Where I'm headed with this argument is that Wall Street publishes a lot of good research, but it needs to be coordinated and then filtered by independent thinkers, like myself, before being summed up in a single presentation. That's the rationale behind the myGrassroot concept I have been working on.

My problem is like your problem, lack of time. Here it is a glorious Thanksgiving Day (in Canada) and I'm reading and preparing investment reports for readers " pro bono at that. You can tell I love doing this or I'd be doing something else.

My first report today is on Oil & Gas (the next is on Metals and metal miners if I can get to it). It's actually a summary of what I gleaned from several recent Morgan Stanley reports. MS is like a dozen or more others I receive research on. I wish I had the time to put them all together.

Someday soon I will because I'm driven by this need to do something tomorrow that is better than I can do today. You see, I compete against myself " if that sounds logical.

This week's report by Morgan Stanley Research on the Integrated Oils, Refiners and Marketers contains in-depth studies of costs and of supply and demand factors. Download MS Oct 2 report on Integrated Oil, R&M.

This Morgan Stanley report on the European Oil & Gas companies contains a review of the key drivers: (i) the commodity prices, which have led to earnings forecast increases through 2006, (ii) volume, which is increasing, but now not expected to be by nearly as much, and (iii) capex, which is now expected to be significantly higher than MS forecasted at the start of 2006. Download MS Oct 3 report on Oil-Europe.

This Morgan Stanley report on the Contract Oil Drillers delves into the reasons for volatility, some ways to price the stocks, and the importance of new technology in an "old economy" industry. Download MS Oct 2 report on Oil Drillers.

You will have to click on these links to the Morgan Stanley reports or the rest may be difficult to comprehend.

Also, you can't read any of this stuff unless and until you know what the bias is, and by that I simply mean the publisher's assumptions and how those have been changing in recent months.

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MS Commodity Price Assumptions and Changes Since Start of 2006:

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So you can see that MS is "constructive on the outlook for prices of crude oil and margins in refining on a global basis. (Their) projection for prices of crude oil are unchanged, with prices slightly higher than projected in the most recent quarter. For 2007-2008, (their) favorable outlook for global markets of crude oil remains as well, with (a) fundamental assessment suggesting that crude oil is fairly valued near $60-65/bbl during the 4th quarter of 2006 and full year 2007. (Their) analysis suggests that full year 2006 is likely to conclude, with prices of crude oil near $60/bbl (WTI); Seasonal correction likely complete. Inventories adjusted for demand relatively low, and with demand set to rise seasonally, prices likely to firm (to $65 for full-year 2007)."

The MS Outlook for Refiners and Marketers is also "Constructive" because: "Near-term, shut-ins of uneconomic production and turnarounds are likely to lower supply, and lift spreads in coming weeks. Winter demand becomes the driver thereafter. For 2007, the multi-year pattern of higher highs and higher lows will likely transition to a plateau, but at high levels."

In terms of Earnings Estimates For Integrated Oils, and R&M, some of these have been revised downward for 2006, but not for 2007. They say: "Prices for crude oil likely to approximate our projections with natural gas and refined products lower than expected in Q4 2006. Integrated Oil and R&M estimates lower by 2% and 11% for full year 2006. No changes for 2007."

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MS Chart on the Supply and Demand Drivers for Oil Prices

MS Chart on the Finding and Developing Cost Drivers for Oil:

MS Chart on the Economics of Oil Supply:

MS Chart on the Growth in Oil Supplied by Non-OPEC Countries:

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How does this analysis factor into their current earnings estimates for the stocks their research dept covers? They say: "Prices for crude oil likely to approximate our projections with natural gas and refined products lower than expected in Q4 2006. Integrated Oil lower by 2 pct and R&M estimates lower by 11 pct for full year 2006. No changes for 2007." Here's the table: MS 2006 Earnings Estimates for Integrated Oils and the Refiners—

What is the MS outlook for the stocks? They have maintained an Over-weight rating for Integrated Oils and In-Line rating for Refiners and Marketers. They say: "Relative valuation is attractive at this time on a variety of measures. Our favorite Integrated Oils are Marathon (MRO, $77, Overweight, target $102), ConocoPhillips (COP, $60, Overweight, target $80), Petrobras (PBR, $84, Overweight, target $115) and Exxon Mobil (XOM, $67, Overweight, target $78). Our top picks in R&M are Valero (VLO, $51, Overweight, target $80) and Sunoco (SUN, $62, Overweight, target $97).

