TEXT-Fitch rates Marathon Oil unsecured notes 'BBB'

Thu Oct 25, 2012 9:43am EDT
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Oct 25 - Fitch Ratings has assigned a 'BBB' to Marathon Oil Corporation's
 (MRO) issuance of $2 billion in senior unsecured three- and 10-year
notes. Net proceeds from the notes will be used to repay outstanding commercial
paper obligations and for general corporate purposes. Commercial paper balances
at Oct. 23, 2012 were $1.8 billion.

Fitch currently rates Marathon as follows:

--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured credit facility and notes 'BBB';
--Industrial revenue bonds 'BBB';
--Commercial paper 'F2'; 
--Short-term IDR 'F2'.

Ratings Rationale:

Marathon's ratings are supported by a reasonably diverse upstream portfolio; 
high exposure to liquids in the upstream (64.5% of production and 75.3% of 2011 
reserves); solid recent operational performance; robust liquidity; a track 
record of defending the rating through asset sales and capex cuts; and debt 
reductions made following the MPC spin off.


These are balanced by lackluster output growth (less than 2% on average from 
2007-2011 as calculated by Fitch); the potential for increased spending to 
accelerate growth; and selective performance/execution issues in the upstream. 
Given the relatively high prices paid for the Hilcorp acquisition, Marathon is 
also likely to need to realize efficiency gains to achieve its return targets. 
Production growth targets for the 2012-2016 time frame are 5%-7% per annum 
(including Libyan production and planned asset sales). 

Upstream Metrics:

Marathon's 2011 upstream metrics were good, driven in large part by a strong 
Reserve Replacement Ratio (RRR) of +137% on a one-year organic basis, and +212% 
on an all-in basis. This resulted in one-year F&D of just $15.23/boe ($26.53/boe
on an FD&A basis including the acreage-driven Hilcorp, LLC deal). However, FD&A 
remained quite reasonable on a three-year basis at $21.92/boe. Good replacement 
numbers positively impacted Marathon's R/P ratio, which increased from 10.9 
years to 12.4 years. The company continues to have relatively high liquids 
reserves and production, which gives it better cash flow relative to gassier but
higher growth peers. At year-end 2011, balance sheet debt/boe 1p reserve was 
$2.67/boe, while balance sheet debt/boe proven developed reserve was $3.43/boe. 

Eagle Ford Acquisition:

In 2011, Marathon acquired a $4.5 billion acreage position in the Eagle Ford 
from Hilcorp. The deal was paid for in cash and interim operating cash flow and 
resulted in the addition of 141,000 net acres (217,000 gross acres),and 
approximately 7,000 boepd of production. In April 2012, MRO entered a follow-on 
$750 million deal for additional acreage which closed Aug. 1, 2012. Second 
quarter Eagle Ford net sales rose to an average 21,000 boepd, and are expected 
to ramp up to 120,000 boepd by 2016. The contribution from all U.S. shale plays 
in Marathon's portfolio is expected to rise sharply over the next several years,
increasing from about 20,000 boepd in 2011 to the 150,000-170,000 boepd level by
2016, with Eagle Ford contributing 100,000 boepd. In addition to Eagle Ford, 
this includes key positions in the Bakken, Anadarko Woodford basin, and 
Niobrara/DJ basins.

Recent Financial Performance:

Marathon's latest 12 month (LTM) credit metrics for the period ending June 30, 
2012 were good. As calculated by Fitch, debt/EBITDA at June 30, 2012 was 
approximately 0.66 times (x) versus 0.65x at year-end (YE) 2011, while its 
EBITDA/gross interest expense coverage ratio rose to 26.3x from 23.5x. LTM free 
cash flow (FCF) declined to approximately -$369 million, and was impacted by 
unfavorable changes in working capital (-$921 million), modestly higher capex, 
and slightly lower funds from operations. 2012 capex is expected to come in at 
$5 billion. Under Fitch's base case assumptions, the company will be moderately 
FCF negative. 


Marathon's liquidity at the end of the second quarter was good, and included 
cash of $452 million, and approximately 78% availability on the company's $2.5 
billion unsecured revolver (due 2017) after netting out capacity used by the 
company's $550 million in commercial paper (MRO's credit facilities are used to 
100% backstop the company's commercial paper program). The main covenant on the 
revolver is a 65% debt to cap ratio, which the company had ample headroom on at 
June 30, 2012. Near-term debt maturities are manageable and include $114 million
in 9.125% notes due 2013 with nothing due thereafter until 2017. Future asset 
sales may provide additional liquidity, including the company's pending Alaska 
Cook Inlet assets ($375 million), and a potential (but uncertain) sale of its 
stake in the Athabasca Oil Sands Project in Alberta.   

Other Liabilities: 

Marathon's other liabilities are manageable. Marathon's Asset Retirement 
Obligation (ARO) rose to $1.51 billion from $1.35 billion at YE 2010, and was 
primarily linked to environmental remediation of existing upstream platforms. 
The pension deficit at YE 2011 was approximately $470 million for the U.S. and 
$523 million across all plans, a significant reduction from previous levels due 
to the spinoff of MPC. 2012 pension contributions are expected to be $64 

Catalysts for positive rating actions could include a sustained improvement in 
upstream performance, reduced leverage, and increased size and scale. Catalysts 
for negative rating action could include a large leveraging transaction, or 
significant deterioration in operational performance resulting in higher 
debt/boe metrics.