levels of $7.47 per Mcfe. The implication: Equity markets are anticipating further liquidity-driven selling in the Nymex gas forward curve.”


Pritchard also noted the decline in the OSX (Oil-Service Index) from the 359.61 peak on June 23, 2008. But that likely means a rally is coming.


This has several precedents. “In the past 10 years, the OSX has fallen by more than 20% on four occasions. The largest decline was a 67% drop from November 5, 1997, to October 8, 1998, when the combination of lower energy consumption, higher OPEC production and the Asian currency crisis sent prices into a downward spiral.?However, this was followed by a 201% increase over the next two years.”


Pritchard says similar rallies occurred after other large meltdowns. “We have also seen a 22% decline starting in January 2006 and a 20% decline starting in October 2007, and both saw larger subsequent rebounds of 79% and 45%, respectively.”
So, the next rally may have begun by the time you read this. You just have to have abs of steel with a strong stomach beneath them to wait it out. In the meantime, I have now declared that I am too big to fail!

Remember that now is the time for you to call or e-mail us your suggestions for the annual Oil and Gas Investor Excellence Awards. Go to OilandGasInvestor.com for the seven categories, criteria and list of prior winners. Nominate your own company or deal, or any other you think deserves industry recognition. We are eager to hear from you.

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