Summary of ML report...
Managing risk: Removing Hess’ from our BofA ML US1 list
Hess’ proxy battle enters the final round with the upcoming shareholder meeting on May 16th. In just the past week, both sides have taken steps to address issues that could potentially sway investors and in our view a reasonable outcome from recent events relegates legacy criticisms over corporate governance to the past.
As it relates to the investment case, surety of improved board oversight arguably lifts confidence that Hess’ transition to a stand alone E&P is assured. However the dilemma for investors is whether with the end to the proxy battle, immediate momentum behind the rapid recovery in the share price since mid 2012 slows.
Upside potential in place…
A balanced board may raise speculation on the prospect of more aggressive restructuring; but it might also leave Hess’ current strategy as the most likely outcome – meaning the promise of a ~$4bn of share buy back program, funded by non core disposals that can provide incremental price support vs peers. On this basis we believe immediate catalysts for share performance become a function of management execution – but this outcome is already known by the market. While we believe this can support a sustained recovery towards our $90 PO, the risk is that following the outcome from the shareholder meeting immediate momentum slows – and event driven investors ‘sell the news’.
…but acknowledging s/term risk
For much of the past year our call on Hess as a constituent of our US1 list was counter consensus; however, the bulk of the dislocation between embedded asset value and the share price has closed; while upside to our PO of $90 remains attractive, 60% appreciation in the past year leads us to remove Hess from our
‘top pick list. Our fundamental Buy rating remains in place, but the risk of near term volatility underlines the need for short term risk mitigation.
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