BP Annual Report and Form 20-F 2011 - Company Reporting

Business reviewLiquidity and capital resourcesFollowing the Deepwater Horizon oil spill in 2010, the group initially facedsignificant costs relating to the immediate response activities as well assignificant uncertainty regarding the ultimate magnitude of its liabilities andtiming of cash outflows. During 2011 the impact on the group’s liquidityand capital resources has stabilized, allowing steps to be taken to enhancethe strength of the balance sheet.The group’s long-term credit ratings are A (stable outlook) fromStandard & Poor’s, strengthened from A (negative outlook) in July 2011,and A2 (stable outlook) from Moody’s Investor Services.BP renegotiated its committed bank facilities during 2011 putting inplace $6.9 billion of facilities with 25 international banking counterparties,mostly for a term of three years. In addition the group has increasedits access to commercial bank letters of credit (LC) by putting in placecommitted LC facilities of $5.1 billion and secured LC arrangements of $2.2billion, to supplement its uncommitted and unsecured LC lines.The disposal programme of $30 billion initially announced in 2010has been increased to $38 billion, for completion by the end of 2013. Bythe end of 2011 agreements had been signed for more than $21 billion,with cash receipts totalling $17 billion in 2010 and $2.7 billion in 2011.BP accessed US and European capital markets throughout the yearwith bond issuances amounting to $10.7 billion in 2011.A further $0.8 billion of US Industrial Revenue/Municipal bondswere re-issued in term-out mode of between three to 10 years duringthe year.During 2011 BP repaid $2.9 billion of the $5.3 billion of borrowingsraised in 2010 that were secured against working capital and other assets,or backed by future crude oil sales from BP’s interests in specific offshoreAngola and Azerbaijan fields.Financial frameworkBP continues to refine its financial framework to support the pursuit ofvalue growth for shareholders, while maintaining a secure financial base.BP intends to increase operating cash flow a by 50% in 2014 compared to2011 b . Half of the increase will arise as the remaining payments into theDeepwater Horizon Oil Spill Trust fund complete by the end of 2012, andhalf from operations. BP plans to use half of the expected additional cashflows to increase investments and half for other purposes.We intend to maintain a significant liquidity buffer and to reduce ournet debt ratio to the lower half of the 10-20% gearing range over time. SeeFinancial statements – Note 35 on page 230 for gross debt, which is thenearest equivalent measure to net debt on an IFRS basis, and for furtherinformation on net debt and net debt ratio.a Operating cash flow is net cash provided by (used in) operating activities, as stated in the groupcash flow statement on page 181.b Assuming an oil price of $100 per barrel in 2014. The projection reflects our expectation that allrequired payments into the $20-billion trust fund will have been completed by the end of 2012.It does not reflect any cash flows relating to other liabilities, contingent liabilities, settlements orcontingent assets arising from the Gulf of Mexico oil spill which may or may not arise at that time.See Financial statements – Note 43 on page 249, for further information on contingent liabilities.Dividends and other distributions to shareholdersOn 1 February 2011, BP announced the resumption of quarterly dividendpayments, with a fourth-quarter 2010 dividend of 7 cents per share. Theresumption followed the suspension of dividend payments for the firstthree quarters of 2010 announced in June 2010 in light of the DeepwaterHorizon oil spill and commitments to fund the $20-billion Trust. The samelevel of dividend was maintained for the first three quarters of 2011.The total dividend paid to BP shareholders in 2011 was $4.1 billionwith shareholders also having the option to receive a scrip dividend,compared with $2.6 billion paid in 2010. The dividend is determined in USdollars, the economic currency of BP.On 7 February 2012, BP announced a dividend of 8 cents per sharein respect of the fourth quarter 2011.During 2011 and 2010, the company did not repurchase any ofits own shares. Details of purchases to satisfy requirements of certainemployee share-based payment plans are set out on page 170.Financing the group’s activitiesThe group’s principal commodity, oil, is priced internationally in US dollars.Group policy has