As readers know, I like PBR and XOM as Integrated's in the Cara 100. But, MRO and COP look sound as well for the reasons MS gives. MRO stands to do well as a refiner of the Canadian oilsands heavy oil.

As for the European Oil & Gas companies, MS does a good job discussing how the higher commodity prices have led to earnings forecast increases through 2006, but how volume, although increasing, is now not expected to rise as much. Moreover MS believes that capex (outside North America where the President has convinced the domestic oil companies that share buy-backs is more important than capex), will be significantly higher than MS had earlier forecasted, for the rest of the world.

This report from MS Europe goes into detail about the economics of the oil & gas industry.
One point they make is that "OPEC policy is likely to remain focused on the ‘right price for producers and consumers', with lower supply likely to materialize if prices decline below $60/bbl for WTI, or $55/bbl for the OPEC basket. OPEC rationalizes its desire for higher petroleum prices via the changing petroleum price and economic growth paradigm, and by the desire for more equitable sharing of wealth between rich consuming, and poor producing countries around the world."

They also state: "longer-term, prices of crude oil appear fairly valued near $55/bbl today, rising to $65/bbl by 2010, in our opinion. Our projections for prices of crude oil over the longer-term assess the economics of supply, which represents the typical approach on Wall Street, but also the economics of demand for crude oil. Our analysis includes assessment of: 1) upstream reinvestment economics, 2) marginal production economics for distillation capacity (refining), and 3) re-investment economics for distillation capacity; While
we concluded following meetings with OPEC leaders in the Middle East (Saudi Arabia, Kuwait, Qatar), that the appropriate price of crude oil was $30/bbl (2000), then $35 (2002), then $40 (2004), and more recently $50-55/bbl; our analysis suggests that significant economic harm is unlikely until petroleum prices approximate $85-90/bbl."

MS also gets into the discussion of Non-OPEC Supply Growth, which they say is set to Rise in 2007: "In 2007, supply growth in non-OPEC areas is likely to rise, with production growth likely to approximate 1.4 MMBPD. The gains that we envision are likely to emanate from Angola, Azerbaijan, Australia, Canada, Kazakhstan, Latin America, Norway, Russia, Sudan, the UK and the US." Several charts they give are interesting.

For Europe, the MS theme for 2006 is: Earnings up, volumes down and capex up.

They state: "Since January, we have raised our earnings numbers by 15% for 2006 and by 19% for 2007 driven by upward revisions to our oil price forecasts. However, our volume expectations have been significantly reduced for this year and next (-5%), while capex increases have accelerated substantially with our estimates raised by 8% for 2006 and 15% for 2007; (But) long-term FCF is down, leaving us at inflection point. The net result of our changes is that for the first time in many years we are witnessing a reduction in our long-term free cash flow estimates (some -10% in 2008). Cash margins are being squeezed and are likely to narrow further if the macro momentum slows.

For 2007 in Europe, the MS theme is: Capex increases, cash return and increased M&A.

They state: "We firmly believe our upstream capex numbers are likely to increase and could be up to $14bn or 20% too low for 2008. Gearing is forecast to fall next year and the risks to our buyback numbers are biased to the upside. With unprecedented strength in balance sheets and access to resources increasingly difficult, we argue M&A activity will accelerate;Too late to sell. Oil prices remain high, our forecasts for next year look robust and we believe there is a risk that longer-term oil prices move higher. Following the recent sharp pullback and with the integrateds now trading on single digit P/Es, we believe there will be better opportunities to reduce weightings in Energy.

MS tells us that "the following are the key drivers to the earnings revisions we have made progressively through the year:

• Commodity price rises — These have fed through to increases in net income forecasts. Our earnings estimates for 2006 have risen by 15% since January.

• Volume assumptions have been falling — We have substantially pushed back some of the growth we had been expecting from the integrated oils. This has effectively deferred the expected growth to 2007 and 2008, but left growth benign in 2006.

