By David Winning

SYDNEY--Oil Search Ltd. said it intends to recommend a new takeover proposal from Santos Ltd. to create an energy company with a market value of more than 22 billion Australian dollars (US$16 billion).

Santos is offering 0.6275 of its own shares in exchange for each Oil Search share. A deal would lead to Santos shareholders owning 61.5% of the combined company, with Oil Search investors holding the remaining stock.

The new proposal represents an increase on Santos's earlier offer of 0.589 of its own shares in exchange for each Oil Search share on issue.

"The Oil Search board believes that the Revised Proposal presents Oil Search shareholders with an opportunity to maintain ongoing exposure to Oil Search's portfolio of world-class assets as part of a merged group for which there is strategic logic," Oil Search said in a regulatory filing.

According to Santos, benefits of a deal included a stronger balance sheet and access to debt markets, with the combined company having an investment grade credit rating.

Oil Search is Papua New Guinea's largest oil producer and owns a minority stake in the Exxon Mobil Corp.-operated PNG LNG gas-export project in the country, which also counts Santos as an investor. Oil Search owns undeveloped oil reserves in Alaska that it hopes to develop if it can bring in another investor.

Analysts had speculated that Oil Search could become a takeover target after Mubadala Investment Co., an investment arm of the Abu Dhabi government, recently sold an around 4.5% stake in the company as part of a broader effort by the emirate to reduce its reliance on the oil sector. Mubadala still owns 4.9% of Oil Search.

The sudden resignation of Oil Search managing director Keiran Wulff for health reasons last month has also made the company more vulnerable to a takeover, some analysts say. Oil Search named Chief Financial Officer Peter Fredricson as acting chief executive with immediate effect while it searches for a permanent successor.

Santos has been an active buyer of energy assets in recent years. It purchased ConocoPhillips's assets in northern Australia for an initial US$1.265 billion last year, including a controlling stake in the Darwin liquefied-natural-gas export project. Santos also completed the US$1.93 billion acquisition of Quadrant Energy, which owned several natural gas assets in Western Australia, late in 2018.

Write to David Winning at david.winning@wsj.com

(END) Dow Jones Newswires

08-01-21 1906ET