Disclosure announcement transmitted by euro adhoc.
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March 29, 2004
BP TO BUY BACK SHARES WITH FREE CASH FLOW
WHEN OIL PRICE EXCEEDS $20 A BARREL
BP said today that, barring unexpected developments - or acquisitions
it does not currently foresee - it expects to be able to deliver
significant extra cash to its shareholders over the next three years
and at the same time strongly grow production and long-term returns.
Chief executive Lord Browne said that a $20 oil price would allow the
company to meet its capital requirements and pay a progressive
dividend, and that all the free cash generated when the oil price is
above that level would be returned to shareholders through buybacks.
Confirming that BP had already bought back some 155 million shares
for $1.25 billion in the first quarter of 2004 and has today made
special arrangements to continue repurchases during a 'close' period,
Browne said: "There appears, at present, to be overwhelmingly more
chance of the oil price being above $20 a
barrel for the next few years, than not."
Previewing a strategy presentation to investors and analysts in
London, Browne said that as well as increasing dividends in line with
improvements in underlying results, BP intends "to distribute 100 per
cent of all excess free cash flow to our shareholders, as part of our
determination to provide them with additional returns through
disciplined cash flow management."
BP has increased its dividends by 6.8 per cent a year in dollar terms
since 1999. It bought back some 775 million of its shares at a cost
of $6 billion between 2000 and end-2003, shrinking its equity base by
2.5 per cent.
Laying out the Group's strategy to end-2006, Browne said BP was in
transition from a period of acquisition and consolidation to a phase
of strong organic growth. It intends over the next three years to
focus on performance, particularly cash returns, while investing at a
rate appropriate for long-term growth.
He said capital spending is expected to moderate from the "relatively
high levels" of 2002 and 2003 to some $13.5 billion this year,
$12-$12.5 billion in 2005 and 2006 and $12-$13 billion beyond 2007,
with the company maintaining its five-year rolling average finding
and development cost for oil and gas at between $4 and $5 a barrel.
BP's production is expected to grow by five per cent a year between
2003 and 2008, or some seven per cent if the contribution of TNK-BP,
its Russian joint venture, is included. TNK-BP's output alone is set
to climb by 12 per cent this year and BP estimates it will rise a
further five per cent annually to 2007.
BP's oil and gas reserves currently stand at 18.3 billion barrels of
oil and gas equivalent, including its share of TNK-BP. This compares
with a pre-merger figure of 8.6 billion barrels at end-1997 and
includes replacing the Group's annual production at an average rate
of 153 per cent over the last five years.
In addition, the company has estimated unproved resources of 24
billion barrels, excluding Russia which could contribute a further 13
billion net barrels.
Browne said BP's positive view of Russia remains unchanged. "The
company's investment is attractive and self-financing in the short
term but with significant longer term strategic importance in a
region where yet-to-find estimates for the industry exceed 300
At an oil price of $20 a barrel BP anticipates TNK-BP can pay
dividends equal to 40 per cent of its net income at the same time as
funding its forward investment programme. "Our estimate is that
replacement operating profit, in a $20-a-barrel environment, divided
by our average capital employed in TNK-BP, will be around
25 per cent on a steady-state basis."
Browne said all the ongoing developments in the company's five other
new profit centres around the world are on track to meet their
first-production dates. The Atlas methanol project in Trinidad, the
Kizomba A field in Angola, Holstein in the Gulf of Mexico, and the
fourth LNG train in Australia's North West Shelf,
are due on stream this year, as is In Salah gas in Algeria.
Next year will see start-up of the Mad Dog and Thunderhorse fields in
the deepwater Gulf of Mexico, the Azeri field in Azerbaijan, the
fourth LNG train in Trinidad and the In Amenas project in Algeria.
As these and subsequent new upstream projects begin producing, BP
expects to see underlying pre-tax cash returns rise by two per cent
between 2003 and 2006, and an increase in operating capital employed
of some 15 per cent during the same period.
Browne said BP had invested significantly in its customer-facing
businesses - refining and marketing, petrochemicals and gas, power
and renewables - essentially pumping back all the operating cash flow
they had generated in recent years. The average pre-tax cash return
from these businesses combined was some 20 per cent in 2001 to 2003.
"During their building, these segments produced no surplus cash flow
to the Group and BP's intention now is to target them to produce
underlying free cash flow in proportion to their capital employed -
at least when compared with the potential of the upstream business at
around $20 oil price," Browne said.
In petrochemicals, with cash returns of only 10 per cent, BP will
invest more in 'advantaged' products - paraxylene, PTA and acetyls -
which account for some $5 billion of operating capital employed.
These have higher market shares, more proprietary technology, greater
exposure to high-growth Asian markets and better returns.
BP said capital spending in the olefins and derivatives business will
be held to very low levels and "all options examined for further
improvement in this area".
Browne said that, while the oil price remains impossible to predict,
the 20-year average for Brent has been some $20 a barrel in nominal
terms. "BP's view is that it is quite reasonable to use $20 as a base
case for balancing cash flows over the next couple of years.
"Over time, as production rises and capital spending declines, we
expect the oil price at which cash flows balance to fall below $20 a
The company manages its gearing in the range of 25-30 per cent,
allowing itself headroom to 35 per cent if the oil price falls to $16
Browne concluded: "As we look at how the company has developed, we
believe BP already holds the assets, market positions and capability
to enable us to go forward, expanding our capital base while
maintaining underlying cash returns at broadly the same average level
as in 2001 to 2003, thereby growing the cash flow
"We expect to do this without affecting the financial risk profile of
the Group so that we have sufficient financial capability to cover a
contingency if oil prices dropped to $16 a barrel, maintain a balance
between sources and uses of funds if oil prices are at $20 a barrel,
and to generate cash flows in excess of the financial needs for
long-term growth if oil prices are above this level.
"So, we have three targets:
·First, to underpin growth by a focus on performance,
particularly on cash returns, investing at a rate appropriate for
·Second, to maintain a progressive dividend policy
·And third, to distribute to shareholders 100 per cent of all
free cash flow in excess of operating investment and dividend needs,
generally when the price of oil is above $20 a barrel.
"Back in 1998 when we announced the merger with Amoco, we were only
partly conscious of the chain of events we were setting in train. It
is hard to predict the consequence of any particular step.
"We feel we are now at a similar point of change. The logic of
restructuring is not just about making companies bigger. It is about
using size and scale to do what was previously unachievable.
"We believe we're beginning to open that door, and beginning to be
able to deliver a level of return - consistently, and sustainably
year by year - which will improve on anything we've seen so far."
- ENDS -
This information is provided by RNS
The company news service from the London Stock Exchange
end of announcement euro adhoc 29.03.2004
Further inquiry note:
Company Secretarial Assistant
020 7496 4062
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