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Rating Action:

Moody's rates Marathon Petroleum notes Baa2; outlook negative

23 Apr 2020

New York, April 23, 2020 -- Moody's Investors Service ("Moody's") assigned a Baa2 rating to Marathon Petroleum Corporation's (MPC) proposed issue of new unsecured notes. The outlook remains negative.

"While the notes issue will bolster MPC's liquidity and provide funding for a sharp increase in working capital, it will stress the company's debt metrics," commented Andrew Brooks, Moody's Vice President. "To the extent increased debt utilization becomes a permanent component of MPC's capital structure, ratings could ultimately be downgraded."

Assignments:

..Issuer: Marathon Petroleum Corporation

....Senior Unsecured Notes, Assigned Baa2

RATINGS RATIONALE

The economic downturn attributable to the spread of the COVID-19 virus and the substantial decline in demand for transportation fuels it has prompted, will seriously erode the earnings and cash flow of refiners over at least the next several quarters. Coupled with the rapid collapse in crude oil prices, we expect the liquidity needs of the petroleum refining sector to be significantly increased. In particular, the dislocation in crude oil prices and unprecedented drop in refined product demand will generate a sudden and substantial increase in second quarter working capital needs among the refiners, posing a significant near-term financing requirement.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The refining sector has been affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, MPC's credit profile has left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and MPC remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on MPC of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Moody's expects a severe erosion in MPC's second quarter net income to only near-breakeven levels accompanied by a $2.0 billion change in working capital. In response to this deterioration in business conditions, MPC has reduced the quantities of crude oil processed through its refineries and temporarily idled portions of its refining capacity. The company has also taken a series of measures to bolster its liquidity including reducing operating costs, deferring certain items of capital spending, deferring certain tax payments under legislation intended to provide taxpayer relief, and it will evaluate the timing of any future common share repurchases when appropriate. Moreover, MPC has drawn $3.5 billion of proceeds under its $5.0 billion revolving credit facility (expiring in 2023) as of mid-April to finance the significant working capital requirement arising from the market dislocation. The company is also negotiating a second $1.0 billion, 364-day revolving credit facility, which will offset in part the decline in availability under MPC's $750 million accounts receivable securitization facility to an estimated $517 million due to the decline in value of the company's trade receivables (the facility presently has a zero balance). The new 364-day facility is expected to remain undrawn. MPC is also likely to incur material non-cash goodwill impairment charges it has estimated between $7.3 and $7.8 billion, and a $3.1 to $3.3 billion inventory valuation adjustment (which is subject to reversal in subsequent periods presuming prices recover).

MPC's proposed unsecured notes issue will further bolster its liquidity. The sum total of this additional debt, however, will increase MPC's total refining and marketing stand-alone debt (including Moody's standard adjustments, but excluding MPLX LP's $21 billion debt) to approximately $15 billion, significantly increased from its 2019 year-end balance of $11.5 billion. With an expected significant erosion in 2020's projected EBITDA, the increase in MPC's stand-alone debt will materially exceed the 2.25x debt/EBITDA metric Moody's has assigned to MPC as a rating downgrade trigger (1.9x actual at December 31).

Moody's presumption is that MPC will use the proceeds of its notes issue to repay a portion of the borrowings under its revolving credit facility which have financed the working capital need, which should begin to reverse from a use of cash to a source of cash in 2020's third quarter as the economy stabilizes and the demand for transportation fuels begins to grow. As the more than $2.0 billion invested in working capital grows into a source of cash, the notes issue in effect should revert back to the longer-term role it was intended to play, that of pre-funding MPC's $650 million December debt maturity and its $1.0 billion March 2021 maturity. The proposed notes issue in essence does "double duty;" initially funding working capital, then pre-funding upcoming debt maturities. However, should some combination of the notes issue, the new-364-day facility and revolving credit utilization become more permanent components of MPC's capital structure, permanently exceeding the 2.25x stand-alone leverage trigger, the company's Baa2 rating would likely be downgraded.

MPC remains on track to separate its Speedway retail marketing business through a spin to shareholders, whose target remains 2020's fourth quarter. Should the spin occur, Moody's assumes that MPC will receive a debt-financed distribution from Speedway in conjunction with the separation, using the proceeds for debt reduction at MPC. Moody's would regard this action as neutral to MPC's credit rather than a positive credit event, as debt reduction in this case would offset MPC's increased business risk attributable to the more merchant-like business profile of its refining operations, no longer having the benefit of Speedway's earnings stability.

MPC's negative outlook reflects the potential separation of the company's more stable Speedway company-owned retail store operations into a newly independent entity, a potential change in its business risk profile exacerbated by the sharp downturn in MPC's refining and marketing operations.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

MPC's ratings could be downgraded if its refining and marketing stand-alone leverage exceeds 2.25x or if consolidated retained cash flow (RCF) to debt falls below 15%. Additional transactions in pursuit of shareholder value or the use of cash generated through the separation of Speedway for share repurchases could also result in a downgrade. Ratings could be upgraded if consolidated RCF to debt remaining in excess of 30% during cyclical lows or if refining and marketing-only stand-alone debt/EBITDA is less than 1.5x

The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Marathon Petroleum Corporation is a leading independent refining and marketing company headquartered in Findlay, Ohio, who also owns the general partnership in MPLX LP (MPLX, Baa2 negative), also headquartered in Findlay, Ohio.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Andrew Brooks
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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