• Capex increases have been substantial since the start of the year and there is a risk of further increases to come through. Perhaps the most important observation from this edition though is that for the first time in years we have downgraded our long-term free cash flow forecasts in Europe over the course of the first nine months of the year. This is despite the fact that we have upgraded our oil price forecasts for each of the forecast years that we show. The main culprit is capex where we have continued the trend of increases to this and future years, but at an accelerated pace. We have increased our capex forecasts in Europe alone for 2008 by some $13 billion. This has more than offset the increase in net income generated from the higher-than-expected commodity price environment;In the short term, we expect to see energy markets tighten as we come out of the shoulder demand months and enter the winter demand season. This could also be complemented by OPEC action or at least a fear that OPEC might cut production — which in turn may put upward risk on our numbers once again. We think that on a 6-month view, even for those investors worried — and rightly worried — about the deteriorating fundamental positioning of the European sector, there will be better times to reduce positions. We retain an Attractive view versus the market for Energy, but firmly expect the more leveraged plays (Services, Russians and E&Ps) to drive that out-performance, with the European super-majors likely to continue to lag Energy and offer a performance comparable to the market.

The Contract Drillers have always confused me, and apparently Morgan Stanley as well. MS gives the reader an elaborate explanation of risk in this sub-sector " lengthy, but worth reading:

Background

"The valuation methodologies we use vary as the earnings cycle develops. At the (perceived) trough, we essentially want to answer the question, "how low could it go?" We favor an investment approach that has a bias towards value at this point, not momentum. We assess where the risk/reward is decidedly more attractive for accumulating longer term positions using normalized earnings, price-to-book, price-to-sales, and for the offshore drillers, net asset value. We often concentrate more on the offshore drillers at this point of the cycle given the tangible asset valuation that is obtainable versus the uncertainties in earnings. Such a value approach however does carry the risk of being early. As the earnings cycle begins to turn up, we use a two year forward earnings multiple, as well as a 12-month forward rolling multiple, price-to-book, price-to-sales, and a peak earnings analysis. The peak earnings analysis offers insight into what the stock could be worth once the EPS revision phase of the cycle really kicks in. For the offshore drillers, we continue to use a net asset value assessment, but also use an EV/EBITDA multiple, CEPS and peak earnings. Our two year forward earnings multiples are based upon prior cycle ranges (see "Trading and Valuation Summary" in this report). The average multiples achieved at the equity peaks of the previous two cycles were 19−23x with a range of 18−33x. The North American natural gas levered stocks typically achieve the higher-end of this range in the early stages of the cycle as the discounting mechanism is rather substantial in these stocks. The later cycle stocks typically include the equipment names, particularly sub-sea. As the earnings cycle matures, momentum often overtakes value as the market digests an onslaught of upward earnings revisions. While the net asset value assessment for offshore drillers is still useful, it becomes more of a reality check. At this stage, the two year forward consensus earnings begin to narrow the gap with peak earnings assumptions, and a two-year forward multiple is placed on these "best case" pricing and utilization scenarios for the services and equipment. Net Asset Value (NAV) is one of the more useful exercises in terms of identifying support levels for the asset intensive offshore drilling stocks. Depending on the mix of assets, a typical price/NAV support level has been 70−100%, while the upside is near two times NAV. The variance in the multiples on net asset value is largely a function of the fleet composition. Today the horsepower is in the deepwater, whereas in prior years, a bias toward jackups yielded a wider trading range. We calculate a NAV/share by applying a vendor published second-hand market value to each rig within a company's fleet, then grossing up to a fleet market value plus other assets, then adjusting for debt.

Investment Risks

The Oil Services and Equipment industry is one of the most volatile and unpredictable industries in the "old economy." The main investment risk is the overall health of the global economy, although with particular interim risk exposure to the fiscal and geopolitical uncertainties in areas including, but not limited to the Middle East, Latin America, Russia, Southeast Asia, and West Africa. In North America, E&P spending is
highly susceptible to changes in oil and natural gas prices, more so in the short-run than any other region due to the dominance of the spot market and independents.

Main Investment Risks include:

􀂾The health of the global economy and its impact on the global demand for oil and natural gas.

􀂾Merger and acquisition activity among operators typically has a negative impact on spending budgets.

􀂾Capacity expansion in long-lived assets such as marine seismic, pressure pumping equipment, and drilling rigs, particularly speculative newbuilding.

