In a new Morgan Stanely report, Stephen Richardson says the dominant theme of 3Q earnings season has been capital preservation. "The ability of the industry to withstand a prolonged period of weak commodity price and tight credit remains a key market focus. Downward revisions to '09 capex budgets have continued (now down $9 billion or about 30% from initial expectations from a cross section of industry players). While seismic and leasehold acquisition budgets have been reduced first, the magnitude of reductions have extended to reduced drilling activity. As 42% of U.S. land rigs are in the hands of private operators, our channel checks suggest that the operating environment for these operators is more dire than the public E&P's. As a result, we continue to gain confidence in our view that rig count reductions will drive a rapid supply side response in natural gas. Our baseline assumption remains an approximate 500 rig reduction during '09 driving flat year-on-year production. "Growth still matters. As E&P's revise capital allocation and adjust the growth outlook, the equities remain vulnerable to outsized growth expectations. As a result, we remain focused on areas where the growth outlook is more secure despite commodity volatility. Highlighting the growth vs. liquidity debate is ExxonMobil's 3Q results where an 8% production decline year-on-year overshadowed an unrivaled capital position. "Natural gas is still facing near-term headwinds. The November NYMEX contract went off the board at $6.47 per thousand cubic feet and December is now trading at $6.78. Despite a number of forecasts calling for a colder than normal winter, the cash market can be expected to remain weak until seasonal demand patterns arrive. We are monitoring lower natural gas liquids fracs which are likely contributing to more near-term production, and liquidfied natural gas imports, where two additional LNG loads arriving in November are likely to re-introduce an element of import risk that has been absent from the market for much of 2008."