BP still at the exploration stage

<a href=www.dailytelegraph.co.uk> Money

Britain's finest oil companies - BP and Shell - like to jockey for the limelight. Yesterday, the BP boss Lord Browne, hampered for so long by the millstone of production targets hanging on his neck, was vindicated - for the time being anyway - for his policy of focusing on exploration and production.

The war in Iraq, the strike in Venezuela and civil strife in Nigeria have all pushed the price of crude oil northward in the first quarter. Brent crude, at an average price of just less than $31.50, is trading more than $10 higher than a year ago.

That price will help BP double its first-quarter net profits from last year and help fund its $20 billion capital expenditure programme, outlined in the full-year results.

Suddenly, now the prices are steep, the idea of investing $6.75 billion for a 50pc stake in Russia's TNK Oil seems even more of a masterstroke. BP should be more than able to turn a healthy profit out of Russia's difficult terrain - if the prices stay high.

BP's advance into far-flung Angola and Azerbaijan to win the big reservoirs also seems a good strategy. Of course, the picture changes somewhat if and when the oil price loses its instability premium. External events make it difficult to predict how far prices will fall, but they will fall.

At that point, BP's operations look less rosy. Refining margins are looking fatter than last year but worries about its US refineries continue.

In addition, analysts are worried that BP has failed to capitalise on the soaring US gas price - despite its relatively high exposure in the market. Such worries saw the shares fall 9.25 to 406.25.

BP is trading off 14 times future earnings and yielding 3.5pc. Until Lord Browne's bold new strategy starts to pay some dividends on exploration and production, and with BP's wobbly performance elsewhere, it's best to hold for now.