BP ruled out a share issue and talk persisted of sovereign wealth fund interest in the British oil major, boosting its shares on Tuesday even as its Gulf of Mexico oil slick spread to the Texas coast.

On the 78th day after an explosion killed 11 people and burst an oil well which scientists say is gushing up to 60,000 barrels a day, BP shares were trading just off a two-week high, supported by a brokerage upgrade and reassurance that it had no plans to issue shares to help pay for the spill.

American Depositary Receipts in the company were indicated more than 6 percent higher after the Independence Day holiday.

Shares in BP, which had at one stage lost $100 billion in market value, have drawn some support from talk that it is a takeover target and has approached sovereign wealth funds with offers of a stake to ward off hostile bids.

On Tuesday, a source in the United Arab Emirates added to the speculation sparked by weekend press reports, saying that BP executives had held talks with a number of sovereign wealth funds including ones in Abu Dhabi, Kuwait, Qatar and Singapore.

BP is seeking a strategic partner so it doesn't get taken over by other major oil companies such as Exxon and Total, the source said.

BP declined to comment on speculation of a stake sale but said there were no plans to issue new equity to anyone, allaying some investors' fears of a dilutive share issue to help pay for a spill analysts say could cost tens of billions of dollars.

(There are) no current plans to issue new equity. We're always happy to welcome new shareholders or existing shareholders who wish to increase their holdings but there's no plans to issue new equity to anyone, the spokesman said.

Sovereign funds already hold shares in BP, with Norway and Kuwait controlling about 1.8 percent each, China 1.1 percent and Singapore 0.7 percent, according to Thomson Reuters data.

A top 10 shareholder said that any move to issue shares would be viewed extremely negatively.

It will be a kind of suicide note -- people will turn up with flame throwers at management. There is a chance that they will issue a bond -- they will do that post the well being shut. But the equity stuff is delusional.

Royal Bank of Scotland upgraded the stock to buy from hold, saying that the market had already discounted a pessimistic view of the spill.

Our base case scenario is significantly less pessimistic and in our view, the risk/reward profile of the shares is currently favorable, it said in a note.

If BP's share price were to remain depressed, it could also trigger credible merger speculation, it said but added that an approach to BP was unlikely before the well was plugged given management's focus on the well and the fact that any mention of cost synergies would be politically unacceptable at this stage.

BP is widely seen by brokers as undervalued. According to Thomson Reuters data, just two out of 37 brokers have an underperform or sell rating on the stock, while over two-thirds say the stock is a buy or strong buy.

CONTINGENCY PLANS?

The Times newspaper reported that Britain was drafting contingency plans should BP collapse but did not give details. BP is a staple holding of many UK pension funds and is a flagbearer for British industry.

The paper said officials from the Department of Business and the Treasury were holding talks about BP's future. The Treasury declined to comment. The Department of Business could not be immediately reached for comment.

BP confirmed on Monday that government tests showed tar balls that washed up on the Texas coast near Galveston were from the spill, but only about five gallons (around 19 liters) were found.

Texas joins Louisiana, Mississippi, Alabama and Florida among the states whose coastlines have been soiled by the largest offshore oil spill in U.S. history.

The U.S. Coast Guard also reported an oily sheen and tar balls in the inland estuary of Lake Pontchartrain, which surrounds much of the city of New Orleans and its suburbs. The oil is being tested to determine if its origin is the Deepwater Horizon well, the government said.

During the long U.S. Independence Day holiday weekend vacationers largely avoided beaches tarred by the leaking well.

POLITICAL HEAT

Politicians have turned the heat on BP after the spill, and speculation has mounted that its chief executive and chairman will be forced from office partly in response to U.S. criticism.

The Financial Times reported that BP had stopped refueling Iranian aircraft as the United States presses sanctions to isolate Tehran economically.

On the site of the spill itself, attempts to stop the flow have not worked, with BP pinning hopes on a relief well that should be completed in August.

The disaster is playing havoc with fragile coastal ecosystems, fishing communities and a tourist industry seen as especially important during a time of high unemployment.

An area of disturbed weather over the southeastern Gulf of Mexico could strengthen into a tropical storm this week, the U.S. National Hurricane Center said. Most computer models showed the storm on a track that would take it over central Texas, well away from the blown-out BP well.

Some oil gushing out a mile undersea is being captured through a pipe, while some is being burned off.

Tests on a supertanker adapted to skim large quantities of oily water from the surface were inconclusive because of high seas, ship owner TMT Shipping Offshore said.

A top-20 investor said that talk of BP approaching investors notwithstanding, its focus had to be on the oil spill.

Cleaning up the spill and stopping the well has to be priority number one rather than any other messing around, he said.

(Additional reporting by Raji Menon, Joel Dimmock, Tessa Walsh, David Brett and Sarah Young in London, Amena Bakr and Nicolas Parasie in Dubai, Tom Brown in Miami and Anna Driver in Houston; writing by Sitaraman Shankar; editing by Michael Shields)

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