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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 Equity | 11 April 2017
Unauthorized redistribution of this report is prohibited. This report is intended for jake.byrne@baml.com
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 non-producing asset value from Guyana is included
we estimate this would be closer to $90. BofAML’s US1 list is a collection of the firm’s best
investment ideas managed with the goal of providing superior investment performance over
the long term. For Hess, we believe the combination of catalysts, short interest and absolute
value can drive a period of strong relative outperformance vs peers. For this reason, Hess
replaces DVN as the energy stock on BofAML’s US 1 list.
Estimates (Dec)
(US$) 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
P/E 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 5.4x
Free Cash Flow Yield* -13.2% -8.7% -3.8% -0.3% 3.7%
* For full definitions of iQmethod SM 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
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
+1 713 247 7144
john.h.abbott@baml.com
Stock Data
Price
Price Objective
Date Established
Investment Opinion
52-Week Range
Mrkt Val (mn) / Shares Out
(mn)
Average Daily Value (mn)
BofAML Ticker / Exchange
Bloomberg / Reuters
49.97 USD
80.00 USD
8-Dec-2016
B-1-7
45.12 USD - 65.56 USD
15,656 USD / 313.3
198.56 USD
HES / NYS
HES US / HES.N
ROE (2017E) -8.6%
Net Dbt to Eqty (Dec-2016A) 26.1%
iQprofile SM Hess Corp.
Company Sector
iQmethod SM – Bus Performance*
(US$ Millions) 2015A 2016A 2017E 2018E 2019E
Return on Capital Employed -8.5% -21.0% -3.6% -0.9% 0.1%
Return on Equity -5.4% -9.0% -8.6% -3.7% -2.1%
Operating Margin -1,197.3% -247.2% -25.4% -5.0% 0.5%
Free Cash Flow (2,061) (1,359) (592) (50) 574
iQmethod SM – Quality of Earnings*
(US$ Millions) 2015A 2016A 2017E 2018E 2019E
Cash Realization Ratio NM NM NM NM NM
Asset Replacement Ratio 1.0x 0.6x 0.9x 0.9x 0.9x
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%
Interest Cover -10.1x -31.1x -3.8x -1.0x 0.1x
Income Statement Data (Dec)
(US$ Millions) 2015A 2016A 2017E 2018E 2019E
Sales 286 4,182 4,379 5,704 6,359
% Change -98.1% 1,363.2% 4.7% 30.3% 11.5%
Gross Profit (2,606) 4,182 4,379 5,704 6,359
% Change NM NM 4.7% 30.3% 11.5%
EBITDA 1,155 (5,482) 2,005 3,097 3,646
% Change -84.3% NM NM 54.5% 17.7%
Net Interest & Other Income (340) (332) (289) (297) (304)
Net Income (Adjusted) (1,113) (1,531) (1,174) (456) (246)
% Change NM -37.6% 23.3% 61.1% 46.0%
Free Cash Flow Data (Dec)
(US$ Millions) 2015A 2016A 2017E 2018E 2019E
Net Income from Cont Operations (GAAP) (3,056) (6,132) (1,126) (408) (246)
Depreciation & Amortization 3,955 3,413 2,857 2,962 3,188
Change in Working Capital 80 (47) 0 0 0
Deferred Taxation Charge (1,319) 2,200 (228) (128) (13)
Other Adjustments, Net 2,321 1,361 357 323 369
Capital Expenditure (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
Oils
Company Description
Hess Corp (HES) is a mid-sized oil and gas
company with 1.0bn boe of proved reserves at the
end of 2015. E&P operations are focused in the US
onshore, deepwater GOM, North Sea, West Africa
oil, and Asian natural gas.
Investment Rationale
Our house view is that oil should rebound long
term to $75 WTI / $80 Brent. Investment case
anchored by exploration prospects led by Guyana.
Added to this, it has a strong balance sheet, low
risk production visibility in the Bakken and a stable
international base. As such, we view HES' valuation
as attractive and maintain our Buy rating.
Stock Data
Average Daily Volume 3,973,678
Quarterly Earnings Estimates
2016 2017
Q1 -1.72A -1.21E
Q2 -1.11A -1.19E
Q3 -1.12A -0.72E
Q4 -1.01A -0.63E
Balance Sheet Data (Dec)
(US$ Millions) 2015A 2016A 2017E 2018E 2019E
Cash & 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 & 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
Short-Term Debt 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 Liabilities 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 & Liabilities 34,195 28,621 26,807 26,220 25,334
* For full definitions of iQmethod SM measures, see page 11.
