Fitch Assigns 'BBB' to Marathon's Unsecured Notes; Outlook Remains Stable
Fitch Ratings has assigned a 'BBB' to Marathon Oil Corporation's (MRO) issuance of $2 billion in senior unsecured three- and 10-year notes. Net proceeds from the notes will be used to repay outstanding commercial paper obligations and for general corporate purposes. Commercial paper balances at Oct. 23, 2012 were $1.8 billion.
Fitch currently rates Marathon as follows:
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured credit facility and notes 'BBB';
--Industrial revenue bonds 'BBB';
--Commercial paper 'F2';
--Short-term IDR 'F2'.
Marathon's ratings are supported by a reasonably diverse upstream portfolio; high exposure to liquids in the upstream (64.5% of production and 75.3% of 2011 reserves); solid recent operational performance; robust liquidity; a track record of defending the rating through asset sales and capex cuts; and debt reductions made following the MPC spin off.
These are balanced by lackluster output growth (less than 2% on average from 2007-2011 as calculated by Fitch); the potential for increased spending to accelerate growth; and selective performance/execution issues in the upstream. Given the relatively high prices paid for the Hilcorp acquisition, Marathon is also likely to need to realize efficiency gains to achieve its return targets. Production growth targets for the 2012-2016 time frame are 5%-7% per annum (including Libyan production and planned asset sales).
Marathon's 2011 upstream metrics were good, driven in large part by a strong Reserve Replacement Ratio (RRR) of +137% on a one-year organic basis, and +212% on an all-in basis. This resulted in one-year F&D of just $15.23/boe ($26.53/boe on an FD&A basis including the acreage-driven Hilcorp, LLC deal). However, FD&A remained quite reasonable on a three-year basis at $21.92/boe. Good replacement numbers positively impacted Marathon's R/P ratio, which increased from 10.9 years to 12.4 years. The company continues to have relatively high liquids reserves and production, which gives it better cash flow relative to gassier but higher growth peers. At year-end 2011, balance sheet debt/boe 1p reserve was $2.67/boe, while balance sheet debt/boe proven developed reserve was $3.43/boe.
Eagle Ford Acquisition:
In 2011, Marathon acquired a $4.5 billion acreage position in the Eagle Ford from Hilcorp. The deal was paid for in cash and interim operating cash flow and resulted in the addition of 141,000 net acres (217,000 gross acres),and approximately 7,000 boepd of production. In April 2012, MRO entered a follow-on $750 million deal for additional acreage which closed Aug. 1, 2012. Second quarter Eagle Ford net sales rose to an average 21,000 boepd, and are expected to ramp up to 120,000 boepd by 2016. The contribution from all U.S. shale plays in Marathon's portfolio is expected to rise sharply over the next several years, increasing from about 20,000 boepd in 2011 to the 150,000-170,000 boepd level by 2016, with Eagle Ford contributing 100,000 boepd. In addition to Eagle Ford, this includes key positions in the Bakken, Anadarko Woodford basin, and Niobrara/DJ basins.
Recent Financial Performance:
Marathon's latest 12 month (LTM) credit metrics for the period ending June 30, 2012 were good. As calculated by Fitch, debt/EBITDA at June 30, 2012 was approximately 0.66 times (x) versus 0.65x at year-end (YE) 2011, while its EBITDA/gross interest expense coverage ratio rose to 26.3x from 23.5x. LTM free cash flow (FCF) declined to approximately -$369 million, and was impacted by unfavorable changes in working capital (-$921 million), modestly higher capex, and slightly lower funds from operations. 2012 capex is expected to come in at $5 billion. Under Fitch's base case assumptions, the company will be moderately FCF negative.
Marathon's liquidity at the end of the second quarter was good, and included cash of $452 million, and approximately 78% availability on the company's $2.5 billion unsecured revolver (due 2017) after netting out capacity used by the company's $550 million in commercial paper (MRO's credit facilities are used to 100% backstop the company's commercial paper program). The main covenant on the revolver is a 65% debt to cap ratio, which the company had ample headroom on at June 30, 2012. Near-term debt maturities are manageable and include $114 million in 9.125% notes due 2013 with nothing due thereafter until 2017. Future asset sales may provide additional liquidity, including the company's pending Alaska Cook Inlet assets ($375 million), and a potential (but uncertain) sale of its stake in the Athabasca Oil Sands Project in Alberta.
Marathon's other liabilities are manageable. Marathon's Asset Retirement Obligation (ARO) rose to $1.51 billion from $1.35 billion at YE 2010, and was primarily linked to environmental remediation of existing upstream platforms. The pension deficit at YE 2011 was approximately $470 million for the U.S. and $523 million across all plans, a significant reduction from previous levels due to the spinoff of MPC. 2012 pension contributions are expected to be $64 million.
Catalysts for positive rating actions could include a sustained improvement in upstream performance, reduced leverage, and increased size and scale. Catalysts for negative rating action could include a large leveraging transaction, or significant deterioration in operational performance resulting in higher debt/boe metrics.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Statistical Review of U.S. E&P Companies' (May 10, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Updating Fitch's Oil & Gas Price Deck' (Aug. 15, 2012);
--Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow Stress (Feb. 29, 2012);
--'Rating Oil and Gas Production Companies?Sector Credit Factors', (Aug. 9, 2012).
Applicable Criteria and Related Research:
Statistical Review of U.S. E&P Companies
Corporate Rating Methodology
Fitch Oil & Gas Price Deck -- 2010 Update
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress
Rating Oil and Gas Production Companies
Mark C. Sadeghian, CFA
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA