TEXT-S&P affirms Marathon Petroleum, Corp ratings

Mon Oct 8, 2012 3:36pm EDT

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Overview
     -- Marathon Petroleum Corp. announced that it will acquire BP PLC's Texas 
City refinery and related assets for $598 million, plus an additional $1.2 
billion for inventories. The acquisition will be funded from Marathon's cash 
balance.
     -- We are affirming our ratings on Marathon.
     -- The stable outlook reflects our expectation that the company will 
maintain strong liquidity and that funded debt will not meaningfully increase 
beyond current levels.

Rating Action
On Oct. 8, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' and 
'A-2 ratings' on U.S.-based Marathon Petroleum Corp. The outlook is stable.

Rationale
We believe Marathon's acquisition is generally credit neutral to mildly 
positive, despite further concentrating its earnings reliance in the highly 
cyclical and volatile refining sector. The assets from BP include:
     -- The 451,000 barrel per day (bpd) Texas City refinery with a 15.3 
Nelson complexity;
     -- A 1,040-megawatt cogeneration power plant at the refinery;
     -- Four light product terminals;
     -- Three NGL pipeline systems; and
     -- Supply agreements to about 1,200 retail locations.

The acquisition significantly increases Marathon's scale, which we broadly 
view as positive within the refining sector. Its daily throughput capacity 
will increase by about 38%, as will its asset diversity and its refining 
complexity. The initial $598 million purchase price, plus about $1.2 billion 
for working capital, appears favorable for Marathon as it is significantly 
below most recent refinery transactions on a dollar per complexity barrel 
basis and includes a diverse set of assets. Marathon intends to fund the 
acquisition entirely in cash from its balance sheet. As a result, we expect no 
additional debt burden, and credit metrics that are likely to benefit from 
midcycle EBITDA, which we forecast at about $700 million. Despite the use of 
cash, we expect Marathon's liquidity position to remain strong, a key credit 
factor to help it weather the cyclical and short-term volatility of the 
refining business. However, we also note that the purchase price may rise by 
up to $700 million over the next four to six years through an "earn out" 
provision, triggered if the refinery's margins exceed minimum thresholds. 
There is also significant capital spending of about $1.8 billion that we 
expect Marathon will make over the next seven years to meet regulatory, 
safety, and sustaining requirements.

The ratings on Marathon Petroleum Corp. (MPC) reflect its "satisfactory" 
business risk and "intermediate" financial risk profiles (as our criteria 
define the terms). The company's operations are primarily in the Midwest and 
Gulf Coast. After the acquisition, MPC will be the fourth-largest refining 
company in the U.S., with about 1.6 million bpd of crude oil refining 
capacity. In addition, the company has extensive terminal, transportation, and 
marketing networks, which are a meaningful contributor to consolidated 
earnings. The performance of these assets is less volatile than that of the 
company's refining assets and is a source of relative cash flow stability 
during periods of weak refining performance.

MPC's satisfactory business risk profile reflects the profitability of the 
company's refining operations, favorable geographic positioning, and the 
diversity of earnings provided by its nonrefining operations. MPC's refineries 
have above-average complexity and are able to process low-cost heavy and sour 
crudes. The company operates its refineries in an integrated manner, which 
allows it to optimize production decisions throughout the system. These 
factors support the company's positioning as one of the top-quartile refiners, 
in terms of profitability, in the U.S. The acquisition will increase 
Marathon's refining exposure to the Gulf Coast at a time when Midwest margins 
are significantly higher due to West Texas Intermediate-based crude discounts. 
However, we believe the long-term benefits of added scale, diversity, and 
complexity are positive.

Our assessment of MPC's business risk profile also incorporates inherent risks 
in the highly volatile and capital-intensive refining industry. The industry 
experienced a sharp downturn beginning in early 2009, as general economic 
weakness resulted in a decrease in customer demand for refined products. At 
the same time, the industry has seen significant increases in global refining 
capacity, most notably in India and China. As a result, gasoline and diesel 
inventory levels rose and crack spreads (the difference between refined 
products and crude oil prices) narrowed through early 2010. However, 
performance over the past two years has strengthened meaningfully from the 
trough-like conditions the industry experienced in 2009, due in large part to 
discounted North American crude production.

We view MPC's financial risk as intermediate. The company has approximately 
$5.2 billion of adjusted debt, which includes approximately $1.9 billion of 
Standard & Poor's adjustments for operating leases, guarantees, and 
underfunded postretirement benefits. Credit measures are currently fully 
satisfactory for the rating category, with trailing 12 months' debt to EBITDA 
of 1.1x as of June 30, 2012.

Liquidity
We view the company's liquidity as "strong." We estimate internally generated 
funds from operations should provide more than 2x coverage for anticipated 
capital spending and dividends over the next two years. We estimate current 
sources of liquidity of about $4.6 billion, including approximately $1.6 
billion of cash pro forma for the acquisition ($3.4 billion of cash at the end 
of September 2012) and full availability under a $2 billion revolving credit 
facility that matures in 2017, a $1 billion working capital facility due 2014, 
and cash from operations. The revolving credit facility is subject to a 
financial covenant pertaining to maximum  net debt to capitalization of 65%. 
We estimate that the company will be well within compliance over the next 12 
months. We expect uses of about $2.3 billion over the next year after the 
transaction, including about $1.6 billion in capital spending, about $500 
million in dividends, and up to $200 million in "earn out" payments to BP. 
Given our expectation for strong refining margins through 2013 that could 
generate about $4 billion in cash flows, and Marathon's plans to draw down the 
working capital purchased from BP by about $600 to $700 million, liquidity 
could improve significantly.

Outlook
The stable outlook reflects our expectation that the company will maintain 
strong liquidity and that funded debt will not meaningfully increase beyond 
current levels. We could consider lowering the rating if leverage materially 
exceeds 3x for an extended period of time. An upgrade is unlikely given our 
assessment of the company's business risk profile, but could occur if the 
company materially increases the share of revenue contributed by more stable 
operations like its terminal and transportation segments while maintaining 
leverage of about 2x.

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Global Oil Refining 
Industry, Nov. 28, 2011
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Principles Of Credit Ratings, Feb.16, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed
Marathon Petroleum Corp.
Corp. Credit Rating       BBB/Stable/A-2
Senior Unsecured          BBB
FILED UNDER: