EFTA00803308.pdf

Hess Corp. Bank of America e Inflection point: adding Hess to BofAML's Merrill Lynch US 1 `best ideas' list Reiterate Rating: BUY I P0: 80.00 USD I Price: 49.97 USD Equity 11 April 2017 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 Doug Leggin Research Analyst discussions with investors, the arguments against Hess seem to begin and end with a Ml_Pf8r5 •1 713 247 6013 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 Kalel Akamine cycle production. We expect this to end in 2Q17 with a rebound in oil and gas production Research Analyst MLPF&S starting in 2H17 and critically, an inflection in free cash flow that we expect will return Hess .1 713 247 7880 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. John H. Abbott Research Analyst Inflection point on multiple levels right around the corner MLPF&S •1 713 247 7144 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 Stock Data 2018/19 but with the contribution from Guyana driving a step change in Hess' growth Rice 49.97 USD trajectory through 2025. Near term, we think Hess is also poised for an inflection in free Rice Objective 80.00 USD cash flow that is reasonably 51bn annualized, with $700mm irrespective of oil prices. Date Established 9-Dec-2016 Versus consensus operating cash flow of -51.9bn in 2017, this stands out as the biggest Investment Opinion 8-1-7 swing in free cash of any company in the sector. 52-Week Range 45.12 USD -65.56 USD Adding Hess to US 1 'best ideas' list MN Val Imo)/ Shares Ou 15.6568SO /313.3 After a year of waiting, we believe the inflection point in Hess' investment case is just around Ohnl the comer, with the broader sector pullback positioning the shares with amongst the highest Average Daly Value (mo) 198.50 USD upside in the sector as implied by our price objectives. At current levels, Hess driscounts' strip Eclat& Ticker f Exchange HES/ NYS oil prices. Under our base case, which assanes a rebound in oil prices towards $70 from 2020 gloamberg/ Reuters HESUSM fair value is reasonably -580 per share. If non-producingasset value from Guyana is included ROE (2017E) we estimate this would be doser to $90. BofAML's US1 list is a collection of the firm's best Net DS to Eqty (Dec-2016A) 26.1% investment ideas managed with the goal of providing superior investment performance over the long term. For Hess, we believe the combination of catalysts, short interest and absolute value can drive a period of strong relative outperformance vs peers. For this reason, Hess replaces DVN as the energy stock on BofAML's US 1 list Estimates (Dec) ‘US$) 2015A 2016A 2017E 2018E 2019E EPS (3.92) (4.94) (3.75) (1.46) (0.76) GARP EPS (10.77) (19.92) (3.75) (1.46) (0.76) EPS Change (YeY) NM 26.0% 24.1% 61.1% 47.9% Consensus EPS (Bbombeng) (3.03) (2.09) (0.45) DPS 1.00 1.00 1.00 1.0D 1.00 Valuation (Dec) 2015A 2016A 2017E 2018E 2019E o PIE NM NM NM NM NM q GARP PiE NM NM NM NM NM Dividend Yield 20% 2.0% 2.0% 2.0% 2.0% EV/ EBITDA' 17.2x NM 9.9x 6.4x 5.4x Free Cash Flow Yield' 13.2% 1.7% 2.8% 43% 3.7% 'For full defrothans of ~or ~mores. :et page II. 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 5 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. 11731410 Timestamp: 11 April 201 7 05:30AM EDT EFTA00803308 iQproMewHess Corp. Company Sector Oils /Qmethod ' 1— Bus Performance' (LISS Millions) 2015A 2016A 2017E 2018E 2019E Return on Caplet Employed -8.5% -21.0% 3.6% -0.9% 0.1% Company Description Return on Equty .5.4% -9.0% -8.6% 3.7% -2.1% Hess Corp (HES) is a mid-sized oil and gas Operating Margin -1.197.3% -247.2% -25.4% .5.0% 0.5% Free Cash Fbw (2,061) (1,359) (592) (50) 574 company with 1.0bn boe of proved reserves at the end of 2015.M operations are focused in the US onshore, deepwater GOM, North Sea West Africa genethod — Duality of Earnings• oil, and Asian natural gas. (LISS Millions) 2015A 2016A 2017E 2018E 2019E Cash Realization Ratio NM NM NM NM NM Asset Repdaoement Ratio 1.0x 0.6x 0.9x 0.9x 0.9x Investment Rationale Tax Rate 18.8% 41.0% 16.2% 21.9% 8.4% Net Debt•to-Equity Ratio 19.2%. 