Text extracted via OCR from the original document. May contain errors from the scanning process.
Hess Corporation (HES)
Doug Leggate +1 713 247 6013
Research Analyst, MLPF&S
Buy, PO $80
1Q17 investment thesis
Broad expectations of a pro-energy agenda from the incoming administration set a
theoretically constructive backdrop for the US oils. Along with the tailwind from
renewed OPEC support for oil prices, we view the broader energy sector as a
momentum play in the early part of 2017 where stock specific catalysts can re-emerge
to differentiate relative performance within the large cap US oils. We view Hess as the
most catalyst rich large cap US E&P for 2017 with a return to growth and
disproportionate exploration risk from a company with the highest cash margins in the
sector, second best balance sheet and significant oil leverage to our base case that is an
oil recovery in 2017. Hess remains amongst our top ideas in the US large cap oil sector
for 2017, and we retain our Buy rating, and $80 PO.
Table 1: Hess key stock data
Industry US oil and gas exploration and production
Market Cap (mn) $19,090
Price $62.90
EV/Debt adjusted cash flow (2017)* 9.4x
% of sell-side rated Buy 46.4%
Short interest % of float 8.52%
Source: Bloomberg and BofA Merrill Lynch Global Research estimates
Deregulation / Gov't Legislation
While the potential for a less onerous regulatory backdrop, and greater access to Federal
lands for exploration and development, the majority of current activity remains
dominated by private lands thereby limiting any material changes arising froma
Republican administration. The exception is the potential for more receptive backdrop
for infrastructure development that can improve regional pricing through improved
access to takeaway capacity.
Tax Policy:
For the majority of the US E&P’s, changes in corporate tax rates have negligible impact
given that substantial net operating losses and deferred tax credits means that cash
taxes remain de minimis for the foreseeable future.
Catalysts:
News flow starts with an expected capex budget unchanged from 2016 at ~$2bn, the
company has stated it expects a return to drilling in the Bakken with a stated ramp up to
6 rigs from 2 currently returning the play to growth in 2017.. The first Guyana
development (Liza) expected to achieve FID by 2Q17 and which we expect to confirm
industry leading economics. Start-up of the first of two major developments — the North
Malay basin gas play in 3Q17, putting Hess back on a growth track and turning attention
to the Stampede start up in the US GoM in early 2Q18. In the background is an
exploration test every 45-60 days any one of which could materially change the scale of
the Hess business model of the next decade.
Bankof America
8 Top 10 US Ideas Quarterly | 03 January 2017 Merrill Lynch
HOUSE_OVERSIGHT_014629