Fitch Upgrades Marathon's IDR to 'BBB+'; Outlook Revised to Stable
CHICAGO -- June 16, 2014
Fitch Ratings has upgraded Marathon Oil Corporation's (MRO) Issuer Default
Rating (IDR) and associated ratings to 'BBB+' from 'BBB', and affirmed the
company's short-term IDR and commercial paper (CP) ratings at 'F2'. The
Outlook has been revised to Stable from Positive. A full list of rating
actions is included at the end of this release.
Approximately $6.46 billion of debt is affected by today's rating action.
Upgrade to 'BBB+': The upgrade was driven by MRO's robust operational and
financial performance over the last several quarters, which in turn has been
driven by strong growth and efficiency gains in its liquids shale plays,
resulting in debt/boe metrics that are strong for the rating category and
compare favorably to a number of higher-rated peers. At March 31, 2014,
Marathon's debt boe/1p reserves declined to $3.04 from $3.42/boe; its debt/boe
proved developed (PD) reserves declined to $4.27/boe from $4.77/boe; and its
debt/flowing barrel stood at $14,156/bbl.
Marathon has a sizable, multi-year inventory of drilling opportunities in the
shale plays which provides good visibility on future production and reserve
growth and increases confidence that it will be able to sustain its positive
momentum going forward.
Key Ratings Drivers: Marathon's ratings are supported by its reasonably
diverse upstream portfolio; high and growing exposure to liquids in the
upstream (72% of production and 79% of reserves in 2013, up from 71% and 77%
in 2012); strong cash generation (full-cycle 2013 netbacks as calculated by
Fitch of $31.21/boe, one of the strongest among oil-heavy peers); robust
liquidity; and track record of defending the rating through asset sales and
These are balanced by the company's historically lackluster output growth
(less than 2% on average from 2007-2011), and selective upstream execution
issues that the company has experienced in the past. However, Fitch believes
the strong performance in the shale plays, and the fact that these lower risk
plays are set to make up a growing percentage of MRO's overall portfolio,
compensates for the risk of misses elsewhere in the portfolio on a
Upstream Metrics: Marathon's 2013 upstream metrics were solid. Total proven
reserves rose to approximately 2.17 billion boe from 2.02 billion boe the year
prior. PD reserves were 71% of totals but included a large number of reserves
associated with the AOSP project in Canada. The company had a strong Reserve
Replacement Ratio (RRR) of +185% on an organic basis, and +181% on an all-in
basis. This resulted in very low 1-year F&D (finding & development cost) of
just $15.81/boe, and 3-year FD&A (finding, development & acquisition costs) of
just $19.29/boe. Sources of reserve gains were mostly operating additions and
As calculated by Fitch, Marathon's 2013 R/P ratio edged up to 12.3 years from
11.8 years in 2012. Unit economics were very strong. Full-cycle netbacks rose
to $31.21/barrel. The company's strong netbacks stem from its high and growing
liquids production, which gives it better cash flow relative to gas-heavy
peers, as well as increased efficiency in shale plays, which lowered unit
North Sea Asset Sale: In early June, Marathon announced it had entered an
agreement to sell its Norwegian North Sea assets to Det norske oljeselskap ASA
for $2.7 billion ($2.1 billion net proceeds) with the effective date of the
transaction Jan. 1, 2014. Marathon retained its UK North Sea assets after
failing to receive an acceptable offer. While the sale of the North Sea asset
will have an impact on debt/flowing barrel, its impact on debt/boe metrics
should be minor given that it has relatively small proven reserves associated
with it (<5% of totals). Fitch does not anticipate the company will need to
borrow to fund its capex program or dividend following the sale, given its
current cash balances and the improving free cash flow (FCF) profile for the
rest of its portfolio. Fitch also expects the company's Asset Retirement
Obligation (ARO) liabilities to improve significantly following the sale, as
just under half of Marathon's total $2.1 billion in AROs were associated with
the North Sea properties.
