Fitch Revises Marathon Oil’s Outlook to Negative On WTO Buy; Affirms ‘BBB+’ IDR

Fitch Revises Marathon Oil’s Outlook to Negative On WTO Buy; Affirms ‘BBB+’ IDR

Fitch Ratings has affirmed the ratings of Marathon Oil Corporation (Marathon) at ‘BBB+’ and revised the Rating Outlook to Negative from Stable following the company’s announcement that it will acquire Western Oil Sands, Inc. (WTO) for $6.2 billion plus assumed debt. Fitch currently rates Marathon’s debt as follows:

–Issuer Default Rating (IDR) ‘BBB+’;

–Senior unsecured credit facility ‘BBB+’;

–Senior unsecured notes ‘BBB+’;

–Industrial revenue bonds ‘BBB+’;

–Commercial paper ‘F2′.

Under proposed terms, Marathon would pay $6.2 billion for WTO, and assume WTO’s outstanding debt at closing. WTO owns a 20% stake in the Athabasca Oil Sands Project (AOSP), a heavy oil mining and upgrading project held in conjunction with Shell (60%) and Chevron (20%) around the Fort McMurray region of Northern Alberta. Marathon will book 436 million barrels of net proved mining reserves of bitumen and 2.6 billion barrels of total net resources of mined bitumen and in situ recovery. By adding long-lived reserves, the transaction is expected to increase Marathon’s Reserve/Production (R/P) ratio from nine years to 12 years. Current production is 31,000 bpd and is set to increase in stages up to 130,000 bpd by 2020. Marathon expects to finance the deal with a mix of equity, debt, and cash. Components include $1.9 billion in equity and the remainder in a mix of cash and debt. Marathon also announced a $2 billion share buyback.

In affirming the rating, Fitch considered the low geological risk associated with the acquisition, and Marathon’s diverse portfolio of energy assets. Primary credit concerns include the high cost structure of oil sands mining operations, the increased capex associated with future oil sand production and related downstream expansions, the possibility of additional debt financing to fund share buybacks, and the long run uncertainty around commodity prices.

Marathon is a large integrated oil company with exploration and production operations in several regions, including the North Sea, Africa, and North America with total proven reserves of 1.262 billion boe at year-end 2006. Marathon’s also owns and operates seven U.S. refineries with 974,000 barrels per day (bpd) of crude capacity. Marathon distributed fuels through approximately 5,800 retail sites marked under the Marathon and Speedway SuperAmerica brands. Marathon also has a 50% interest in PTC, a joint venture with Pilot Corporation that owns and operates 269 travel centers in North America.

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