Shares in U.K.-listed oil giant BP PLC (BP) rose to a six-month high Tuesday following reports that compensation payouts for the Gulf oil spill may be much lower than expected and lingering rumors that the company is a takeover target.

After having one of the worst years in its history in 2010 because of the huge oil spill in the Gulf of Mexico, BP shares soared on the first trading day of 2011, adding as much as GBP5.1 billion ($7.9 billion) to the company's market value. At 1301 GMT, the company's shares were up 5.6%, or 26 pence, at 491 pence.

The oil sector in general had a good start to the year thanks to strong oil prices, with most of BP's European peers seeing share price increases of between 1% and 3%. Larger movers Tuesday included Tullow Oil PLC (TLW.LN), which was up 4%, and BG Group (BG.LN), which jumped 3.2%.

While takeover rumors about BP are generally "spurious," good news about the size of the compensation bill for the spill will encourage investors who were already taking a more optimistic view of the size of BP's ultimate liability for the disaster, said Panmure Gordon analyst Peter Hitchens.

Kenneth Feinberg, the lawyer administering BP's $20 billion compensation fund, told Bloomberg Television Friday that just $10 billion may be enough to compensate economic victims of the spill.

"It remains to be seen, but I would hope that half that money would be more than enough to pay all the claims," Feinberg told Bloomberg. BP has already paid out around $2.7 billion in compensation from the fund to over 170,000 people affected by the spill, Feinberg said.

The fund will also be used to cover cleanup costs. Feinberg said $20 billion is "ample" for both compensation and cleanup.

BP still faces tremendous uncertainty over the size of the fines it will have to pay for the spill, which are not covered by the fund, said Hitchens. More clarity on the scale of this liability should emerge within the next six months as the U.S. Department of Justice concludes its investigations, he said.

U.K. newspaper The Daily Mail reported Monday that Royal Dutch Shell PLC (RDSB.LN) considered and rejected the idea of buying BP last summer. Shell's board decided against a bid because of the huge uncertainty of BP's liabilities for the spill, the paper said citing an unnamed source. Shell remains interested in the prospect of a merger with BP, but would not be the first mover, it added.

Rumors of a takeover of BP have been rife since the Gulf oil spill wiped away more than half its market value last summer. In addition to Shell, ExxonMobil Corp. (XOM) is also commonly cited as a potential suitor.

"I would rule out a takeover," of BP by Shell, Hitchens said. In addition to the uncertainty over liabilities for the spill, "a merger between Shell and BP would end up with all sorts of monopoly problems...in places like Germany they would be getting towards 50% market share," he said.

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