By Sonali Paul
SYDNEY (Reuters) - Oil Search Ltd (AX:OSH) on Monday rebuffed an $8 billion(5.18 billion pounds) takeover proposal from Australia's biggest energy company Woodside Petroleum Ltd (AX:WPL) as far too cheap, although it left the door open to higher offers.
Woodside last week sought exclusive talks with the Papua New Guinea-focused oil and gas producer on a one-for-four share offer, conditional on support from key stakeholders, including the PNG government.
The rejection is a blow to Woodside, which is chasing low cost liquefied natural gas assets in PNG at a time when the company has little new output due to start this decade and its undeveloped projects face challenges in a world of cheap oil.
"The proposal from Woodside from every which way we looked at it grossly undervalued Oil Search," Oil Search Chairman Rick Lee told Reuters.
Oil Search said it was in a strong financial position and highlighted its low-cost operations in PNG, where its output could double in the early 2020s working with giants ExxonMobil Corp (N:XOM) and France's Total SA (PA:TOTF) on two liquefied natural gas projects.
Lee said there were unlikely to be any benefits in putting the two companies together, and the board saw Woodside's plan to create a regional LNG champion conflicting with Oil Search's long history as PNG's national energy champion.
The company and its partners did not need Woodside's operational or liquefied natural gas marketing expertise, Lee told analysts on a conference call.
Shareholders found Woodside's proposal unattractive, he added. Oil Search is nearly one-fourth owned by the PNG government and Abu Dhabi's International Petroleum Investment Corp.
"If any proposals are tabled in the future that reflect compelling value for Oil Search shareholders, we will engage on them," Lee said.
Woodside declined to comment on whether it was considering another approach.
"Woodside is surprised and disappointed that the board of Oil Search has rejected the proposal without meeting with Woodside to understand the benefits of the opportunity or to negotiate the terms of a possible merger," it said in a statement to the stock exchange.
Credit Suisse (SIX:CSGN) estimated Woodside would have to pay between A$9 and A$10 a share, or at least A$13 billion ($9.2 billion), to snare Oil Search, well above its A$11.4 billion value on Monday.
The PNG government last year bought its 9.8 percent stake in Oil Search for A$8.20 a share, so it's unlikely it would sell for less than that.
"The door's been closed pretty firmly in their face," Credit Suisse analyst Mark Samter said.
Investors said Woodside shareholders had little to gain from paying a bigger premium and said they doubted Woodside would sweeten its offer.
"They're seen not to have been frivolous in the past with their bid prices. For that reason, I think they're most likely to walk away from a tie-up with Oil Search," said Simon Mawhinney, chief investment officer at Allan Gray, which owns Woodside shares.
Both companies' shares initially fell about 3 percent on Monday after the proposal was rejected, with Woodside hitting a near seven-year low. Both recovered to trade up around 0.1 percent.
($1 = 1.4104 Australian dollars)