BP 2006 Annual Report Download - page 57

Net cash used in financing activities was $19,071 million in 2006
compared with $23,303 million in 2005 and $12,835 million in 2004.
The lower outflow in 2006 reflects a net increase in short term debt
of $5,330 million, a decrease in repayments of long-term financing
of $1,165 million and higher proceeds from long-term financing of
$1,356 million, partially offset by an increase in the net repurchase of
share of $3,836 million. The higher outflow in 2005 compared with 2004
reflects an increase in the net repurchase of ordinary share capital of
$4,107, higher repayments of long-term financing of $2,616 million,
a net decrease of $1,433 million in short-term debt, and increases in
equity dividends paid to BP shareholders of $1,318 million and to
minority interest of $794 million.
The group has had significant levels of capital investment for many
years. Capital investment, excluding acquisitions, was $16.9 billion in
2006, $13.9 billion in 2005 and $13.8 billion in 2004. Sources of funding
are completely fungible, but the majority of the group’s funding
requirements for new investment come from cash generated by existing
operations. The group’s level of net debt, that is debt less cash and cash
equivalents, was $21.7 billion at the end of 2004, $16.2 billion at the end
of 2005 and was $21.4 billion at the end of 2006. The lower level of debt
at the end of 2005 reflects the receipt of the Innovene disposal proceeds
in December 2005.
Over the period 2004 to 2006 our cash inflows and outflows were
balanced, with sources and uses both totalling $101 billion. During that
period, the price of Brent has averaged $52.63/bbl. The following table
summarizes the three-year sources and uses of cash.
$billion
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Sources
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Net cash provided by operating activities 78
Divestments 22
Movement in net debt 1
--------------------------------------------------------------------------------------------------------------------------------------------------
101
$billion
--------------------------------------------------------------------------------------------------------------------------------------------------
Uses
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Capital expenditure 42
Acquisitions 3
Net repurchase of shares 34
Dividends to BP shareholders 21
Dividends to Minority Interest 1
101
Acquisitions made for cash were more than offset by divestments. Net
investment over the same period has averaged $7.7 billion per year.
Dividends to BP shareholders, which grew on average by 14.9% per year
in dollar terms, used $21 billion. Net repurchase of shares was $34 billion,
which includes $35 billion in respect of our share buyback programme
less proceeds from share issues. Finally, cash was used to strengthen the
financial condition of certain of our pension funds. In the last three years,
$1.9 billion has been contributed to funded pension plans.
Trend information
We expect to grow cash flows underpinned by the following:
– We expect to grow production even in a $60/bbl price environment.
– We aim to control cost increases below inflation.
– We expect capital expenditure to be around $18 billion in 2007.
– We expect to continue to high-grade our portfolio consistent with
our strategy.
As noted above, we expect capital expenditure, excluding acquisitions, to
be around $18 billion in 2007; the exact level will depend on a number of
things including: the actual level of sector inflation that we will experience
in the year; time-critical and material one-off investment opportunities
which further our strategy; and any acquisition opportunities that
may arise.
In 2006, the UK supplementary tax charge was raised to 20%,
increasing the group’s effective tax rate by 2%. The impact of the
additional one-off deferred tax adjustment relating to this rate change was
largely offset by relieving measures specifically provided in the legislation.
Total production for 2007 is expected to remain broadly the same as in
2006 after allowing for the impact on 2007 of divestments made in 2006.
This estimate is based on the group’s asset portfolio at 1January 2007,
expected start-ups in 2007 and Brent at $60/bbl, before any 2007 disposal
effects and before any effects of prices above $60/bbl on volumes
in PSAs.
The anticipated decline in production volumes from subsidiaries in
our existing profit centres is partly mitigated by the development of
new projects and the investment in incremental reserves in and around
existing fields. We expect that this overall decline in production from
subsidiaries in our existing profit centres will be more than compensated
for by strong increases in production from subsidiaries in our new profit
centres over the next few years. Production growth in our equity-
accounted joint venture, TNK-BP, is expected to remain broadly constant
to 2009.
The most important determinants of cash flows in relation to our oil
and natural gas production are the prices of these commodities. In a
stable price environment, cash flows from currently developed proved
reserves are expected to decline in a manner consistent with anticipated
production decline rates. Development activities associated with recent
discoveries, as well as continued investment in these producing fields, are
expected to more than offset this decline, resulting in increased operating
cash flows over the next few years. Cash flows from equity-accounted
entities are expected to be in the form of dividend payments.
Dividends and other distributions to shareholders and gearing
The total dividend paid in 2006 was $7,686 million, compared with
$7,359 million in 2005 and $6,041 million in 2004. The dividend per
share was 38.40 cents, compared with 34.85 cents per share in 2005
(an increase of 10%) and 27.70 cents per share in 2004 (an increase
of 26% between 2005 and 2004). In sterling terms, the dividend paid
in 2006 was also 10% higher than 2005.
Our dividend policy is to grow the dividend per share progressively.
In pursuing this policy and in setting the levels of dividends we are
guided by several considerations, including:
– The prevailing circumstances of the group.
– The future investment patterns and sustainability of the group.
– The trading environment.
We determine the dividend in US dollars, the economic currency of BP.
BP intends to continue the operation of the Dividend Reinvestment
Plan (DRIP) for shareholders who wish to receive their dividend in the
form of shares rather than cash. The BP Direct Access Plan for US and
Canadian shareholders also includes a dividend reinvestment feature.
We remain committed to returning the excess of net cash provided
by operating activities less net cash used in investing activities to our
investors where this is in excess of investment and dividend needs.
During 2006, the company repurchased 1,334 million of its own shares
at a cost of $15,481 million. Of these, 358 million were purchased for
cancellation and the remainder are held in treasury. The repurchased
shares had a nominal value of $333 million and represented 6.5% of
ordinary shares in issue, net of treasury shares, at the end of 2005.
Since the inception of the share repurchase programme in 2000 until
the end of 2006 we have repurchased some 3,996 million shares at a
cost of $40.7 billion. We plan to continue our programme of share
buybacks, subject to market conditions and constraints and to renewed
authority at the April 2007 annual general meeting.
Our financial framework includes a gearing band of 20-30% which is
intended to provide an efficient capital structure and the appropriate level
of financial flexibility. Our aim is to maintain gearing within this range.
At 31 December 2006, gearing was 20%, at the bottom of the
targeted band.
The discussion above and following contains forward-looking
statements with regard to future cash flows, future levels of
capital expenditure and divestments, future production volumes, working
capital, the renewal of borrowing facilities, shareholder distributions and
share buybacks and expected payments under contractual and
commercial commitments. These forward-looking statements are based
on assumptions that management believes to be reasonable in the light of
the group’s operational and financial experience. However, no assurance
can be given that the forward-looking statements will be realized. You are
urged to read the cautionary statement under Forward-looking statements
BP Annual Report and Accounts 2006 55