BP 2013 Annual Report Download - page 60

BP Annual Report and Form 20-F 201356
Liquidity and capital
resources
Since the Gulf of Mexico oil spill in 2010 and the significant costs relating
to the response activities and the uncertainty regarding the ultimate
magnitude of its liabilities and timing of cash outflows, the group’s
situation has continued to stabilize. This has been reflected in the group’s
liquidity and capital resources position, which has continued to strengthen
underpinned by a prudent financial framework.
The group’s long-term credit ratings are A (positive outlook) from Standard
& Poor’s, and A2 (stable outlook) from Moody’s Investor Services, both
remaining unchanged during 2013.
We increased our financial flexibility in 2013 with the completion of the
sale of BP’s 50% share in TNK-BP to Rosneft in return for cash and shares.
We received net $11.8 billion cash on completion (in addition to $0.7 billion
already received as a dividend in December 2012), as well as increasing our
shareholding in Rosneft from 1.25% to 19.75%.
Financial framework
We continue to refine our financial framework to support the pursuit
of value growth for shareholders, while maintaining a secure financial
base. BP intends to increase operating cash flowa by around 50% in
2014 compared with 2011b, and thereafter maintain focus on growing
sustainable free cash flowc. We expect that the improvement in operating
cash flow will be delivered partly from the completion of the Deepwater
Horizon Oil Spill Trust fund payments, and partly through high-margin
projects coming onstream. Any growth in operating cash flow will be
available to increase both organic capital expenditure and shareholder
distributions.
The financial framework remains prudent and we expect to operate
within a gearingd range of 10-20%, and to be robust to cash break-even
levels in an oil price environment between $80 and $100 per barrel. We
expect to continue to maintain a significant liquidity buffer while
uncertainties remain.
Dividends and other distributions to shareholders
We are committed to maintaining a progressive and sustainable dividend
policy through our focus on increasing sustainable free cash flows.
Since resuming dividend payments in 2011, we have steadily increased the
dividend. From the quarterly dividend of 7 cents per share paid in 2011 it
has increased by 36% to 9.5 cents per share paid in the fourth quarter of
2013. Going forward, the board will review the dividend level with the first
and third quarter results each year.
The total dividend paid in cash to BP shareholders in 2013 was $5.4 billion
with shareholders also having the option to receive a scrip dividend (2012
$5.3 billion cash). The dividend is determined in US dollars, the economic
currency of BP.
During 2013 we started to buy back shares as part of an $8-billion share
repurchase programme, fulfilling a commitment to offset any dilution to
earnings per share from the Rosneft transaction. The total cash paid for
share buybacks in 2013 was $5.5 billion (2012 nil). Details of share
repurchases to satisfy the requirements of certain employee share-based
payment plans are set out on page 278.
Financing the group’s activities
The group’s principal commodity, oil, is priced internationally in US dollars.
Group policy has generally been to minimize economic exposure to
currency movements by financing operations with US dollar debt. Where
debt is issued in other currencies, including euros, it is generally swapped
back to US dollars using derivative contracts, or else hedged by maintaining
offsetting cash positions in the same currency. The cash balances of the
group are mainly held in US dollars or swapped to US dollars and holdings
are well-diversified to reduce concentration risk. The group is not therefore
exposed to significant currency risk regarding its borrowings. Also see Risk
factors on page 51 for further information on risks associated with prices
and markets and Financial statements – Note 19.
The group’s finance debt at 31 December 2013 amounted to $48.2 billion
(2012 $48.8 billion). Of the total finance debt, $7.4 billion is classified as
short term at the end of 2013 (2012 $10.0 billion). The short-term balance
includes $6.2 billion for amounts repayable within the next 12 months
relating to long-term borrowings (2012 $6.2 billion). Commercial paper
markets in the US and Europe are a further source of short-term liquidity
for the group to provide timing flexibility. At 31 December 2013,
outstanding commercial paper amounted to $1.0 billion (2012 $3.0 billion).
We have a European Debt Issuance Programme (DIP) in place under which
the group may raise up to $30 billion of debt for maturities of one month or
longer. At 31 December 2013, the amount drawn down against the DIP
was $13.9 billion (2012 $14.0 billion). Since 5 February 2013 the group has
had a US shelf registration statement with a limit of $30 billion. This was
converted from an unlimited shelf registration following the approval in
December 2012 of the SEC settlement in respect of Deepwater Horizon-
related claims. At 31 December 2013 $6.9 billion had been drawn down
since conversion. In addition, the group has an Australian Note Issuance
Programme of $5 billion Australian dollars, and as at 31 December 2013
the amount drawn down was $0.8 billion Australian dollars (2012
A$0.5 billion).
None of the capital market bond issuances since the Gulf of Mexico oil spill
contain any additional financial covenants compared with the group’s
capital markets issuances prior to the incident.
BP accessed international capital markets throughout the year using its US,
European and Australian issuance programmes, with bond issuances
amounting to $8.6 billion in 2013.
The maturity profile and fixed/floating rate characteristics of the group’s
debt are described in Financial statements – Note 19.
Net debt was $25.2 billion at the end of 2013, a reduction of $2.3 billion
from the 2012 year-end position of $27.5 billion. The ratio of net debt to net
debt plus equity was 16.2% at the end of 2013 (2012 18.7%). Net debt and
the ratio of net debt to net debt plus equity are non-GAAP measures.
We believe that these measures provide useful information to investors.
Net debt enables investors to see the economic effect of gross debt,
related hedges and cash and cash equivalents in total. The net debt ratio
enables investors to see how significant net debt is relative to equity from
shareholders. See Financial statements – Note 28 for gross debt, which
is the nearest equivalent measure on an IFRS basis, and for further
information on net debt.
Cash and cash equivalents of $22.5 billion at 31 December 2013 (2012
$19.6 billion) are included in net debt. We manage our cash position to
ensure the group has adequate cover to respond to potential short-term
market illiquidity, and expect to maintain a strong cash position. Cash
balances are pooled centrally where permissible, and deployed globally
as required. Cash surpluses are deposited with creditworthy banks or
invested in high grade commercial paper and money market funds with
short maturities to ensure availability. The group holds $2 billion of cash
outside the UK and it is not expected that any significant tax will arise on
repatriation. Further information on the management of liquidity risk and
credit risk is provided in Financial statements – Note 19, and on the cash
position in Financial statements – Note 23.
a Operating cash flow is net cash provided by operating activities, as presented in the group cash
flow statement on page 125.
b Assuming an oil price of $100 per barrel and a Henry Hub gas price of $5/mmBtu in 2014. The
projection assumes BP’s estimate of a Rosneft dividend. 2011 excludes BP’s share of TNK-BP
dividends. The projection includes BP’s payment commitments under the Department of Justice
and SEC settlements. It does not reflect any cash flows relating to other liabilities, contingent
liabilities, settlements or contingent assets arising from the Gulf of Mexico oil spill which may or
may not arise at that time. We are not able to reliably estimate the amount or timing of a number
of contingent liabilities. See Financial statements – Note 2 for further information.
c Free cash flow is operating cash flow less net cash used in investing activities, as presented in
the group cash flow statement on page 125.
d Gearing refers to the ratio of the group’s net debt to net debt plus equity and is a non-GAAP
measure. See Financial statements – Note 28 for information on gross debt, which is the nearest
equivalent measure to net debt on an IFRS basis.