I have a 96 mercruiser mpi 502. I am getting moisture in the valve cover and milky sludge coming from the vent tube goin to arrestor. There is no trace of water in the pan or on dipstick. What could cause this? I changed the thermostat boat holds at 160. Also while getting on plane I'm noticing a lot of a steam from exhaust. Any help would be great thanks.

Cold water, condensation, once oil gets hotter then 212 the condensation will burn off. You can solve with oil thermostat, but really not needed.

Any other suggestions?

You running Merc recirculating pump set up or crossover ?

How cold is the water you are running in ?

Excessive Steam can be air temp/humidity......or it can be not pushing enough water thru the exhaust. Impellar/blockage/ or ?

How many hrs on engine ? Salt water use ?

I believe it's the recirculating pump, it's in a 96 donzi 27zx. All fresh water, 300 hours. I just replaced the impeller and thermostat. If I cover the vent breather while it's running and build pressure when I release it spits a couple drops of water.

I live in Orlando Florida water doesn't get too cold low 70s

Ayuh,.... Sure sounds like condensation,....

The cure is to run it harder, longer,....

I'm hoping, for him, it's not an exhaust valve guide leaking water....just trying to cover other basis.

might add a oil temp gauge as see where that is getting, needs to get over 200 to get rid of the moisture