Marathon Oil Corp. Downgraded To 'BBB-' On Weak Market Conditions; Outlook Negative

  • The coronavirus has a significant negative impact on the global economy, resulting in significant demand destruction for crude oil and natural gas. A market share war between Saudi Arabia and Russia has exacerbated an already weak market and led to a crash in crude oil prices.
  • S&P Global Ratings has lowered its oil and natural gas price assumptions and now forecasts that Brent will average $30 per barrel while West Texas Intermediate (WTI) averages $25 per barrel for the remainder of 2020.
  • We expect independent oil and gas company Marathon Oil Corp.'s financial measures to weaken below our expectations for the rating.
  • We are lowering the issuer credit and senior unsecured ratings to 'BBB-' from 'BBB'. We are also lowering the short-term and commercial paper ratings to 'A-3' from 'A-2'.
  • The outlook is negative, reflecting the persistent weak pricing environment and potential that the impacts of the coronavirus and Saudi-Russia price war could be prolonged beyond 2020. We could lower the ratings if demand destruction and price erosion persists and we expect average funds from operations (FFO)/debt to approach 20% for a sustained period.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
The drop in oil prices will result in a sustained fall in expected financial measures.   The downgrade reflects the significant decline in our oil price assumptions due to the unprecedented reduction in demand stemming from the coronavirus, as well as the cessation of OPEC+'s production limits and the resulting price war between Saudi Arabia and Russia. In particular, we expect average crude oil prices to be significantly lower in 2020, including WTI at $25 per barrel (bbl) and Brent at $30 per barrel, before recovering to $45/bbl and $50/bbl in 2021. As a result, we expect Marathon's financial measures to be weaker than previous expectations, including average FFO to debt below 25% in 2020, with a recovery to the mid-30% range in 2021.
The negative outlook reflects our expectation that while Marathon will maintain modest financial policies that balance expected cash flows with capital spending, leverage will increase significantly under current price assumptions. We expect FFO/debt will average around 30% over the next 24 months, and that the company will generate negative discretionary cash flow (DCF) in 2020 despite capital spending cuts.
We could lower our ratings on Marathon if we expected FFO/debt to approach 20% on a sustained basis. This could occur if crude oil prices fail to improve, most likely due to a prolonged Saudi-Russia price war and/or continued demand destruction from the coronavirus pandemic.
We could revise the outlook to stable if we expect FFO/debt to comfortably exceed 30% on a sustained basis. This is likely in conjunction with a sustained improvement in crude oil prices on the back of an end to the Saudi-Russia price war combined with an improving global economy.
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