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 [email protected] 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 p