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 January 12, 2016 - 12:25 PM EST
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Fitch Affirms Hess' L-T Ratings at 'BBB'; Revises Outlook to Negative

Fitch Ratings has affirmed Hess Corporation's (Hess; NYSE: HES) long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB' but revised the Rating Outlook to Negative from Stable.

Approximately $6.55 billion in debt is impacted by today's rating actions. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS

Hess' ratings are supported by the company's strong current liquidity (approximately $8 billion at Sept. 30, with one of the lowest net-debt-to-capital ratios among independent E&Ps one year into the downturn); good remaining capex flexibility; high exposure to liquids (approximately 74% of 2014 production and 78% of reserves); consistent track record as one of the better operators in the space and good operational metrics; and decent size and scale as an independent, with 1.431 billion boe reserves at YE 2014, core regions in the U.S. (GoM, onshore Bakken and Utica), North Sea, Asia-Pacific, and West Africa.

The Negative Outlook is driven by projected outspending on growth projects in 2016 that Fitch anticipates is likely to meaningfully reduce the company's liquidity under a lower for longer oil price scenario; the loss of diversification associated with the previous sale of downstream, midstream and retail assets; and the reduction in size in the upstream through asset sales.

While Hess' liquidity is currently very strong, the company has aggressively sold off a large number of assets as part of earlier restructurings (as calculated by Fitch, approximately $9 billion since 2009), which may limit its ability to liquidate additional assets under a lower-for-longer scenario without unfavorably impacting core credit metrics. Discretionary growth investments over the next several quarters while likely to be highly accretive in a rising oil price environment might also limit financial flexibility if the downturn is prolonged.

FCF TRENDS

Hess' LTM FCF at Sept. 30, 2015 was -$2.82 billion, significantly weaker than the -$1.11 billion seen at YE 2014, and was driven primarily by the full year effects of the collapse in oil prices. Fitch expects the FCF deficit to drop significantly in 2016 as capex is stepped down from approximately $5 billion level to approximately $3 billion. As modelled by Fitch, under our base case assumption of $50/bbl WTI, 2016 FCF is approximately -$1.3 billion, while under a stress case assumption of $40 WTI, it is approximately -$2 billion. However, Hess' current cash balances mean it should not need to borrow incremental debt for E&P operations under either of these scenarios in 2016.

STRONG OPERATIONAL TRACK RECORD

As calculated by Fitch, Hess has been a solid performer in the independent E&P space, with a consistent track record of strong reserve growth at economical replacement costs, which are key indicators of health for an E&P company. This includes above average full cycle netbacks (average of $17.70/boe from 2010-2014); good reserve replacement (average organic RR of 129% from 2010-2014); and a 2014 reserve life of just under 12 years.

Hess also continues to move down the cost curve in key shale plays. Well completion costs in the Bakken have fallen to less than $5.3 million per well versus $13.4 million seen in early 2012 while days to spud a well have dropped from 45 in 2011 to 17. The company continues to have one of the highest 30 day IP rates in the space. Despite its drop in size following restructurings, it still retains good geographical diversity, with core positions in the onshore shale (Bakken, Utica); offshore GoM; the North Sea; Southeast Asia; and offshore West Africa. It is important to note that several of these regions are PSC (Production Sharing Contracts) regimes which offer a partial cash flow hedge in lower priced environment. Hess also has a track record as one of the more successful independent E&Ps in the exploration space, highlighted by its most recent success in offshore Guyana.

AMPLE CURRENT LIQUIDITY

Hess has gotten ahead of the liquidity issue heading into the oil price downturn. Total liquidity at Sept. 30 was $8 billion, including $3 billion in cash (mostly from the Bakken midstream JV in July of this year); $4 billion in undrawn revolver commitments which mature in January 2020; and another $900 million in uncommitted lines. Net debt to cap at Sept. 30, 2015 was just 13%. The company's maturity wall is light and includes just $522 million in total between now and 2018. As stated above, under our base case assumption of $50/bbl WTI and stress assumption of $40/bbl WTI in 2016, Hess would not need to borrow incremental debt for E&P operations.

