34
to dramatically increase its production output and its level of 2P reserves, its current targets are unlikely to be met and
the Group’s strategy may be unsuccessful.
The Group’s exploration, appraisal and development programmes are capital intensive and the Group will be unable
to implement these programmes and fulfil its licensing commitments without significant capital expenditure for which
funding may not be available.
As at 1 June 2014, the Group’s exploration, appraisal and development programmes, and the terms of certain of the
Group’s licences, are expected to require $377.6 million in exploration and development capital expenditure through the
end of 2016, a substantial majority of which is expected to be directed towards the Group’s Iraq assets. See “—
Risks
relating to the jurisdictions in which the Group operates— The Group expects a substantial amount of its future activity
to focus on Iraq, which presents a high-risk operational and security environment
.” In particular, 82.6% of the Group’s
2P reserves are categorised under SPE-PRMS guidelines as “undeveloped”, and improving their status to that of
“developed” reserves will require significant capital expenditure. The Group’s exploration, appraisal and development
programmes include, among other things, drilling wells, building and improving infrastructure and upgrading production
technology in an effort to improve access, reduce operating expenses and enhance profit margins.
The Group incurred total capital expenditure of $162.1 million during 2013, and an additional $34.0 million during the
first three months of 2014. Going forward, the success of the Group’s strategy will be substantially dependent upon its
ability to fund its $377.6 million of exploration and development capital expenditures that are expected to be required
(mainly under the Group’s Iraq licences) from 1 June 2014 through the end of 2016. The level of funding required to
successfully execute the Group’s exploration, appraisal and development programmes could be substantially higher or
lower, depending upon geological factors, the success rates of the Group’s ongoing exploration and appraisal
programme, the level of funding costs and operating expenses, the availability of required personnel and equipment and
other factors.
The Group intends to fund its planned capital expenditure, in particular those set out in “
The Group’s business—Planned
capital expenditure and near-term exploration and appraisal programmes
” below, from amounts available under
borrowings (including the proceeds of the Notes), operating cash flows resulting from production and sale of oil, natural
gas and condensate, the sale of certain assets or the agreement of farm out financing arrangements in respect of certain
assets (including in respect of Block 9 in Iraq), and additional capital markets funding, in the form of both equity and
debt. The Group may also be unable to draw any further on its Convertible Loans. See “
Description of other
indebtedness—Convertible Loans
.” Moreover, upon the occurrence of any default under the Indenture, the holders of the
Notes could elect to declare all amounts outstanding, together with accrued interest, immediately due and payable. A
default under the Indenture, if not cured or waived, could result in the acceleration of other debt instruments that contain
cross default or cross acceleration provisions, including the Convertible Loans. Conversely, a payment default or other
default resulting in acceleration under the Convertible Loans could lead to an event of default under the Indenture. See
“
Risks relating to the Group’s financial profile
Restrictive covenants in the Indenture may restrict the Group’s ability
to operate its business. The Group’s failure to comply with these covenants, including as a result of events beyond its
control, could result in an event of default that could materially and adversely affect its business, results of operations
and financial condition
.”
In addition, the Group may not be able to generate sufficient funds from operating cash flows or, particularly during
periods of distress and limited capital availability in global capital markets, to raise sufficient funds from asset sales,
from farm out arrangements (including in respect of Block 9 in Iraq), and from borrowing or raising equity to meet its
future capital expenditure requirements, or to do so at a reasonable cost. The Group’s ability to arrange future financing,
and the cost of financing generally, depends on many factors, including:
•
economic and capital markets conditions generally;
•
investor confidence in the oil and gas industry and in the Group;
•
the business performance of the Group;
•
the success of exploration and appraisal efforts for a given asset;
•
regulatory developments;
•
credit available from banks and other lenders; and
•
provisions of tax and securities laws that are conducive to raising capital.
