27
RISK FACTORS
Any investment in the Notes is subject to a high degree of risk. Prospective investors should consider carefully the
factors and risks described below before making an investment in the Notes, the Group’s business and the industry in
which it operates, together with all other information contained in this Offering Memorandum including, in particular,
the risk factors described below. Should these or any other material risks occur, the Group may not be able to pay
interest or principal on the Notes and investors could lose all or part of their investment.
Additional risks and uncertainties relating to the Group that are not currently known, or that it currently deems
immaterial, may also have a material adverse effect on its business, prospects, financial condition and results of
operations and, if any such risk should occur, the Group may not be able to pay interest or principal on the Notes and
investors could lose all or part of their investment. Investors should consider carefully whether an investment in the
Notes is suitable for them in the light of the information in this Offering Memorandum and their personal circumstances.
Risks relating to the Group
The Group is dependent on its operations in Egypt for a significant portion of its revenues, and receivables due from
the Group’s operations in Egypt under the Group’s licence agreements are paid irregularly and after significant
delay.
Historically, the Group has generated a significant majority of its revenues from sales of oil in Egypt to the Egyptian
General Petroleum Corporation (“
EGPC
”) under the terms of its production sharing agreements for Burg El Arab, East
Ras Qattara (“
ERQ
”) and Abu Sennan, and from the service contract governing the Group’s interest in Area A. Total
revenues from EGPC amounted to 77% of Group revenues in the three months ended 31 March 2014 compared to 70%
in the three months ended 31 March 2013, and 74% of the Group revenues in 2013 compared to 91% in 2012 and 87% in
2011. Under the terms of these agreements, EGPC has agreed to pay the Group its share of the proceeds of sale of oil and
gas produced, including those amounts the Group is permitted to recover in order to defray operational, exploration,
appraisal and development costs and to reflect the Group’s profit entitlement.
Historically, EGPC has typically remitted payments due to the Group several months in arrears. Payments from EGPC
were paid, on average, after 13 months in 2011, 11.5 months in 2012, 6.5 months in 2013 and 6 months in the six months
ended 30 June 2014. Particularly as a result of political unrest in Egypt beginning in 2011, the pace of payments
received from EGPC has varied widely. As at 30 June 2014 the total amount of receivables due to the Group from EGPC
was $124.4 million, of which $76.1 million were considered past due, but not impaired as at that date. As at 31
December 2013, the total amount of receivables due to the Group from EGPC was $116.7 million, of which $89.5
million were considered past due, but not impaired as at that date. As at 31 December 2012, the total amount of
receivables due to the Group from EGPC was $163.8 million, of which $125.2 million were considered past due, but not
impaired as at that date. As at 31 December 2011, the total amount of receivables due to the Group from EGPC was
$131.4 million, of which $97.7 million were considered past due, but not impaired as at that date. Although EGPC has
been making periodic payments on these outstanding receivables, these payments have been received on an irregular and
unpredictable basis that is outside the Group’s ability to predict or control. Any remittance to the Group which serves to
reduce the balance of receivables from EGPC will be partly or wholly offset by new receivable obligations incurred by
EGPC due to new production by the Group in Egypt, which is increasing. EGPC has, since 2012, periodically arranged
for the Group to receive the proceeds of certain volumes of oil sold via cargo payments, whereby EGPC sells to market
purchasers who pay the Group directly, for oil sold by EGPC. There is no assurance that such cargo payments will
continue in the future. Receipt of cash payments from EGPC may be subject to continued or increased delay in the future
as a result of various factors, including the prevailing political and economic climate in Egypt, the availability of US
dollars in Egypt, and trends in international oil prices. In addition, rising oil prices and increased production have
historically resulted in longer payment periods as total receivables increase, due in part to the impact of higher prices on
EGPC’s financial commitments to subsidise oil imports. See
“—Risks relating to the jurisdictions in which the Group
operates—The Group’s operations in Egypt may be disrupted by political and economic developments.
”
In addition, even if payments to the Group from EGPC on its existing or newly-incurred receivables continue or
accelerate, Egypt’s ongoing shortage of foreign currency, in particular US dollars, may result in part of all of such
payments being remitted to the Group in Egyptian Pounds rather than US dollars, subjecting the Group to the risk of
currency fluctuations between the Egyptian Pound, Pounds Sterling and US dollars. For example, in the three months
ended 31 March 2014, a total of $16.5 million, or 49.7%, of the Group’s $33.2 million received from EGPC was
received in Egyptian Pounds. Since 31 March 2014, a substantial proportion of the cash received from EGPC has
continued to be paid in Egyptian Pounds. If the proportion of payments received from EGPC in Egyptian Pounds
substantially increases going forward, the Group may receive more Egyptian Pounds than it needs to fund its operating
expenses in Egypt, causing a decline in the US dollar value of its Egyptian revenues and increased exposure to the value
of the Egyptian Pound. Furthermore, due to an increasingly constrained global foreign exchange market for Egyptian