26.1% 34.9% 40.7% 40.5% Our house view is that oil should rebound long Interest Cover .10.1x -31.1x -3.8x -1.0x 0.1x term to $75 WTI / S80 Brent. Investment case anchored by exploration prospects led by Guyana. Added to this, it has a strong balance sheet, low Income Statement Data (Dec) risk production visibility in the Bakken and a stable (LISS Millions) 2015A 2016A 2017E 2018E 2019E international base. As such, we view HES' valuation Sales 286 4.182 4.379 5.704 6,359 % Chenge 38.1% 1.363.2% 4.7% 30.3% I1.5% as attractive and maintain our Buy rating. Gross Profit (2,606) 4,182 4.379 5,704 6,359 %Change NM NM 4.7% 30.3% I I.5% EBITDA 1,155 (5,482) 2.005 3.097 3,646 %Change -84.3% NM NM 54.5% 17.7% Net Interest 8 Other Income (340) (332) (289) (297) (304) Net Income (Adjusted) (1,113) (1,531) (1,174) (456) (246) Stock Data % Change MI 37.6% 23.3% 61.1% 46.0% Menge Dad/ Voime 3973.678 Quarterly Earnings Estimates Free Cash Flow Data (Dec) (LISS Millions) 2015A 2016A 2017E 2018E 2019E 2016 2017 Net Income from Cont Operations (GAAP) (3,056) (6,132) (1,126) (408) (246) 01 -1.72A -1.2IE Depreciation 8 Amortization 3.955 3.413 2.857 2.962 3.188 02 .1.11A -I.19E Change in Working Capital 80 (47) 0 0 0 03 -1.12A -0.72E Deferred Taxation Charge (1,319) 2.200 (228) (128) (13) 04 .1.01A .0.63E Other Adjustments. Nei 2,321 1,361 357 323 369 Capital Expendkre (4,042) (2.154) (2.453) (2.798) (2.725) Free Cash Flow -2,061 .1,359 .592 .50 574 % Change .98.0% 34.1% 56.4% 91.6% NM Balance Sheet Data (Dee) (USS Millions) 2015A 2016A 2017E 2018E 2019E Cash 8 Equivalents 2.716 2.732 1.974 1.974 1.974 Trade Receivables 847 768 768 768 768 Other Current Assets 841 776 776 776 776 Property. Plant 8 Equipment 26,352 19,941 18,886 18,299 17.412 Other Non-Current Assets 3.439 4.404 4.404 4.404 4.404 Total Assets 34,195 28,621 26,807 26,220 25,334 Shan-Term Debi 86 112 112 112 112 Other Current Liabilities 2.542 2.139 2.088 2.036 1.982 Long-Term Debt 6.544 6.694 6.694 7.105 6.844 Other Non-Current Liabii6es 4.622 4.085 4.085 4.085 4.085 Total Liabilities 13,794 13,030 12,979 13,338 13,023 Total Equity 20,401 15,591 13,828 12,883 12,311 Total Equity 8 LiabiNties 34,195 28,621 26,807 26,220 25,334 • For fug clefintoons of embed' measures. see page II 2 Hess Corp. III April 2017 Bankof Amenca Merrill Lynch EFTA00803309 Adding Hess to BofAML US1 list Inflection point Over the past six months Hess has proven to be one of the most volatile stocks in the sector, facing extraordinary headwinds from a significant increase in short interest that has exaggerated volatility of what is already one of the more highly levered oil stocks in the sector. From discussions with investors, the arguments against Hess begin and end with a combination of declining production and expanding balance sheet — all part of the deliberate portfolio choices that favored completing major projects at the expense of short cycle production. This cycle ends in 2Q17 with an expected rebound in oil and gas production starting in 2H17 and critically, an inflection in free cash flow that by our estimates should return Hess to free cash flow with the flexibility to re-up investment in the Bakken. We thus view Hess as a dangerous short for investors seeking to hedge other portfolio positions. Exhibit 1: Short interest ratio (days to cover) US oh Exhibit 2: Hess shod interest ratio (mm shares) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 APTI,I §iginE§gtfia04'figirai-E 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-16 Jan-16 Jan-17 Source Bloomberg. BolAtilernII