Annual Report 2010 - SBM Offshore

Capital risk management
The Company’s objectives when managing capital are
to safeguard the Company’s ability to continue as a
going concern in order to provide returns for shareholders
and benefits for other stakeholders and to maintain
an optimal capital structure to reduce the cost of
capital.
In order to maintain or adjust the capital structure, the
Company may adjust the amount of dividends paid to
shareholders, return capital to shareholders, issue new
shares or sell assets to reduce debt.
Consistent with others in the industry, the Company
monitors capital on the basis of the gearing ratio. This
Financial Review / Financial Statements 2010
ratio is calculated as net debt divided by total capital.
Net debt is calculated as total borrowings (including the
short term part of the long term debt and bank overdrafts
as shown in the consolidated balance sheet) less
cash and cash equivalents. Total capital is calculated
as equity, as shown in the consolidated balance sheet,
plus net debt.
During 2010, the Company’s strategy which was
unchanged from 2009, was to target a gearing ratio
between 50% and 60%. This target is subject to maintaining
headroom of 20% of all banking covenants.
The gearing ratios at 31 December 2010 and 2009 were
as follows:
in thousands of US$ 2010 2009
Total borrowings 1,814,542 1,610,705
Less: net cash and cash equivalents (103,421) (146,712)
Net debt 1,711,121 1,463,993
Total equity 2,123,405 1,816,832
Total capital 3,834,526 3,280,825
Gearing ratio 44.6% 44.8%
Fair value estimation
The Company uses the following fair value hierarchy for
financial instruments that are measured at fair value in
the balance sheet, which require disclosure of fair value
measurements by level:
• Quoted prices (unadjusted) in active markets for
identical assets or liabilities (level 1).
• Inputs other than quoted prices included within
level 1 that are observable for the asset or liability,
either directly (that is, as prices) or indirectly (that is,
derived from prices) (level 2).
• Inputs for the asset or liability that are not based on
observable market data (that is unobservable inputs)
(level 3).
Derivative financial instruments are the only assets and
liabilities valued at fair value and they can be categorised
as level 2 (2009: level 2). The derivative financial
instruments are not traded in an active market. The
fair value of these instruments is determined by using
valuation techniques. These valuation techniques
maximise the use of observable market data where it is
available and rely as little as possible on entity specific
estimates.
Other risks
In respect of controlling political and credit risk, the
Company has a policy of thoroughly reviewing risks
associated with contracts, whether turnkey or longterm
leases. Where political risk cover is deemed
necessary and available in the market, insurance is
obtained. In respect of credit risk, bank or parent
company guarantees are negotiated with customers.
Furthermore, limited recourse project financing
removes a large part of the risk on long term-leases.
SBM Offshore – Annual Report 2010 171