Oil price gains boost BAE's Saudi cash

SHARES in BAE Systems gained ground today after revealing better than expected cash inflows last year. The company's net cash position stood at £5m at the end of the year, compared with net debt of £870m 12 months ago.

The position was helped by the booming oil price since the company's military supplies to Saudi Arabia are paid for in oil under the kingdom's Al Yamamah arms contract.

The improved cash position deflected attention from the group's worsened bottom line position - BAE Systems dived deeply into the red with a £232m pre-tax loss, against a £233m profit last time. The apparently poor performance was due to accounting charges of £1.04bn to cover write-downs on the value of some contracts.

Analysts, however, said the results were in line with expectations and its shares were 7p ahead at 257p when the market opened, having been adrift earlier this month on concerns about the outlook for sales to China and its work on the Royal Navy's aircraft carriers project.

BAE said that its programmes division, which works on the delivery of major projects such as the Eurofighter Typhoon and Type 45 destroyers, improved profits by £8m to £64m after sales rose to £2.9bn in 2004. That was despite no profit contribution from Nimrod aircraft upgrades and Astute submarines after BAE found itself at the centre of a budget wrangle with the Ministry of Defence last year.

BAE insisted that the outlook for its programmes division had improved after it moved to eliminate excessive risk on many of the contracts. Probably the most high-profile defence project with which BAE is involved is the Royal Navy's aircraft carriers programme. The Navy wants two major carriers but plans to build the ships remain dogged by rows over budgets and specifications.

Next month marks the deadline for the assessment phase of the carriers programme. BAE is working with Thales and the Defence Procurement Agency to agree the full extent of the project before proceeding to full-scale development. Last month saw two new members added to the alliance, including Kellogg, Brown and Root, part of the US Halliburton Group, which was previously chaired by US Vice-President Dick Cheney.

Elsewhere BAE Systems reported growth in a wide range of aerospace, defence and systems projects. The company is looking for increased sales as deliveries of the Typhoon increase and more work comes from Hawk training aircraft, as well as the Nimrod and Type 45 projects.

Doubt remains about the extent to which BAE could get involved in the potentially massive Chinese defence market. The company said it would need US approval before joining a European push to lift an arms embargo on China.

BAE has become Europe's largest defence company by revenue, thanks largely to sales in the United States, where the military market is bigger than those of western Europe combined. It said that 25% of its group defence-related sales were in the US where it ranks among the top 10 suppliers to the US military.

The importance of this work might see BAE hold back from developing any interests in China. This could potentially leave the way open for French rivals, which are much less concerned about the US Government's attitude to hi-tech defence sales, if the current ban were lifted. The ban was imposed following Beijing's crackdown on pro-democracy demonstrators in Tiananmen Square in 1989 and has divided successive US and European governments.