EFTA01049603.pdf

From: "Ens, Amanda" To: "jeffrey E." <[email protected]>, Richard Kahn Subject: **HESS added to BAML USI List - Play it through the Mandatory Convert Preferred Date: Wed, 12 Apr 2017 19:48:52 +0000 Attachments: HESS US1 List.pdf !Wine-Images: image00Ljpg Stock Thesis: Doug Leggate believes Hess' investment case is approaching an inflection point on multiple levels. BAML expects 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 should kickstart an extended period of growth in 2018/19 but with contribution from Guyana driving a step change in Hess' growth trajectory through 2025. In the near term, BAML thinks Hess is also poised for an inflection in FCF that is reasonably $1bIn annualized, with $700mm irrespective of oil prices. BAML believes the combination of catalysts, short interest, and absolute value can drive a period of strong relative outperformance vs. peers. For this reason, HESS is replacing DVN as energy stock on BAMI!s US1 List. Price target is $80 (58% upside from today's levels.) Mandatory Convertible Pfd Details: Maturity: 2/1/2019 Dividend: 8% paid quarterly Current Yield: 6.65% Yield Adv. Over equity: 465bps Size of Deal: $575mm Par Value: $50 Participation on a +/- 20% move in common: +84%/-73% What is a mandatory preferred? It is a pfd stock that pays a dividend that upon maturity (2/1/2019), automatically converts into common shares. The conversion ratio is determined upon where the stock is at the maturity of the pfd. If the stock is below $39 at maturity, holders will receive 1.2821 shares of stock per pfd If the stock is above $45.83 at maturity, holders will receive 1.0911 shares of stock per pfd If the stock is between $39 and $45.83, holders will receive the equivalent of $50 in stock (i.e. stock at 42.50, holders will receive 1.1765 shares) Why do the pfd over the equity? The HES mandatory convertible preferred allows you to participate in the upside participation of the common while outyielding the equity by 465 basis points. The common yields 2% and the mandatory pfd yields 6.65% currently. We have a BUY rating with a $80 price objective, the highest on the street, representing 60% upside. Out of 28 analyst rankings, 12 are BUYS and 16 are holds with an average 12 month price target of $63.83, 28% upside. On a +20% move in the stock, the pfd participates 84% of that while participating only 73% on the downside on a -20% move. The pfd is listed on the NYSE under symbol HES A and is $575mm notional so it has decent liquidity. I think this is a great way to play the equity story. Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated EFTA01049603 Rcid:Image003.jpg@O1D 27B0E.95197D80 This message, and any attachments, is for the intended recipient(s) only, may contain information that is rivileged, confidential and/or proprietary and subject to important terms and conditions available at If you are not the intended recipient, please delete this message. EFTA01049604