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Latest reports: Tales from the road (Dec 1, 2016); Speculation builds over
Payara (Dec 19, 2016)
1Q17 risks: We expect a supportive commodity backdrop, spending clarity and
confirmed return to growth all punctuated by a steady stream of large scale exploration
news flow to support relative performance for Hess in 1Q17. Greatest risk to the
broader energy sector comes from adherence of the OPEC agreement to support oil
prices through coordinated production cuts; With this backdrop note that Hess retains
one of the most resilient balance sheets in the sector, with adjusted net debt / cap of
just 14% and $2.9bn of net cash on the balance sheet at end 3Q16.
Company Description: Hess Corp (HES) is a mid-sized oil & gas company with 1.0bn
boe of proved reserves at end 2015. E&P operations are focused in the US onshore,
deep water GOM, North Sea, Guyana, West Africa, and Asia.
MGM Resorts International (MGM)
Shaun Kelley +1 646 855 1005
Research Analyst, MLPF&S
Buy, PO $33
1Q investment thesis
MGM is a levered play to improving/accelerating US economic growth. The US makes up
80% of EBITDA (70% Vegas, 20% Macau, 10% US regional) and the company has 4-5x
net debt/EBITDA which is high, but coming down to under 4x by end of 2017 which
could allow for a possible upgrade to investment grade by the end of 2017 or early
2018.
MGM has high operating leverage (50%+ flow through of revenues) and should benefit
from any macroeconomic improvement as well as already healthy/strong Las Vegas
fundamentals (visitation +3% YTD, RevPAR +6% which is one of best hotel markets in
the US). MGM benefits from both consumer (80%) and business (20%) travel. There is
zero supply growth in Las Vegas the next 2-3 years and virtually no Airbnb/disruption
risk as staying at integrated casino resorts on the Strip is key to the experience.
MGM should see accelerating growth in 2017 to a very high +24% Y/Y on an organic
basis. We think this is some of the highest growth we will see in the Gaming, Lodging &
Leisure industries. MGM should also see a meaningful free cash flow inflection in 2017
as capex falls off dramatically after its 2 new property openings in Washington DC and
Cotai/Macau.
Table 1: MGM key stock data
Industry Gaming
Market Cap (mn) $11,993
Price $28.50
P/E (2017) 21.6x
% of sell-side rated Buy 95.7%
Short interest % of float 2.94%
Source: Bloomberg and BofA Merrill Lynch Global Research estimates
Bankof America <>
Merrill Lynch Top 10 US Ideas Quarterly | 03 January 2017 9
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