generally been to minimize economic exposure tocurrency movements by financing operations with US dollar debt. Wheredebt is issued in other currencies, including euros, it is generally swappedback to US dollars using derivative contracts, or else hedged by maintainingoffsetting cash positions in the same currency. The overall cash balancesof the group are mainly held in US dollars or swapped to US dollars andholdings are well-diversified to reduce concentration risk. The group is nottherefore exposed to significant currency risk, such as in relation to theeuro, regarding its borrowings. Also see Risk factors on page 59 for furtherinformation on risks associated with the general macroeconomic outlook,including the stability of the eurozone and Financial statements – Note 26on page 217.The group’s finance debt at 31 December 2011 amounted to $44.2billion (2010 $45.3 billion). Of the total finance debt, $9.0 billion is classifiedas short term at the end of 2011 (2010 $14.6 billion). The short-termbalance includes $4.9 billion for amounts repayable within the next 12months relating to long-term borrowings (2010 $6.9 billion). Commercialpaper markets in the US and Europe are a further source of short-termliquidity for the group to provide timing flexibility. At 31 December 2011,outstanding commercial paper amounted to $3.6 billion (2010 $1.0 billion).Also included within short-term debt at the end of 2010 was $6.2 billionrelating to deposits received for announced disposal transactions stillpending legal completion post the balance sheet date. At the end of 2011the balance was de minimis at $30 million.We have in place a European Debt Issuance Programme (DIP)under which the group may raise up to $20 billion of debt for maturitiesof one month or longer. At 31 December 2011, the amount drawn downagainst the DIP was $11.6 billion (2010 $12.3 billion). In addition, the grouphas in place an unlimited US shelf registration statement under which itmay raise debt with maturities of one month or longer. None of the capitalmarket bond issuances since the Deepwater Horizon oil spill contain anyadditional financial covenants compared with the group’s capital marketsissuances prior to the incident.The maturity profile and fixed/floating rate characteristics of thegroup’s debt are described in Financial statements – Note 34 on page 229.Net debt was $29.0 billion at the end of 2011, an increase of $3.1billion from the 2010 year-end position of $25.9 billion. The ratio of netdebt to net debt plus equity was 20.5% at the end of 2011 (2010 21.2%).Net debt and the ratio of net debt to net debt plus equity are non-GAAPmeasures. We believe that these measures provide useful information toinvestors. Net debt enables investors to see the economic effect of grossdebt, related hedges and cash and cash equivalents in total. The net debtratio enables investors to see how significant net debt is relative to equityfrom shareholders. See Financial statements – Note 35 on page 230 forgross debt, which is the nearest equivalent measure on an IFRS basis, andfor further information on net debt.Included in net debt are cash and cash equivalents of $14.1 billionat 31 December 2011 (2010 $18.6 billion). BP manages its cash positionto ensure the group has adequate cover to respond to potential short-termmarket illiquidity, and expects to maintain a strong cash position. Cashbalances are pooled centrally where permissible, and deployed globallyas required. Cash surpluses are deposited with creditworthy banks andmoney market funds with short maturities to ensure availability. Thegroup holds $1.2 billion of cash outside the UK and it is not expectedthat any significant tax will arise on repatriation. Further information onthe management of liquidity risk and credit risk is provided in Financialstatements – Note 26 on pages 217-222, and on the cash position inFinancial statements – Note 30 on page 223.The group also has access to significant sources of liquidity in theform of committed bank facilities. At 31 December 2011, the group hadavailable undrawn committed standby borrowing facilities of $6.9 billion(2010 $12.5 billion), made up of:• $6.8 billion of standby facilities available to draw and repay by mid-March2014.• 625 million Chinese yuan ($0.1 billion) of 365-day standby facilitiesavailable to draw and repay until the second half of 2012.During 2011 $7.2 billion of 364-day facilities expired and were not renewed.Business review: BP in more depthBP Annual Report and Form 20-F 2011 103