Fitch Ratings expects to rate Marathon Petroleum Corporation's
(Marathon; NYSE: MPC) senior unsecured notes 'BBB'. Marathon expects to
issue approximately $1.5 billion in notes in three maturity tranches.
The company intends to use net proceeds to pre-fund a $750 million 2016
bond maturity, as well as for general corporate purposes.
KEY RATING DRIVERS
MPC's ratings are supported by significant scale in the domestic
refining space, strong free cash (FCF) flow generation in the refining
segment, business integration with the pipeline and logistics segment,
an expanded retail presence supporting placement of product volumes, and
adequate financial flexibility.
Rating concerns include plans for higher growth spending in the pipeline
and transportation segment. Fitch anticipates a potential need for MPC
to support growth at MPLX, due to a large slate of capital projects at
Markwest and current weakness in equity market access for master limited
partnerships. Support from MPC could include taking MPLX units rather
than cash for asset dropdowns or building assets at the MPC level. These
actions could lower MPC's liquidity cushion or increase near-term capex
requirements at the MPC level, respectively.
REFINERIES PROFITABLE DESPITE VOLATILITY
Despite the volatility in crude and product prices in 2015, crack
spreads remained strong, allowing MPC refineries to achieve high
utilization rates and good financial results. The rapid change in
commodity prices contributed to decreases in operating cash flow driven
by changes in working capital, which are typical of refiners during
volatile periods. MPC's integrated downstream distribution system should
help it to weather changes in pricing by enabling the company to access
the most economic product markets, including export markets.
RECENT FINANCIAL PERFORMANCE
LTM cash flow generation has remained strong. As of Sept. 30, 2015,
consolidated LTM FCF was $1.2 billion, including the effect of
distributions to non-controlling interests and $581 million in common
dividends. As calculated by Fitch, LTM EBITDA was $7 billion, leading to
debt/EBITDA of 1.0x, with leverage moderately below Fitch's expectations
based on a strong EBITDA contribution from the refining segment.
UPSIZED INVESTMENT SLATE
MPC recently announced a 2016 capital budget of $4.2 billion. The
company is allocating $1.5 billion to refining and marketing, $400
million to Speedway, and $2.2 billion to the pipeline and transportation
segment, which includes MPLX. Over $1.2 billion of
pipeline/transportation spending is allocated towards Markwest's
development of natural gas and NGL infrastructure in the U.S. Northeast.
These investments, particularly with regard to flexibility in sourcing
and placement, serve as a net positive given the rapidly changing
dynamics of North American energy markets, as well as a way for MPC to
deploy FCF from the refining segment into higher-return projects.
Fitch's key assumptions within the rating case for Marathon include:
--Crack spreads reverting towards mid-cycle levels in out years;
--2016 capital spending in-line with management's announced plans;
--Modest increases in retail EBITDA driven by Speedway investments;
--MPC share buybacks are pursued opportunistically but with regard to
through-the-cycle leverage and liquidity targets;
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.
Fitch views positive rating actions as unlikely in the near term, given
the large scope of investment projects from the merger of MPLX and
Markwest which may require support from MPC, as well as MPC's focus on
returns to shareholders.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action:
--A sustained period of weak capital market access at MPLX, leading to
significant sponsor support which increases MPC leverage or results in a
weaker liquidity position, potentially though significant dropdowns for
units rather than cash;
--Large debt-funded capital expenditures or share repurchases leading to
mid-cycle debt/EBITDA above 2.0x;
--Material operational problems at one of the large refineries leading
to an impaired cash flow profile.
Negative rating actions would likely be driven by a combination of the
factors above, as well as significantly weaker than expected financial
results in the company's core refining segment. To date, strong cash
flow generation from the refining operations has supported share
buybacks, capital investments, and facilitated the cash portion of
consideration for the combination of MPLX and Markwest.
At Sept. 30 2015, MPC had total liquidity of $5.4 billion, including $2
billion in cash, a $2.5 billion undrawn credit facility, and $811
million available through a receivables securitization facility. When
combined with good near-term operating cash flow prospects, particularly
in the refining segment, liquidity is estimated to be adequate in 2016.
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, which will be pre-funded by the $1.5 billion senior note
FULL LIST OF RATING ACTIONS
Fitch currently rates Marathon Petroleum Corporation as follows:
--Long-Term Issuer Default Rating 'BBB';
--Senior unsecured notes 'BBB';
--Bank revolver and term loan 'BBB'.
Fitch expects to rate the following senior unsecured notes:
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Feb. 4, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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