CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Marathon Petroleum Corporation (MPC: APC) at 'BBB'. The Short-term IDR was affirmed at 'F2'. The Rating Outlook is Stable.
Approximately $6.4 billion of debt, excluding non-recourse debt at MPLX LP (NYSE: MPLX), is affected by today's rating action. A full list of ratings actions follows at the end of this release.
MPC's credit ratings are based on its large, high-quality domestic refining base and integrated logistics platform; a significant retail and midstream business presence, substantial organic growth platform, and solid liquidity position. These strengths are offset by the cyclical nature of the refining industry, as well as increased capital investment at midstream subsidiary MPLX, who could require increased financial support from MPC if capital market access for midstream MLPs remains weak for an extended period.
KEY RATING DRIVERS
High Quality Refining Assets
MPC is the fourth largest U.S. refiner and operates a seven-plant refinery network with 1.8MMbbl/d of refining capacity. MPC operates high-complexity refineries with material secondary conversion capacity, the ability to run heavy and sour crudes, and convert lower value residuals into more valuable light products including gasoline and distillate. MPC refining operations are located in the Midwest and Gulf Coast, which have been attractive places to operate given flexibility in crude sourcing and favourable refined product placement. MPC has access to Bakken and WTI-linked crudes, which have both been discounted relative to similar waterborne grades leading to higher gross margins. Approximately 20% of crude throughput in 2015 was priced off of WTI. However, Fitch expects that refining advantages related to WTI-priced crude will moderate due to repeal of the ban on U.S. crude exports, which could affect profitability at MPC's refining operations.
Integrated Crude and Product Logistics
Through its pipeline/logistics segment and GP and LP interests in MPLX, MPC controls significant infrastructure connecting its refineries to crude supply locations, including emerging U.S. shale basins, Canadian heavy crudes, and waterborne imports at the Gulf Coast. Access to these crude and refined products systems through its control of MPLX is important for MPC and enables the company to source price-advantaged crudes, as well as deliver refined products to higher priced markets.
Significant Retail Presence
MPC owns a significant retail business, with approximately 2,766 owned and operated locations in the 22 states operating under the Speedway brand. The Speedway assets provide for more stable cash flow relative to the refining business, as well as a means to assure placement of refined products from MPC's refineries. Speedway has industry leading convenience-store margins, driven by a focus on higher margin merchandise sales. Speedway's 2015 segment EBITDA was $927 million, up from $696 million in 2014, and accounted for 14% of 2015 segment EBITDA.
Revised Investment Slate
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, including spending at MPLX. MPLX spending includes Markwest's (MWE) development of natural gas and NGL infrastructure in the U.S. Northeast. These investments, particularly with regard to flexibility in crude sourcing and product 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 free cash flow from the refining segment into higher-return projects.
Organic Growth Platform
MPC has announced a $2 billion multi-year refining project (STAR) which will fully integrate the Galveston Bay and Texas City refineries, increase residual oil processing and distillate recovery, increase overall crude processing capacity, and allow the refinery to produce 100% ultra-low sulfur diesel and kerosene. Through its equity interest in Enbridge's Sandpiper pipeline, MPC is also investing in pipelines to bring Bakken light sweet crudes to its refinery network. In connection with the MWE merger, MPLX has also identified an investment portfolio of projects totaling $6 billion to $9 billion. These potential investments are primarily related to the Utica and Marcellus shales, and would provide transportation solutions for producers in these regions.
MPLX Provides Funding Option
MPC retains significant pipeline and logistics assets that are eligible for dropdown to MPLX. Pro forma for the recent inland marine dropdown, management estimates it has up to approximately $1.5 billion in qualifying EBITDA. Remaining assets eligible for dropdown include pipeline assets, including Southern Access and the Sandpiper stake, crude and product terminals, owned and leased railcars, and significant fuels distribution volume related to Speedway.
If capital market conditions are favourable, MPLX is expected to raise new debt and equity capital to fund dropdowns from MPC. To the extent that MPC dilutes its LP interest via secondary MPLX equity offerings, MPC's share of LP cash flows will diminish, though MPC will maintain significant value through its GP interest and incentive distribution rights. However, as assets with more stable cash flow profiles are dropped to MPLX it could influence overall cash flow stability and diversification at MPC.
Higher Consolidated Leverage Profile
As calculated by Fitch, as of Dec. 31, 2015, consolidated debt/EBITDA was 1.9x, up from 1.3x in 2014. The increase is largely due to MPLX's assumption of MWE debt, which is consolidated into MPC's financial statements. When determining MPC credit quality, Fitch will look primarily at MPC debt relative to estimated deconsolidated MPC earnings and cash flow. MPC's deconsolidated leverage is expected to remain below 2.0x over the forecast horizon, consistent with an investment grade refiner of this size and scale.
Strong Shareholder Focus
MPC has aggressively returned capital to shareholders in the form of share repurchases and dividends, repurchasing $5.9 billion in stock over the last three years. The purchases have been funded with positive free cash flow, leading to minimal impacts on credit quality. However, to the extent that management continued the aggressive pacing or utilizes long term MPC debt to fund repurchases it could impair credit quality. The dividend remains fairly modest in relation to both cash flow from operations and share repurchases, providing management some flexibility in returning capital and managing the balance sheet in the event of changes in profitability.
Fitch's key assumptions within the rating case for MPC include:
--Refining revenues increase on higher projected crude prices, with follow-through effects on refined product pricing;
--Refining gross margins revert to historical means over the forecast;
--Refining operating costs/bbl are relatively flat, reflecting an established, diversified asset base, as well as lower U.S. natural gas costs;
--2016 capex of $3 billion, which includes midstream spending of $1.3 billion. In out years, midstream spending increases and spending on large refinery expansion projects (including STAR) wind down.
Positive (individually or collectively)
--Demonstrated commitment to lower debt levels, consistent with mid-cycle MPC deconsolidated debt/EBITDA under 1.0x;
--Increased percentage of gross margin from more stable retail and pipeline operations.
As 'BBB+' ratings are typically associated with refiners with substantial business line and cash flow diversification, upgrades are not considered probable in the near term given the current capital structure.
Negative (individually or collectively)
--A sustained collapse in U.S. refining fundamentals leading to mid-cycle deconsolidated debt/EBITDA above 2.0x;
--Large share repurchases funded with incremental MPC debt;
--Material operational problems at one of the large refineries leading to an impaired cash flow profile.
Adequate Liquidity, Manageable Maturity Schedule
At Dec. 31, MPC had $4.3 billion in total liquidity, consisting of $1.1 billion in cash, a $2.5 billion credit facility and a $668 million receivables securitization facility. Cyclicality remains a feature of the refining business, leading to a need for MPC to maintain substantial liquidity balances and lower debt balances relative to more stable corporate entities. When combined with the strong near-term operating cash flow prospects, liquidity is estimated to be more than adequate to deal with short-term shocks. Near term maturities are manageable and include the $700 million term loan due in 2019.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings for Marathon Petroleum Corporation:
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Senior unsecured notes at 'BBB';
--Bank revolver and term loan at 'BBB';
--Commercial paper at 'F2'.
Summary of Financial Statement Adjustments
Deconsolidated Leverage Forecast: In calculating forecasted deconsolidated debt/EBITDA, Fitch deducts MPLX debt from total consolidated debt. To estimate deconsolidated MPC EBITDA, Fitch deducts MPLX EBITDA and adds distributions from MPLX to MPC.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)
Dodd-Frank Rating Information Disclosure Form