STRATEGIC TRANSFORMATION COMPLETE

Hess has all but completed its transition to a pure play E&P company from a small integrated oil company, with its earlier exit from refining and trading, the sale of its retail business for $2.8 billion in September of 2014, and the sale of a 50% stake of its Bakken Midstream to GIP for $3 billion in mid-2015. The only piece left is an IPO of the equity stake in the Bakken midstream jv. Difficult market conditions for MLPs suggest that such an IPO may be delayed; however, total proceeds expected from such an event are small. In the future, when MLP market valuations recover, Fitch expects the MLP is likely to provide an ongoing valuable source of liquidity to Hess parent through dropdowns of logistics assets.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case include:

--Base Case WTI oil prices of $50/bbl in 2016, $60/bbl in 2017, $65 in 2018, and $70/bbl in 2019;

--Stress Case WTI oil prices of $40/bbl in 2016, $45/bbl in 2017, and $50/bbl thereafter;

--Base Case Henry Hub natural gas prices of $2.75/mcf in 2016, $3.00/mcf in 2017,and $3.25/mcf in 2018;

--Stress Case Henry Hub natural gas prices of $2.25/mcf in 2016, flatlining at $2.75/mcf thereafter;

--Base Case cumulative production growth of 1.7% from 2015-2019;

--Stress Case cumulative production growth of -4.6% from 2015-2019;

--Capex of less than $3.0 billion in 2016;

--Minimal growth in dividend and minimal asset sales in the Base Case;

--Flat dividends and $150 million in annual asset sales in the Stress Case.

RATING SENSITIVITIES

Positive: No positive rating actions are currently contemplated given the reduction in Hess' size, scale and diversification associated with recent company restructuring and weakening credit metrics associated with low oil prices. However, future developments that could lead to positive rating actions include:

For an upgrade to 'BBB+':

--Increased size, scale, and diversification, and;

--Sustained debt/boe 1p in the <$30/boe range, debt/EBITDA<1.25x or debt/flowing barrel <$13,500;

Negative: Future developments that could lead to negative rating action include:

--Sustained debt/boe 1p above approximately $4.75/boe;

--Sustained debt/EBITDA above the 2x-2.25x;

--Sustained debt/flowing barrel > $18,000.

To remove the Negative Outlook at 'BBB':

--A credit-friendly method to fund deficit spending, for example a material equity issuance, or asset sale with limited impacts on existing metrics.

Fitch would anticipate downgrading the credit to the 'BBB-'level absent evidence of meaningful production decline or oil inventory drawdown that supports a price recovery by the end of 2016. A credit-friendly method to fund deficit spending that helps bridge the credit profile through an extended price recovery may also alleviate ratings pressure over the next 12-18 months.

LIQUIDITY AND MATURITY PROFILE

Hess' total liquidity at Sept. 30 was $8 billion, including $3 billion in cash; $4 billion in undrawn revolver maturing in January 2020, and another $900 million in uncommitted lines. Net debt to cap was just 13%. The company's maturity wall is very light and includes $71 million due in 2016, $373 million due 2017, and $78 million due 2018, with the next sizable maturity due 2019 ($1 billion). Hess' main financial covenant is a maximum debt-to-capitalization ratio of 62.5% contained in its revolver, and the company had ample headroom on this at Sept. 30. Hess had historically carried a large LoC position linked to its energy marketing arm but this requirement has largely gone away following its exit from the downstream and energy marketing.

Covenant restrictions across Hess' debt instruments are light. There are no financial covenants beyond the debt-to-cap covenant contained in the revolver. Other non-financial covenants contained in the bond indentures include restrictions on mergers and asset sales, limitations on sale leasebacks and cross default provisions.

OTHER OBLIGATIONS:

Hess' other obligations are manageable. Hess' qualified pension was underfunded by -$199 million at YE 2014, versus overfunded by $188 million the year prior. The main drivers of the decrease were actuarial losses and lower returns on plan assets. For 2015, expected pension contributions were $45 million, of which $41 million had been paid as of Sept. 30. Hess' Asset Retirement Obligation (ARO) linked to environmental remediation stood at $2.16 billion at Sept. 30, 2015 versus $2.32 billion at Sept. 30, 2014.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Hess' ratings as follows:

--Long-term IDR at 'BBB';

--Senior unsecured notes/debentures at 'BBB';

--Senior unsecured revolver at 'BBB'.

The Rating Outlook is revised to Negative from Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997759

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997759

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Dino Kritikos
Director
+1-312-368-3150
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations
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Email: alyssa.castelli@fitchratings.com


Source: Business Wire (January 12, 2016 - 12:25 PM EST)

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