Zacks Investment Research



|Hess Corporation |(HES - NYSE) |$148.80 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted

Reason for Report: Name and Ticker Change: AHC to HES Previous Edition: April 5, 2006

Overview

Based in New York, Amerada Hess Corporation (AHC) is a global integrated oil company engaged in the exploration and production, and refining and marketing of crude oil and natural gas. The bulk of its earnings come from exploration and production activities, which are concentrated in the United States, U.K., Norwegian and Danish sectors of the North Sea, Equatorial Guinea, Indonesia, Thailand, Malaysia, and Columbia. Its refining and marketing business consists of a 50% interest in the 495,000 (BPD) Hovensa refinery (whose major source of crude oil is Venezuela) joint venture in the U.S. Virgin Islands as well as a refining facility on the East Coast of the U.S. AHC owns nearly 1,350 retail gasoline stations. More information on the company is available at its website: . FY ends on December 31.

On May 3, 2006, shareholders approved a plan to shorten the company's name to Hess Corp. and agreed to a 3-for-1 stock split. Shareholders approved an increase in the number of authorized shares from 200 million to 600 million to effect the split. The split will be distributed on May 31 to shareholders of record May 17, 2006. To reflect the company's name change, its stock ticker will be listed on the New York Stock Exchange as "HES" beginning May 9, 2006.

The key positive and negative arguments are addressed below:

|Key Positive Arguments |Key Negative Arguments |

|Compelling Fundamentals: |Earnings Impediments: |

|Asset upgrade initiatives moving forward (recent asset swap with |High cost structure (operating and F&D costs) – well above industry |

|Apache) |average |

|Improved reserve replacement ratios |One of the lowest reserve/production ratios in the sector |

|Continued strengthening of balance sheet |Sharp decline rates in existing fields have contributed to high operating|

|Higher than expected retail marketing earnings |costs per barrel |

|Earnings momentum accelerating |Macro Issues: |

|Hedging losses expected to decline dramatically, beginning in 2006. |Geopolitical risks associated with international operations |

|Growth: |High sensitivity to volatile oil prices |

|Improving visibility of production growth profile | |

|Plans to drill approximately 15 high impact wells annually | |

|Upward revision in capex | |

|Rising commodity prices and refining margins are increasing free cash | |

|flow and enabling greater expenditure on exploration activities | |

Revenue

Production of crude oil, natural gas liquids, and natural gas make up the majority of AHC’s earnings. Refining and marketing make up the majority of its sales but a much smaller percentage of its earnings. Analysts mainly focus on operating earnings instead of revenue. A better measure than sales that reflects AHC’s prior activities and prospects is its average daily worldwide production of oil and gas.

Segment Operating Income:

AHC operates in two segments, exploration and production, and refining and marketing. Earnings from recurring operations forecast by segment are detailed below:

|$ in Millions |2004A |4Q05A |2005A |1Q06A |

|Total daily Production |343 |331 |365 |393 |

|Y-o-Y Growth Rate | |-3.6% |8.8% |12.8% |

During 1Q06, AHC and its Oasis partners, COP ($66.90, Buy) and MRO ($79.36, Buy), re-entered their former oil and gas production operations in Libya. AHC’s net share of Libyan oil in 1Q06 was 23 mbd, produced, but not sold.

Geographical Production Breakdown:

The Company has operations in the United States, United Kingdom, Norway, Denmark, Equatorial Guinea, Gabon, Azerbaijan, Thailand, Libya, Nigeria, and Indonesia. It continues to increase reserves outside the mature regions of the United States and North Sea.

GOM Update. About 5.5 mbd of AHC’s production in the Gulf of Mexico (GOM) is still shut in, and is split about equally between the Garden Banks area of operations, and the shallow water production from state leases and Main Pass Breton Sound area. AHC expects 2.5 mbd from the deepwater production of the Garden Banks area in May. AHC plans to sell some of its assets on the Gulf Coast and in the state leases offshore. Drilling in the Pony and Ouachita prospects continues, and both are expected to reach their targeted objectives soon. Drilling of the Pony project, 100% interest, has encountered delays because of mechanical problems at 27,000 feet with the equipment, together with loop currents at the location, causing some delays in reaching the total depth of 32,000 feet. The Barossa exploration well on Garden Banks 158 encountered non-commercial quantities of hydrocarbons and was plugged and abandoned.