2 Hess Corp. | 11 April 2017
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 oils
14.0
12.0
10.0
8.0
6.0
4.0
2.0
Exhibit 2: Hess short interest ratio (mm shares)
35
30
25
20
15
10
5
0.0
DVN
APC
PE
COP
NFX
XOM
XEC
EOG
MRO
OXY
PXD
WRD
RRC
COG
CVX
CHK
SWN
MRD
SM
CXO
LPI
PDCE
NBL
RSPP
OAS
APA
CLR
CRC
HES
EPE
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg; BofA Merrill Lynch Global Research estimates
Source: Bloomberg; BofA Merrill 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 1 ) 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; startup
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 FY contribution and continued
Bakken ramp contributing to ~10% growth in 2019 including first oil from Guyana.
1
North Malay Basin, adding 20,000 boepd starting in Sep 2017
Hess Corp. | 11 April 2017 3
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: Hess production outlook: inflection point from 2Q17
600
500
400
300
200
100
-
1Q16A 2016E 4Q17E 3Q18E 2Q19E 1Q20E 2020E 4Q21E 3Q22E
Guyana Utica NMB Valhall Stampede
JDA EG Other GoM Other / base Bakken
Source: BofA Merrill Lynch Global Research 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 ~$700mm 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
6,000
4,000
2,000
-
(2,000)
(4,000)
Exhibit 4: with an accelerating decline in net debt
6,000
5,000
4,000
3,000
2,000
1,000
4.0x
3.5x
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
(6,000)
2015A 2016A 2017E 2018E 2019E 2020E 2021E
-
2015A 2016A 2017E 2018E 2019E 2020E 2021E
0.0x
CFO Capex Free Cash Flow
Source: BofA Merrill Lynch Global Research estimates
Net Debt
Source: BofA Merrill Lynch Global Research estimates
Net Debt / DACF
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. | 11 April 2017
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
Source: Exxonmobil
Source: Exxonmobil
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 oil pay discovered with Liza-3
brings the total discovered resource on the block to somewhere between 1.4 billion oil
equivalent barrels and 2 billion oil equivalent barrels.’
’ to clarify, what we have found – not potential upside, but what we have found is 1.4
billion to 2 billion BOE. The upside is multi-billion barrel unrisked potential’.
Hess Corp. | 11 April 2017 5
• 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 Stena Carron drillship will move back to Payara to drill an
appraisal well which will also test a deeper prospect ‘Pacuma tail’. Where predrill
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
Source: Hess
Source: Hess
Again quoting ExxonMobil management:
‘Just as we progressed rapidly at Liza, we'll move 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 $70 Brent base case, the theoretical NPV would be around $10/sh. This is on
top of the approximate $12-14/ 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-$14 for Liza mentioned above and $22-$24 for Liza / Payara. The table
below assumes gas valued at $1 / mmcfe.
6 Hess Corp. | 11 April 2017
Table 1: Notional multi-phase development at Guyana: about $22/sh to Hess
Gross Barrels
(mmboe)
Full Project NPV
$MM
Hess 30% Interest
NPV
NPV net to
Hess
(mmboe) $mm $mm $/sh
Liza
Early Production
System 425 4,258 1,277 $3.9
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
Phase 1 600 3,668 1,100 $3.4
Phase 2 600 2,682 805 $2.5
Payara spec Total 1,625 9,742 2,923 $9.0
Guyana Total 3,250 22,753 6,826 $21.1
Source: BofA Merrill Lynch Global Research estimates; Hess shares fully dluted 324.2mm shares after prefernce convert
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 / Payara
Exhibit 10: Hess net production profile (by phase)
Source: BofA Merrill Lynch Global Research estimates
Source: BofA Merrill 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 derisking
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.
Hess Corp. | 11 April 2017 7
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)
3,500
3,000
2,500
2,000
1,500
1,000
500
Chart 3: Hess free cash flow contribution: Guyana ($70 base case)
3,000
2,500
2,000
1,500
1,000
500
-
-
2017 2022 2027 2032
Liza Early PS Liza Phase1 Liza Phase 2
Payara Early PS Payara Phase1 Payara Phase 2
(500)
2017 2022 2027 2032
Liza Early PS Liza Phase1 Liza Phase 2
Payara Early PS Payara Phase1 Payara Phase 2
Source: BofA Merrill Lynch Global Research
Source: BofA Merrill 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 FID 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
~$6/share.
