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
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
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 forward-looking basis.
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
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
North Sea Asset Sale: In early June, Marathon announced it had entered an agreement to sell its
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
Recent Financial Performance: Marathon's latest 12-month (LTM) credit metrics for the period ending
Liquidity: Marathon's liquidity at the end of the first quarter was good, and included cash of
Other Liabilities: Marathon's other liabilities are manageable. The company's ARO rose to
Positive: No upgrades are anticipated in the near term beyond the 'BBB+' level. However, future developments that could lead to positive rating actions include:
---Sustained lower debt levels, accompanied by increased size, scale, and diversification in plays, as well as continued solid upstream operational performance.
Negative: Future developments that could lead to negative rating action include:
--Inability to execute on stated growth targets in key plays or major negative reserve revision;
--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
--A sustained period of low oil prices without offsetting adjustments in spending;
--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'.
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--Global Impact of US Shale Oil - Rising Production Tempers World Prices (
--Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact (
--Scenario Analysis: Lifting the U.S. Crude Export Ban (
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (
--Updating Fitch's Oil & Gas Price Deck (
Energy Handbook -
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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