Fitch Assigns First-Time 'BBB' Ratings to Marathon Petroleum Corporation

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned ratings to Marathon Petroleum Corporation MPC as follows:

--Issuer Default Rating (IDR) 'BBB';

--Senior unsecured debt 'BBB'.

Approximately $5.9 billion of debt is affected by this rating action.

The Rating Outlook is Stable.

KEY RATINGS DRIVERS

MPC's ratings are supported by significant scale in the domestic refining space, integration with its pipeline and logistics segment, an expanded retail presence, material free cash flow generation, access to refined product export markets, and ample financial flexibility. Rating concerns include an elevated leverage profile after the acquisition of Hess Retail in 2014, a heightened focus on shareholder returns, and exposure to changes in crude and refined product prices.

RECENT FINANCIAL PERFORMANCE

MPC's recent financial performance has been strong. Fitch estimates 2014 free cash flow of $1.1 billion, which includes working capital effects of negative $660 million. Increases in 2014 EBITDA were primarily driven by increased volumes in the pipeline transportation and Speedway segments, including the effects of acquisitions. In 2014, MPC added $2.65 billion in long-term debt to fund the acquisition of Hess Retail, leading to consolidated 2014 debt/EBITDA of 1.3x. The leverage profile is moderately higher than similarly-rated refining peers but is not an undue concern given strong cash flow generation and sufficient financial flexibility.

SHAREHOLDER RETURNS FUNDED WITH FREE CASH FLOW

MPC has aggressively returned capital to shareholders in the form of share repurchases and dividends, including $2.7 billion in 2014. Stock repurchases have been driven by capital restructuring post-spin and have taken place in a favorable refining environment, moderating impacts on credit quality. In Fitch's view, capex, dividends, and planned repurchases are manageable given the cash flow profile. However, an increase in shareholder initiatives inconsistent with a mid-cycle cash flow profile could heighten credit risk.

REFINERIES PROFITABLE DESPITE VOLATILITY

Despite the volatility in crude and product prices in the fourth quarter, crack spreads remained positive during the quarter, allowing MPC refineries to realize high utilization rates and good financial results. The rapid change in commodity prices contributed to decreases in operating cash flow due to changes in working capital, which are typical for the refining sector during times of volatility. MPC's integrated downstream distribution system should help it to weather changes in pricing by increasing the company's ability to access the most economic product markets, including exports.

ATTRACTIVE INVESTMENT SLATE

MPC has set a 2015 capital budget of $2.5 billion. The company is allocating $1.3 billion capital to the pipeline and retail segments in 2015, which should increase the overall percentage of cash flow from these more stable business lines. MPC has several smaller scale investments lined up for the refining segment designed to increase capacity to run lighter crudes, including condensates from the emerging Utica and Marcellus Shales. MPC's refining investments will diversify the crude and product slate and should increase operational flexibility. These investments, particularly with regard to flexibility in sourcing and placement, serve as a net positive given the rapidly changing dynamics of North American crude and product markets.

MLP FUNDING VEHICLE

MPLX LP, MPC's MLP pipeline and logistics subsidiary, is expected to actively raise new debt and equity capital to fund asset dropdowns from MPC. This provides an additional funding source for midstream investment, while MPC retains a large equity stake (currently 70% of LP units as well as the 2% GP interest and incentive distribution rights) in MPLX. MPC retains significant pipeline and logistics assets, and estimates it has up to $1.6 billion in qualifying EBITDA eligible for dropdown to MPLX. In 2014 MPC focused on dropping incremental equity stakes in MPLX Pipe Line Holdings to develop the asset base at MPLX in anticipation of future drops. As of Dec. 31, MPLX held 99.5 percent of MPLX Pipe Line Holdings LP, up from 56 percent in 2013. MPC has the option of monetizing portions of its LP interest while maintaining control of MPLX via the GP interest. In addition, MPC has to the ability to accelerate or defer dropdowns to MPLX depending on market conditions, contributing to additional financial flexibility.

AMPLE LIQUIDITY

At Dec. 31, MPC had $1.5 billion in cash, and has $3.8B in additional liquidity from a $2.5 billion credit facility and a $1.3B receivables securitization facility, leading to $5.3 billion in total liquidity. When combined with solid near-term operating cash flow prospects, liquidity is estimated to be more than adequate to deal with short-term working capital shocks. Management also retains significant flexibility with regard to the timing of stock buybacks as a means to maintain liquidity. Near term maturities are manageable and include $750 million in senior notes due in 2016.

RATINGS SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Demonstrated commitment to lower debt levels, consistent with mid-cycle debt/EBITDA under 1.0x;

--An increasing percentage of operating margin from more stable pipeline and retail operations.

Negative: Future developments that may, individually or collectively, lead to a negative rating action:

--Large debt-funded capital expenditures leading to mid-cycle debt/EBITDA above 2.0x;

--Large share repurchases funded with incremental debt;

--Material operational problems at one of the large refineries leading to an impaired cash flow profile.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Production Sharing Contracts- Counter-cyclicality Supports Debt in a Low Oil Price Environment (Jan. 28, 2015);

--'E&P Borrowing Base Redeterminations- History Suggests Lenders May Go Easy in a Downturn' (Dec. 5, 2014);

--'Energy Handbook--Upstream Oil & Gas' (July 16, 2014);

--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 2014);

--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact' (Feb. 4, 2014);

--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=857828

E&P Borrowing Base Redeterminations (History Suggests Lenders May Go Easy in a Downturn)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=829628

Energy Handbook - Upstream Oil & Gas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706481

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979231

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