66
The Group does not currently hedge against fluctuations in prices for crude oil. As a result, during the three months
ended 31 March 2014, every $1 movement in the international Brent crude price would have affected the Group’s
revenue by approximately $1.5 million and the Group’s net cash generated by operating activities by $1.5 million.
The price of crude oil also has a significant effect on the Group’s exploration, appraisal and development strategies and
capital expenditure plans. Specifically, higher oil prices may allow for profitable production of hydrocarbons in a
proportionately higher number of fields than would be possible in an environment of lower oil prices, and may
encourage the Group to undertake more extensive and widespread exploration and appraisal activities. Crude oil prices
have been volatile in the past and are likely to continue to be volatile in the future. Wide fluctuations in oil prices may
result from relatively minor changes in the global or regional balance of supply and demand for oil, market uncertainty
and other factors. See “
Risk factors—Risks relating to the oil and gas industry—Historically, oil and gas prices have
been volatile and subject to wide fluctuations, which may materially and adversely affect the Group’s business,
prospects, financial condition and results of operations.
”
The Group regularly reviews oil price risks and may from time to time hold derivative financial instruments to hedge
commodity price risk. See “
—Quantitative and qualitative disclosures about market risks
” below.
Receipt of cash payments from EGPC
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, ERQ
and Abu Sennan, and from the service agreement governing the Group’s interest in Area A. See
“Risk factors—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.”
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. 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.
Historically, EGPC has remitted payments due to the Group several months in arrears, resulting in significant
fluctuations in working capital availability for the Group from 2011 to present. 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. See
“—Liquidity and Capital
Resources—Receivables”
below. Any remittance to the Group by EGPC which reduces the balance of receivables will
be partly or wholly offset by new receivable obligations incurred by EGPC due to new production by the Group in
Egypt, which is expected to increase as the Group’s assets in Egypt increase production.
The Group currently relies upon cash flows from its assets in Egypt to fund a significant portion of its working capital
and liquidity needs, both in Egypt and in other jurisdictions. As the Group’s existing balance of overdue receivables from
EGPC declines upon release of overdue cash to the Group, the Group will have the ability to fund working capital
requirements and will be less dependent on additional external funding. 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. These cargo payments provide cash proceeds to the Group
shortly after sale of the produced volumes, without lengthy delay. If EGPC decides to continue these cargo payments, or
increase their frequency, the Group could similarly experience an improved working capital and liquidity position.
Conversely, if the balance of overdue receivables from EGPC increases, or if EGPC decides to reduce or altogether
eliminate cargo payments, the Group may be required to cancel or delay certain of its exploration, appraisal and
development programmes, or seek additional external funding in the form of equity and / or debt financing to maintain
its projected schedule of exploration, appraisal and development work.
See
“Risk factors—Risks relating to the Group—
The Group’s exploration, appraisal and development plans are capital intensive and the Group will be unable to fulfil its
strategy and fulfil its licensing commitments without significant capital expenditure for which funding may not be
available.”
In addition, due to the ongoing shortage of foreign currency, in particular US dollars, part of the EGPC payments may be
remitted to the Group in Egyptian Pounds rather than US dollars. For example, in the three months ended 31 March
2014, a total of $16.5 million, or 49.7%, of the $33.2 million received from EGPC was received in Egyptian Pounds,
potentially subjecting the Group to significant exchange rate risk resulting from fluctuations in the value of Egyptian
Pounds as compared to other currencies, particularly the US dollar. To date, the amount of cash payments received from
EGPC in Egyptian Pounds rather than US dollars has generally corresponded to the level of the Group’s operating
expenses which are paid in Egyptian Pounds, thereby minimizing the foreign exchange impact on the Group of receiving
