-- 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
-- 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.
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.
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
-- 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.
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.
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
Marathon Petroleum Corp.
Corp. Credit Rating BBB/Stable/A-2
Senior Unsecured BBB