Lynch(kW Research estimates Souse. Bloomberg. BotA Merril Lynch Global Research estimates In our view, any meaningful reduction in short interest could drive an outsize response to the improving operating outlook that we expect to start in 2H17 and can be summarized as follows: By our estimates, oil and gas production troughs in 2Q17 as Bakken production stabilizes before recovering through year-end. With start-up of the first of two major projects (NMB') and incremental production in the US GoM, we anticipate growth in oil and gas production of -60.000boepd or 22% between 2Q17 & 4Q17. • Planned increase in Bakken rig count points to an exit rate of -105-110 kboepd up from 90-95 kboepd in 1Q17 for an intra-year growth rate of -16% underpinned by a step up to 6 rigs from 2 at the start of the year. We expect Bakken growth to continue in 2018 and 2019 at -16% yoy with upside from larger completions. Management guidance suggests exit rate production in 2017 of -335.000 boepd; start- up of the second of Hess' major projects (Stampede) adds 15,000 boepd from 1H18 (est); along with a resumption of growth by resurgent operator Aker BP at Valhall (Hess 64%) we expect top line growth of 15% in 2018 with a re contribution and continued Bakken ramp contributing to -10% growth in 2019 including first oil from Guyana. I North Malay Basin, adding 20,000 boepd starting in Sep 2017 Bank of America"! Hess Corp. 111 April 2017 3 Merrill Lynch EFTA00803310 In other words, 2Q17 marks the low point In oil and gas production, with momentum accelerating in 2H17 to kick start a multi-year period of growth. Chart 1: Hiss production outlook: inflection point from 2Q17 Source BMA klemll Lynch GlobalResearth estimates Critically, Hess has multiple levers to pull that reverse production declines as cash becomes available from completion of NMB and Stampede. Planned spending to complete NMB and Stampede is 4700mm in 2017; with completion we expect this to drop closer to $200mm in 2018 so that before any contribution from operating cash flow from these projects we expect Hess 'apples to apples' capex to move lower in 2018 driving an inflection in free cash flow. Exhibit 3: Free cash flow turns positive in 2018 Exhibit 4: with an accelerating decline in net debt 6.000 6.000 4.Ox 3.5x 43)30 5.000 3.0x 2.030 4.000 2.5x 3.000 2.0x 1.5x (2,000) 2.000 1.0x (4,000) 1.03'3 0.5x (6,000) 0.Crx 20154 2016A 2017E 2018E 2019E 2020E 2021E 2015A 2016A 2017E 2018E 2019E 2020E 20121E CFO Cox —Free Cash Flow Net Debi —Net Debi / DACF Source Boa Merrill LynchGlobal Reseed!, estimates Saute 8ofA Memll Lynch Global Research estimates Our assumptions include a likely project sanction of the first phase 'early production system' at the Liza discovery in 2Q17. However, based on discovered oil to date that we believe now easily exceeds 2bn barrels, we believe Hess is on the cusp of a multi-year period of growth that is material for a company of its size. Critically, we believe most commentators have not yet included the cash flow contribution from Guyana in Hess' estimates given visibility that barely looks past 2018. However, with first oil now likely 4 Hess Corp. 111 April 2017 Bankof America 40' Merrill Lynch EFTA00803311 in 2H19, we view final investment decision (FID) — and an exploration program that yields one well result every 6-8 weeks as a catalyst to rerate Hess over time. Liza area moving towards 2bn boe Operator Exxon recently confirmed the latest exploration test in Guyana 'Snoek' as the latest discovery in the Liza development area, with -82ft of net pay and in line with pre drill expectations we are led to believe is in the 200-300mm boe range. Recall from our discussions with management, Snoek was characterized as a smaller but distinct target, updip of Liza, but lower