HOUSE_OVERSIGHT_014873.jpg

Unauthorized redistribution of this report is prohibited. This report is intended for jake.byrne@baml.com Hess Corp. Inflection point: adding Hess to BofAML’s US 1 ‘best ideas’ list Reiterate Rating: BUY | PO: 80.00 USD | Price: 49.97 USD Short interest ratio: catalyst for recovery Over the past six months Hess has been one of the most volatile stocks in the sector, facing headwinds from a significant increase in short interest that has exaggerated volatility. From discussions with investors, the arguments against Hess seem to begin and end with a combination of declining production and an expanding balance sheet — all part of the deliberate portfolio choices that favored completing major projects at the expense of short cycle production. We expect this to end in 2Q17 with a rebound in oil and gas production starting in 2H17 and critically, an inflection in free cash flow that we expect will return Hess to free cash flow with the flexibility to re-up investment in the Bakken. We thus would view Hess as a dangerous ‘short’ for investors seeking to hedge other portfolio risks. Inflection point on multiple levels right around the corner We believe Hess’ investment case is approaching an inflection point on multiple levels. We expect oil and gas production to trough in 2Q17, with a rebound of 60,000 boepd or 22%, by 4Q17 marking the single biggest sequential change in production of any company in the sector. This is likely to kickstart an extended period of growth in 2018/19 but with the contribution from Guyana driving a step change in Hess’ growth trajectory through 2025. Near term, we think Hess is also poised for an inflection in free cash flow that is reasonably $1bn annualized, with $700mm irrespective of oil prices. Versus consensus operating cash flow of ~$1.9bn in 2017, this stands out as the biggest swing in free cash of any company in the sector. Adding Hess to US 1 ‘best ideas’ list After a year of waiting, we believe the inflection point in Hess’ investment case is just around the corner, with the broader sector pullback positioning the shares with amongst the highest upside in the sector as implied by our price objectives. At current levels, Hess ‘discounts’ strip oil prices. Under our base case, which assumes a rebound in oil prices towards $70 from 2020 fair value is reasonably ~$80 per share. If mon-producing asset value from Guyana is included we estimate this would be closer to $90. BofAML’s US1 list is a collection of the firm’s best investment ideas managed with the goal of providing superior investment performance over the long term. For Hess, we believe the combination of catalysts, short interest and absolute value can drive a period of strong relative outperformance vs peers. For this reason, Hess replaces DVN as the energy stock on BofAML’s US 1 list. Estimates (Dec) (USS) 2015A 2016A 2017E 2018E 2019E EPS (3.92) (4.94) (3.75) (1.46) (0.76) GAAP EPS (10.77) (19.92) (3.75) (1.46) (0.76) EPS Change (YoY) NM -26.0% 24.1% 61.1% 47.9% Consensus EPS (Bloomberg) (3.03) (2.09) (0.45) DPS 1.00 1.00 1.00 1.00 1.00 Valuation (Dec) 2015A 2016A 2017E 2018E 2019E PIE NM NM NM NM NM GAAP P/E NM NM NM NM NM Dividend Yield 2.0% 2.0% 2.0% 2.0% 2.0% EV / EBITDA* 17.2x NM 9 9x 6.4x 5 Ax Free Cash Flow Yield* -13.2% 87% 3.8% -0.3% 3.7% * For full definitions of sQnethod™ measures, see page 11. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 12 to 14. Analyst Certification on page 10. Price Objective Basis/Risk on page 10. 11731481 Timestamp: 11 April 2017 05:30AM EDT Bankof America Merrill Lynch Equity | 11 April 2017 Doug Leggate Research Analyst MLPF&S +1 713 247 6013 doug.leggate@baml.com Kalei Akamine Research Analyst MLPF&S +1 713 247 7880 kalei.akamine@baml.com John H. Abbott Research Analyst MLPF&S +1713 247 7144 john.h.abbott@baml.com Stock Data Price 49.97 USD Price Objective 80.00 USD Date Established 8-Dec-2016 Investment Opinion B-1-7 52-Week Range 45.12 USD - 65.56 USD Mrkt Val (mn) / Shares Out 15,656 USD / 313.3 (mn} Average Daily Value (mn) 198.56 USD BofAML Ticker / Exchange HES / NYS Bloomberg / Reuters HES US/ HES.N ROE (2017E) -8.6% Net Dbt to Eqty (Dec-2016A) 26.1% HOUSE_OVERSIGHT_014873