Equatorial Guinea. The Okume development continues on track with the installation of the two deep water tension leg platforms and the four shallow water jackets. Development drilling and installation of the Central Processing Facility topsides are scheduled for the second half of this year. First production is expected in 1Q07. AHC has two drilling rigs coming into the fields in August-September. Management estimates that about four wells will be completed by the end of the year and expects production to ramp from January through the end of 1Q07.

Indonesia. Good progress is being made on AHC's two development projects in Indonesia with the construction of the onshore gas plant and offshore facilities. Development drilling is expected in

4Q06 and first production is expected to commence in the first half of 2007.

Thailand

The onshore gas development is on track to go from projects sanction to first production in about 14 months. Gas plant construction is progressing and the 40 mile gas pipeline to the power plant is being laid and first production is expected by 1Q07.

United Kingdom. The commissioning of the onshore gas handling facilities for the Atlantic/Cromarty development is nearing completion with first production expected soon.

Russia. Production in 1Q06 averaged 16 mbd, boosted by a small acquisition in 4Q05. AHC is focused on E&P only and has no interest in expanding downstream.

Egypt. AHC recently acquired Apache's (APA, $71.04, Buy) interest in the Mediterranean and is currently working with partners to evaluate a number of different options for development before securing a drilling rig. But it is still very much a work in progress as the company is learning about the challenge of operating in West Med, coordinating with partners and dealing with Egyptian authorities.

Outlook

Production guidance for 2006 remains 360-380 MBOE/d, which was previously revised down modestly. This represents about a 10% increase, or 35 MBOE/d, versus 2005 levels, and is largely driven by the re-entry into Libya (20-25 MBOE/d) and full year of production from its Russian transaction/interests (7 MBOE/d). On an organic basis, production is expected to be essentially unchanged y-o-y. In 2005, volumes were down 2%.

2007 is expected to represent a major inflection point in its production profile driven by the start-up of

three major development projects, Okume (Equatorial Guinea), Phu-Horm (Thailand) and Pangkah (Indonesia), all of which are on track to start-up in the first half of 2007 and could fuel average annual growth of 3-5%.

Amerada experienced some operational difficulties with its three-well wildcat drilling program in the U.S. Gulf of Mexico during Q1. The Barossa exploration well was abandoned following low production volumes. The other two wells, including the Pony prospect have not yet reached target objectives following delays due to minor mechanical complications and down-hole pressure challenges. Management notes that down-hole pressure regime challenges are not uncommon to the location, but have forced Amerada to pursue a number of sidetrack drilling applications. Pony is 100% Amerada owned and is currently drilling at approximately 27,000 feet (target depth of 32,000 feet).

One brokerage firm (UnionBankSwitz.) forecasts 2006 and 2007 production growth of 9.5% and 8%, respectively.

One brokerage firm (MorganStanley) opines that E&P earnings were above expectations due to stronger than expected pricing as overall volumes were in line with expectations.

Refining and Marketing

Marketing and Refining earnings were $49 million in the first quarter of 2006 compared with $63 million in the first quarter of 2005. Refining earnings were $21 million in the first quarter of 2006 compared with $42 million in the first quarter of 2005. In the first quarter of 2006, earnings from HOVENSA were adversely impacted by the unscheduled shutdown and maintenance of the fluid catalytic cracking unit which lasted for approximately 20 days.

Marketing operations generated earnings of $12 million in the first quarter of 2006, compared with $13 million in the same period of 2005. The analysts forecast Refining and Marketing revenue of $400M for 2006 and $413M for 2007, which reflects a decline of 19.7% in 2006 and a growth of 3.2% in 2007.