risk. The well was drilled in 26 days to a depth of -17,000ft in 5.128ft of water 5 miles south west of Liza #1, as shown in the graphic below; the Stena Carron drill ship has now relocated to the next well test, the 'Liza #4' appraisal, where we anticipate results by end April but with the possibility of a drill stem test in a success case that may push the well result into mid-May. Exhibit 5: Liza targeting Exhibit 6: Exxon operated blocks in Guyana • Multi-FPS°, SoconMobil-operated development p#K7I, Web, - Phase 1: 100 -120 KBD; attractive return at $40/B flat real - FEED under way; Phase 1 FID expected in 2017 KBD Cross 300 Future potential O USGC•AOCS &aim 150 Liza Phase • 06covenes Potental 2017.2'019 Liza Phase 1 oppeanbes C %OMintern 0 Salta, Extonmobil Sotoce ExxcanoN Critically, 'Snoek' reinforces management's prior characterization of the Stabroek block as moving towards a 'DHI play meaning the risk profile of incremental exploration improves - a critical factor for the next well in queue, the Payara #2 appraisal that will also target a deeper test (Pacuma) scaled with a pre drill target of -1bn boe. The next prospect, Liza lookalike named 'Turbot will likely be spud around mid-year. From our discussions with Hess and the operator we summarize our understanding as follows: Operator XOM had previously framed the discovered potential in the Liza / Payara at 1.5bn - 2.0bn boe, subject to completion of two planned additional appraisal wells. Quoting EVP Mark Albers and CEO Darren Woods 'The success at Payara combined with the additional oilpay discovered with Liza-3 brings the totaldiscoveredresource on the block to somewhere between 1.4 billion oil equivalent barrels and2 billion oil equivalent barrels.' 'to clarify, what we have found - not potentialupside, but what we have foundis 1.4 billion to 2 billion BOE. The upside is multi-billion barrel unriskedpotential: Bankof Amenca ea' Hess Corp.' 11 April 2O17 $ Merrill Lynch EFTA00803312  • Snoek and with Liza deep previously likely moves recoverable resource closer to the upper end of this range 2bn boe before Liza #4 and Pacuma, providing line of sight for at least a 4 FPSO development starting in 2019. • After Liza 4, the Scene Carron drillship will move back to Payara to drill an appraisal well which will also test a deeper prospect 'Pacuma tail'. Where pre- drill prospect size is scaled at about 1bn boe. The next prospect (Turbot) will then be spud south east of Payara. Note is that if Payara 2 is successful, this would likely add another 'boat' with capacity of 150.000 boepd. The graphics below characterize Hess view of Payara and Snoek. We assume the 1bn boe Pacuma prospect is the light green area below Payara. Exhibit 7: Initial characterization of Payara Exhibit 8: Updated characterization suggests a similar footprint to Liza Liza Water Depth: 5.500-4.000 ft Uze Water Depth: 6,6004,700 tt Drilling TD: 14.000-10.SO° et Drilling TO: 111,000-111,800 ft Ranger Future Prospect Payara Payara it e Liza L. en A Snoek • GoM Green Canyon for scale Source Hess Seine Hess Again quoting ExxonMobil management: just as weprogressedrapidly at Liza, wellmove quickly to develop Payara if the delineation well is successful' Recall that Hess management has suggested Payara will 'definitely be commercial'. However at this early stage we assume no value for Payara in our assessed value of Hess' not least as any attempt at precision is obviously premature. But with discussions with management suggesting scenarios through appraisal where Payara is a lookalike to Liza, we believe a 'plus three year development scheme is a reasonable basis to frame option value in a success case. Under our 570 Brent base case, the theoretical NPV would be around 510/sh. This is on top of the approximate 512-14/ share value we estimate is reasonable for Hess from the existing Liza discovery. Note we continue to assume about 400.000 bpd gross development scenario—reviewed again below to reflect the latest project proposal submitted to the Guyana Government which now targets first production in 2H19. Note we assume negligible value for natural gas revenue in this latest iteration, thus the range of $12-514 for Liza mentioned above and $22-$24 for Liza / Payara. The table below assumes gas valued at $1 / mmcfe. 6 Hess Corp. 111 April 2017 Bankof America 44 " Merrill Lynch EFTA00803313 Table 1: Notional multi-phase development at Guyana: about $22/sh to Hess Gross Barrels Full Project NPV Hess 30% Interest NPV net to (mmboe) SKIM NPV Hess (mmboe) 5mm $rnm Liza Eady Production System 425 4.258 1.277 53.9 Phase 1 600 4.932 1.480 $4.6 Phase 2 600 3.821 1.146 $3.5 Liza Total 1,625 13,010 3,903 $12.0 Payara (spec) Early Production System 425 3,392 1,018 $3.1 0 Phase 1 600 a 3,688 1,100 113.4 Phase 2 600 EL 2,682 805 $2.5 Papua spec Total on o 1,625 AIL 9,742 ot 2223 $9.0 Guyana Total 3,250 22,753 6,826 Source BofAhlerrgl Lpch GlobalResearch esumates. Hess shares fuly dluted 324 Imm shares alter pretence conuen Note that at current strip oil prices of -$55 Brent, this is closer to $14.4/sh of which Payara is -$6/sh or $2.0bn. On a 'risked' basis, we believe this is a reasonable development scenario representative of any incremental discovery that resembles Liza recalling that the partners have identified over 20 additional drilling prospects. On the assumption of a 'plus three year development scenario after Liza, the potential impact on incremental production and cash flow is significant for Hess while the cumulative impact also becomes significant for XOM. The charts below show our latest assessment of how a compound timeline for a Liza / Payara development could look, if Payara as a project does indeed prove to be a look alike to Liza. Exhibit 9: Hess theoretical production profile for Liza I Payara Exhibit 10: Hess net production profile (by phase) 300 250 200 150 100 50 • 2016 2018 2020 2022 2024 2016 2021 2026 2031 intim Early PS • Liza Riese 2 • Liza Pnase 3 — Liza Early PS Liza Phase 2 —Liza Phase 3 • Pewee Early PS • Patera Fliase 2 • Payara Rase 3 — Payara Early PS —Payers Phase 2 —Papa Phase 3 Scam BoaMerrill Lynch GlobS Research estimates Source 8ofA Merril Lynch Global Research estimates Critically, Guyana is now being described as a 'DHI play meaning seismic and core have been sufficiently calibrated as to provide direct hydrocarbon indicators and hence de- risking future exploration tests. This appears confirmed again by the latest 'Snoek' success. XOM's development plan calls for an FPSO (floating production and storage offloading vessel) with production capacity of about 150,000 boepd for every 450mm barrels of recoverable reserves, with plateau production extending up to 10 years. We suggest management's commentary supports gross production capacity from current discovered resource of at least 600,000 boepd. Bank of America'! Hess Corp. 11 April 2017 7 Merrill Lynch EFTA00803314 Impact on cash flow While the impact on production is significant, we suggest the impact on cash flow is transformational for Hess. Referencing the charts below: • Under our base case that assumes $70 oil from 2020, we estimate operating cash flow net to Hess would reach over $2.5bn; Net free cash flow peaks at over $2bn with a net cash outflow at any point in the development of -$300mm. Chart 2: Hess operating cash flow contribution: Guyana ($70 base case) Chart 3: Hess free cash flow contribution: Guyana ($70 base case) 3.500 3,000 3.000 2,500 2.500 2,000 2.000 1,500 1.500 1,000 1.000 500 500 (500) 2017 2022 2027 2032 2017 2022 2027 2032 ■Liza Early PS • Liza Phase1 ■ Liza Phase 