CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned Marathon Petroleum Corporation (MPC) a short-term Issuer Default Rating (IDR) and commercial paper rating of 'F2'.
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.
UPSIZED INVESTMENT SLATE
MPC's board approved a 2016 capital budget of $4.2 billion. In light of current market conditions and revisions to expected completion dates for certain projects, MPC currently expects that 2016 capital spending and investments will be $3 billion. The company is allocating $1.3 billion to refining and marketing, $310 million to Speedway, and $1.3 billion to the midstream segment, which includes MPLX. MPLX's spending is based on the midpoint of their 2016 forecast range of $0.8 billion and $1.2 billion and includes 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 Petroleum include
--Crack spreads reverting towards mid-cycle levels in out years;
--2016 capital spending in-line with management's announced plans;
--Moderate 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 Dec. 31 2015, MPC had total liquidity of $4.3 billion, including $1.1 billion in cash, a $2.5 billion undrawn credit facility, and approximately $700 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 size and timing of stock buybacks as a means to maintain liquidity. Near-term maturities are manageable and include $600 million in senior notes due in 2018. The company's $750 million in senior notes due in 2016 were extinguished in December 2015 using proceeds from a $1.5 billion senior note issuance.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
Marathon Petroleum Corporation
--Short-Term IDR 'F2';
--Commercial paper 'F2'
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form