EFTA00638905.pdf

From: "Ens, Amanda" To: "jeffrey E." <jeevacation(a gmail.com> Cc: " Subject: RE: Buy Hess for levered oil upside Date: Fri, 30 Sep 2016 12:44:21 +0000 Attachments: Revisiting_Hess.pdf Inline-Images: image001.png BAML is making a call today to BUY HESS, in front of what we believe will be several catalysts.... Trade: buy $2mm HES 8% 2/01/2019 at 64.75 (HES A Pfd) ***We have a differentiated view and are making this call into a neutral Street view, and larger than average short position... What to Watch for... 1) Our XOM (Operator of Guyana asset) corporate Access meetings in London next week, 2) The Liza #3 well result in late Oct/Nov, and 3) The further recovery in oil forecasted by Francisco Blanch which will bolster HES cash flow and unit margins. KEY POINTS: • BUY Rated from Doug Leggate $85 PO... Street is Neutral with 17 Hold ratings • Hedge Funds are Short: 6 days of Average Daily Volume to cover the existing short position. • Guyana Exploration is a company maker, and not priced into shares now. • Guyana can add 30-50% to overall HES company reserves • CATALYST: Exclusive corporate access with XOM (Guyana operator) next week • CATALYST: Next Guyana well expected as early as HES 3Q 10/26 • Beyond Guyana... HES cash flow story is misunderstood as North Malay and Stampede run off. • Bakken assets offer optionality, while being under-owned relative to the Permian • HES is highly leveraged to oil...Our call is for $61 oil avg for '17, $70 mid-17. • $10 per barrel improvement in oil = $700mm in annual after-tax cash flow Why Buy Hess: 1. HES has a 30% interest in a project in Guyana (called Liza) that could be a transformational find. According to BAML Research, XOM confirmed a "world class discovery" in the Liza #2 well drilled in the waters off of Guyana. This asset in Guyana is not discounted in HES shares and could be worth $12-16/shr to HES. 2. HES currently has total reserves of —1.3b bls.. Per XOM, The Guyana discovery (called Liza) holds 800mm to 1.4B bls of reserves. HES has 30% of Liza (XOM the rest). Liza alone could increase overall HES reserves by 25-50%, and this ignores additional Guyana prospects. 3. Hess cash flow could theoretically expand by more than 40% in a flat oil price environment post 2020... Guyana could be worth $12-16/share to HES. 4. Guyana is a "Company Maker" for HES - No other company in the energy space coverage offers this kind of "company maker" event for investors with asymmetric upside. EFTA00638905 5. Beyond Guyana...HES's portfolio includes an industry leading position in North Dakota's Bakken Shale. As oil recovers, above $50 HES believes these assets deliver returns that are competitive with the Permian. This is part of the leverage to crude where HES suggests that A $10 per barrel improvement in the oil price would generate $700 million in additional annual after-tax cash flow. Investors will gravitate back towards Bakken assets in a crude recovery. Positioning: 1) Shares are +6% (vs a broader E&P sector performance of +15%), suggesting investors are not pricing in the Guyana discovery. 2) Hedge Funds are SHORT 1. This is a tailwind into the event, with an all time high short interest currently, while the 6 days of average volume to cover that short, is also near an all time high 2. Given the potential transformational nature of Guyana, we think investors cannot risk be short into this pending event. 3) —17% of the holders are passive, there is limited supply that could be used to cover shorts. Risks: 1) Exploration is not guaranteed, and the Liza tt3 well is not a sure thing, however this is mitigated by what I believe will be a short cover in front of the event in the next 4-6 weeks (as outlined above), where money can be made. 2) HES's Bakken assets do not work at current commodity prices, unlike core parts of the Permian and STACK. While this is true, investor dollars switch into Bakken names like HES as the commodity recovers into year end and next year, recall our commodity analyst Francisco Blanch sees $60+ crude 2H17 Report: Hess Corp. Revisiting Hess: unique option value from an overlooked, low risk, levered oil name. Following the failure at Skipjack, perceived absence of near term news flow has likely allowed Hess to underperform. Short interest has jumped. However with the change in OPEC strategy we believe the risk / reward skews back in Hess favor. Guyana is still being overlooked. A 20 prospect backlog could drive exploration news flow for the next 2 years. (Buy, PO: 85USD I Price: 52.15USD, Doug Leggate) Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, 5th Floor, New York, NY 10036 Phone: 212.449.7781 Mobile: 917.386.3280 The power of global connectionsTM ;:lcid:image001.png@01D1B4D 2.34B2F410 From: Ens, Amanda Sent: Friday, September 09, 2016 3:04 PM To: 'Jeffrey E.' EFTA00638906 Cc: Subject: Buy Hess for levered oil upside Jeffrey, • Heading into the winter, we see oil prices picking up again and reiterate our 2016 year-end WTI target of $54/bbl and mid-2017 WTI target of $69 • We prefer energy stocks over WTI for a longer term view o CFTC positioning looks overbought and September tends to be