OREANDA-NEWS. Fitch Ratings has affirmed Marathon Oil Corporation's (MRO) Issuer Default Rating (IDR) and associated ratings at 'BBB+', and affirmed the company's short-term IDR and commercial paper (CP) ratings at 'F2'. The Rating Outlook is Stable. A full list of rating actions is included at the end of this release.

On a pro forma basis including Marathon's June \$2.0 billion senior unsecured issuance, approximately \$8.4 billion of debt is affected by today's rating action.

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 gains 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 Q1 2014 to 229,000 boepd in Q1 2015, a 49% increase. Shale continues to provide opportunities for the company to lower costs and increase 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%, while three-year FD&A declined to just \$17.36/boe. 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. At YE 2014, debt/1p was \$2.91/boe, and debt/PD was \$4.35/boe. On a PF basis, assuming that the company uses half of its \$2.0 billion June issuance to refinance its 2015 notes, pro forma debt/1p would have been \$3.36/boe and debt/PD \$5.03/boe.

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 warehouse 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 brought in approximately \$3.7 billion in proceeds. MRO retained the UK portion of its North Sea business in 2014 given difficulties in finding a suitable buyer. Fitch expects this asset may come on the block again if selling conditions improve.

Reasonable Financial Performance: Marathon's 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 3/31/2015 declined to -\$1.78 billion but was negatively impacted by still high LTM capex (\$5.56 billion), matched with sharply lower oil prices. Looking forward, we expect this FCF deficit will be sharply reduced in 2015 and 2016 due to lower capex (\$3.3 billion), modestly higher prices, and production volume growth before returning to FCF positive status in 2017.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--WTI oil prices of \$50/bbl in 2015, \$60/bbl in 2016, and \$70/bbl in 2017;
--2015 capex of \$3.3 billion;
--\$500 million in asset sales in 2015;
--2015 production volume growth of just over 6%; long term volume growth of approximately 5.5%;
--No material equity repurchases;
--Modest dividend growth.

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, asset sale or share repurchase which resulted in sustained debt/boe 1p> 3.50-\$4.00/boe and debt/PD> \$5.00-\$5.50/boe.
--A sustained period of low oil prices without offsetting adjustments in spending.

LIQUIDITY AND DEBT STRUCTURE
Marathon's liquidity at the end of Q1 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, prior to the \$2.0 billion issuance, the revolver was upsized from \$2.5 billion to \$3.0 billion (due May 2020), resulting in pro forma liquidity of \$4.13 billion. The revolver is also used to backstop the company's commercial paper program. 2015 liquidity should also be increased by an additional \$500 million in asset sales in 2015. 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 cap 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 >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) declined to \$1.98 billion at YE 2014 versus \$2.1 billion the year prior, and was primarily linked to environmental remediation of existing offshore platforms. The modest reduction in AROs was linked to the company's sale of its Norway North Sea properties. The pension deficit for US plans at year end 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 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 Q1 to freeze pension benefits as part of broader cost control efforts.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Marathon Oil Company's ratings as follows:

--IDR at 'BBB+';
--Senior Unsecured Revolver and Notes at 'BBB+';
--Industrial Revenue Bonds at 'BBB+';
--Commercial Paper at 'F2';
--Short-Term IDR at 'F2'.