One brokerage firm (MorganStanley) opines that R&M results were below projections as unexpected turnaround costs associated with a conversion unit at the HOVENSA refinery were higher than expected. Below the operating line, corporate costs and interest expense were similar to expectations.

Please refer AHC Zacks Research Digest spreadsheet for further details on operating income estimates.

Capital Structure/Solvency/Cash Flow/Governance/Other

Cash flow

Operating cash flow was $889 million. Net cash provided by operating activities was $1,198 million in the first quarter of 2006 compared with $461 million in 2005. Capital and exploratory expenditures for the first quarter of 2006 amounted to $1,387 million of which $1,354 million related to exploration and production activities

At March 31, 2006, cash and cash equivalents totaled $504 million compared with $315 million at December 31, 2005.

Capital Expenditure

The 2006 capital budget of $4 billion remained unchanged. This budget is inclusive of $780 million for

acquisitions/concessions (Egypt/Libya), $3.1 billion for the upstream business and $125 million for the downstream business. Of the $3.1 billion upstream budget, $1.4 billion is earmarked for major development projects underway in 2006, which include the Okume Complex (Nigeria), the Shenzi prospect (Gulf of Mexico), JDA Phase II (Thailand/Malaysia), Ujung Pangkah (Indonesia) and Gassi Arab Agreb (Algeria).

Capital Structure

The Corporation's debt to capitalization ratio at March 31, 2006 was 35.8% compared with 37.6% at the end of 2005. Total debt was $3,775 million at March 31, 2006 and $3,785 million at December 31, 2005.

Stock Options

The effect of expensing stock options in 1Q06 was $6 million before income taxes, and $4 million after income taxes or $0.04/diluted share. The expected full-year effect of expensing stock options is

$30 million before income taxes and $20 million after income taxes.

Other Discussion

On May 3, 2006, shareholders approved a plan to shorten the company's name to Hess Corp. and agreed to a 3-for-1 stock split. Shareholders approved an increase in the number of authorized shares from 200 million to 600 million to effect the split. The split will be distributed on May 31 to shareholders of record May 17, 2006. To reflect the company's name change, its stock ticker will be listed on the New York Stock Exchange as "HES" beginning May 9, 2006.

On May 3, 2006,the Board of Directors of Hess Corporation declared, a quarterly dividend of 87.5 cents per share payable on the 7% Mandatory Convertible Preferred Stock of the Corporation on June 1, 2006 to holders of record at the close of business on May 15, 2006.

On December 29, 2005, the Oasis Group, a consortium of Amerada Hess (8.16%), ConocoPhillips (16.33%), and Marathon Oil (16.33%), announced it had reached an agreement with the Libyan National Oil Corporation to resume oil and gas production operations in the Waha concession. Amerada Hess will pay $260 million as its share to re-enter and extend the concessions to 2034, and $106 million to cover investments by the Libyan government while the group’s assets were in escrow. The Waha concessions are located in the Sirte Basin, and contain approximately 980 million barrels of oil equivalent (boe) in reserves. Current production is approximately 350,000 b/d of oil. Based on its interest, Amerada Hess is expected to add 80 million boe to proved reserves and 20,000-25,000 b/d to production in 2006. Deal terms favor the Libyan government.

On December 9, 2005, the company announced that it repurchased $181M in principal amount of its outstanding debt in connection with the partial tender offer of its $284.4M 7.375% Notes due October 1, 2009 announced on November 8, 2005.

Earnings per Share

|EPS |

|Positive |50% |

|Neutral |43% |

|Negative |7% |

|Average Target Price |$161.14↑ |

|Digest High |$176 |

|Digest Low |$107 |

|Number of Analysts providing Target Price/|7/16 |

|Number of Total Analysts | |

Risks to the price target include volatile oil and gas prices, a slowdown in global economic growth, cost reductions, financial targets, and exploration success as it relates to future growth and geopolitical risks.

Please refer Zacks Research Digest spreadsheet on AHC for further details on valuation.

Long-Term Growth

Long-term growth for integrated oil and gas is a function of the outlook for production growth, the extent of refineries’ expansion capabilities and balance sheet strength.

Recently, reserve replacement and finding and development (F&D) costs of AHC have shown improvement. The company has an active exploration program for 2006. This would also add further visibility to Hess's long-term production profile. Most analysts believe results will continue to improve, with growth rates possibly reaching double digits beyond 2006, when new upstream projects are expected to come on line. However, the analyst community will likely need to see more proof of a full turnaround in the E&P business and successful integration of recent acquisitions before becoming more bullish on longer-term prospects.

The analysts are also concerned about AHC’s high unit cost structure as well as relatively high average unit finding and development costs. AHC is one of the highly leveraged companies in the large-cap E&P space. Its balance sheet has improved slightly, benefiting from increased cash flow (higher price realizations and margins). If oil prices decline to mid-cycle levels, it would be difficult for AHC, with an aggressive capital expenditure plan, to further reduce leverage or increase its return on invested capital.

Key Events and Dates

July 26, 2006: Expected 2Q ‘06 Earnings Release.

Individual Analyst Opinions

POSITIVE RATINGS (50%)

BMO Nesbitt – Outperform ($170 Price Target) – (4/27/06): The firm maintains an Outperform rating. It thinks the stock is attractively valued given the improving visibility of the company’s production growth profile and leverage to strong downstream refining fundamentals.

B. of America – Buy ($170) – (4/27/06): The firm maintains a Buy rating and its price target on the stock.

Deutsche Bank – Buy ($155) – (4/26/06): The firm maintained a Buy rating and lowered the target price to $155 from $162 per share. The firm values Hess on its returns and growth returns on cost of capital.

Friedman, Billings – Outperform ($175) – (4/27/06): The firm reiterated an Outperform rating.

Oppenheimer – Buy – (5/1/06): The firm expects AHC's stock price to benefit from industry consolidation because of its attractive asset mix and upstream portfolio.

Smith Barney – Buy ($175) – (4/26/06): The firm views AHC as one of the most attractive names in the large-cap US oil space. It anticipates a stronger quarter for AHC in the second quarter 2006 with continued leverage to the strong commodity prices and improved recovery of volumes. It maintains a Buy rating and a target price of $175 per share.

UnionBankSwitz. – Buy ($176) – (4/26/06): The firm maintains a Buy rating on the stock. It opines that Amerada Hess’s relative valuation should improve as F&D costs and organic production growth should match the peer group over the next several years, driven by the execution of the development of its inventory of discoveries.

NEUTRAL RATINGS (43%)

AG Edwards – Hold – (04/26/06): Despite a high impact drilling program and its leverage to oil prices, the firm reiterates a Hold rating.

Goldman – In-Line – (04/26/06): The firm reiterated an In-Line rating. It sees meaningful upside potential for AHC’s shares.

J.P. Morgan – Neutral – (4/26/06): The firm thinks the stock’s valuation discount relative to the peer group sufficiently compensates investors for the risk inherent in the stock (pricey exploration strategy, downside risk if oil prices retreat, weak cash flow and poor returns relative to the peer group).

Lehman – Equal Weight ($107) – (5/1/06): The firm maintained an Equal weight rating and raised the 12-month target price to $107 from $98 per share. It believes the stock is fairly priced in comparison to other America-based integrated oil companies within the firm’s universe. While Hess will likely benefit handsomely and will likely rank among the top winners of the group if oil prices continue to ascend higher, given its earnings sensitivity to changes in the commodity prices, it believes the stock will be more vulnerable.

Merrill – Neutral – (4/27/06): The firm remains neutral on the stock.

NEGATIVE RATINGS (7%)

MorganStanley – Under weight – (4/26/06): The firm believes AHC will outperform the S&P 500 and that fair value is near $170-$175 per share. However it prefers other names in the space.

Copy Editor: Uttara G.

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May 3, 2006

Research Associate: Prabhlin Chandhok, ACA

Editor: Lynnette Woolery, M.Sc.(Fin.), CFA

Sr. Editor: Ian Madsen, CFA imadsen@ 800-767-3771 x417

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