seasonally weak o Equity fund managers are still underweight the energy sector, which should lend support o We expect a rotation from defensives into cyclicals to further support energy equities • Hess is one of our top energy picks. Stock pulled back recently on their Skipjack well failure but this has no read through to their other prospects. We see considerable upside potential in their Guyana Liza project (appraisal in 4Q16). In our view, the market is not sufficiently pricing in Guyana upside. Our price target is $85 (70% upside from $50.00 currently). Let me know if you'd like to do a deeper dive into our analysis. Trade: buy $2mm HES 8% 2/01/2019 at 62.50 (HES A Pfd) • 6.4% strip yield, vs common stock at 2.0% div yield • It converts with a low strike of $39 (1.28 shares) and high strike of $45.82 (1.09 shares) at maturity in 2019 • If stock is up 25%, the preferred returns 25.1%. If stock is up 50%, the preferred returns 46.9% (held to maturity) • If stock is down 25%, the preferred returns -7.1%. If stock is down 50%, the preferred returns -32.7% (held to maturity) • $575mm notional, $725mm market value outstanding (good liquidity) We'll look to add names to Hess over time. Other top energy sector picks are DVN, CLR, MRO & COP. Additional market color following yesterday's energy short cover.... Oil is down modestly, refusing to chase yesterday's short cover, as the market digests the outsized inventory draws, which may be a one-off due to the storm and ship channel issues. While crude is down 1.5% in early trading, the next two weeks will also be impacted by OPEC statements and press reports. One notable issue right now though is that CFTC positioning is bullish right now going into a seasonal lull for demand. Does this mean buying power will soon be exhausted for the commodity ??...Time will tell, but September and October are not without their downside risks. While weakness may be bought, it is worth noting storm normalizations coupled with seasonal pressures in the Fall may lead to a modest crude correction. On the positive side and as Doug Leggate notes in his weekly, demand cover for both gasoline and distillate is now back in line with last year - underpinning a modest recovery in refining margins. And lastly, as Francisco Blanch notes today he still sees a $54 tgt for year-end WTI, followed by $60+ in '17 (See Report below). Yesterday was interesting with nearly 150bps of Energy sector outperformance vs the S&P 500 Index, led by what appeared to be a big wave of short covering where CHK, DO, APA, SWN, MUR were the top 5 performers in the S&P Energy and all having bigger than average short interests. Again, I have to draw from Doug's weekly (See Attached), which sums it up pretty well. The impact of a one week significant crude draw has shown up EFTA00638907 with a strong sector rally across the board, but where lower risk names are now laggards vs higher beta names. In a rising oil environment, this will be the pattern in our view, led by a short squeeze in the early stages of a commodity recovery. Conclusions.... We do not expect the recovery in oil prices to be a straight line. When overlaid with genuine improvements at the operating level, potential for outsize returns from higher beta names means the next 12 months will challenge stock selection with greatest opportunity for absolute upside lying within highest risk names. But there is middle ground where dislocations, portfolio rate of change and the potential for binary value recognition on longer dated assets all offer meaningful upside, without the need to accept lower portfolio quality or b/sheet risk. Research Focus.... Energy Weekly Back in 1Q16 we warned that an oil recovery would not be a linear event and projected a pullback in WTI prices to $39/bbl in 3Q16 on seasonal demand weakness (see Look out for Win WTI). Heading into the winter, we still see prices picking up steam again and reiterate our 2016 year-end WTI target of $54/bbl. Thus, we continue to see any dip in prices as a buying opportunity, albeit with a couple of risks. (Francisco Blanch) Oil Inventory Biggest weekly oil draw since '99: imagine what happens if markets rebalance. Crude oil stocks dropped 14.5mmb, the largest since 1999 as a result of storms that impacted waterborne imports. Oil prices drove a strong sector rally but where lower risk names are now laggards vs higher beta names. In a rising commodity price environment, this will be the pattern, led by a short squeeze in the early stages of a recovery (Doug Leggate) (This was prepared by a member of the Specialist Sales Team) Disclaimer: This material was prepared by Sector Specialist Sales personnel of Merrill Lynch and is subject to the terms available at the following link: http://oorp.bankoramerica.com/businessismbilandincilemaildisclaimedamericasiglobal-markets Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, 5th Floor, New York, NY 10036 Phone: 212.449.7781 Mobile: 917.386.3280 The power of global connections"' ;icid:image001.png@0lD1B4D] 2.34B2F410 This message, and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. 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