Table 2: At strip oil prices, Hess looks fairly valued based on a target multiple of 5.5x EV/DACF
2015 2016 2017e 2018e 2019e 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 5.5x
Source: BofA Merrill Lynch Global Research
8 Hess Corp. | 11 April 2017
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 closer to $80 based on a target multiple of 5.5x EV/DACF
2015 2016 2017e 2018e 2019e 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
Pref 557 557 557
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 4,291 5,132
Forward EV / DACF 23.3x 12.7x 9.3x 7.9x 6.5x 5.3x
Source: BofA Merrill Lynch Global Research
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 S&P500
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
Q1 Q2 Q3 Q4 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) n/a
2017E (1.21) (1.19) (0.72) (0.63) (3.75) (3.03)
Previous (1.37) (1.19) (0.72) (0.63) (3.91) n/a
2018E (0.40) (0.40) (0.35) (0.30) (1.46) (2.09)
Previous (0.40) (0.41) (0.35) (0.31) (1.47) n/a
Source: BofA Merrill Lynch Global Research
Hess Corp. | 11 April 2017 9
Price objective basis & risk
Hess Corp. (HES)
Our price objective of $80 / share is based on a 5-year outlook which assumes a 5.5x
DACF multiple and a commodity deck of $67.50 WTI and $70 Brent to which we add
$10 / 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 Cluster
Investment rating
BUY
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UNDERPERFORM
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Noble Energy NBL NBL US Doug Leggate
Phillips 66 PSX PSX US Doug Leggate
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. | 11 April 2017
iQmethod SM Measures Definitions
Business Performance Numerator Denominator
Return On Capital Employed NOPAT = (EBIT + Interest Income) * (1 - Tax Rate) + Goodwill Amortization Total Assets – Current Liabilities + ST Debt + Accumulated Goodwill
Amortization
Return On Equity Net Income Shareholders’ Equity
Operating Margin Operating Profit Sales
Earnings Growth Expected 5-Year CAGR From Latest Actual N/A
Free Cash Flow Cash Flow From Operations – Total Capex N/A
Quality of Earnings
Cash Realization Ratio Cash Flow 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 & Equivalents Total Equity
Interest Cover EBIT Interest Expense
Valuation Toolkit
Price / Earnings Ratio Current Share Price Diluted Earnings Per Share (Basis As Specified)
Price / Book Value Current Share Price Shareholders’ Equity / Current Basic Shares
Dividend Yield Annualised Declared 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 Liabilities
EV / EBITDA Enterprise Value Basic EBIT + Depreciation + Amortization
iQmethod SM is the set of BofA Merrill Lynch standard measures that serve to maintain global consistency under three broad headings: Business Performance, Quality of Earnings, and validations. The key features of
iQmethod are: A consistently structured, detailed, and transparent methodology. Guidelines to maximize the effectiveness of the comparative valuation process, and to identify some common pitfalls.
iQdatabase ® is our real-time global research database that is sourced directly from our equity analysts’ earnings models and includes forecasted as well as historical data for income statements, balance sheets, and cash
flow statements for companies covered by BofA Merrill Lynch.
iQprofile SM , iQmethod SM are service marks of Bank of America Corporation.iQdatabase ® is a registered service mark of Bank of America Corporation.
Hess Corp. | 11 April 2017 11
Disclosures
Important Disclosures
HES Price Chart
1-Apr B
Leggate
PO:US$115
1-May
PO:US$120
120
30-May
100 PO:US$128
21-Sep
PO:US$135
15-Oct
PO:US$130
5-Dec
PO:US$105
13-Apr
PO:US$100
15-Jun
PO:US$105
24-Aug
PO:US$85
28-Jan
PO:US$80
5-Feb
PO:US$75
30-Jun
PO:US$85
8-Dec
PO:US$80
80
60
30-Jun
PO:US$130
21-Jan
PO:US$95
40
20
0
1-Jan-15 1-Jan-16 1-Jan-17
HES
Review Restricted No Coverage
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of March 31, 2017 or such later date as indicated.
Equity Investment Rating Distribution: Energy Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 109 49.77% Buy 84 77.06%
Hold 52 23.74% Hold 43 82.69%
Sell 58 26.48% Sell 34 58.62%
Equity Investment Rating Distribution: Global Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1578 51.33% Buy 979 62.04%
Hold 690 22.45% Hold 434 62.90%
Sell 806 26.22% Sell 381 47.27%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A
stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12
month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be
referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays
no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s
coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Hess.
MLPF&S or an affiliate was a manager of a public offering of securities of this issuer within the last 12 months: Hess.
The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Hess.
MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: Hess.
The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Hess.
MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: Hess.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: Hess.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the
ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of
the report: Hess.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: Hess.
The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Hess.
BofA Merrill Lynch Research Personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America
Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall
profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.
12 Hess Corp. | 11 April 2017
Other Important Disclosures
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Hess Corp. | 11 April 2017 13
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14 Hess Corp. | 11 April 2017