(The following statement was released by the rating agency)
-- 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.
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.
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
Ratings List Ratings Affirmed Marathon Petroleum Corp. Corp. Credit Rating BBB/Stable/A-2 Senior Unsecured BBB
(Caryn Trokie, New York Ratings Unit)