BP 2008 Annual Report Download - page 60

BP Annual Report and Accounts 2008
Performance review
During 2008, we established momentum in cost control, mitigating the
cost inflation that was primarily driven by rising oil prices. In 2009, our
highest priority will continue to be achieving safe, compliant and reliable
operations and we intend to continue our focus on cost efficiency. We
expect cost deflation to be increasingly visible as we move through 2009.
We expect capital expenditure, excluding acquisitions and asset
exchanges, to be around $20-21 billion in 2009. This reflects our
intention in Exploration and Production to maintain investment whilst
vigorously working to drive down costs and to reduce spending in our
Refining and Marketing and Alternative Energy businesses in keeping
with the current weak economic environment. We expect disposal
proceeds to be between $2-3 billion in 2009.
On the basis of our current plans, we expect cash inflows and
outflows in 2009 would balance at oil prices of around $60/bbl, taking
account of expected disposal proceeds. We would expect that break
even point to lower as we realize the benefits of our operational
momentum and our action on costs.
Dividends and other distributions to shareholders
The total dividend paid to BP shareholders in 2008 was $10,342 million,
compared with $8,106 million for 2007. The dividend paid per share was
55.05 cents, an increase of 30% compared with 2007. In sterling terms,
the dividend increased 40% due to the strengthening of the dollar
relative to sterling. We determine the dividend in US dollars, the
economic currency of BP.
During 2008, the company repurchased 269.8 million of its own
shares for cancellation at a cost of $2.9 billion. The repurchased shares
had a nominal value of $67.5 million and represented 1.4% of ordinary
shares in issue, net of treasury shares, at the end of 2007. Since the
inception of the share repurchase programme in 2000, we have
repurchased 4,929 million shares at a cost of $51.1 billion.
Our aim is to strike the right balance for shareholders, between
current returns via the dividend, sustained investment for long-term
growth, and maintaining a prudent gearing level. At the beginning of
2008, we rebalanced our distributions away from share buybacks in
favour of dividends.
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.
The discussion above and following contains forward-looking
statements with regard to oil prices, production, demand for refining
products, refining volumes and margins and impact on the
petrochemicals sector, refining availability, continuing priority of safe,
compliant and reliable operations, and focus on cost efficiency, cost
deflation, capital expenditure, expected disposal proceeds, cash flows,
shareholder distributions, gearing, working capital, guarantees, expected
payments under contractual and commercial commitments and
purchase obligations. 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 on page 14 and Risk factors on pages 12-14, which describe
the risks and uncertainties that may cause actual results and
developments to differ materially from those expressed or implied by
these forward-looking statements. The company provides no
commitment to update the forward-looking statements or to publish
financial projections for forward-looking statements in the future.
Financing the group’s activities
The group’s principal commodity, oil, is priced internationally in US
dollars. Group policy has been to minimize economic exposure to
currency movements by financing operations with US dollar debt
wherever possible, otherwise by using currency swaps when funds
have been raised in currencies other than US dollars.
The group’s finance debt is almost entirely in US dollars and at
31 December 2008 amounted to $33,204 million (2007 $31,045 million)
of which $15,740 million (2007 $15,394 million) was short term.
Net debt was $25,041 million at the end of 2008, a decrease of
$1,776 million compared with 2007. We believe that a net debt ratio,
that is net debt to net debt plus equity, of 20-30% provides an efficient
capital structure and the appropriate level of financial flexibility. The net
debt ratio was 21% at the end of 2008 and 22% at the end of 2007,
close to the lower end of our target band. Net debt, which BP uses as a
measure of financial gearing, includes the fair value of associated
derivative financial instruments that are used to hedge foreign exchange
and interest rate risks relating to finance debt, for which hedge
accounting is claimed.
The maturity profile and fixed/floating rate characteristics of the
group’s debt are described in Financial statements – Note 28 on page
142 and Note 35 on page 155.
We have in place a European Debt Issuance Programme (DIP)
under which the group may raise $20 billion of debt for maturities of
one month or longer. At 31 December 2008, the amount drawn down
against the DIP was $10,334 million (2007 $10,438 million).
In addition, the group has in place a US Shelf Registration under
which it may raise $10 billion of debt with maturities of one month or
longer. At 31 December 2008, the amount raised under the US Shelf
Registration was $6,500 million (2007 $2,500 million).
Commercial paper markets in the US and Europe are a primary
source of liquidity for the group. At 31 December 2008, the outstanding
commercial paper amounted to $4,268 million (2007 $5,881 million).
The group also has access to significant sources of liquidity in
the form of committed facilities and other funding through the capital
markets. At 31 December 2008, the group had available undrawn
committed borrowing facilities of $4,950 million (2007 $4,950 million).
Despite current uncertainty in the financial markets, including a
lack of liquidity for some borrowers, we have been able to issue
$5 billion of long-term debt in the fourth quarter of 2008. In addition, we
have been able to issue short-term commercial paper at competitive
rates. In the context of unforeseen market volatility, we have however,
increased the cash and cash equivalents held by the group to $8.2 billion
at the end of 2008, compared with $3.6 billion at the end of 2007.
BP believes that, taking into account the substantial amounts of
undrawn borrowing facilities available, the group has sufficient working
capital for foreseeable requirements.
Off-balance sheet arrangements
At 31 December 2008, the group’s share of third-party finance debt
of equity-accounted entities was $6,675 million (2007 $6,764 million).
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 2008 are summarized on the
following page. Some guarantees outstanding are in respect of
borrowings of jointly controlled entities and associates noted above. The
analysis by time period indicates the ultimate expiry of the guarantees.
Performance review
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