The combined entity would become an ASX top-20 company, overtaking Woodside Petroleum as the nation’s largest oil and gas producer and ranking among the 20 biggest producers globally.

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Oil Search’s board said it would open its books to Santos and recommend investors support the proposal in the absence of a higher offer being received.

Any merger agreement would be subject to conditions including Oil Search shareholder approval, PNG court approval and regulatory approvals, the companies said.

MST Marquee analyst Mark Samter said he was “delighted” with the news.

“I am in a slight state of shock that common sense has actually prevailed in the oil and gas industry,” he said.

“The fact they [Santos] are willing to make this bid, which is being done from a position of strength, not weakness, gives me comfort their scrip is not overpaying for its share of the combined entity.”

Credit Suisse analyst Saul Kavonic, however, said it appeared that Santos may have overpaid.

“We struggle to see how Santos can capture synergies to justify the approximately 17 per cent premium to Oil Search shareholders, let alone much more to provide upside room left to Santos shareholders,” he said. “Over $US160 million per annum in cost savings would be required to justify the premium.”

Investors and analysts are predicting a wave of merger-and-acquisition activity to sweep the oil and gas industry in coming years, as elevated concerns about global warming cause lenders to flee the sector and push the cost of capital higher.

A landmark report by the International Energy Agency in May recommended investors must avoid funding any new oil and gas fields for the world to achieve the Paris agreement’s goal of limiting global temperature rises to 1.5 degrees.

The Australasian Centre for Corporate Responsibility – a shareholder advocacy group that has been pressuring fossil fuel producers to set bolder decarbonisation targets – said the tie-up suggested “neither company is serious about taking climate action”.

“Their only goal is to maximise oil and gas production at a time when climate chaos is raging across the northern hemisphere,” said Dan Gocher, the group’s climate director.

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