BP 2015 Annual Report Download - page 223

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 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. Our principal objective
over the medium term is to re-establish a balance in our financial
framework, where operating cash flow (excluding payments related to
the Gulf of Mexico oil spill) covers capital expenditure and the dividend
at an assumed medium-term price of $60 per barrel. We aim to do this
while maintaining safe and reliable operations, preserving core growth
activities and sustaining the dividend. We responded quickly to the
lower environment, resetting both the capital and cash cost base of the
Group. We expect organic capital expenditure in 2016 to be at the lower
end of the range of $17-19 billion. In 2016 we expect to announce a
further $3-5 billion of divestments and from 2017 we expect
divestments to average the historical norm of around $2-3 billion
per annum.
We aim to manage gearing*with some flexibility around the 20% level
while volatile market conditions remain and maintain a significant
liquidity buffer. We expect the net debt ratio to be above 20% while oil
prices remain weak. As well as uncertainties relating to current lower oil
prices, the group also continues to face uncertainties relating to the Gulf
of Mexico oil spill as explained in Financing the group’s activities below.
We will keep our financial framework under review as we monitor oil
and gas prices and their impact on industry costs as we move through
2016 and beyond.
Dividends and other distributions to shareholders
Since resuming dividend payments with a quarterly dividend of 7 cents
per share paid in 2011, it has increased by 43% to 10 cents per share
paid in the fourth quarter of 2015. The dividend level is regularly
reviewed by the board.
The total dividend paid in cash to BP shareholders in 2015 was
$6.7 billion (2014 $5.9 billion) with shareholders also having the option
to receive a scrip dividend. The dividend is determined in US dollars, the
economic currency of BP.
Details of share repurchases to satisfy the requirements of certain
employee share-based payment plans are set out on page 253. There
were no other buyback programmes during 2015.
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 53
for further information on risks associated with prices and markets and
Financial statements – Note 28.
The group’s gross debt at 31 December 2015 amounted to $53.2 billion
(2014 $52.9 billion). Of the total gross debt, $6.9 billion is classified as
short term at the end of 2015 (2014 $6.9 billion). See Financial
statements – Note 25 for more information on the short-term balance.
Standard & Poor’s Ratings long-term credit rating for BP is A- and
assigned a stable outlook and Moody’s Investors Service rating is A2
(rating under review).
Net debt was $27.2 billion at the end of 2015 an increase of $4.6 billion from
the 2014 year-end position of $22.6 billion. The ratio of net debt to net debt
plus equity*was 21.6% at the end of 2015 (2014 16.7%). See Financial
statements – Note 26 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 $26.4 billion at 31 December 2015 (2014
$29.8 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 robust cash position.
The group also has undrawn committed bank facilities of $7.4 billion
(see Financial statements – Note 28 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 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 24 and Note 28. 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 25 and Note 28.
In relation to the Gulf of Mexico oil spill, during 2015, BP signed
agreements in principle to settle all federal and state claims, subject to
court approval, and to settle claims made by more than 400 local
government entities. These agreements significantly reduce the
uncertainties faced by BP following the Gulf of Mexico oil spill in 2010.
There continues to be uncertainty regarding the outcome or resolution
of current or future litigation and the extent and timing of costs relating
to the incident not covered by these agreements. See Risk factors on
page 53 and Financial statements – Note 2 for further information.
Off-balance sheet arrangements
At 31 December 2015, the group’s share of third-party finance debt of
equity-accounted entities was $11.8 billion (2014 $14.7 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, incremental to amounts recognized on the balance sheet,
at 31 December 2015 were $35 million (2014 $83 million) in respect of
liabilities of joint ventures*and associates*and $163 million (2014
$244 million) in respect of liabilities of other third parties. Of these
amounts, $22 million (2014 $64 million) of the joint ventures and
associates guarantees relate to borrowings and for other third-party
guarantees, $119 million (2014 $126 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 27.
The information above contains forward-looking statements, which by their nature involve risk and uncertainty because they relate to events and
depend on circumstances that will or may occur in the future and are outside the control of BP. You are urged to read the Cautionary statement on
page 246 and Risk factors on page 53, 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.
Additional disclosures
*Defined on page 256. BP Annual Report and Form 20-F 2015 219