From: Richard Kahn Sent: Wednesday, September 14, 2016 4:30 PM To: jeffrey E. Subject: Fwd: ***Buy HES convert preferred following a 15% drop in the stock.... Richard Kahn HBRK Associates Inc. 575 Lexington =venue 4th Floor New York, NY 10022 tel fax cel Begin forwarded message: From: =/b>"Ens, Amanda" Subject: ./b>"*Buy HES =onvert preferred following a 15% drop in the stock.... Date: =/b>September 14, 2016 at 11:05:05 =M EDT To: =/b> Macro Focus: Oil is down modestly in front of EIA at 10:30am.... =PI was modestly bullish (+1.44m bbl, gasoline - 2.39m, distillate =5.31m, Cushing crude -1.12m) with a smaller build and a Cushing draw, but people are willing to wait for EIA... All eyes will be on DOE =ata at 10:30am after last week's draw of 14.5mmb which was =he biggest draw going back to 1999. This was the result of storms =nd related shutins. This kicked off a massive short squeeze where higher beta outperformed lower risk in last week's rising =ommodity price environment. The lEA weighed on group yesterday =along with stronger dollar) as they said the oil glut will last longer =han initially estimated. HES is down over 15% in the last couple of weeks =fter results for their Skipjack well disappointed investors. We believe =hat "shorts" have piled on and see a potential opportunity =o get long the stock into year-end as they are due to announce the =esult of the Liza#3 well in 4Q. Conclusions....Skipjack disappointed and HES equity has more than =aid the price. While the lack of imminent news may weigh following the exploration miss, Guyana is not discounted in =hares, and Liza #3 is an event that investors will have to revisit in =oming weeks. Next catalysts are the Liza #3 appraisal (4Q16) and Payara =early 2017). The Liza #3 well, has the potential =o further de-risk a resource base for the play opening Liza discovery currently suggested by XOM at between 800mm -1.4bn =oe. At the mid-point this represents a 30% increase in Hess' net oil & gas reserves at y/end 2015. Following =iza #3, it is entirely possible that XOM and its partners could have an exploration =est every 3/4 =/span>months in a block that covers the equivalent of =,150 GoM blocks. Recognizing exploration has risk we assume no =alue for incremental success - but Liza may already represent a — =0% uplift in current production by early EFTA_R1_00103434 EFTA01783089 next decade with world class economics, even at current oil prices. For now the =ocus remains on the $10/share net to HES we believe has yet to be =ecognized. Earn yield + upside into a pending exploration =atalyst with the mandatory convertible preferred. HES 8% 2/01/2019 at 59.50 (HES A Pfd) 6.8% strip yield, vs common stock at 2.1% div =ield It converts with a low strike of $39 (1.28 shares) =nd high strike of $45.82 (1.09 shares) at maturity in 2019 If stock is up 25%, the preferred returns 24.8%. If =tock is up 50%, the preferred returns 46.4% (held to maturity) • If stock is down 25%, the preferred returns -7.1%. If =tock is down 50%, the preferred returns -32.4% (held to maturity) • $575mm notional, $725mm market value outstanding =good liquidity) (This is not a product of BAML Research) Disclaimer: This material was prepared by Sector =pecialist Sales personnel of Merrill Lynch and is subject to the terms =vailable at the following link: http://corp.bankofamerica.com/business/smb/landing/emaildisclai=er/americas/globalmarkets Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, =enner & Smith Incorporated One Bryant Park, 5th =loor, New York, NY 10036 The power =f global connections" This message, and any attachments, is for the intended =ecipient(s) only, may contain information that is privileged, =onfidential and/or proprietary and subject to important terms and =onditions available at http://www.bankofamerica.com/emaildisclaimer. If you =re not the intended recipient, please delete this message. 2 EFTA_R1_00103435 EFTA01783090 3 EFTA_R1_00103436 EFTA01783091