􀂾Changes in fiscal terms (taxes) on oil and natural gas production in the major drilling basins including, but not limited to the Gulf of Mexico, Venezuela, Mexico, Brazil, Argentina, North Sea, West Africa, Southeast Asia, Russia, and the Middle East.

Adoption of new technology is often slow in the oilfield. There is meaningful risk to companies whose success is predominantly dependent upon a single new technology and the acceptance of that technology; We believe real-time data integration and reservoir modeling will represent the fastest growing segments of the oilfield in the years ahead.

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Global OS, D & E Valuation Summary

2008 EPS Estimates and Price Targets: Oil Services & Equipment

2008 EPS Estimates and Price Targets: Oil Contract Drillers

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The MS charts related to various pricing methodology may be helpful:

Price/Nav Trading Range:

Price/Book Trading Range:

Price/Sales Trading Range:

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For the Cara 100, here are the Daily-Weekly-Monthly charts with RSI values:

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CNOOC [GICS 10, Cara 100] (CEO: Yahoo Finance file) (CEO: StockChart chart) (CEO: Investertech chart) (CEO: ADVFN Financial Data) (CEO: ADVFN Financial Data)

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Chevron Texaco Corp [GICS 10, Cara 100]
(CVX: Yahoo Finance file)
(CVX: StockChart chart)
(CVX: Investertech chart)
(CVX: ADVFN Financial Data)
(CVX: ADVFN Financial Data)

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EnCana Corp [GICS 10, Cara 100]
(ECA: Yahoo Finance file)
(ECA: StockChart chart)
(ECA: Investertech chart)
(ECA: ADVFN Financial Data)
(ECA: ADVFN Financial Data)

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Imperial Oil Ltd [GICS 10, Cara 100]
(IMO: Yahoo Finance file)
(IMO: StockChart chart)
(IMO: Investertech chart)
(IMO: ADVFN Financial Data)
(IMO: ADVFN Financial Data)

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Petroleo Brasileiro S.A. [GICS 10, Cara 100]
(PBR: Yahoo Finance file)
(PBR: StockChart chart)
(PBR: Investertech chart)
(PBR: ADVFN Financial Data)
(PBR: ADVFN Financial Data)

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PetroChina Co [GICS 10, Cara 100]
(PTR: Yahoo Finance file)
(PTR: StockChart chart)
(PTR: Investertech chart)
(PTR: ADVFN Financial Data)
(PTR: ADVFN Financial Data)

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Statoil ASA (ADR) [GICS 10, Cara 100]
(STO: Yahoo Finance file)
(STO: StockChart chart)
(STO: Investertech chart)
(STO: ADVFN Financial Data)
(STO: ADVFN Financial Data)

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Suncor Energy Inc [GICS 10, Cara 100]
(SU: Yahoo Finance file)
(SU: StockChart chart)
(SU: Investertech chart)
(SU: ADVFN Financial Data)
(SU: ADVFN Financial Data)

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TOTAL S.A. (ADR) [GICS 10, Cara 100]
(TOT: Yahoo Finance file)
(TOT: StockChart chart)
(TOT: Investertech chart)
(TOT: ADVFN Financial Data)
(TOT: ADVFN Financial Data)

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Exxon Mobil Corp [GICS 10, Cara 100]
(XOM: Yahoo Finance file)
(XOM: StockChart chart)
(XOM: Investertech chart)
(XOM: ADVFN Financial Data)
(XOM: ADVFN Financial Data)
(XOM: Value Line Report Sep. 15: next one is due Dec. 15)

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The Data charts from Investertech for two of these ten are wrong for the Weekly and Monthly. I have given up asking for charts to be fixed.

In any event, if you combine these Oil & Gas reports from Morgan Stanley with others I have uploaded from UBS, ML, DB, CS, BS, Citi, BMO, TD, RBC, Peters, and others, you should be able to put it all together.

The bottom line is that Oil is not going back to 35 or 45, and the global economy will pick up, which will help stabilize commodity prices and corporate earnings at about these levels. Yes, there may be a broad market sell-off, but it's time to stop selling the Oil & Gas stocks. There are some good companies, like my Cara 100, among others like MRO and VLO, that will do well.

Buy on weakness; sell on strength. It is not any harder than that. You just need confidence that the asset you are buying is a high-quality one.