2 • Liza Early PS • Liza Phasel ■ Liza Phase 2 ■ Payara Early PS ■ Payara Phase' • Payara Phase 2 ■ Payara Early PS ■ Payara Phase1 ■ Payara Phase 2 Source. BofA Merrill Lynch Glohi Research Some 8ofA merni Lynch Global Research While first oil in 2019 is only the early stage of development, it is enough in our view to provide visibility on multiple compression perceived absent from Hess' investment case given its focus on short cycle development However, after the low point in production in 2Q17 we suggest Hess has both — short cycle, comprising not only the Bakken but tie back opportunities across established infrastructure in Norway and the US GoM — and long cycle in the shape of a transformational opportunity in Guyana, that becomes tangible with a likely AD in 2Q17. Impact on valuation in our view, an imminent inflexion point in free cash flow comes with a step change in value recognition for Hess. Momentum from a >20% jump in production in the six months of the second half of 2017 carries growth through 2018. with Guyana accelerating for a decade from 2019. At our base case we suggest this leaves Hess 'discounting' current strip oil prices at current levels of -$50 / share. The table below sets our PO at our target mid cycle multiple of 5.5x EV/DACF; note this does not include any value for non-producing Guyana resource value that we estimate at -56/share. Table 2: At strip oil pikes, Hess looks fairly valued based on a target multiple of 5.5x EV/DACF 2015 2016 2017e 2018e 201% 2020e 2021e Shares Outstanding 284 310 313 313 323 324 324 Market Cap 13,119 13,334 13,415 13.415 13,415 13,415 13.415 Non•producing Guyana NAV • Net Debt 3,914 4,074 5,136 6,224 6,985 7.798 7,866 Preference shares 557 557 557 EV 17,033 17,965 19.108 20,196 20,400 21,213 21,281 DACF 2,321 1.127 1,847 2,378 2,625 3.030 3.795 Forward EV/ DACF 15.1x 9.7x 8.0x 7.7x 6.7x 5Sx Source MA KOMI Lrch Crobal Research B Hess Corp. April 2017 Bankof America 40' Merrill Lynch EFTA00803315 Under our base case, which assumes a rebound in oil prices towards $70 from 2020, we see fair value as reasonably around $80 per share. If non-producing asset value is included (around $3bn or -$9/sh). we estimate this would be closer to $90. Table 3: At our base case, we see fair value doser to $80 based on a target multiple of S.Sx EV/DACE 2015 2016 2017e 2018e 20190 2020e 2021e Shares Outstanding 284 310 313 313 323 324 324 Market Cap 22,341 22,684 22,814 22,814 22.814 22,814 22,814 Non•producing Guyana NAV • • • Net Debt 3.914 4.074 4,832 5,243 4.983 4.441 3.020 Prel 557 557 567 EV 26,255 27,315 28,203 28.614 27.797 27,255 25,834 DACF 2.321 1.127 2.150 3,045 3.602 4291 5.132 Forward EV/ DACF 23.3x 12.7x 9.3x 7.9x 6.Sx Six Souse EMA Mead LOCIICicea!Reseath BofAML US 1 list The BofAML 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. Since the presidential election, the 'trump tax rally that has arguably lifted the broader S84:1500 on the expectation of lower corporate taxes has left most US oils lagging given the absence of any benefit from lower taxes. For Hess. we believe the catalysts are still ahead while the relative performance hurdle associated with the election has passed. For this reason, Hess replaces DVN as our energy stock on the BofAML US1 list. Earnings updates Marking to market for 1Q17 we update earnings as follows: Table 4: HES Earnings Estimates 01 02 03 04 FY BBG Consensus 2015A (0.98) (0.52) (1.03) (1.40) (3.92) (3.92) 2016E (1.72) (1.11) (1.12) (1.01) (4.94) (4.98) Previous (1.72) (1.11) (1.12) (1.01) (4.94) nra 2017E (1.21) (1.19) (0.72) (0.63) (3.75) (3.03) Previous (1.37) (1.19) (0.72) (0.63) (3.91) nra 2018E (0.40) (0.40) (0.35) (0.30) (1.46) (2.09) Previous (0.401 0.41 (0.35) (0.31) (1.47) nra Source BolAhlerri toicheobailtesearch Bank of Amenca ea* Hess Corp.' 