CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Marathon Oil Corporation's (MRO) Issuer Default Rating (IDR) and debt ratings to 'BBB' from 'BBB+'. Fitch has also affirmed MRO's short-term IDR and commercial paper (CP) ratings at 'F2' and revised its Outlook to Negative from Stable. A full list of rating actions follows at the end of this release.
Approximately $7.3 billion of debt is affected by today's rating action.
The main driver of the downgrade is Fitch's downward revision of its price deck in January and its impact on Marathon's forecast credit metrics, particularly leverage, which was weak for the 'BBB+' rating category. The current rating also reflects the company's high exposure to liquids (as calculated by Fitch, 69% of production and 81% of reserves); reasonably diverse upstream portfolio; strong 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.
KEY RATING DRIVERS
Weaker Projected Metrics: Continued weakness in oil and gas pricing has caused Fitch to revise its base and stress price decks lower, including a base case of $45/barrel in 2016 and $55/barrel in 2017, and a Stress Case of $35/barrel in 2016 and $40/barrel in 2017. Marathon has a relatively high sensitivity to oil pricing given its high liquids exposure. As projected by Fitch, in 2016 Marathon's debt/EBITDA will rise to approximately 3.8x and its free cash flow will stand at approximately -$390 million. Under the stress case of $35/bbl, debt/EBITDA rises to approximately 7.0x and free cash flow stands at approximately -$1.14 billion. Given the current oversupply in the market, Fitch has placed increasing weight on the $35 Stress Case for 2016 but believes prices are likely to recover in the out years as large capex cuts made across the industry to date begin to result in meaningful supply reductions.
Strong Operational Metrics: Marathon's recent operational results continue to be strong and generally compare well against peers. As calculated by Fitch, the company's 2014 1- and three-year organic reserve replacement was 155% and 176%, while three-year FD&A declined to just $17.36/boe. MRO's most recent reserve life was 13.1 years. Netbacks compare well against independent E&P peers, averaging approximately $19.30/boe on a full cycle and $39.30/boe on a half cycle (cash cost) basis since 2010. Given the recent sharp decline in prices, full cycle netbacks at Sept. 30 were -$4.84/boe, but the half cycle netback remained positive at $12.50/boe. Following the repayment of the company's $1 billion in 0.9% notes in November of 2015, pro forma debt/1P was $3.35/boe and debt/PD was $5.01/boe.
Credit Supportive Actions in the Downturn: Marathon has made substantial adjustments to offset low oil prices. It was a leader across the sector in cutting its dividend early to preserve credit quality, reducing it by 75% in Q3 of last year, which should improve FCF by $425 million per year. Fitch thinks it reasonably likely that if a lower for longer environment persists, the remaining payout could also be revisited, freeing up to $135 million in cash flow. Marathon also has high levels of capex flexibility. 2015 capex is expected to come in at or below $3.1 billion, down 36% from levels seen in 2014. In response to falling oil prices, in October MRO announced that it would cut its 2016 program further, up to $2.2 billion. The majority of this ($1.7 billion) is allocated to resource plays, which generally have the highest capex flexibility given that nearly all the acreage is held by production. The Eagle Ford in particular looks like it could be ramped down quickly, given the fact that it is still an eight rig program.
Asset Sales: Marathon has sold off a number of non-core assets over the years as part of portfolio pruning, and Fitch expects this will continue to be an important part of liquidity management. The company has sold off approximately $300-$310 million in assets over the last half of the year, including $205 million for Gulf of Mexico operated field, and exploration acreage in East Africa and Kenya.
KEY ASSUMPTIONS
Fitch's key assumptions for the issuer include:
--Base Case WTI oil prices of $45/bbl in 2016, $55/bbl in 2017, and $60 in 2018;
--Base Case Henry Hub natural gas prices of $2.50/mcf in 2016, $2.75/mcf in 2017, and $3.00/mcf in 2018;
--Base Case capex of $1.88 billion in 2016; $2.36 billion in 2017 and $2.98 billion in 2018;
--Base Case cumulative production growth of 2.5% from 2015 to 2019;
--Modest dividend growth after the 2015 cut;
--Stress Case WTI oil prices of $35/bbl in 2016, $40/bbl in 2017, and $42 in 2018;
--Stress Case Henry Hub natural gas prices of $2.25/mcf in 2016, $2.50/mcf in 2017, and $2.75/mcf in 2018;
--Stress Case capex of $1.88 billion in 2016 growing by 1% per year over the life of the forecast;
--Stress Case cumulative production growth of -7% from 2015 to 2019;
--Elimination of the dividend in 2017.
RATING SENSITIVITIES
Positive: No upgrades are currently contemplated given weakening credit metrics associated with low oil prices. However, future developments that could lead to positive rating actions include:
For an upgrade to 'BBB+':
--Increased size and scale;
--Sustained debt/EBITDA in the 1.25x-1.50x range, or debt/PD at or below the <$5.00-$5.50/boe range.
Negative: Future developments that could lead to negative rating action include:
For a downgrade to 'BBB-':
--Sustained debt/EBITDA above 2.25x-2.75x;
--Sustained debt/boe PD above the $6.00-$6.25/boe range;
--Meaningful gross debt reductions, done through either an equity issuance, or asset sales, could also be a credit mitigant that would help stabilize the company's ratings at the current level.
LIQUIDITY AND DEBT STRUCTURE
Marathon's liquidity at the end of Q3 was strong, and included cash of $1.68 billion, marketable securities of $700 million, and full availability on the company's $3 billion unsecured revolver for total liquidity of $5.38 billion. The revolver is also used to backstop the company's commercial paper program. The revolver is not due until May 2020 and near term maturities are modest over the next few years ($0, $682 million, $854 million, and $228 million from 2016 to 2020). Under both Fitch's base and stress cases, there is enough liquidity and revolver capacity to fund FCF deficits over the length of the forecast without the need to go to the market to issue incremental debt. Covenants across MRO's capital structure are generally light and include a 65% debt to cap ratio on the revolver (actual cash adjusted debt to capital ratio 30% at Sept. 30, 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) was $1.97 billion at Sept. 30, 2015, and was primarily linked to decommissioning costs for existing offshore platforms. Approximately $250 million-$300 million of that is linked to recent GoM asset sales and should fall away in 2016. The pension deficit for U.S. 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. As of Sept. 30, 2015, Marathon had made $65 million in contributions to its funded pension plans.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions:
Marathon Oil Company
--Long-term IDR downgraded to 'BBB' from 'BBB+';
--Senior unsecured revolver and notes downgraded to 'BBB' from 'BBB+';
--Industrial revenue bonds downgraded to 'BBB' from 'BBB+';
--Commercial Paper affirmed at 'F2';
--Short-term IDR affirmed at 'F2'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999155
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999155
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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