Equity research note on Hess volatility and short interest

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 Exhibit 2: Hess short interest ratio (mm shares) 14.0 35 12.0 30 10.0 25 8.0 20 6.0 15 4.0 10 2.0 5 On ZQwWaxsgograoc exe zZosQruda uguonw Secoe€suorkxerosreeraxGomaatitgua 0 ae SARA Se oP oe Oo peewee 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') 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 FY contribution and continued Bakken ramp contributing to ~10% growth in 2019 including first oil from Guyana. ‘North Malay Basin, adding 20,000 boepd starting in Sep 2017 Bankof America <> Merrill Lynch Hess Corp. | 11 April 2017 3 HOUSE_OVERSIGHT_014875