11 April 2017 9 Merrill Lynch EFTA00803316 Price objective basis & risk Hess Corp. (HES) Our price objective of S80 / share is based on a S-year outlook which assumes a 5.5x DACF multiple and a commodity deck of $67.50 WTI and $70 Brent to which we add S10 / sh for Liza in offshore Guyana. The multiple is based on a finite timeline to delivery which is supported by core NAV. The risks to our price objective are: 1) the oil and gas price environment. (2) slowdowns in development drilling that leave production below expectations, and (3) news flow around HES' exploratory and appraisal drilling activities that could impact the stock. Analyst Certification I. Doug Leggate, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be. directly or indirectly, related to the specific recommendations or view expressed in this research report US • Large Cap Oils Coverage Ouster Both Merrill Lynch Investment rating Company ticker Bloomberg symbol Analyst BUY Anadarko Petroleum Corp. APC APC US Doug Leggate Chevron Corp. CVX CVX US Doug Leggate ConocoPhillips COP COP US Doug Leggate Continental Resources Inc. CLR CLR US Doug Leggate Devon Energy Corp. DVN INN US Doug Leggate EOG Resources EGG EOG US Doug Leggate Hess Corp. HES HES US Doug Leggate Marathon Oi Corp. MRO MRO US Doug Leggate Marathon Petroleum Company MPC MPC US Doug Leggate Occidental Patrolman Corp. OXY OXY US Doug Leggate Pioneer Natural Resources PXD PXD US Doug Leggate Range Resources Corp RRC RRC US Doug Leggate Tesoro Corp. TS0 TSO US Doug Leggate Valero Energy Corp. VLO VLO US Doug Leggate NEUTRAL Chesapeake Energy Corp. CHK CHK US Doug Leggate Derek US Holdngs. Inc. DK DK US Doug Leggate EmorMobi Corp. XOM XOM US Doug Leggate HolyFronlier Corp HFC HFC US Doug Leggate Noble Energy NBL NBL US Doug Leggate Philips 66 PSX PSX US Doug Leggate UNDERPERFORM Apache Corp APA APA US Doug Leggate Cabot Oil & Gas Corp. COG COG US Doug Leggate PBF Energy PBF PBF US Doug Leggate Southwestern Energy Corp. SWN SWN US Doug Leggate 10 Hess Corp. 111 April 2017 Bankof Amenca Merrill Lynch EFTA00803317 tQnedl& Measures Definitions Business Performance Numerator Denominator Return On Caudal Employed NOPAT = (EBIT + Interest Income) ' (1 • Tax Rate) + Goodwill Amortization Total Assets- Orem Liahities + ST Debt + Accunulated Goodwill Amonization Return On Equity Net Income Shareholders• Equity Operating Margin Operating Profit Sales Earnings Growth Expected 5•Year CAGR From Latest Actual WA Free Cash Flow Cash Fbw From Operations- Total Capex WA Quality of Eamktgs Cash Realization Ratio Cash Fbw From Operations Net Income Asset Replacement Ratio Capex Depreciation Tax Rate Tax Charge Pre•Tax Income Net Debt•To-Equity Ratio Net Debt = Total Debt. Less Cash 8 Equivalents Total Equity Interest Cover EBIT Interest Expense Valuation TooIldt Pricer Earrings Ratio Current Share Price Diluted Earnings Per Share (Basis As Speciied) Pricer Book Value Current Share Price Shareholders• Equity /Current Basic Shares Dividend Yield Annuaised Dedared Cash Dividend Current Share Price Free Cash Flow Yield Cash Flow From Operations- Total Capex Market Cap. = Current Share Price' Current Basic Shares Enterprise Value / Sales EV = Current Share Price' Current Shares + Minority Equity + Net Debt + Sales Other LT Liabities EV/ EDINA Enterprise Value Basic EBIT + Depreciation + Amorlizatica 4rwd'•ts the set of Both Meniltl.rch standard rneasires that sene to manor, gcbai consistency triter thee hold headings. Business Performance. CuYity of Eamngs. and validatrons The key features of i(Vnethod are A COnSiStenfly suthtured detailedand transparent methodolo& Guidelines to ma'nwe the effectweness of the comparatue valuation process, and to ickntify some common pidalk atecte is ou rel tullegbbat research darabase dot is scoff ed dtecdy