BP 2014 Annual Report Download - page 215

Liquidity and capital resources
Financial framework
We maintain our financial framework to support the pursuit of value
growth for shareholders, while ensuring a secure financial base. BP’s
objective over time is to grow sustainable free cash flow*through a
combination of material growth in underlying operating cash flow*and
a strong focus on capital discipline, providing a sound platform to grow
shareholder distributions. The priority is to grow dividend per share
progressively in accordance with the growth in sustainable underlying
operating cash flow from our businesses over time. Any surplus cash
over and above that required for capital investment and dividend
payments will be biased towards further shareholder distributions
through buybacks or other mechanisms.
In the near term, and reflecting the weaker oil price environment, the
focus is to manage the business through a period of low oil prices and
support the dividend, which remains a priority. We aim to achieve this
by completing the $10-billion divestment programme (announced in the
fourth quarter of 2013), re-sizing the cost base and re-setting capital
expenditure to $20 billion, from the previously advised level of
$24-26 billion.
We aim to operate within a gearing*range of 10-20% and maintain a
significant liquidity buffer. As well as uncertainties relating to current
lower oil prices, the group also faces uncertainties relating to the Gulf of
Mexico oil spill as explained in Financing the group’s activities below.
Dividends and other distributions to shareholders
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 increased by 43% to 10 cents per share paid in the fourth
quarter of 2014. The dividend level is reviewed by the board in the first
and third quarter of each year.
The total dividend paid in cash to BP shareholders in 2014 was
$5.9 billion (2013 $5.4 billion) with shareholders also having the option
to receive a scrip dividend. 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 initial buyback
programme completed during the third quarter of 2014. Further surplus
cash, beyond capital and dividend payments, was applied to additional
buybacks, such that total cash paid for share buybacks in 2014 was
$4.8 billion (2013 $5.5 billion). Details of share repurchases to satisfy
the requirements of certain employee share-based payment plans are
set out on page 250.
Financing the group’s activities
The group’s principal commodities, oil and gas, are 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 48
for further information on risks associated with prices and markets and
Financial statements – Note 27.
The group’s gross debt at 31 December 2014 amounted to $52.9 billion
(2013 $48.2 billion). Of the total gross debt, $6.9 billion is classified as
short term at the end of 2014 (2013 $7.4 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. See Financial statements –
Note 24 for more information on the short-term balance.
Standard & Poor’s Ratings Services changed BP’s long-term credit
rating to A (negative outlook) from A (positive outlook) and Moody’s
Investors Service rating changed to A2 (negative outlook) from
A2 (stable outlook) during 2014.
Net debt was $22.6 billion at the end of 2014 a reduction of $2.6 billion
from the 2013 year-end position of $25.2 billion. The ratio of net debt to
net debt plus equity*was 16.7% at the end of 2014 (2013 16.2%). See
Financial statements – Note 25 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 $29.8 billion at 31 December 2014 (2013
$22.5 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.
The group also has undrawn committed bank facilities of $7.4 billion
(see Financial statements – Note 27 for more information).
We believe that the group has sufficient working capital for foreseeable
requirements, taking into account the amounts of undrawn borrowing
facilities and increased levels of cash and cash equivalents, and the
ongoing ability to generate cash.
The group’s sources of funding, its access to capital markets and
maintaining a strong cash position are described in Financial statements
– Note 23 and Note 27. Further information on the management of
liquidity risk and credit risk, and the maturity profile and fixed/floating
rate characteristics of the group’s debt are also provided in Financial
statements – Note 24 and Note 27.
Uncertainty remains regarding the amount and timing of future
expenditures relating to the Gulf of Mexico oil spill and the implications
for future activities. See Risk factors on page 48 and Financial
statements – Note 2 for further information.
Off-balance sheet arrangements
At 31 December 2014, the group’s share of third-party finance debt of
equity-accounted entities was $14.7 billion (2013 $17.0 billion). These
amounts are not reflected in the group’s debt on the balance sheet. The
group has issued third-party guarantees under which amounts
outstanding at 31 December 2014 were $83 million (2013 $199 million)
in respect of liabilities of joint ventures*and associates*and $244
million (2013 $305 million) in respect of liabilities of other third parties.
Of these amounts, $64 million (2013 $115 million) of the joint ventures
and associates guarantees relate to borrowings and for other third-party
guarantees, $126 million (2013 $143 million) relate to guarantees of
borrowings. Details of operating lease commitments, which are not
recognized on the balance sheet, are shown in the table below and
provided in Financial statements – Note 26.
*Defined on page 252. BP Annual Report and Form 20-F 2014 211
Additional disclosures