Energy Winners: Time to Join the BP Bulls?

(BP story updated for reports of Royal Dutch Shell bid)
NEW YORK (TheStreet) -- Shares of BP(BP) had their most bullish trading day since November on the new year's first market day, and on Tuesday, looked poised for another up day, after a report surfaced that Royal Dutch Shell(RDS.A) had considered a bid for BP during the worst moments of the oil spill crisis.

Close to 14 million shares of BP were traded on Monday -- twice its average volume -- and the 2.2% gain in BP shares took the British oil giant to its highest share price since the oil spill, closing at $45.15, after hitting an intraday high of $45.78. It was good enough for best in the energy sector, too, with an ExxonMobil(XOM) gain of just under 2% on Monday playing second fiddle to BP bullish sentiment.

On Tuesday in the pre-market session, BP shares were up 2.5%, hitting a fresh six-month high. In London trading, BP shares rose 5.5 on Tuesday afternoon.

The news of a Royal Dutch Shell bid was yet one more sign that BP's financial situation is not as bad as the worst-case scenario predicted during the oil spill, and has the market speculating about a bidding war for BP that could yet occur. If the BP bulls are to be believed, there's plenty of room left to get in on the 2011 BP rally, even if no M&A action occurs. For one thing, recent comments by BP oil spill claims chief Keneth Feinberg have indicated that BP has more than enough cash on hand to handle its oil spill economic damage claims. That said, Feinberg wasn't commenting on litigation that could reach into the billions upon billions of dollars and take years to sort out.

TheStreet noted in a recent poll of investors growing conviction that BP shares would continue their resurgence in 2011, climbing above the $60.

>>BP Stock to Surge in 2011 Above $60

On Monday, Raymond James added to the bullish BP outlook, upgrading BP shares to a buy and citing several reasons why there's reason to believe investors will support BP shares at yet a higher valuation.

As TheStreet poll results indicated, investors expect a reinstated BP dividend in 2011 will provide a boost to BP shares.

Raymond James said in its research report on Monday that the BP dividend could be reinstated in the first quarter. Raymond James also thinks that BP may be able to support its shares with stock repurchase activity later in 2011, as worst-case scenario fears about its oil spill liabilities are mitigated. Raymond James is less sure about the stock buyback program than the dividend, saying that buybacks are "in the realm of possibility" for 2011.

The dividend and any stock buyback program are management enticements that BP can use to lure back shareholders who bailed on the company during the oil spill. However, Raymond James also thinks there's a compelling valuation case to be made about BP using three key points:

BP's asset base: it has the lowest level of refining exposure among the majors and above-average organic resource replacement, though this is partially offset by elevated exposure to North American natural gas.

BP offers the highest free cash flow yield (10% in 2011) among the major oil companies in the Raymond James universe, even adjusting for annual payment into the Gulf compensation fund, and without baking into the numbers future asset sales.

Valuation: at 7.2x 2011 estimated earnings per share, it's the lowest in the Raymond James universe. The 7.2 times earnings multiple for BP is well below the 12.3 times range at which BP traded from 2000-2010, and reflects the ongoing liability from the oil spill.