Fitch Rates Marathon Senior Unsecured Notes 'BBB '
Marathon's ratings reflect the company's high exposure to liquids (as calculated by Fitch, 69% of production and 81% of reserves); reasonably diverse upstream portfolio; good liquidity; trend of efficiency gains in its core shale plays, which provide good visibility on future reserve and production growth going forward; and track record of defending the rating. The strong operational improvements in its shale plays were a key driver behind the upgrade to 'BBB+' in June 2014.
KEY RATING DRIVERS
High Growth from Shale: MRO's trend of robust production growth is driven by ongoing efficiency gains and higher recoveries in the company's liquids shale plays (the Eagle Ford, Bakken, and Oklahoma Resource Basins). Production across all three regions rose sharply y-o-y from 154,000 boepd in first quarter 2014 (1Q14) to 229,000 boepd in 1Q15, a 49% increase. Onshore shale continue to provide opportunities to further lower costs and increase cost competitiveness in the current low oil price environment. Marathon has maintained its 5%-7% production growth guidance target for 2015 despite large announced reductions in capex due to increased productivity from these plays.
Strong Upstream Metrics: Linked to its strong asset profile, Marathon's operational results continue to be strong and compare well against peers. As calculated by Fitch, the company's one- and three-year organic reserve replacement was 155% and 176%, respectively, while three-year FD&A declined to just \\$17.36/boe. Total liquids comprised approximately 69% of production and 81% of reserves. The largest source of reserve gains was operating additions (+270 mmbbls), although this was partly offset by asset sales (-111.3 mmbbls). MRO's 2014 reserve life increased from 12.3 to 13.1 years. Full-cycle netbacks were \\$16.17/boe in 2014 and have averaged approximately \\$20/boe since 2008. Prior to current refinancing activity, debt levels declined modestly, dropping from \\$6.6 billion in 2013 to \\$6.4 billion at March 31, 2015, resulting in debt/1p of \\$2.91/boe, debt/PD of \\$4.35/boe, and debt/EBITDA leverage of 1.75x.
Asset Sales: Marathon has sold off a number of non-core assets over the years as part of portfolio pruning. Proceeds have been used to reinvest in shale plays, support buybacks, and build liquidity. In 2014, the company sold off its licenses for the North Sea (Norway) for \\$2.1 billion, and closed on the sale of its 10% non-operated Production Sharing Contract for Angola blocks 31 and 32. Together, these proceeds brought in approximately \\$3.7 billion in proceeds. MRO retained the UK portion of its North Sea business in 2014 given weak bidder interest. Fitch expects this asset may come up again as an asset sale candidate if selling conditions improve.
Reasonable Financial Performance: Marathon's latest 12 month (LTM) credit metrics for the period ending March 31, 2015 were reasonable. As calculated by Fitch, EBITDA declined to \\$3.65 billion, while debt edged down to \\$6.4 billion, resulting in LTM debt/EBITDA of 1.75x. The decline in EBITDA was driven by the combination of lower oil pricing and lost production from asset sales. EBITDA/gross interest expense coverage stood at 13.7x. LTM free cash flow (FCF) at March 31, 2015 declined to -\\$1.78 billion but was negatively impacted by still high LTM capex (\\$5.56 billion), matched with sharply lower oil prices. The combination of strong reserve additions, strong production growth, and moderate debt reductions combined to produce debt/boe metrics that are robust for the rating category.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--WTI oil prices trending to a long-term price of \\$75/bbl in 2017;
--Proven reserve growth averaging approximately 4% per yr from 2015-2017.
RATING SENSITIVITIES
Positive: No upgrades are anticipated in the near term beyond the 'BBB+' level. However, future developments that could lead to positive rating actions include:
---Sustained lower debt levels, accompanied by increased size, scale, and diversification in plays, as well as continued solid upstream operational performance.
Negative: Future developments that could lead to negative rating action include:
--Inability to execute on stated growth targets in key plays or major negative reserve revision
--A large leveraging transaction or asset sale which resulted in sustained debt/boe metrics significantly above current levels.
--Significant debt-funded shareholder-friendly actions.
LIQUIDITY AND DEBT STRUCTURE
Marathon's liquidity at the end of the first quarter was good, and included cash and equivalents of \\$1.13 billion, and full availability on the company's \\$2.5 billion unsecured revolver for total liquidity of \\$3.63 billion. In May, the revolver was upsized to \\$3 billion (due May 2020), resulting in pro forma liquidity before Marathon's recent issuance of \\$4.13 billion. The revolver is also used to backstop the company's commercial paper program. Near-term debt maturities are manageable and include \\$1.068 billion due 2015, nothing due 2016, and \\$682 million due 2017. Covenants are light and include a 65% debt-to-capital ratio on the revolver (actual cash adjusted debt-to-capital ratio 20% at March 31, 2015), a negative pledge, and change of control provisions. The change of control provision is triggered if the voting stock of more than 35% of the borrower is acquired. Other covenants across Marathon's debt structure include restrictions on asset sales, restrictions on sale-leasebacks, and restrictions on mergers.
OTHER LIABILITIES
Marathon's other liabilities are manageable. The company's asset retirement obligation (ARO), which is primarily linked to remediation of offshore platforms, declined to \\$1.98 billion at YE 2014 versus \\$2.1 billion the year prior. s. The modest reduction in ARO was linked to the company's sale of its North Sea Norway properties. The pension deficit for U.S. plans at YE 2014 rose to \\$320 million versus \\$318 million the year before. Across all plans, the deficit declined to \\$349 million versus \\$360 million the year prior. The deficits are manageable when scaled to underlying funds from operations (FFO). Total pension contributions for 2015 are expected to be \\$80 million for U.S. plans and \\$15 million for non-U.S. plans. Additional relief in pension expense is possible from recent headcount reductions, as well as moves by the company in the first quarter to freeze pension benefits as part of broader cost control efforts.
FULL LIST OF RATING ACTIONS
Fitch currently rates Marathon Oil Company as follows:
--IDR at 'BBB+';
--Sr Unsecured Revolver and Notes at 'BBB+';
--Industrial Revenue Bonds at 'BBB+';
--Commercial Paper at 'F2';
--Short-Term IDR at 'F2'.
Contact:
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1 312-368-2090
Fitch Ratings, Inc.
70 West Madison Street,
Chicago, IL 60602
Secondary Analyst
Dino Kritikos
Director
+1 312-368-3150
Committee Chairperson
Eric Ause
Senior Director
+1 312 606-2302
Date of Relevant Rating Committee: June 13, 2014
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