Will the oil price hurt BAE Systems?

The aerospace firm benefits from instability in the Middle East, but cheap oil means defence budgets are tight.

by Adam Gale
Credit: Peter Gronemann/Wikipedia
Credit: Peter Gronemann/Wikipedia

War. What is it good for? Absolutely nothing. Who is it good for? Defence contractors, obviously. Sales at BAE systems rose 7.6% to £17.9bn in 2015 as the Syrian conflict escalated. Orders from the UK and Saudi Arabia both increased, but the latter still refused to make a big order of Typhoon fighters, despite last doing so way back in 2012.  

BAE announced a few months ago that it would slow production of the fighter jet as a result, which is largely why underlying earnings before interest, tax and amortisation fell 1.1% to £1,683m. Chief executive Ian King is pinning his hopes on a new order from the Gulf kingdom, saying ‘talks are always ongoing, because we have a relationship which is ongoing.’

But Saudi Arabia has some a few cash flow problems right now. Its budget has been gutted by the sustained fall in the oil price, from $110 (£76) a barrel in mid-2014 to lows of $28 last month. The kingdom is currently running a deficit equivalent to 15% of GDP, which has led it to consider selling a stake in the mother of all cash cows, state oil giant Aramco. Hardly an ideal time to splash out on several hundred state-of-the-art jets.

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