Outperformance in Shales: Marathon has significantly exceeded previous
production guidance for the Eagle Ford - earlier given as 80,000 boepd by 2016
and now reset to approximately 140,000 boepd by 2017. Higher well productivity
and sharp drops in well completion times have been key drivers of gains in
shale play. In first quarter 2014 (1Q'14), production averaged 96,000 boepd, a
33% increase over year ago averages. On a forward-looking basis, further gains
are expected in the Eagle Ford as pad drilling increases, and spacing between
wells, continues to fall. MRO's other shale plays have also performed well,
including legacy Bakken/Three Forks positions, as well as South Central
Oklahoma Oil Province (SCOOP). Total production across the company's three
onshore shale plays rose to 154,000 boepd in 1Q'14, a 26% increase from levels
seen a year ago.
Recent Financial Performance: Marathon's latest 12-month (LTM) credit metrics
for the period ending March 31, 2014 were strong. As calculated by Fitch,
EBITDA stood at $7.94 billion, while debt edged down to $6.6 billion,
resulting in LTM debt/EBITDA of just 0.81x, while EBITDA/gross interest
expense stood at 28.1x. The combination of strong reserve additions, strong
production growth, and moderate debt reductions combined to produce debt/boe
metrics that are strong for the rating category. As calculated by Fitch,
Marathon had debt/boe proven reserves of $3.04/boe, debt/boe PD reserves of
$4.27/boe, and debt/flowing barrel of $13,625. LTM FCF improved significantly
from -$1.41 billion at YE 2012 to $249 million for the LTM period. Under
Fitch's base case assumptions including the North Sea asset sale, the company
will be FCF negative in 2014 and 2015, but will not need to borrow to fund
capex over this period.
Liquidity: Marathon's liquidity at the end of the first quarter was good, and
included cash of $1.964 billion, and full availability on the company's $2.5
billion unsecured revolver (recently renewed, now due 2019), which is also
used to backstop the company's commercial paper program. The main covenant on
the revolver is a 65% debt-to-cap ratio, which the company had significant
headroom on at March 31, 2014. The revolver also contains a negative pledge
and change of control provisions. Other covenants across Marathon's debt
structure include restrictions on asset sales, sale-leasebacks, and mergers.
Near-term debt maturities include $51 million due in 2014, $1.068 billion due
2015 and nothing due 2016.
Other Liabilities: Marathon's other liabilities are manageable. The company's
ARO rose to $2.1 billion from $1.78 billion at YE 2012, and was primarily
linked to environmental remediation of existing upstream platforms. The
pension deficit at year-end 2013 for U.S. plans declined to $318 million
versus $516 million the year before, but was manageable when scaled to
underlying cash flows. Total pension contributions for 2014 across all plans
are expected to be $77 million, of which MRO had contributed $20 million at
the end of 1Q'14.
Positive: No upgrades are anticipated in the near term beyond the 'BBB+'
level. However, future developments that could lead to positive rating actions
---Sustained lower debt levels, accompanied by increased size, scale, and
diversification in plays, as well as continued solid upstream operational
Negative: Future developments that could lead to negative rating action
--Inability to execute on stated growth targets in key plays or major negative
--A large leveraging transaction or asset sale which resulted in sustained
debt/boe metrics significantly above current levels. This might include the
sale of AOSP or Equatorial Guinea, depending on the size of the stake sold;
--A sustained period of low oil prices without offsetting adjustments in
--Significant debt-funded shareholder-friendly actions.
Fitch has upgraded Marathon's ratings as follows with a Stable Outlook:
--IDR to 'BBB+' from 'BBB';
--Senior unsecured revolver and notes to 'BBB+' from 'BBB';
--Industrial revenue bonds to 'BBB+' from 'BBB'.
Fitch has affirmed the following, with a Stable Outlook:
--Commercial paper at 'F2';
--Short-Term IDR at 'F2.'
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);
--Global Impact of US Shale Oil - Rising Production Tempers World Prices
(February 10, 2014);
--Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an
Impact (February 4, 2014);
--Scenario Analysis: Lifting the U.S. Crude Export Ban (January 27, 2014);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services
Sectors (Aug 12, 2013)
--Updating Fitch's Oil & Gas Price Deck (July 29, 2013)
--Energy Handbook--Upstream Oil & Gas (June 28, 2013)
Applicable Criteria and Related Research:
Energy Handbook - Upstream Oil & Gas
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Mark C. Sadeghian, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Brian Bertsch, New York, +1-212-908-0549
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