Balance of risks makes BP a sell

Ukbetting worth a flutter in an expanding market; SkyePharma promises further significant growth

It looks like it might take a while for Lord Browne's tarnished halo to regain its shine. The chief executive of BP – the oil giant that is Britain's biggest company – has suffered in the past year from the perception that he has crept away from ambitious targets for increasing oil production.

There was no mention at all of production volumes in yesterday's trading update, a silence that spoke volumes. The company no longer wants to be judged by its previous aim of raising production by 5.5 per cent a year. It is much more focused on underlying profitability now, it says.

But for a company that has chosen to concentrate its efforts "upstream", in the business of finding and extracting oil and gas, this raises questions about the long-term progress of the group. It might seem a niggle for now, when there is much else to worry about, but it needs more fully addressing. The first attempt to do so – a bold, some might argue reckless – acquisition in Russia, has upped the risk profile of this previously relatively conservative institution.

This acquisition, of a 50 per cent stake in TNK for £4bn, looks expensive and comes with the usual risks associated with integrating a big new deal, plus the extra stress of doing business in Russia, the modern day equivalent of the Wild West, where exporting the oil produced could prove a challenge.

Into this negative mix, add the disappointments of yesterday's trading update. The price the group has got for its natural gas was lower in the first quarter than many had hoped. BP is still plagued by high costs in the oil refining business. And its chemicals business is, as you would expect, suffering from weak demand because of the sluggish global economy and from higher costs.

The "war premium" that sent oil prices soaring ensures another bumper year on the bottom line, but this is already coming out of the price and the medium-term outlook for oil is no longer as good.

When we last wrote on the sector six months ago, we reckoned BP's premium to Shell was now unjustified. It still prevails today, by just about every measure of the share price, and it is still our view that it must come down. Because falling oil prices are likely to cool demand for the sector, it is more likely that BP shares will fall. Sell.

Ukbetting worth a flutter in an expanding market

Ukbetting is a rapidly growing online sports betting business that owns famous names including Sportinglife.com and TeamTalk, an online sports content site. It even has a contract with the Royal Navy to supply our boys in the Gulf with the latest sports news.

Floated in August 2001, it has been involved in the typical e-commerce "land-grab", buying half a dozen companies as it seeks to broaden its business. Its most recent deal is an agreement with CryptoLogic, a software supplier, which will help ukbetting add poker and casino gaming to its portfolio by the summer.

The latest full-year figures, reported yesterday, showed the impact of the deal-making. Pre-tax losses totalled £8.8m, hit by heavy reorganisation charges and redundancy costs as the group cut its workforce from 245 to 150 after the acquisitions.

More encouraging is the top line growth, with gaming turnover up by 56 per cent to £42.9m and advertising revenue up from £100,000 to £1.2m. The idea is for the sites to use their content and the strength of brands such as Sporting Life to attract customers which can then be channelled towards betting. This saves money on advertising.

The plan is to move towards higher margin football betting rather than horseracing, which still makes up 60 per cent of betting revenue. Other new opportunities include racing commentaries on premium phone lines.

Analysts are forecasting the group will be profitable at the pre-tax level next year. Ukbetting has the right mix of assets in a market which is growing strongly. The challenge is to make them work. The shares, at 24.5p, are worth a punt.

SkyePharma promises further significant growth

SkyePharma has been a depressing investment for those who have held the shares for a number of years, plagued with delays to product launches and seemingly unable to break into profit despite many promises. Until yesterday. The difference? An anti-depressant called Paxil CR.

SkyePharma's skill is in drug delivery technology, coming up with clever new formulations for drugs to improve the way they affect the human body. Paxil CR is a controlled-release version of the giant-selling anti-depressant (known here as Seroxat), launched in the US a year ago.

It is one of a number of new products which the group has got on the market, all with significant growth potential. Royalties from these products should add up and the company felt confident to promise that the 2002 profit of £1.3m won't be a one-off. There will be "further significant growth in profitability in 2003" and an improvement in turnover from £70m to about £100m.

Despite the excitement over Paxil CR, though, and talk yesterday of its pre-cancer skin treatments and meningitis drug, most of the coming year's numbers are still dependent on milestones from existing collaborations with Big Pharma and new partnerships. This is lower-quality business, difficult to predict. But SkyePharma has moved a significant step closer to building an impressive specialty pharmaceuticals company.

The shares, which fell 3p to 45.75p after surging before the results, are due a pause. But this time, sustainable profitability doesn't seem pie in the Skye. Speculative buy.